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As filed with the Securities and Exchange Commission on April 14, 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. 25 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 26 [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):
[_] immediately upon filing pursuant to paragraph (b)
[_] on (date) pursuant to paragraph (b)
[_] 60 days after filing pursuant to paragraph (a)(1)
[_] on (date)pursuant to paragraph (a)(1)
[X] 75 days after filing pursuant to paragraph(a)(2) 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
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M.S.D. & T. FUNDS, INC.
CAPITAL OPPORTUNITIES FUND
Prospectus
__________________, 2000
As with all mutual funds, the Securities and Exchange Commission has not
approved or disapproved the shares of this Fund or determined if this prospectus
is accurate or complete. Anyone who tells you otherwise is committing a crime.
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TABLE OF CONTENTS
Page
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RISK/RETURN SUMMARY......................................................1
Investment Objective.................................................1
Principal Investment Strategies......................................1
Principal Investment Risks...........................................2
Fund Performance.....................................................3
Fees and Expenses....................................................4
Additional Information about Risk....................................5
INVESTING IN THE FUND....................................................6
Getting Your Investment Started......................................6
How to Buy Fund Shares...............................................6
How to Sell Fund Shares..............................................8
Other Purchase and Redemption Information...........................10
SHAREHOLDER SERVICES....................................................12
Retirement Plans....................................................12
Exchange Privilege..................................................12
Automatic Investment Plan...........................................12
Systematic Withdrawals..............................................13
Directed Reinvestments..............................................13
DIVIDENDS AND DISTRIBUTIONS.............................................14
TAX INFORMATION.........................................................15
MANAGEMENT OF THE COMPANY...............................................16
Investment Adviser..................................................16
Sub-Adviser.........................................................16
Portfolio Managers..................................................16
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RISK/RETURN SUMMARY
Investment Objective
The investment objective of the Capital Opportunities Fund is to seek
long-term capital growth.
The Fund's investment objective can be changed by the Board of
Directors of M.S.D. & T. Funds, Inc. without shareholder approval. Shareholders
will be given at least 30 days' written notice before any such change occurs.
Principal Investment Strategies
[Sidebar:]
A company's market capitalization is the price of a share of its stock,
multiplied by the number of shares held by investors.
The Fund invests primarily in the common stocks of small companies.
These are generally considered to be companies with market capitalizations of
$1.5 billion or less at the time of purchase. The Fund may also invest in
preferred stock and securities convertible into common stock. In addition, the
Fund also may invest a portion of its assets in securities of companies offering
shares in initial public offerings ("IPOs").
Securities purchased by the Fund will generally be publicly-traded
common stocks of U.S. companies. The Fund also may invest up to 25% of its total
assets in foreign equity securities, either directly or indirectly, through
American Depositary Receipts ("ADRs"). ADRs that are denominated in U.S. dollars
and traded on a U.S. exchange will not be treated as foreign securities for
purposes of the 25% limitation on foreign securities.
There is no minimum credit rating with respect to the Fund's
investments in convertible securities.
In selecting stocks for the Fund's portfolio, the Fund's sub-adviser
focuses on small growth-oriented companies which it believes to be responsive to
changes in the marketplace and to have the fundamental characteristics necessary
to support continued growth. The Fund's sub-adviser uses a bottom-up approach in
selecting stocks for the Fund's portfolio. This approach focuses on evaluating
individual companies, but also considers trends in the economy or the investment
markets. Researching each company, its products, services, competitors and
management team helps the Fund's sub-adviser to select stocks of companies that
it thinks will provide high and consistent earnings growth.
The Fund may emphasize, from time to time, particular companies or
market sectors, such as technology, in attempting to achieve its investment
objective.
[Sidebar:]
<PAGE>
Growth stocks may offer strong revenue and earnings potential and accompanying
capital growth, with generally less dividend income than value stocks.
Principal Investment Risks
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.
Investments in the stocks of small companies can be riskier than
investments in larger companies. Small companies tend to have limited resources,
product lines and market share. As a result, their share prices tend to
fluctuate more than those of larger companies. Their shares may also trade less
frequently and in limited volume, making them potentially less liquid. The price
of small company stocks might fall regardless of trends in the broader market.
Because small companies often borrow money to finance their operations, they
also may be adversely affected by rising interest rates.
To the extent that the Fund emphasizes particular companies or market
sectors, such as technology, it will be especially susceptible to the risks
associated with investments in those companies or market sectors. Stocks of
technology companies may be subject to greater price volatility than stocks of
companies in other sectors. Technology companies may produce or use products or
services that prove commercially unsuccessful, become obsolete or become
adversely impacted by government regulation. Technology stocks may experience
significant price movements caused by disproportionate investor optimism or
pessimism.
The Fund's performance results may reflect periods of above-average
performance attributable to its investing a portion of its assets in the
securities of companies offering shares in IPOs. It is possible that the
above-average performance of such companies may not be repeated in the future.
Convertible debt securities are subject to the usual risks associated
with fixed income investments, such as interest rate risk and credit risk. In
addition, because they react to changes in the value of the equity securities
into which they will convert, convertible debt securities are also subject to
stock market risk.
Convertible debt securities that carry the lowest of the four highest
ratings assigned by rating agencies 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 (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
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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
(although the Fund will not purchase convertible debt securities that are 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.
Certain securities purchased by the Fund may be privately placed
securities that are eligible for resale only by certain institutional buyers
without registration. The Fund is subject to the risk that these securities
cannot be readily sold within seven days at approximately the price at which the
Fund has valued them.
The Fund's sub-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.
An investment in the Fund 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 Fund.
Fund Performance
No performance information is provided because the Fund had not
commenced operations as of the date of this prospectus.
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Fees and Expenses
The following table shows the fees and expenses you may pay when you
buy and hold shares of the Fund.
Annual Fund Operating Expenses:
(expenses that are deducted from Fund assets)
Management Fees1 1.30%
Distribution (12b-1) Fees None
Other Expenses1,2 0.62%
Total Annual Fund Operating Expenses1 1.92%
1 Management Fees, Other Expenses and Total Fund Operating Expenses for
the Fund for the current fiscal year are expected to be less than the
amounts shown above because the Fund's 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 Fund
at a certain level. Management Fees, Other Expenses, and Total Fund
Operating Expenses for the Fund, after taking these fee waivers into
account, are set forth below. These fee waivers may be revised or
cancelled at any time. The Fund's investment adviser and administrator
have the right to be reimbursed by the Fund for such amounts prior to
the end of any fiscal year.
Management Fees 0.68%
Distribution (12b-1) Fees None
Other Expenses 0.57%
Total Annual Fund Operating Expenses 1.25%
2 Other Expenses are based on estimated amounts for the current fiscal
year.
Example
This example is intended to help you compare the cost of investing in
the Fund 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 Fund's operating expenses remain the same. Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
1 Year 3 Years
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$192 $605
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Additional Information about Risk
The principal risks of investing in the Fund have been described above.
The following supplements that discussion.
Temporary Defensive Positions
The 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. These investments may include
high quality short-term money market instruments, high quality corporate debt
securities and debt securities issued by the U.S. Government, its agencies and
instrumentalities. This strategy could prevent the 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 the Fund's principal investment strategies
and the types of securities in which the Fund principally invests. The 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.
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INVESTING IN THE FUND
Getting Your Investment Started
Shares of the Fund may be purchased either through the account you
maintain with certain financial institutions or directly through M.S.D. & T.
Funds, Inc. (referred to as 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 below under "How to Buy Fund Shares - 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 Fund. The
minimum initial investment in a particular portfolio 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
Fund may be made in a number of different ways, as shown in the following chart.
Simply choose the method that is most convenient for you. Should you have any
questions, please call 1-800-551-2145. As described above under "Getting Your
Investment Started," you may also purchase Fund shares through the Banks.
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<CAPTION>
To Open an Account To Add to an Account
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<S> <C> <C>
By Mail . Complete a New Account . Make your check payable to
Application and mail it along with M.S.D. & T. Funds, Inc. and mail
a check payable to M.S.D. & T. it to the address on the left.
Funds, Inc. to:
. Include the name of the Fund
M.S.D. & T. Funds, Inc. and your account number on your
P.O. Box 182028 check.
Columbus, OH 43218-2028
To obtain a New Account
Application, call 1-800-551-2145
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By Wire . Before wiring funds, please call . Instruct your bank to wire
1-800-551-2145 for complete wiring Federal funds to: Huntington
instructions. Bank, Columbus, OH 43219, Bank
Routing #044000024, M.S.D. & T.
. Promptly complete a New Account Concentration A/C #01899622436.
Application and forward it to:
Be sure to include your name and
M.S.D. & T. Funds, Inc. your Fund account number.
P.O. Box 182028
Columbus, OH 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.
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. Explanation of Sales Price. The public offering price for shares of
the Fund is based upon net asset value. The Fund will calculate its net asset
value per share by adding the value of the Fund's investments, cash and other
assets, subtracting the Fund's liabilities, and then dividing the result by the
number of shares of the Fund that are outstanding. This process is sometimes
referred to as "pricing" a Fund's shares.
The assets of the Fund are valued at market value or, if market quotes
cannot be readily obtained, at fair value as determined by the Fund's investment
adviser under the supervision of the Company's Board of Directors. Debt
securities held by the Fund that have sixty days or less until they mature are
valued at amortized cost, which generally approximates market value.
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
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exception of those holidays on which the Exchange, the Federal Reserve Bank of
Cleveland, the purchasing Bank (if applicable) or the Fund's investment adviser,
sub-adviser, transfer agent or custodian is closed. The Fund currently observes
the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Columbus Day,
Veterans Day, Thanksgiving Day and Christmas Day.
Shares of the Fund are sold at the public offering price per share next
computed after receipt of a purchase order by the Fund's transfer agent.
Purchase orders will be accepted by the 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 the Fund through a Bank, the Bank is
responsible for transmitting your purchase order and required funds to the
Fund's transfer agent on a timely basis. If the transfer agent receives your
purchase order from a Bank on a Business Day prior to the close of regular
trading hours (currently 4:00 P.M. Eastern Time) on the Exchange, your Fund
shares will be purchased at the public offering price calculated at the close of
regular trading hours on that day provided that the Fund's custodian receives
payment on the next Business Day in immediately available funds. If such payment
is not received on the next Business Day, the Bank which submitted the order
will be notified that the order has not been accepted. Payment for orders which
are not received or accepted will be returned after prompt inquiry.
If you purchase shares of the 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 Fund's transfer agent on a Business Day prior to the close of regular
trading hours on the Exchange, your Fund shares will be purchased at the public
offering price calculated at the close of regular trading hours on that day.
Otherwise, your Fund shares will be purchased at the public offering price next
calculated after the transfer agent receives your purchase order in proper form
with the required payment.
On a Business Day when the Exchange closes early due to a partial
holiday or otherwise, the Company reserves the right to advance the times at
which purchase orders must be received in order to be processed on that Business
Day.
The 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 where 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.
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<CAPTION>
To Redeem Shares
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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;
- 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 if you checked the name, account number and amount of redemption ($1,000 minimum
appropriate box on the New Account per transaction).
Application)
. If you have already opened your account and would like to
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.
- ---------------------------------------------------------------------------------------------------------------------
. Call 1-800-551-2145. You will need to provide the account
By Telephone name, account number and amount of redemption.
(automatic unless you checked the
appropriate box on the New Account . If you have already opened your account and would like to
Application) 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.
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. Explanation of Redemption Price. Redemption orders received in proper
form (including all necessary documentation and signature guarantees, where
required) by the Fund's transfer agent are processed at their net asset value
per share next determined after receipt. On a Business Day when the Exchange
closes early due to a partial holiday or otherwise, the Company reserves the
right to advance the time at which redemption orders must be received in order
to be processed on that Business Day.
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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 Fund's investment adviser believes that earlier payment would adversely
affect the Fund. 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 Fund's transfer agent. The Automated Clearing House ("ACH")
system may also be utilized for payment of redemption proceeds. In unusual
circumstances, the Company may pay redemption proceeds in readily marketable
portfolio securities having a market value equal to the redemption price.
Banks are responsible for transmitting their customers' redemption
orders to the Fund's transfer agent and crediting their customers' accounts with
redemption proceeds on a timely basis. No charge is imposed by the Company for
wiring redemption proceeds, although the Banks may charge their customers'
accounts directly for redemption and other services. In addition, if a customer
has agreed with a Bank to maintain a minimum cash balance in his or her account
maintained with the Bank and the balance falls below that minimum, the customer
may be obliged to redeem some or all of the Fund shares held in the account in
order to maintain the required minimum balance.
The Company imposes no charge when you redeem shares. The value of the
shares you redeem may be more or less than your cost, depending on the Fund's
current net asset value.
Other Purchase and Redemption Information
Federal regulations require that you provide a certified taxpayer
identification number whenever you open or reopen an account.
Shareholders who purchased Fund shares directly through the Company
should note that if an account balance falls below $500 as a result of
redemptions and is not increased to at least $500 within 60 days after notice,
the account may be closed and the proceeds sent to the shareholder.
If you purchased shares by wire, you must file a New Account
Application with the Fund's transfer agent before any of those shares can be
redeemed. You should contact your bank for information about sending and
receiving funds by wire, including any charges by your bank for these services.
The Company may decide at any time to change the minimum amount per transaction
for redemption of shares by wire or to no longer permit wire redemptions.
You may choose to initiate certain transactions by telephone. The
Company and its agents will not be responsible for any losses resulting from
unauthorized transactions when reasonable procedures to verify the identity of
the caller are followed. To the extent that the Company does not follow such
procedures, it and/or its agents may be responsible for any unauthorized
transactions.
The Company reserves the right to refuse a telephone redemption if it
believes it is advisable to do so. Procedures for redeeming shares by telephone
may be modified or terminated
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by the Company at any time. It may be difficult to reach the Company by
telephone during periods of unusual market activity. If this happens, you may
redeem your shares by mail as described above.
The Company may suspend the right of redemption or postpone the date of
payment upon redemption (as well as suspend the recordation of the transfer of
its shares) for such periods as permitted under the Investment Company Act.
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.
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<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 the Fund may be purchased in connection with certain
tax-sheltered retirement plans, including individual retirement accounts. Shares
may also be purchased in connection with profit-sharing plans, section 401(k)
plans, money purchase pension plans and target benefit plans. Further
information about how to participate in these plans, the fees charged, the
limits on contributions and the services available to participants in such plans
can be obtained from the Company. To invest through any tax-sheltered retirement
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 the Fund may be exchanged 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 portfolio by exchange, the exchanged shares must be at
least equal in value to the minimum investment for the portfolio in which the
account is being opened.
You should read the prospectus for the 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
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<PAGE>
domestic financial institution that is an ACH member. You will be responsible
for any loss or expense to the Fund if an ACH transfer is rejected. To select
this option, or for more information, please call 1-800-551-2145.
The Automatic Investment Plan is one 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 Fund whose price per share fluctuates.
Instead of trying to time market performance, a fixed dollar amount is invested
in Fund shares at predetermined intervals. This may help you to reduce your
average cost per share because the agreed upon fixed investment amount allows
more shares to be purchased during periods of lower share prices and fewer
shares during periods of higher prices. In order to be effective, Dollar Cost
Averaging should usually be followed on a sustained, consistent basis. You
should be aware, however, that shares bought using Dollar Cost Averaging are
made without regard to their price on the day of investment or to market trends.
In addition, while you may find Dollar Cost Averaging to be beneficial, it will
not prevent a loss if you ultimately redeem your shares at a price which is
lower than their purchase price.
Systematic Withdrawals
The Company offers a convenient way of withdrawing money from your Fund
account. You may request regular monthly, quarterly, semi-annual or annual
withdrawals in any amount of $100 or more. The withdrawal will be made on the
fifteenth day of each month of the period you select and distributed in cash or
reinvested in shares of another portfolio offered by the Company. To elect this
option, or for more information, please call 1-800-551-2145.
Directed Reinvestments
Generally, dividends and capital gain distributions are automatically
reinvested in shares of the Fund. You may elect, however, to have your dividends
and capital gain distributions automatically reinvested in shares of another
portfolio offered by the Company. To elect this option, or for more information,
please call 1-800-551-2145.
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DIVIDENDS AND DISTRIBUTIONS
Shareholders receive dividends and net capital gain distributions.
Dividends for the Fund, which are derived from its net investment income, will
be declared and paid annually. The Fund realizes capital gains whenever it sells
securities for a higher price than it paid for them. Capital gain distributions
will be declared and paid annually.
Shares in the Fund begin earning dividends on the day a purchase order
is processed and continue earning dividends through and including the day before
the shares are redeemed. If you purchased your Fund shares through a Bank, your
dividends and distributions will be paid in cash and wired to your Bank. If you
purchased your shares directly from the Company, your dividends and
distributions will be automatically reinvested in additional shares of the Fund
unless you notify the Company in writing that you wish to receive dividends
and/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.
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<PAGE>
TAX INFORMATION
Federal taxes. The 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 the 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 the Fund's distributions exceed its net income and gain, 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 portfolio
offered by the Company, 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.
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, to some extent, the Fund will be subject to
foreign withholding taxes with respect to dividends or interest received from
sources in foreign countries.
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 the 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.
-15-
<PAGE>
MANAGEMENT OF THE COMPANY
Investment Adviser
Mercantile-Safe Deposit & Trust Company (referred to as "Mercantile")
is the investment adviser for the 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. Mercantile and its
predecessors have been in the business of managing the investments of fiduciary
and other accounts in the Baltimore area since 1864. As of December 31, 1999,
Mercantile had approximately $16 billion in assets under management.
Mercantile, subject to the general supervision of the Company's Board
of Directors, manages the investment portfolio of the Fund in accordance with
its investment objective and policies. This includes selecting portfolio
investments and placing purchase and sale orders for the Fund.
In exchange for these services, Mercantile is entitled to investment
advisory fees from the Fund that are calculated daily and paid monthly, at the
annual rate of 1.30% of the first $1 billion of the Fund's average daily net
assets, plus 1.20% of the Fund's average daily net assets in excess of $1
billion. After waivers, it is expected that investment advisory fees paid by the
Fund will be 0.68% of average daily net assets during the current fiscal year.
Sub-Adviser
Mercantile has delegated responsibility for day-to-day portfolio
management with respect to the Fund to Delaware Management Company ("Delaware").
Delaware manages the investment portfolio of the Fund in accordance with the
investment requirements and policies established by Mercantile. Delaware
receives a quarterly fee from Mercantile based on the Fund's average daily net
assets.
Delaware, which has its main office at One Commerce Square,
Philadelphia, Pennsylvania 19103, is a series of Delaware Management Business
Trust, a Delaware business trust. As of December 31, 1999, Delaware and its
investment management affiliates had approximately $47 billion in assets under
management.
Portfolio Managers
Gerald S. Frey, Vice President/Senior Portfolio Manager
Mr. Frey has 22 years' experience in the money management business and
holds a BA in Economics from Bloomsburg University and attended Wilkes
College and New York University. Prior to joining Delaware in 1996, he
was a Senior Director with Morgan Grenfell Capital Management in New
York.
Marshall T. Bassett, Vice President
Mr. Bassett joined Delaware in 1997. In his most recent position, he
served as Vice President in Morgan Stanley Asset Management's Emerging
Growth Group, where he
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<PAGE>
analyzed small growth companies. Prior to that, he was a trust officer
at Sovran Bank and Trust Company. He received his bachelor's degree and
MBA from Duke University.
John A. Heffern, Vice President
Mr. Heffern holds a bachelor's degree and an MBA from the University
of North Carolina at Chapel Hill. He joined Delaware in 1997.
Previously, he was a Senior Vice President, Equity Research at Nat
West Securities Corporation's Specialty Finance Services unit and a
Principal and Senior Regional Bank Analyst at Alex. Brown & Sons.
Jeffrey W. Hynoski, Vice President
Mr. Hynoski joined Delaware in 1998. Previously he served as a Vice
President at Bessemer Trust Company in the mid and large
capitalization growth group. Prior to that, Mr. Hynoski held positions
at Lord Abbett & Co. and Cowen Asset Management. Mr. Hynoski holds a
BS in Finance from the University of Delaware and an MBA from Pace
University.
Stephen T. Lampe, Vice President
Mr. Lampe earned a bachelor's degree and an MBA at the University of
Pennsylvania's Wharton School. He joined Delaware in 1995 and provides
analytical services for small and mid-capitalization stocks. He
previously served as a manager at Price Waterhouse. Mr. Lampe is a
Certified Public Accountant.
Lori P. Wachs, Vice President
Ms. Wachs joined Delaware in 1992 from Goldman Sachs, where she was an
equity analyst for two years. She is a graduate of the University of
Pennsylvania's Wharton School, where she majored in Finance and
Oriental Studies.
-17-
<PAGE>
[Inside Back Cover Page]
Service Providers
Management and support services are provided to the Capital Opportunities Fund
by several organizations.
Investment Adviser and Administrator:
Mercantile-Safe Deposit & Trust Company
Baltimore, Maryland
Sub-Adviser:
Delaware Management Company
Philadelphia, Pennsylvania
Custodian:
The Fifth Third Bank
Cincinnati, Ohio
Transfer Agent:
BISYS Fund Services Ohio, Inc.
Columbus, Ohio
Distributor:
BISYS Fund Services Limited Partnership
Columbus, Ohio
-18-
<PAGE>
For More Information
You'll find more information about the Fund in the following documents:
Annual and semi-annual reports
The Company's annual and semi-annual reports will contain more information about
the Fund and the annual report will contain a discussion about the market
conditions and investment strategies that had a significant effect on the Fund's
performance during the last fiscal year.
Statement of Additional Information (SAI)
The SAI contains detailed information about the Fund and its 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
Fund and make shareholder inquiries by calling 1-800-551-2145 or writing to:
M.S.D. & T. Funds, Inc.
Mutual Fund Administration
20 South Charles Street
Fifth Floor
Baltimore, Maryland 21201
If you buy your shares through a financial institution, you may contact your
institution for more information.
You 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 Fund 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.
-19-
<PAGE>
M.S.D. & T. FUNDS, INC.
Capital Opportunities Fund
Statement of Additional Information
___________________ , 2000
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
INVESTMENT OBJECTIVE, POLICIES AND RISKS.......................... 1
FUNDAMENTAL LIMITATIONS........................................... 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION.................... 22
NET ASSET VALUE................................................... 23
ADDITIONAL INFORMATION CONCERNING TAXES........................... 24
MANAGEMENT OF THE COMPANY......................................... 25
INDEPENDENT ACCOUNTANTS........................................... 32
COUNSEL........................................................... 32
ADDITIONAL INFORMATION CONCERNING SHARES.......................... 32
PERFORMANCE INFORMATION........................................... 34
MISCELLANEOUS..................................................... 37
APPENDIX A........................................................ A-1
APPENDIX B........................................................ B-1
</TABLE>
This Statement of Additional Information is meant to be read in
conjunction with the Prospectus dated __________________, 2000 for the Capital
Opportunities Fund of M.S.D. & T. Funds, Inc. This Statement of Additional
Information is incorporated by reference in its entirety into the Prospectus.
Because this Statement of Additional Information is not itself a prospectus, no
investment in shares of the Fund should be made solely upon the information
contained herein. Copies of the Prospectus may be obtained by calling 1-800-551-
2145 or by writing M.S.D. & T. Funds, Inc., c/o BISYS Fund Services Limited
Partnership, 3435 Stelzer Road, Columbus, OH 43219-3035. Capitalized terms used
but not defined herein have the same meanings as in the Prospectus.
Shares of the Fund are not bank deposits or obligations of, or guaranteed,
endorsed or otherwise supported by, Mercantile-Safe Deposit and Trust Company,
its parent company or its affiliates, and such shares are not federally insured
or guaranteed by the U.S. Government, the Federal Deposit Insurance Corporation,
the Federal Reserve Board or any other governmental agency. Investment in the
Fund involves investment risks, including possible loss of principal. You could
lose money by investing in the Fund. In addition, the dividends paid by the Fund
will go up and down. Mercantile-Safe Deposit and Trust Company serves as
investment adviser and administrator to the Fund, is paid fees for its services,
and is not affiliated with BISYS Fund Services Limited Partnership, the Fund's
distributor.
<PAGE>
M.S.D. & T. FUNDS, INC.
M.S.D. & T. Funds, Inc. (the "Company") is a Maryland corporation
which commenced operations on July 21, 1989 as a no-load, open-end,
professionally managed investment company. In addition to the Capital
Opportunities Fund (the "Fund"), the Company offers shares in five other equity
portfolios (the Growth & Income Fund, Equity Income Fund, Equity Growth Fund,
International Equity Fund and Diversified Real Estate Fund); three money market
portfolios (the Prime Money Market Fund, Government Money Market Fund and Tax-
Exempt Money Market Fund); and five bond portfolios (the Limited Maturity Bond
Fund, Total Return Bond Fund, Maryland Tax-Exempt Bond Fund, Intermediate Tax-
Exempt Bond Fund and National Tax-Exempt Bond Fund).
INVESTMENT OBJECTIVE, POLICIES AND RISKS
The investment objective, principal investment strategies and
principal risks of the Fund are described in the Prospectus. The following
information supplements the description of the Fund's investment objective,
policies and risks as set forth in the Prospectus.
Mercantile-Safe Deposit and Trust Company, the Fund's investment
adviser ("Mercantile" or the "Adviser"), and Delaware Management Company, the
Fund's sub-adviser ("Delaware" or the "Sub-Adviser"), use a range of investments
and investment techniques in seeking to achieve the Fund's investment objective.
The Fund may not use all of the investments and investment techniques described
below, which involve various risks which are also described below. The Adviser
and Sub-Adviser will use its best efforts to achieve the Fund's investment
objective, although its achievement cannot be assured. An investor should not
consider an investment in the Fund to be a complete investment program.
Although the Fund invests primarily in the equity securities of small
companies, during normal market and economic conditions it 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 Sub-Adviser has determined to be
of comparable quality. Up to 10% of the Fund's total assets may be invested in
convertible securities that are rated at the time of purchase in the fourth
highest rating category or lower by one or more rating agencies. Convertible
securities that carry the lowest of the four highest ratings assigned by a
rating agency are considered to have speculative characteristics, even though
they are of investment grade quality, and changes in economic conditions or
other circumstances are more likely to lead to a weakened capacity to make
principal and interest payments than is the case with higher grade debt
obligations. Lower quality debt securities (including convertible securities),
also known as "junk 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
<PAGE>
category may present the risk of default, or may be in default. See Appendix A
for a description of applicable debt security ratings.
Risk Factors
Market Risk.
-----------
Because the Fund invests primarily in equity securities, the Fund is
subject to market risk. That is, the possibility exists that common stocks will
decline over short or even extended periods of time. 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 the Fund may fluctuate with movements in the equity
markets.
Interest Rate Risk and Credit Risk.
----------------------------------
To the extent that the Fund invests in fixed income securities, its
holdings of such securities are sensitive to changes in interest rates and the
interest rate-environment. Generally, the market value of fixed income
securities (including municipal obligations) in the Fund can be expected to vary
inversely to changes in prevailing interest rates. 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 the 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.
Certain of the risks associated with investments in foreign securities
are heightened with respect to investments in developing countries and fledgling
democracies. The
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<PAGE>
risks of expropriation, nationalism and social, political and economic
instability are greater in those countries than in more developed capital
markets.
European Currency Unification
-----------------------------
Many European countries have adopted a single European currency, the
euro. On January 1, 1999, the euro became legal tender for all countries
participating in the Economic and Monetary Union ("EMU"). A new European Central
Bank has been created to manage the monetary policy of the new unified region.
On the same date, the exchange rates were irrevocably fixed between the EMU
member countries. National currencies will continue to circulate until they are
replaced by euro coins and bank notes by the middle of 2002.
This change is likely to significantly impact the European capital
markets and may result in additional risks, which include, but are not limited
to, volatility of currency exchange rates, uncertainty as to capital market
reaction, conversion costs that may affect issuer profitability and
creditworthiness, and lack of participation by some European countries.
Derivative Instruments
----------------------
The Fund may purchase certain "derivative" instruments as described
below under various headings. Derivative instruments are instruments that derive
value from the performance of underlying assets, interest 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 Sub-Adviser will evaluate the risks presented by the derivative
instruments purchased by the Fund, and will determine, in connection with its
day-to-day management of the Fund, how they will be used in furtherance of the
Fund's investment objective. It is possible, however, that the Sub-Adviser's
evaluations will prove to be inaccurate or incomplete and, even when accurate
and complete, it is possible that the Fund will, because of the risks discussed
above, incur loss as a result of its investments in derivative instruments.
-3-
<PAGE>
Additional Information on Investment Policies and Risks
Government Obligations and Money Market Instruments
---------------------------------------------------
The 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 Fund include, in addition to U.S. Treasury bonds, notes
and bills, the obligations of the Federal Housing Administration, Farmers Home
Administration, Export-Import Bank of the United States, Small Business
Administration, Government National Mortgage Association, Federal National
Mortgage Association, Federal Financing Bank, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Banks, Federal Home Loan Mortgage Corporation, Federal Intermediate Credit
Banks, Federal Land Banks, Federal Farm Credit Banks, Maritime Administration,
Tennessee Valley Authority, Washington D.C. Armory Board, International Bank for
Reconstruction and Development (the "World Bank"), and Resolution Trust
Corporation. Obligations of certain agencies and instrumentalities, such as
those of the Government National Mortgage Association, are supported by the full
faith and credit of the U.S. Treasury; others, such as those of the Export-
Import Bank, are supported by the issuer's right to borrow from the Treasury;
others, such as those of the Federal National Mortgage Association, are
supported by the discretionary authority of the U.S. Government to purchase the
entity's obligations; still others, such as those of the Federal Home Loan
Mortgage Corporation, are backed solely by the issuer's credit. There is no
assurance that the U.S. Government would provide support to a U.S. Government-
sponsored entity were it not required to do so by law.
The Fund may from time to time invest in money market instruments,
including bank obligations, commercial paper and corporate bonds with remaining
maturities of thirteen months or less. Bank obligations include bankers'
acceptances, negotiable certificates of deposit and non-negotiable time deposits
issued or supported by U.S. or foreign banks that have total assets of more than
$1 billion at the time of purchase (the assets of a bank or savings institution
will be deemed to include the assets of its domestic and foreign branches). The
Fund may invest in obligations of foreign banks or foreign branches of U.S.
banks when the Sub-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 Fund's total assets at the time of purchase.
Commercial paper purchased by the Fund will be rated at the time of
purchase within tier one. Corporate bonds purchased by the Fund with remaining
maturities of thirteen months or less will be rated investment grade at the time
of purchase. In addition, the Fund may acquire unrated commercial paper and
corporate bonds that are determined by the Sub-Adviser at the time of purchase
to be of comparable quality. Commercial paper may include variable and floating
rate instruments.
-4-
<PAGE>
Variable and Floating Rate Instruments
--------------------------------------
The 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.
Because of the absence of a market in which to resell a variable or floating
rate instrument, the Fund might have trouble selling an instrument should the
issuer default or during periods when the Fund is not permitted by agreement to
demand payment of the instrument, and for this and other reasons a loss could
occur with respect to the instrument.
The Sub-Adviser 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.
Municipal Obligations
---------------------
The 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 the
Fund when, as a result of prevailing economic, regulatory or other
circumstances, the yield of such securities on a pre-tax basis is comparable to
that of other debt securities the Fund can purchase. Dividends paid by the 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
-5-
<PAGE>
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.
Municipal obligations purchased by the Fund in some cases may be
insured as to the timely payment of principal and interest. There is no
guarantee, however, that the insurer will meet its obligations in the event of a
default in payment by the issuer. In other cases, municipal obligations may be
backed by letters of credit or guarantees issued by domestic or foreign banks or
other financial institutions which are not subject to federal deposit insurance.
Adverse developments affecting the banking industry generally or a particular
bank or financial institution that has provided its credit or guarantee with
respect to a municipal obligation held by the Fund 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 Fund 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 Fund may invest in bonds and other types of
longer-term tax-exempt instruments.
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 payment of principal and interest on most securities purchased by
the 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
Prospectus and this Statement of Additional Information. The non-governmental
user of facilities financed by private activity bonds is also considered to be
an "issuer."
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by federal or state legislatures extending the time for
payment of principal or interest, or both, or
-6-
<PAGE>
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.
Stand-By Commitments
--------------------
The Fund may acquire "stand-by commitments" with respect to municipal
obligations held in its portfolio. Under a stand-by commitment, a dealer or
bank agrees to purchase from the 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 at any time
before the maturity of the underlying municipal obligations, and may be sold,
transferred or assigned only with the instruments involved.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the 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 Fund will not exceed 1/2
of 1% of the value of the Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The Fund intends to enter into stand-by commitments only with banks,
brokers or dealers which, in the Sub-Adviser's opinion, present minimal credit
risks. In evaluating the creditworthiness of the issuer of a stand-by
commitment, the Sub-Adviser will review periodically the issuer's assets,
liabilities, contingent claims and other relevant financial information. The
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 Fund would acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its 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 the Fund would be valued at zero in determining net
asset value. Where the 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 Fund entitle the
holder to receive interest paid or accrued on debt or the dividend paid on
preferred stock until the securities mature or are redeemed, converted or
exchanged. Prior to conversion, convertible securities have characteristics
similar to ordinary debt securities in that they normally provide a stable
stream of income with generally higher yields than those of common stock of the
same or similar issuers. Convertible securities rank senior to common stock in
a corporation's capital structure and therefore generally entail less risk than
the corporation's common stock, although
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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 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 the 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 Sub-Adviser will consider whether such issuers will have
sufficient cash flow and profits to meet required principal and interest
payments.
Lower Quality Debt Securities ("Junk Bonds").
--------------------------------------------
The Fund may purchase lower quality debt securities convertible into
common stock. Such securities, while generally offering higher yields than
investment grade securities with similar maturities, involve greater risks,
including the possibility of (or actual) default or bankruptcy. They are
regarded as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal.
Issuers of low rated or non-rated securities ("high yield" securities,
commonly known as "junk bonds") may be highly leveraged and may not have
available to them more traditional methods of financing. Therefore, the risks
associated with acquiring the securities of such issuers generally are greater
than is the case with higher rated securities. For example, during an economic
downturn or a sustained period of rising interest rates, issuers of high yield
securities may be more likely to experience financial stress, especially if such
issuers are highly leveraged. During such periods, such issuers may not have
sufficient revenues to meet their interest payment obligations. The issuer's
ability to service its debt obligations also may be adversely affected by
specific issuer developments, or the issuer's inability to meet specific
projected business forecasts, or the unavailability of additional financing.
The risk of loss due to default by the issuer is significantly greater for the
holders of lower-rated securities because such securities may be unsecured and
may be subordinated to other creditors of the issuer.
Lower-rated securities frequently have call or redemption features
which would permit an issuer to repurchase the security from the 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.
The 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 the Fund's ability to
dispose of particular issues when necessary to meet the Fund's liquidity needs
or in
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<PAGE>
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 the
Fund's net asset value. In addition, the 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
---------------------
The Fund may buy portfolio securities subject to the seller's
agreement to repurchase them at an agreed upon date and price. These
transactions are known as repurchase agreements. Repurchase agreements involve
the risk that the seller will fail to repurchase the securities as agreed. In
that event, the Fund will bear the risk of possible loss due to adverse market
action or delays in liquidating the underlying obligations. Repurchase
agreements are considered to be loans under the Investment Company Act of 1940,
as amended (the "1940 Act").
The repurchase price under repurchase agreements generally is equal to
the price paid by the Fund plus interest negotiated on the basis of current
short-term rates (which may be more or less than the rate on the securities
underlying the repurchase agreement). Securities subject to repurchase
agreements will be held by the Fund's custodian or registered in the name of the
Fund involved on the Federal Reserve/Treasury book-entry system. The seller
under a repurchase agreement will be required to maintain the value of the
securities subject to the agreement at not less than the repurchase price
(including accrued interest). Default by the seller would, however, expose the
Fund to possible loss because of adverse market action or delays in connection
with the disposition of the underlying obligations. The Sub-Adviser will enter
into repurchase agreements only with financial institutions it deems
creditworthy and during the term of any repurchase agreement, the Sub-Adviser
will continue to monitor the creditworthiness of the seller.
Reverse Repurchase Agreements
-----------------------------
The Fund may borrow money for temporary purposes by entering into
reverse repurchase agreements. Under these agreements, the Fund sells portfolio
securities to a financial institution and agrees to buy them back at an agreed
upon date and price. Reverse repurchase agreements may be used to meet
redemption requests without selling portfolio securities. Reverse repurchase
agreements involve the risk of counterparty default and possible loss of
collateral held by the counterparty. Reverse repurchase agreements are
considered to be borrowings under the 1940 Act.
Whenever the 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
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that such value is maintained. The Fund would consider entering into reverse
repurchase agreements to avoid otherwise selling securities during unfavorable
market conditions to meet redemptions. Reverse repurchase agreements involve the
risk that the market value of the portfolio securities sold by the Fund may
decline below the price of the securities the Fund is obligated to repurchase.
When-Issued Purchases and Forward Commitments
---------------------------------------------
The Fund 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 the 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 Fund does not intend to engage in when-issued and forward
commitment transactions for speculative purposes.
When the Fund agrees to purchase securities on a when-issued basis or
enters into a forward commitment to purchase securities, the Fund's 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 the Fund
may be required subsequently to place additional assets in the separate account
in order to ensure that the value of the account remains equal to the amount of
the Fund's commitment. It may be expected that the Fund's net assets will
fluctuate to a greater degree when it sets aside portfolio securities to cover
such purchase commitments than when it sets aside cash. Because the Fund's
liquidity and ability to manage its portfolio might be affected when it sets
aside cash or portfolio securities to cover such purchase commitments, the Fund
expects that its commitments to purchase securities on a when-issued or forward
commitment basis will not exceed 25% of the value of its 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.
The Fund will make commitments to purchase securities on a when-issued
basis or to purchase or sell securities on a forward commitment basis only with
the intention of completing the transaction and actually purchasing or selling
securities. If deemed advisable as a matter of investment strategy, however,
the Fund may dispose of or renegotiate a commitment after it is entered into,
and may sell securities it has committed to purchase before those securities are
delivered to the Fund on the settlement date. In these cases the Fund may
realize a capital gain or loss.
When the Fund engages in when-issued or forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their value, is taken into
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<PAGE>
account when determining the Fund's net asset value starting on the day the Fund
agrees to purchase the securities. The Fund does not earn interest on the
securities it has committed to purchase until they are paid for and delivered on
the settlement date. When the Fund makes a forward commitment to sell securities
it owns, the proceeds to be received upon settlement are included in the Fund's
assets, and fluctuations in the value of the underlying securities are not
reflected in the Fund's net asset value as long as the commitment remains in
effect.
Other Investment Companies
--------------------------
In connection with the management of its daily cash position, the Fund
may invest in securities issued by other investment companies which invest in
eligible quality, short-term debt securities, whether taxable or tax-exempt, and
which seek to maintain a $1.00 net asset value per share, i.e., "money market"
funds. In addition, the 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, the Fund would bear, along with other shareholders, its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the advisory and other expenses that the
Fund bears in connection with its own operations.
The Fund may invest in securities issued by other investment companies
within the limits prescribed by the 1940 Act. The Fund currently intends to
limit its investments so that, as determined immediately after a securities
purchase is made: (a) not more than 5% of the value of its total assets will be
invested in the securities of any one investment company; (b) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (c) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund or by the
Company as a whole.
Lending Portfolio Securities
----------------------------
The Fund may lend its portfolio securities to broker-dealers and other
institutions as a means of earning additional income. Although securities loans
will be fully collateralized, such loans present risks of delay in receiving
additional collateral or in recovering the securities loaned or even a loss of
rights in the collateral if the borrower of the securities fails financially.
However, loans will be made only to borrowers deemed by the Sub-Adviser to be of
good standing and only when, in the Sub-Adviser's judgment, the income to be
earned from the loans justifies the attendant risks.
When the Fund lends its securities, it continues to receive interest
or dividends on the securities loaned and also earns income on the loans. Any
cash collateral received by the Fund in connection with such loans will be
invested in short-term money market obligations. Although voting rights, or
rights to consent, attendant to securities on loan pass to the borrower, such
loans may be called at any time and will be called so that the securities may be
voted if a material event affecting the investment occurs. While there is no
limit on the amount of securities which the Fund may loan, fees attributable to
securities lending activities are subject to certain limits under the Internal
Revenue Code of 1986, as amended.
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<PAGE>
Standard & Poor's Depository Receipts, Standard & Poor's MidCap 400
-------------------------------------------------------------------
Depository Receipts and The Dow Industrials DIAMONDS.
----------------------------------------------------
The Fund 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 track 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 Depositary Receipts.
-------------------------------------------------
The Fund may invest up to 25% of its total assets in ADRs, EDRs, GDRs
and similar securities. ADRs typically are issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
issuer. EDRs, which are sometimes referred to as Continental Depositary
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 depositary 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 Fund 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 to establish a rate of exchange for a future point in
time. The Fund may enter into forward foreign currency exchange contracts when
deemed advisable by the Sub-Adviser under two circumstances.
First, when entering into a contract for the purchase or sale of a
security, the 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.
-12-
<PAGE>
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 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, the 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 Fund does not
intend to enter into forward contracts for position hedging purposes on a
regular or continuing basis.
The Fund will not enter into such forward contracts or maintain a net
exposure to such contracts where the consummation of the contracts would
obligate the 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 Fund will incur costs in connection with forward foreign currency exchange
contracts and conversions of foreign currencies and U.S. dollars.
The Fund's custodian will place in a separate account cash or liquid
portfolio securities in an amount equal to the value of the 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, the 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 the 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 the 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
-13-
<PAGE>
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.
Options Trading
---------------
The Fund may write covered call options, buy put options, buy call
options and sell, or "write," secured put options on particular securities or
various securities indices. A call option for a particular security gives the
purchaser of the option the right to buy, and a writer the obligation to sell,
the underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is the consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell the underlying security at the stated exercise price
at any time prior to the expiration date of the option, regardless of the market
price of the security. In contrast to an option on a particular security, an
option on a securities index provides the holder with the right to make or
receive a cash settlement upon exercise of the option.
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 the Fund writes a call option on a security, the option is
"covered" if the Fund 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 maintains with its
custodian cash or liquid portfolio securities equal to the contract value. A
call option is also covered if the Fund 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 the Fund means that the
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<PAGE>
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.
The Fund's obligation to sell a security subject to a covered call
option written by it, or to purchase a security subject to a secured put option
written by it, may be terminated prior to the expiration date of the option by
the Fund's executing a closing purchase transaction, which is effected by
purchasing on an exchange an option of the same series (i.e., same underlying
security, exercise price and expiration date) as the option previously written.
Such a purchase does not result in the ownership of an option. A closing
purchase transaction will ordinarily be effected to realize a profit on an
outstanding option, to prevent an underlying security from being called, to
permit the sale of the underlying security or to permit the writing of a new
option containing different terms on such underlying security. The cost of such
a liquidation purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in the transaction. An option position may be closed out only on an
exchange which provides a secondary market for an option of the same series.
There is no assurance that a liquid secondary market on an exchange will exist
for any particular option. A covered call option writer, unable to effect a
closing purchase transaction, will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise
with the result that the writer in such circumstances will be subject to the
risk of market decline in the underlying security during such period. The Fund
will write an option on a particular security only if the Sub-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 the 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.
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<PAGE>
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 the 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 the Fund will not exceed 5%, and options written
by the Fund will not exceed 25%, of its net assets. Options may or may not be
listed on a national securities exchange and issued by the Options Clearing
Corporation. Unlisted options are not subject to the protections afforded
purchasers of listed options issued by the Options Clearing Corporation which
performs the obligations of its members if they default.
Options trading is a highly specialized activity and carries greater
than ordinary investment risk. Purchasing options may result in the complete
loss of the amounts paid as premiums to the writer of the option. In writing a
covered call option, the Fund gives up the opportunity to profit from an
increase in the market price of the underlying security above the exercise price
(except to the extent the premium represents such a profit). Moreover, it will
not be able to sell the underlying security until the covered call option
expires or is exercised or the Fund closes out the option. In writing a secured
put option, the Fund assumes the risk that the market value of the security will
decline below the exercise price of the option. The use of covered call and
secured put options will not be a primary investment technique of the Fund.
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.
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<PAGE>
Futures and Related Options
---------------------------
The Fund may invest to a limited extent in futures contracts and
options on futures contracts in order to gain fuller exposure to movements of
securities prices pending investment, for hedging purposes or to maintain
liquidity. Futures contracts obligate the Fund, at maturity, to take or make
delivery of certain securities or the cash value of a securities index. The Fund
may not purchase or sell a futures contract (or related option) unless
immediately after any such transaction the sum of the aggregate amount of margin
deposits on its existing futures positions and the amount of premiums paid for
related options is 5% or less of its total assets (after taking into account
certain technical adjustments).
The Fund may also purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When the Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When the Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, the Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities which
the Fund intends to purchase. Similarly, if the value of the Fund's portfolio
securities is expected to decline, the Fund might purchase put options or sell
call options on futures contracts rather than sell futures contracts.
More information regarding futures contracts and related options can
be found in Appendix B.
Rights and Warrants
-------------------
The Fund may participate in rights offerings and may purchase
warrants, which are privileges issued by corporations enabling the owner to
subscribe to and purchase a specified number of shares of the corporation at a
specified price during a specified period of time. Subscription rights normally
have a short life to expiration. The purchase of rights and warrants involves
the risk that the purchaser could lose the purchase value of the right or
warrant if the right to subscribe to additional shares is not exercised prior to
the warrant's expiration. Also, the purchase of rights and warrants involves
the risk that the effective price paid for the right or warrant added to the
subscription price of the related security may exceed the value of the
subscribed security's market price, such as when there is no movement in the
level of the underlying security. The Fund does not intend to invest more than
5% of its net assets in rights and warrants during the current fiscal year.
Managing Liquidity
------------------
Disposing of illiquid investments may involve time-consuming
negotiations and legal expenses, and it may be difficult or impossible to
dispose of such investments promptly at an acceptable price. Additionally, the
absence of a trading market can make it difficult to value a security. For these
and other reasons the Fund will not knowingly invest more than 15% of the value
of its net assets in illiquid securities. Illiquid securities include repurchase
agreements and
-17-
<PAGE>
time deposits that do not permit the Fund to terminate them after seven days'
notice, restricted securities and other securities, for which market quotations
are not readily available. Certain securities that might otherwise be considered
illiquid, however, such as some issues of commercial paper and variable amount
master demand notes with maturities of nine months or less and securities for
which the Sub-Adviser has determined pursuant to guidelines adopted by the
Company's Board of Directors that a liquid trading market exists (including
certain securities that may be purchased by institutional investors pursuant to
Rule 144A under the Securities Act of 1933, as amended) are not subject to this
limitation. Investments in Rule 144A securities could have the effect of
increasing the level of illiquidity in the Fund during any period that qualified
institutional buyers were no longer interested in purchasing these restricted
securities.
Portfolio Transactions and Turnover
Subject to the general supervision and approval of the Company's Board
of Directors, the Sub-Adviser is responsible for, makes decisions with respect
to, and places orders for all purchases and sales of portfolio securities for
the Fund in accordance with the investment policies and requirements established
by the Adviser.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment of brokerage commissions which are generally
fixed.
Transactions in both foreign and domestic over-the-counter markets are
generally principal transactions with dealers, and the costs of such
transactions involve dealer spreads rather than brokerage commissions. With
respect to over-the-counter transactions, the Sub-Adviser, where possible, will
deal directly with dealers who make a market in the securities involved except
in those circumstances in which better prices and execution are available
elsewhere.
The Fund may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Fund will engage in this practice, however, only when the Sub-Adviser, in
its sole discretion, believes such practice to be otherwise in the Fund's
interests.
In making portfolio investments, the Sub-Adviser seeks to obtain the
best net price and the most favorable execution of orders. The Sub-Adviser may,
in its discretion, effect transactions in portfolio securities with dealers who
provide research advice or other services to the Fund or the Sub-Adviser. The
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 the
Fund which is in excess of the amount of commission another broker or dealer
would have charged for effecting that transaction if the 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 Sub-Adviser's overall
responsibilities to the Fund. Such brokerage and research services might
-18-
<PAGE>
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 Sub-Adviser and
does not reduce the advisory fees payable by the Fund or the sub-advisory fees
payable by the Adviser. The Board of Directors will periodically review the
commissions paid by the Fund to consider whether the commissions paid over
representative periods of time appear to be reasonable in relation to the
benefits inuring to the Fund. It is possible that certain of the supplementary
research or other services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, the Fund may be the primary beneficiary of the research
or services received as a result of portfolio transactions effected for such
other account or investment company.
Investment decisions for the Fund are made independently from those
for other accounts advised or managed by the Sub-Adviser. Such other accounts
may also invest in the same securities as the Fund. When a purchase or sale of
the same security is made at substantially the same time on behalf of the Fund
and such other accounts, the transaction will be averaged as to price, and
available investments allocated as to amount, in a manner which the 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 the Fund or the size of the position obtainable or sold for the
Fund. To the extent permitted by law, the Sub-Adviser may aggregate the
securities to be sold or purchased for the Fund with those to be sold or
purchased for such other accounts in order to obtain the best execution.
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase agreements with the Adviser, 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
Securities and Exchange Commission ("SEC"). Under certain circumstances, the
Fund may be at a disadvantage because of these limitations in comparison with
other investment companies which have similar investment objectives but are not
subject to such limitations.
The 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 the
Fund, a rated security may cease to be rated or its rating may be reduced below
the minimum rating required for purchase by the Fund. The Board of Directors or
the Sub-Adviser, when authorized, will consider such an event in determining
whether the Fund should continue to hold the security in accordance with the
interests of the Fund.
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<PAGE>
The portfolio turnover rate for the Fund is calculated by dividing the
lesser of purchases or sales of portfolio securities for the reporting period by
the monthly average value of the portfolio securities owned during the reporting
period. The calculation excludes all securities, including options, whose
maturities or expiration dates at the time of acquisition are one year or less.
Under certain market conditions, the Fund may experience high
portfolio turnover rates as a result of its investment strategies. Portfolio
investments may be sold for a variety of reasons, such as a more favorable
investment opportunity or other circumstances bearing on the desirability of
continuing to hold such investments. Higher portfolio turnover rates (100% or
more) can result in corresponding increases in brokerage commissions, tax
consequences (including the possible realization of additional taxable capital
gains and income) and other transaction costs, which must be borne by the Fund
and ultimately by its shareholders.
Portfolio turnover rates for the Fund may vary greatly from year to
year as well as within a particular year, and may be affected by cash
requirements for redemption of shares and by requirements which enable the Fund
to receive favorable tax treatment. Portfolio turnover will not be a limiting
factor in making portfolio decisions for the Fund, and the Fund may engage in
short-term trading to achieve its investment objective. Although it is not
possible to accurately predict the Fund's portfolio turnover rate, such rate may
exceed 100% for the current fiscal year.
FUNDAMENTAL LIMITATIONS
The investment objective of the Fund described in the Prospectus 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, the Fund's investment policies
discussed above are not fundamental and may be changed by the Company's Board of
Directors without shareholder approval.
The Fund is subject to the following fundamental limitations, which
may be changed with respect to the Fund only by a vote of the holders of a
majority of the Fund's outstanding shares (as defined below under
"Miscellaneous").
The Fund may not:
1. Purchase securities of any one issuer (other than securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities)
if, immediately after such purchase, more than 5% of the value of the Fund's
total assets would be invested in the securities of such issuer, or more than
10% of the issuer's outstanding voting securities would be owned by the Fund,
except that up to 25% of the value of the total assets of the Fund may be
invested without regard to these limitations. For purposes of these limitations,
a security is considered to be issued by the entity (or entities) whose assets
and revenues back the security. A guarantee of a security will not be deemed to
be a security issued by the guarantor when the value of all
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<PAGE>
securities issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets.
2. Purchase any securities which would cause 25% or more of the
value of its total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal business activities
in the same industry, provided that (a) there is no limitation with respect to
(i) obligations issued or guaranteed by the United States, any state, territory,
or possession of the United States, the District of Columbia, or any of their
authorities, agencies, instrumentalities, or political subdivisions and (ii)
repurchase agreements secured by any such obligations; (b) wholly-owned finance
companies will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of the parents; and
(c) utilities will be classified according to their services (for example, gas,
gas transmission, electric and gas, and electric and telephone each will be
considered a separate industry).
3. Borrow money or issue senior securities, except that the Fund may
borrow from banks and enter into reverse repurchase agreements for temporary
purposes and then in amounts not in excess of 10% of the value of its total
assets at the time of such borrowing; or pledge any assets except in connection
with any such borrowing and in amounts not in excess of the lesser of the dollar
amounts borrowed or 10% of the value of its total assets at the time of such
borrowing. The Fund will not purchase portfolio securities while borrowings
(including reverse repurchase agreements and borrowings from banks) in excess of
5% of the Fund's total assets are outstanding. Securities held by the Fund in
escrow or separate accounts in connection with the Fund's investment practices
are not deemed to be pledged for purposes of this limitation.
4. Purchase or sell real estate, except that the Fund may (a)
purchase securities of issuers which deal in real estate; (b) invest in
municipal obligations secured by real estate or interests therein; and (c)
purchase securities which are secured by real estate or interests therein.
5. Act as an underwriter of securities, except to the extent that
the purchase of obligations directly from the issuer thereof in accordance with
the Fund's investment objective, policies, and limitations may be deemed to be
underwriting.
6. Write or sell put options, call options, straddles, spreads, or
any combination thereof, except that the Fund may engage in transactions in
options on securities, securities indices, futures contracts and options on
futures contracts.
7. Purchase securities of companies for the purpose of exercising
control.
8. Purchase securities on margin, make short sales of securities, or
maintain a short position, except that (a) this investment limitation shall not
apply to transactions in options,
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<PAGE>
futures contracts and related options; and (b) the Fund may obtain short-term
credit as may be necessary for the clearance of purchases and sales of portfolio
securities.
9. Purchase or sell commodities or commodity contracts, or invest in
oil, gas, or mineral exploration or development programs, except that the Fund
may (a) purchase, to the extent appropriate to its investment objective,
publicly traded securities of companies engaging in whole or in part in such
activities; and (b) enter into futures contracts and related options.
10. Make loans, except that the Fund may (a) purchase and hold debt
instruments in accordance with its investment objective and policies; (b) enter
into repurchase agreements with respect to portfolio securities; and (c) 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.
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 the Fund's portfolio securities does not mean that the
limitation has been violated.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Information on how to purchase and redeem the Fund's shares is
included in the Fund's Prospectus. Shares of the Fund are sold on a continuous
basis by 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 shares.
If any portion of the shares to be redeemed represents an investment
made by check, the Fund may delay the payment of the redemption proceeds until
the Fund's transfer agent is reasonably satisfied that the check has been
collected, which could take up to fifteen days from the purchase date. This
procedure does not apply to shares purchased by money order or wire payment.
During the period prior to the time the shares are redeemed, dividends on such
shares will accrue and be payable.
Under the 1940 Act, the Fund may suspend the right of redemption or
postpone the date of payment upon redemption for any period during which the New
York Stock Exchange is closed, other than customary weekend and holiday
closings, or during which trading on said Exchange is restricted, or during
which (as determined by the SEC by rule or regulation) an emergency exists as a
result of which disposal or valuation of portfolio securities is not reasonably
practicable, or for such other periods as the SEC may permit. (The Fund may
also suspend or postpone the recordation of the transfer of its shares upon the
occurrence of any of the foregoing conditions.)
In addition to the situations described in the Prospectus, the Company
may redeem shares involuntarily to reimburse the Fund for any loss sustained by
reason of the failure of a shareholder to make full payment for shares purchased
by the shareholder or to collect any
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<PAGE>
charge relating to a transaction effected for the benefit of a shareholder which
is applicable to Fund shares as provided in the Prospectus from time to time.
The Company reserves the right, if conditions exist which make cash
payments undesirable, to honor any request for redemption or repurchase of the
Fund's shares by making payment in whole or in part in readily marketable
securities chosen by the Company and valued in the same way as they would be
valued for purposes of computing the Fund's net asset value (a "redemption in-
kind"). If payment is made in securities, a shareholder may incur transaction
costs in converting the securities into cash. The Company has elected, however,
to be governed by Rule 18f-1 under the 1940 Act as a result of which the Company
is obligated to redeem shares, with respect to any one shareholder during any
90-day period, solely in cash up to the lesser of $250,000 or 1% of the net
asset value of the Fund at the beginning of the period.
NET ASSET VALUE
The net asset value per share of the Fund is calculated by dividing
the total value of the assets belonging to the Fund, less the liabilities of the
Fund, by the number of outstanding shares of the Fund. "Assets belonging to"
the Fund consist of the consideration received upon the issuance of shares of
the Fund together with all income, earnings, profits, and proceeds derived from
the investment thereof, including any proceeds from the sale of such
investments, any funds or payments derived from any reinvestment of such
proceeds, and a portion of any general assets of the Company not belonging to a
particular investment portfolio. Assets belonging to the Fund are reduced by
the direct liabilities of the Fund and by a share of the general liabilities of
the Company allocated daily in proportion to the relative net asset values of
all of the 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 the Fund are conclusive.
The Fund's 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.
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
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<PAGE>
matrix pricing systems, electronic data processing techniques, and/or quoted bid
and asked prices provided by investment dealers. Short-term investments that
mature in 60 days or less are valued at amortized cost unless the Board of
Directors determines that this does not constitute fair value.
ADDITIONAL INFORMATION CONCERNING TAXES
The following summarizes certain additional considerations generally
affecting the Fund and its shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussions here and in the
Prospectus are not intended as a substitute for careful tax planning. Investors
are advised to consult their tax advisers with specific reference to their own
tax situations.
The tax principles applicable to transactions in certain financial
instruments and futures contracts and options that may be engaged in by the Fund
are complex and, in some cases, uncertain. Such transactions may cause the Fund
to recognize taxable income prior to the receipt of cash, thereby requiring the
Fund to liquidate other positions, or to borrow money, so as to make sufficient
distributions to shareholders to avoid corporate-level tax. Moreover, some or
all of the income recognized may be ordinary income or short-term capital gain,
so that the distributions may be taxable to shareholders as ordinary income.
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 Internal Revenue Code of 1986, as amended (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 Fund will be eligible for the dividends received
deduction allowed to certain corporations only to the extent of the total
qualifying dividends received by the Fund from domestic corporations for a
taxable year. Corporate shareholders will have to take into account the entire
amount of any dividend received in making certain adjustments for federal
alternative minimum tax purposes. The dividends received deduction is not
available for capital gain dividends.
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.
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<PAGE>
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. The 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.
The Fund is treated as a separate entity under the Code. Although the
Fund expects to qualify as a regulated investment company and to be relieved of
all or substantially all federal income taxes, depending upon the extent of the
Company's activities in states and localities in which its offices are
maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, the Fund may be subject
to the tax laws of such states or localities. In addition, in those states and
localities which have income tax laws, the treatment of the Fund and its
shareholders under such laws may differ from their treatment under federal
income tax laws. Shareholders are advised to consult their tax advisers
concerning the application of state and local taxes.
If for any taxable year the Fund does not qualify for the special
federal income tax treatment afforded regulated investment companies, all of its
taxable income will be subject to federal income tax at regular corporate rates
without any deduction for distributions to its shareholders. In such event,
dividend distributions would be taxable as ordinary income to shareholders to
the extent of the Fund's current and accumulated earnings and profits, and would
be eligible for the dividends received deduction allowed to corporations under
the Code.
The Fund will be required in certain cases to withhold and remit to
the U.S. Treasury 31% of taxable dividends or gross proceeds realized upon sale
paid to shareholders who have failed to provide a correct tax identification
number in the manner required, who are subject to withholding by the Internal
Revenue Service for failure properly to include on their return payments of
taxable interest or dividends, or who have failed to certify to the Fund that
they are not subject to backup withholding when required to do so or that they
are "exempt recipients."
MANAGEMENT OF THE COMPANY
Directors and Officers
- ----------------------
The business of the Company is managed under the general supervision
of the Company's Board of Directors. The Directors and officers of the Company,
their addresses, principal occupations during the past five years, and other
affiliations are as follows:
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Position with During Past 5 Years
Name and Address the Company and Other Affiliations
- ---------------- ------------- ----------------------
LESLIE B. DISHAROON* Chairman of the Retired; Director,
11321 John Carroll Road Board and Baltimore Gas & Electric
Owings Mills, MD 21117 President Company; Director,
Age: 66 Travelers Inc. (diversified
financial services);
Director, GRC
International, Inc.
(technology based services
and products); Director,
Aegon USA, Inc. (holding
company-insurance).
DECATUR H. MILLER* Director and Retired.
26 Whitfield Road Treasurer
Baltimore, MD 21201
Age: 66
EDWARD D. MILLER Director Dean/Chief Executive
Johns Hopkins Medicine Officer, Johns Hopkins
720 Rutland Street Medicine, January 1997 to
Baltimore, MD 21205-2196 date; Interim Dean, Johns
Age: 56 Hopkins Medicine, March
1996 to January 1997;
Chairman, Department of
Anesthesiology and Critical
Care Medicine, Johns
Hopkins University, July
1994 to date.
JOHN R. MURPHY Director Vice Chairman, National
3115 Blendon Road Geographic Society, March
Owings Mills, MD 21117 1998 to date; President and
Age: 65 Chief Executive Officer,
National Geographic Society
May 1996 to March 1998.
GEORGE R. PACKARD, III Director President, U.S. - Japan
U.S. - Japan Foundation Foundation, July 1998 to
145 East 32/nd/ Street date; Visiting President,
New York City, NY 10016 International University of
Age: 67 Japan, 1994 to date; Former
Dean, School of Advanced
International Studies at
The Johns Hopkins
University; Director,
Offitbank (private bank).
W. BRUCE McCONNEL, III Secretary Partner of the law firm of
One Logan Square Drinker Biddle & Reath LLP,
18/th/ & Cherry Streets Philadelphia, Pennsylvania.
Philadelphia, PA 19103-6996
Age: 57
___________________
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<PAGE>
* 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 $______. 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:
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PENSION OR TOTAL
RETIREMENT COMPENSATION
BENEFITS FROM THE
AGGREGATE ACCRUED AS COMPANY AND
COMPENSATION PART OF FUND COMPLEX*
NAME OF FROM THE COMPANY PAID TO
PERSON/POSITION COMPANY EXPENSES DIRECTORS
Leslie B. Disharoon $______ N/A $______
Chairman of the Board of
Directors and President
Decatur H. Miller $______ N/A $______
Director and Treasurer
Edward D. Miller, M.D. $______ N/A $______
Director
John R. Murphy $______ N/A $______
Director
George R. Packard, III $______ N/A $______
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
serves as the Fund's investment adviser and administrator and has its principal
offices at Two Hopkins Plaza, Baltimore, Maryland 21201. Delaware acts as sub-
adviser for the Fund and is located at One Commerce Square, Philadelphia,
Pennsylvania 19103. 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 Fund's 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 Fund and serves as the transfer and dividend disbursing agent for the
Fund. The Fund also has a custodian, The Fifth Third Bank, located at 38
Fountain Square Plaza, Cincinnati, Ohio 45263.
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 Fund.
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<PAGE>
Advisory and Sub-Advisory Services
- ----------------------------------
Mercantile serves as investment adviser to the Fund pursuant to an
Addendum dated _________________, 2000 to the Advisory Agreement dated July 24,
1998. Delaware provides sub-advisory services with respect to the Fund pursuant
to a Sub-Advisory Agreement dated _________________ , 2000. Mercantile and
Delaware each have 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 Fund that are calculated daily and paid monthly at the
annual rate of 1.30% of the first $1 billion of the Fund's average daily net
assets, plus 1.20% of the Fund's average daily net assets in excess of $1
billion. Mercantile has agreed to pay Delaware a sub-advisory fee, computed
daily and paid quarterly, at the annual rate of 0.70% of the first $1 billion of
the Fund's average daily net assets, plus 0.60% of the Fund's average daily net
assets in excess of $1 billion. The fees paid by Mercantile to Delaware come out
of Mercantile's advisory fee and are not an additional expense of the Fund.
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 and Sub-Advisory Agreements
will continue in effect through July 31, 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 the Fund, provided that in either event such Agreement's
continuance also is approved by a majority of the Company's Directors who are
not parties to such Agreement, or "interested persons" (as defined in the 1940
Act) of any such party, by votes cast in person at a meeting called for the
purpose of voting on such approval. The Advisory Agreement and Sub-Advisory
Agreement each may be terminated by the Company or the Adviser (or the Sub-
Adviser in the case of the Sub-Advisory Agreement) on 60 days' written notice,
and will terminate immediately in the event of its assignment. Upon termination
of the Advisory Agreement, the Company would be required, at the request of the
Adviser, to change its name to a name not including "M.S.D. & T." or
"Mercantile-Safe Deposit and Trust Company."
Administrator
- -------------
Mercantile serves as the Company's administrator pursuant to an
Administration Agreement dated as of May 28, 1993 (the "Administration
Agreement") and generally assists in all aspects of the Company's operation and
administration. Mercantile has agreed to maintain
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<PAGE>
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 the Fund.
Custodian
- ---------
The Fifth Third Bank ("Fifth Third") serves as custodian of the assets
of the Fund, pursuant to a Custody Agreement, under which Fifth Third has
agreed, among other things, to (i) maintain a separate account in the name of
the Fund; (ii) hold and disburse portfolio securities on account of the Fund;
(iii) collect and receive all income and other payments and distributions on
account of the Fund's portfolio investments; and (iv) make periodic reports to
the Company concerning the Fund's operations. Fifth Third is authorized to
select one or more banks or trust companies to serve as sub-custodian on behalf
of the Fund, provided that Fifth Third shall remain liable for the performance
of all of its duties under the Custody Agreement and will hold the Fund harmless
from losses caused by the negligence or willful misconduct of any bank or trust
company serving as sub-custodian.
Distributor, Transfer and Dividend Disbursing Agent and Fund Accountant
- -----------------------------------------------------------------------
Shares of the Fund 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 the Fund from year to year if approved at least annually by the
Company's Board of Directors, or by the vote of a majority of the outstanding
voting securities of the Fund, and by the vote of a majority of the Directors of
the Company who are not parties to the Agreement or interested persons of any
such party, cast in person at a meeting called for the purpose of voting on such
approval. The Distribution Agreement will terminate in the event of its
assignment, as defined in the 1940 Act.
BISYS Fund Services Ohio, Inc. ("BISYS Ohio"), an affiliate of the
Distributor, serves as transfer and dividend disbursing agent for the Fund.
Under its Transfer Agency Agreement, BISYS Ohio has agreed, among other things,
to (i) receive purchase orders and
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<PAGE>
redemption requests for shares of the Fund; (ii) issue and redeem shares of the
Fund; (iii) effect transfers of shares of the Fund; (iv) prepare and transmit
payments for dividends and distributions declared by the Fund; (v) maintain
records of account for the Fund and shareholders and advise each as to the
foregoing; (vi) record the issuance of shares of the Fund and maintain a record
of and provide the Fund on a regular basis with the total number of shares of
the Fund which are authorized, issued and outstanding; (vii) perform the
customary services of a transfer agent, dividend disbursing agent and custodian
of certain retirement plans and, as relevant, agent in connection with
accumulation, open account or similar plans; and (viii) provide a system
enabling the Fund to monitor the total number of shares sold in each state.
BISYS Ohio also provides fund accounting services for the Company,
including the computation of the Fund's net asset value, net income and realized
capital gains, if any.
Compensation of Administrator, Custodian, Transfer and Dividend Disbursing Agent
- --------------------------------------------------------------------------------
and Fund Accountant
- -------------------
Mercantile, the Custodian 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.
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 custodian, transfer agent, fund
accountant and blue sky servicing agent; 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 Fund's other service providers. The amount
of the fee waivers may be changed at any time at the sole discretion of
Mercantile with respect to advisory and administration fees, and by the Fund's
other service providers, with respect to all other fees. As to any amounts
voluntarily waived or reimbursed, the service providers retain the ability to be
reimbursed by the Fund for such amounts prior to fiscal year-end. Such waivers
and
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<PAGE>
reimbursements would increase the return to investors when made but would
decrease the return if the Fund were required to reimburse a service provider.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 2400 Eleven Penn Center, Philadelphia,
Pennsylvania 19103, serve as independent accountants for the Company.
COUNSEL
Drinker Biddle & Reath LLP, One Logan Square, 18/th/ & Cherry Streets,
Philadelphia, Pennsylvania 19103, serves as counsel to the Company and will pass
upon certain legal matters on behalf of the Company.
ADDITIONAL INFORMATION CONCERNING SHARES
The Company was incorporated in Maryland on March 7, 1989 and is a
mutual fund of the type known as an "open-end management investment company."
The Company's Articles of Incorporation authorize the Board of Directors to
issue up to 10,000,000,000 full and fractional shares of capital stock, $.001
par value per share. The Company's Articles of Incorporation further authorize
the Board of Directors to classify and reclassify any unissued shares into any
number of additional classes of shares. Of these authorized shares, 700,000,000
shares are classified as Class A Common Stock representing shares of the Prime
Money Market Fund, 700,000,000 shares are classified as Class B Common Stock
representing shares of the Government Money Market Fund, 600,000,000 shares are
classified as Class C Common Stock representing shares of the Tax-Exempt Money
Market Fund, 600,000,000 shares are classified as Class D Common Stock
representing shares of the Tax-Exempt Money Market Fund (Trust), 500,000,000
shares are classified as Class E Common Stock representing shares of the Growth
& Income Fund, 500,000,000 shares are classified as Class F Common Stock
representing shares of the Limited Maturity Bond Fund, 400,000,000 shares are
classified as Class G Common Stock representing shares of the Maryland Tax-
Exempt Bond Fund, 400,000,000 shares are classified as Class H Common Stock
representing shares of the International Equity Fund, 400,000,000 shares are
classified as Class I Common Stock representing shares of the International Bond
Portfolio, 400,000,000 shares are classified as Class J Common Stock
representing shares of the Diversified Real Estate Fund, 400,000,000 shares are
classified as Class K Common Stock representing shares of the National Tax-
Exempt Bond Fund, 400,000,000 shares are classified as Class L Common Stock
representing shares of the Total Return Bond Fund, 400,000,000 shares are
classified as Class M Common Stock representing shares of the Equity Growth
Fund, 400,000,000 shares are classified as Class N Common Stock representing
shares of the Equity Income Fund, 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
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<PAGE>
Statement of Additional Information, neither the International Bond Fund nor the
Capital Opportunities Fund had commenced operations.
In the event of a liquidation or dissolution of the Company or an
individual portfolio, shareholders of a particular portfolio would be entitled
to receive the assets available for distribution belonging to such portfolio,
and a proportionate distribution, based upon the relative net asset values of
the Company's respective portfolios, of any general assets not belonging to any
particular portfolio which are available for distribution. Shareholders of a
portfolio are entitled to participate equally in the net distributable assets of
the particular portfolio involved on liquidation, based on the number of shares
of the portfolio 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.
Shareholders of the Fund, as well as those of any other investment
portfolio offered by the Company in the future, will vote in the aggregate and
not by portfolio or class on all matters, except as otherwise required by law or
when the Board of Directors determines that the matter to be voted upon affects
only the interests of the shareholders of a particular portfolio or class. Rule
18f-2 under the 1940 Act provides that any matter required to be submitted to
the holders of the outstanding voting securities of an investment company such
as the Company shall not be deemed to have been effectively acted upon unless
approved by the holders of a majority of the outstanding shares of each
portfolio affected by the matter. A portfolio is affected by a matter unless it
is clear that the interests of each portfolio in the matter are substantially
identical or that the matter does not affect any interest of the portfolio.
Under the Rule, the approval of an investment advisory agreement or sub-advisory
agreement or any change in a fundamental investment objective or investment
policy would be effectively acted upon with respect to a portfolio only if
approved by a majority of the outstanding shares of such portfolio. 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
portfolios voting together in the aggregate without regard to particular
portfolios.
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.
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<PAGE>
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 portfolio'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
portfolio 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 portfolio's assets
into money and, in connection therewith, to cause all outstanding shares of such
portfolio to be redeemed at their net asset value; or (c) combine a portfolio's
assets with the assets belonging to one or more other portfolios if the Board of
Directors reasonably determines that such combination will not have a material
adverse effect on the shareholders of any portfolio participating in such
combination and, in connection therewith, to cause all outstanding shares of any
such portfolio to be redeemed or converted into shares of another portfolio at
their net asset value. The exercise of such authority may be subject to certain
restrictions under the 1940 Act.
PERFORMANCE INFORMATION
Yield Calculations. From time to time the Fund may quote its yield in
------------------
advertisements, sales literature or in reports to shareholders. The yield for
the 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. The 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.
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<PAGE>
For the purpose of determining net investment income earned during the
period (variable "a" in the formula), dividend income on equity securities held
by the Fund is recognized by accruing 1/360 of the stated dividend rate of the
security each day that the security is in the portfolio. The Fund calculates
interest earned on any debt obligations held in its portfolio by computing the
yield to maturity of each obligation held by it based on the market value of the
obligation (including actual accrued interest) at the close of business on the
last business day of each 30-day period, or, with respect to obligations
purchased during the 30-day period, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
30-day period that the obligation is in the portfolio. The maturity of an
obligation with a call provision is the next call date on which the obligation
reasonably may be expected to be called or, if none, the maturity date. With
respect to debt obligations purchased at a discount or premium, the formula
generally calls for amortization of the discount or premium. The amortization
schedule will be adjusted monthly to reflect changes in the market values of
such debt obligations.
Total Return Calculations. The Fund computes its average annual total
-------------------------
return by determining the average annual compounded rates of return during
specified periods that equate the initial amount invested in the Fund to the
ending redeemable value of such investment in the Fund. This is done by
dividing the ending redeemable value of a hypothetical $1,000 initial payment by
$1,000 and raising the quotient to a power equal to one divided by the number of
years (or fractional portion thereof) covered by the computation and subtracting
one from the result. This calculation can be expressed as follows:
ERV /1/n/
T = [(-----) - 1]
P
Where: T = average annual total return.
ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Fund computes its aggregate total return by determining the
aggregate rates of return during specified periods that likewise equate the
initial amount invested in the Fund to the ending redeemable value of such
investment in the Fund. The formula for calculating aggregate total return is
as follows:
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<PAGE>
ERV
T = [(-------) - 1]
P
The calculations of average annual total return and aggregate total
return assume the reinvestment of all dividends and capital gain distributions
on the reinvestment dates during the period. The ending redeemable value
(variable "ERV" in each formula) is determined by assuming complete redemption
of the hypothetical investment and the deduction of all nonrecurring charges at
the end of the period covered by the computations.
Since performance will fluctuate, performance data for the Fund cannot
necessarily be used to compare an investment in the Fund's shares with bank
deposits, savings accounts and similar investment alternatives which often
provide an agreed or guaranteed fixed yield for a stated period of time.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a portfolio, portfolio maturity,
operating expenses and market conditions.
Any fees charged by a Bank directly to your account in connection with
an investment in the Fund will not be included in the Fund's calculations of
yield and/or total return.
Performance Comparisons
- -----------------------
From time to time, in advertisements or in reports to shareholders,
the Fund's yield or total return may be quoted and compared to that of other
mutual funds with similar investment objectives and to stock or other relevant
indices. For example, the total return and yield of the Fund may be compared to
the Consumer Price Index, Standard & Poor's SmallCap 600 Index, an index of
unmanaged 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. In addition, total return and yield data as reported in
national financial publications such as Money Magazine, Forbes, Barron's, The
Wall Street Journal, and The New York Times, or in publications of a local or
regional nature, may be used in comparing the performance of the Fund. The
total return and yield of the Fund may also be compared to data prepared by
Lipper Analytical Services, Inc.
From time to time, the Company may include the following types of
information in advertisements, supplemental sales literature and reports to
shareholders: (1) discussions of general economic or financial principles (such
as the effects of inflation, the power of compounding and the benefits of
dollar-cost averaging); (2) discussions of general economic trends; (3)
presentations of statistical data to supplement such discussions; (4)
descriptions of past or anticipated portfolio holdings for the Fund; (5)
descriptions of investment strategies for the Fund; (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 Fund; (7)
comparisons of investment products (including the Fund) with relevant market or
industry indices or other appropriate
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<PAGE>
benchmarks; and (8) discussions of Fund rankings or ratings by recognized rating
organizations. The Company may also include calculations, such as hypothetical
compounding examples, which describe hypothetical investment results in such
communications. Such performance examples will be based on an express set of
assumptions and are not indicative of the performance of the Fund.
Information concerning the current yield and performance of the Fund
may be obtained by calling 1-800-551-2145.
MISCELLANEOUS
As used in this Statement of Additional Information, a "majority of
the outstanding shares" of the Fund means, with respect to the approval of an
investment advisory agreement or sub-advisory agreement or change in a
fundamental investment policy, the lesser of (a) 67% of the shares of the Fund
represented at a meeting at which the holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy, or (b) more
than 50% of the outstanding shares of the Fund.
As of March 27, 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 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 March 27, 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 Equity Growth Fund was as follows: Nanticoke
Health Services, 801 Middleford Rd., Seaford, DE 19973 (6.70%).
As of March 27, 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 Diversified Real Estate Fund was as follows:
Mercantile-Safe Deposit & Trust, Company Pension, Two Hopkins Plaza, Baltimore,
MD 21201 (43.76%) and The Walters Art Gallery, Attn. Harold Stephens,
Controller, 600 North Charles Street, Baltimore, MD 21201-5118 (9.28%).
As of March 27, 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 Limited Maturity Bond Fund was as follows: C.R.
Daniels, Inc. Profit Sharing, c/o Mercantile-Safe Deposit & Trust, Two Hopkins
Plaza, Baltimore, MD 21201 (5.69%).
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<PAGE>
As of March 27, 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 Tax-Exempt Money Market Fund was as follows:
Reliable Liquors, Inc., 2200 Winchester Street, Baltimore, MD 21216 (8.88%).
As of March 27, 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 Government Money Market Fund was as follows:
National Asbestos Workers Pension, c/o Carday Associates Inc., 4600 Powder Mill
Road, Beltsville, MD 20705-2675 (5.24%).
If you have any questions concerning the Company or any of the Funds,
please call 1-800-551-2145.
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<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
A-1
<PAGE>
the debt ratings assigned to specific issues. Foreign currency issuer ratings
are also distinguished from local currency issuer ratings to identify those
instances where sovereign risks make them different from 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.
The three rating categories of Duff & Phelps for investment grade
commercial paper and short-term debt are "D-1," "D-2" and "D-3." Duff & Phelps
employs three designations, "D-1+," "D-1" and "D-1-," within the highest rating
category. The following summarizes the rating categories used by Duff & Phelps
for commercial paper:
"D-1+" - Debt possesses the highest certainty of timely payment.
Short-term liquidity, including internal operating factors and/or access to
alternative sources of funds, is outstanding, and safety is just below risk-free
U.S. Treasury short-term obligations.
"D-1" - Debt possesses very high certainty of timely payment.
Liquidity factors are excellent and supported by good fundamental protection
factors. Risk factors are minor.
A-2
<PAGE>
"D-1-" - Debt possesses high certainty of timely payment. Liquidity
factors are strong and supported by good fundamental protection factors. Risk
factors are very small.
"D-2" - Debt possesses good certainty of timely payment. Liquidity
factors and company fundamentals are sound. Although ongoing funding needs may
enlarge total financing requirements, access to capital markets is good. Risk
factors are small.
"D-3" - Debt possesses satisfactory liquidity and other protection
factors qualify issues as to investment grade. Risk factors are larger and
subject to more variation. Nevertheless, timely payment is expected.
"D-4" - Debt possesses speculative investment characteristics.
Liquidity is not sufficient to insure against disruption in debt service.
Operating factors and market access may be subject to a high degree of
variation.
"D-5" - Issuer failed to meet scheduled principal and/or interest
payments.
Fitch IBCA short-term ratings apply to debt obligations that have time
horizons of less than 12 months for most obligations, or up to three years for
U.S. public finance securities. The following summarizes the rating categories
used by Fitch IBCA for short-term obligations:
"F1" - Securities possess the highest credit quality. This designation
indicates the 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.
"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 uncertain 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.
A-3
<PAGE>
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.
"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.
A-4
<PAGE>
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.
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.
"c" - The "c" subscript is used to provide additional information to
investors that the bank may terminate its obligation to purchase tendered bonds
if the long-term credit rating of the issuer is below an investment-grade level
and/or the issuer's bonds are deemed taxable.
"p" - The letter "p" indicates that the rating is provisional. A
provisional rating assumes that successful completion of the project financed by
the debt being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful, timely completion of the
project. This rating, however, while addressing credit quality subsequent to
completion of the project, makes no comment on the likelihood of or the risk of
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default upon failure of such completion. The investor should exercise his own
judgment with respect to such likelihood and risk.
* - Continuance of the ratings is contingent upon Standard & Poor's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
"r" - The "r" highlights derivative, hybrid, and certain other
obligations that Standard & Poor's believes may experience high volatility or
high variability in expected returns as a result of 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. Debt obligations of
issuers outside the United States and its territories are rated on the same
basis as domestic corporate and municipal issues. The ratings measure the
creditworthiness of the obligor but do not take into account currency exchange
and related uncertainties.
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
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unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba," "B," "Caa," "Ca" and "C" - Bonds that possess one of these
ratings provide questionable protection of interest and principal ("Ba"
indicates speculative elements; "B" indicates a general lack of characteristics
of desirable investment; "Caa" indicates poor standing; "Ca" represents
obligations which are speculative in a high degree; and "C" represents the
lowest rated class of bonds). "Caa," "Ca" and "C" bonds may be in default.
Con. (...) - Bonds for which the security depends upon the completion
of some act or the fulfillment of some condition are rated conditionally. These
are bonds secured by (a) earnings of projects under construction, (b) earnings
of projects unseasoned in operating experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
Note: Moody's applies numerical modifiers 1, 2, and 3 in each generic
rating classification from "Aa" through "Caa". The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates a ranking in the
lower end of its generic rating category.
The following summarizes the long-term debt ratings used by Duff &
Phelps for corporate and municipal long-term debt:
"AAA" - Debt is considered to be of the highest credit quality. The
risk factors are negligible, being only slightly more than for risk-free U.S.
Treasury debt.
"AA" - Debt is considered to be of high credit quality. Protection
factors are strong. Risk is modest but may vary slightly from time to time
because of economic conditions.
"A" - Debt possesses protection factors which are average but
adequate. However, risk factors are more variable in periods of greater economic
stress.
"BBB" - Debt possesses below-average protection factors but such
protection factors are still considered sufficient for prudent investment.
Considerable variability in risk is present during economic cycles. This is the
lowest investment grade category.
"BB," "B," "CCC," "DD" and "DP" - Debt that possesses one of these
ratings is considered to be below investment grade. Although below investment
grade, debt rated "BB" is deemed likely to meet obligations when due. Debt rated
"B" possesses the risk that obligations will not be met when due. Debt rated
"CCC" is well below investment grade and has considerable uncertainty as to
timely payment of principal, interest or preferred dividends. Debt rated "DD" is
a defaulted debt obligation, and the rating "DP" represents preferred stock with
dividend arrearages.
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To provide more detailed indications of credit quality, the "AA," "A,"
"BBB," "BB" and "B" ratings may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within these major categories.
The following summarizes the ratings used by Fitch IBCA for corporate
and municipal bonds:
"AAA" - Bonds considered to be investment grade and of the highest
credit quality. These ratings denote the lowest expectation of credit risk and
are assigned only in case of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events.
"AA" - Bonds considered to be investment grade and of very high credit
quality. These ratings denote a very low expectation of credit risk and indicate
very strong capacity for timely payment of financial commitments. This capacity
is not significantly vulnerable to foreseeable events.
"A" - Bonds considered to be investment grade and of high credit
quality. These ratings denote a low expectation of credit risk and indicate
strong capacity for timely payment of financial commitments. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings.
"BBB" - Bonds considered to be investment grade and of good credit
quality. These ratings denote that there is currently a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered adequate, but adverse changes in circumstances and in economic
conditions are more likely to impair this capacity. 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
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liquidation of the obligor. While expected recovery values are highly
speculative and cannot be estimated with any precision, the following serve as
general guidelines. "DDD" obligations have the highest potential for recovery,
around 90%-100% of outstanding amounts and accrued interest. "DD" indicates
potential recoveries in the range of 50%-90%, and "D" the lowest recovery
potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their
obligations. Entities rated "DDD" have the highest prospect for resumption of
performance or continued operation with or without a formal reorganization
process. Entities rated "DD" and "D" are generally undergoing a formal
reorganization or liquidation process; those rated "DD" are likely to satisfy a
higher portion of their outstanding obligations, while entities rated "D" have a
poor prospect for repaying all obligations.
To provide more detailed indications of credit quality, the Fitch IBCA
ratings from and including "AA" to "CCC" may be modified by the addition of a
plus (+) or minus (-) sign to denote relative standing within these major rating
categories.
"NR" indicates the Fitch IBCA does not rate the issuer or issue in
question.
"Withdrawn": A rating is withdrawn when Fitch IBCA deems the amount of
information available to be inadequate for rating purposes, or when an
obligation matures, is called, or refinanced.
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.
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<PAGE>
"BBB" - This designation represents the lowest investment-grade
category and indicates an acceptable capacity to repay principal and interest.
Issues rated "BBB" are more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings.
"BB" - 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.
"BB," "B," "CCC," and "CC" - These designations are assigned by
Thomson Financial BankWatch to non-investment grade long-term debt. Such issues
are regarded as having speculative characteristics regarding the likelihood of
timely payment of principal and interest. "BB" indicates the lowest degree of
speculation and "CC" the highest degree of speculation.
"D" - This designation indicates that the long-term debt is in
default.
PLUS (+) OR MINUS (-) - The ratings from "AAA" through "CC" may
include a plus or minus sign designation which indicates where within the
respective category the issue is placed.
Municipal Note Ratings
- ----------------------
A Standard and Poor's 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.
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<PAGE>
"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.
"SG" - This designation denotes speculative quality. Debt instruments
in this category lack margins of protection.
Fitch IBCA and Duff & Phelps use the short-term ratings described
under Commercial Paper Ratings for municipal notes.
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<PAGE>
APPENDIX B
----------
As previously stated, the Fund 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, the 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.
The 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 the Fund, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate
----------------------------------------------
futures contract sale would create an obligation by the 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 the 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
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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 Fund intends 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. The 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. The 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 the
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury bonds"). The Sub-Adviser 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 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 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. The 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 the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The 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 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 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.
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<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.
The 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. The 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, the Fund
will purchase index futures contracts in anticipation of purchases of
securities. In a substantial majority of these transactions, the 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, the Fund may utilize index futures contracts in
anticipation of changes in the composition of its portfolio holdings. For
example, in the event that the 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.
The Fund may also sell futures contracts in connection with this strategy, in
order to protect against the possibility that the value of the securities to be
sold as part of the restructuring of its portfolio will decline prior to the
time of sale.
The following are examples of transactions in stock index futures (net
of commissions and premiums, if any).
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<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 the Fund had entered into an anticipatory purchase
hedge, or market value increased and the 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 the 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 the Fund purchases or sells a security, no price is paid
or received by the Fund upon the purchase or sale of a futures contract.
Initially, the 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
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<PAGE>
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 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 the 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 the 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 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 the
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, the 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, the
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 the Fund has sold futures to hedge its portfolio
B-7
<PAGE>
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.
Where futures are purchased to hedge against a possible increase in
the price of securities before the 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 the 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 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 Fund
intends 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, the Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will normally not be sold until the
futures contract can be terminated. In such circumstances, an in-
B-8
<PAGE>
crease in the price of the securities, if any, may partially or completely
offset losses on the futures contract. However, as described above, there is no
guarantee that the price of the securities will in fact correlate with the price
movements in the futures contract and thus provide an offset on a futures
contract.
Further, it should be noted that the liquidity of a secondary market
in a futures contract may be adversely affected by "daily price fluctuation
limits" established by commodity exchanges which limit the amount of fluctuation
in a futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions.
Successful use of futures by the Fund is also subject to the Sub-
Adviser's ability to predict correctly movements in the direction of the market.
For example, if the 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. The Fund
may have to sell securities at a time when it may be disadvantageous to do so.
VI. Options on Futures Contracts.
----------------------------
The Fund 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 the Fund because the maximum amount at risk is
the premium paid for the options (plus transaction costs).
B-9
<PAGE>
VII. Other Transactions
------------------
The Fund is 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
Fund's hedging and other investment strategies if, in the judgment of the 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.
C-1
<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.
(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 the Registrant's Registration
Statement filed on September 26, 1997.
C-2
<PAGE>
(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) Form of Addendum No. 1 to Advisory Agreement with
respect to the Capital Opportunities Fund between
Registrant and Mercantile-Safe Deposit and Trust
Company.
(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) Form of Sub-Advisory Agreement between Registrant and
Delaware Management Company with respect to the Capital
Opportunities Fund.
C-3
<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) Form of Amendment 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) 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.
(3) Letter Agreement dated February 27, 1998 supplementing
the Custody Agreement between Registrant and Fifth
Third Bank is incorporated herein by reference to
Exhibit (8)(c) of Post-Effective Amendment No. 22 to
the Registrant's Registration Statement filed on July
31, 1998.
(4) Form of Letter Agreement supplementing the Custody
Agreement between Registrant and Fifth Third Bank with
respect to the Capital Opportunities Fund.
(5) 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
C-4
<PAGE>
reference to Exhibit (8)(c) of Post-Effective Amendment
No. 19 to the Registrant's Registration Statement filed
on September 26, 1997.
(6) 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) Form of Addendum No. 1 to Transfer Agency Agreement
between Registrant and BISYS Fund Services, Ohio, Inc.
with respect to the Capital Opportunities Fund.
(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) Form of Amendment 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
C-5
<PAGE>
incorporated herein by reference to Exhibit (9)(g) of
Post-Effective Amendment No. 19 to the Registrant's
Registration Statement filed on September 26, 1997.
(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) Form of Amendment 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.
(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) Opinion and Consent of Counsel.
(j) (1) Consent of Drinker Biddle & Reath LLP.
(k) None.
(l) (1) Purchase Agreement between Registrant and The Winsbury
Company dated May 28, 1993 is incorporated herein by
reference to Exhibit (13)(a) of Post-Effective
Amendment No. 19 to the Registrant's Registration
Statement filed on September 26, 1997.
C-6
<PAGE>
(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 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) Form of Purchase Agreement between Registrant and BISYS
Fund Services Ohio, Inc. with respect to the Capital
Opportunities Fund.
(m) None.
C-7
<PAGE>
(n) None.
(o) None.
(p) (1) Code of Ethics of the Registrant.
(2) Code of Ethics of Mercantile-Safe Deposit & Trust
Company.
(3) Code of Ethics of Delaware Management Company, a series
of Delaware Management Business Trust.
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,
C-8
<PAGE>
resolution, or agreement make further provision for indemnification of
directors, officers, employees, and agents to the fullest extent
permitted by the Maryland General Corporation Law.
(c) No provision of this Article shall be effective to protect or
purport to protect any director or officer of the Corporation against
any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad
faith, gross negligence, or reckless disregard of the duties involved
in the conduct of his office.
(d) References to the Maryland General Corporation Law in this
Article are to the law as from time to time amended. No further
amendment to the Articles of Incorporation of the Corporation shall
affect any right of any person under this Article based on any event,
omission, or proceeding prior to such amendment.
Section 6.2 of the Registrant's Bylaws incorporated herein by
reference as Exhibit (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
C-9
<PAGE>
Company Act of 1940, as such statutes are now or hereafter in
force, whether the standards required by this Section 6.2 have
been met.
(d) Other Rights. The indemnification provided by this Section 6.2
shall not be deemed exclusive of any other right, in respect of
indemnification or otherwise, to which those seeking such
indemnification may be entitled under any insurance or other
agreement, vote of stockholders or disinterested directors or
otherwise, both as to action by a director or officer of the
Corporation in his official capacity and as to action by such person
in another capacity while holding such office or position, and shall
continue as to a person who has ceased to be a director or officer and
shall inure to the benefit of the heirs, executors and administrators
of such a person.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "1933 Act"), may be permitted to directors,
officers, and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1933 Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the 1933 Act
and will be governed by the final adjudication of such issue.
Item 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.
C-10
<PAGE>
<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
Director Electricity & Natural Gas
Constellation Energy
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
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Thomas M. Bancroft, Jr. Director Former Chairman of the Board Racecourse Management
and Chief Executive
Officer
The New York Racing
Association, Inc.
P.O. Box 90
Jamaica, NY 11417
(prior to January 1990)
Richard O. Berndt Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Partner Law Firm
Gallagher, Evelius & Jones
The Park Charles Building
Suite 400
218 North Charles Street
Baltimore, MD 21201
Director Financing Housing Projects
Municipal Mortgage &
Equity LLC
Suite 500
218 N. Charles St.
Baltimore, MD 21201
William R. Brody, M.D. Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
Johns Hopkins
University
Charles & 34th St.
Baltimore, MD 21218
Director Medical Instruments
ALZA Corporation
950 Page Mill Rd.
Palo Alto, CA 94303-0802
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
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
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 Executive Charitable Organization
Officer
THE ASSOCIATED: Jewish
Community Federation of
Baltimore
101 W. Mt. Royal Ave.
Baltimore, MD 21201
</TABLE>
C-13
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Freeman A. Hrabowski, Director Director Bank Holding Company
III Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
President University
University of Maryland
Baltimore County
1000 Hilltop Circle
Baltimore, MD 21250
Director Electricity & Natural Gas
Constellation Energy
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
President and Chief Operating Diversified Media Company
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 Executive General Construction
Officer
Kinsley Construction, Inc.
2700 Water St.
York, PA 17403-9306
</TABLE>
C-14
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Partner Construction
Various Construction
Ventures
William J. McCarthy Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Principal, William J. Law Firm
McCarthy, P.C., a Partner,
Venable, Baetjer and Howard
Two Hopkins Plaza
Baltimore, MD 21201
Director, Chairman of Real Estate Development
the Board and Services
Riparius Corporation
375 Padonia Road West
Timonium, MD 21093
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
Martin 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
Christian H. Poindexter Director Director Bank Holding Company
Mercantile Bankshares
Corporation
Two Hopkins Plaza
Baltimore, MD 21201
Director and Chairman of the Electricity & Natural Gas
Board and Chief Executive
Officer
Constellation Energy
Group, Inc.
P.O. Box 1475
Baltimore, MD 21203
</TABLE>
C-16
<PAGE>
<TABLE>
<CAPTION>
Name Position with Merc-Safe Other Business Connections Type of Business
- ---- ----------------------- -------------------------- ----------------
<S> <C> <C> <C>
J. Marshall Reid Director, President & 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.
2 East Chase Street
Baltimore, MD 21202
Member of the Executive Board Insurance
AEGON, N.V.
2 East Chase Street
Baltimore, MD 21202
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-17
<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 Performance
Funds, AmSouth Funds, Mercantile Mutual Funds, Inc. (formerly known as The ARCH
Funds, Inc.), The BB&T Mutual Funds Group, The Coventry Group, ESC Strategic
Funds, The Eureka Funds, Fifth Third Funds, Governor Funds, Hirtle Callaghan
Trust, HSBC Family of Funds Trust, HSBC Mutual Funds Trust, American
Independence Funds, The Infinity Mutual Funds, Inc., Magna Funds,
Metamarkets.com, Meyers Investment
C-18
<PAGE>
Trust, MMA Praxis Mutual Funds, M.S.D. & T. Funds, Pacific Capital Funds,
Republic Advisor Funds Trust, The Republic Funds Trust, Summit Investment Trust,
Variable Insurance Funds, The Victory Portfolios, The Victory Variable Insurance
Funds and Vintage Mutual Funds, Inc. each of which is a management investment
company.
(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
C-19
<PAGE>
7 Castle Street
Edinburgh, Scotland EH3 3AM
(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)
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
18/th/ and Cherry Streets
Philadelphia, Pennsylvania 19103-6996
(registrant's Articles of Incorporation, Bylaws and
minute books)
Item 29. Management Services.
--------------------
C-20
<PAGE>
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-21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Post-Effective Amendment No. 25 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 14th day of April, 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. 25 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 April 14, 2000
- ----------------------------- Board and President
Leslie B. Disharoon
*/s/ Decatur H. Miller Director and Treasurer April 14, 2000
- ----------------------------- (Principal Financial
Decatur H. Miller and Accounting Officer)
*/s/ Edward D. Miller Director April 14, 2000
- -----------------------------
Edward D. Miller
*/s/ John R. Murphy Director April 14, 2000
- -----------------------------
John R. Murphy
*/s/ George R. Packard, III Director April 14, 2000
- -----------------------------
George R. Packard, III
</TABLE>
*By: /s/ Linda A. Durkin
-------------------------
Linda A. Durkin
Attorney-in-fact
<PAGE>
M.S.D. & T. Funds, Inc.
POWER OF ATTORNEY
Leslie B. Disharoon, whose signature appears below, does hereby constitute
and appoint W. Bruce McConnel, III, 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
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>
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>
EXHIBIT INDEX
-------------
Exhibit No. Description
- ----------- -----------
(a)(10) Articles Supplementary dated March 23, 2000 and
recorded in the State of Maryland on March 27,
2000.
(d)(2) Form of Addendum No. 1 to Advisory Agreement with
respect to the Capital Opportunities Fund between
Registrant and Mercantile-Safe Deposit and Trust
Company.
(d)(4) Form of Sub-Advisory Agreement between Registrant
and Delaware Management Company with respect to
the Capital Opportunities Fund.
(e)(3) Form of Amendment 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)(4) Form of Letter Agreement supplementing the Custody
Agreement between Registrant and Fifth Third Bank
with respect to the Capital Opportunities Fund.
(h)(2) Form of Addendum No. 1 to Transfer Agency
Agreement between Registrant and BISYS Fund
Services, Ohio, Inc. with respect to the Capital
Opportunities Fund.
(h)(5) Form of Amendment to Schedule A of Administration
Agreement between Registrant and Mercantile-Safe
Deposit and Trust Company with respect to the
Capital Opportunities Fund.
(h)(8) Form of Amendment 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.
<PAGE>
(h)(9) Blue Sky Services Agreement dated August 23, 1999
between Registrant and BISYS Fund Services, Ohio,
Inc.
(i) Opinion and Consent of Counsel.
(j)(1) Consent of Drinker Biddle & Reath LLP.
(l)(8) Form of Purchase Agreement between Registrant and
BISYS Fund Services Ohio, Inc. with respect to the
Capital Opportunities Fund.
(p)(1) Code of Ethics of the Registrant.
(2) Code of Ethics of Mercantile-Safe Deposit & Trust
Company.
(3) Code of Ethics of Delaware Management Company, a
series of Delaware Management Business Trust.
-2-
<PAGE>
Exhibit (a)(10)
ARTICLES SUPPLEMENTARY
OF
M.S.D. & T. FUNDS, INC.
M.S.D. & T. FUNDS, INC., a Maryland corporation having its principal
office in the City of Baltimore, Maryland and registered as an open-end
investment company under the Investment Company Act of 1940, as amended
(hereinafter called the "Corporation"), hereby certifies to the State Department
of Assessments and Taxation of Maryland that:
FIRST: Pursuant to Section 2-208 of the Maryland General Corporation
Law, the Board of Directors of the Corporation has classified Four Hundred
Million (400,000,000) shares of the Corporation's authorized but unissued and
unclassified shares of capital stock, of the par value of One Mill ($.001) per
share, as Class P Common Stock, of the par value of One Mill ($.001) per share
pursuant to the following resolutions adopted by the Board of Directors of the
Corporation at a special meeting held on February 28, 2000:
RESOLVED, that pursuant to the authority expressly given to the Board
of Directors in Article VI, Section 6.4 of the Company's Articles of
Incorporation, the Board hereby classifies Four Hundred Million
(400,000,000) of the Company's authorized but unissued and unclassified
shares as Class P Common Stock (with an aggregate par value of Four Hundred
Thousand Dollars ($400,000));
FURTHER RESOLVED, that shares of Class P Common Stock shall represent
interests in the Small Cap Equity Fund;
FURTHER RESOLVED, that each share of Class P Common Stock shall have
the preferences, conversion and other rights, voting powers, restrictions,
limitations as to dividends, qualifications and terms and conditions of
redemption as set forth in the Articles; and
FURTHER RESOLVED, that the officers of the Company be, and each of
them hereby is, authorized and empowered to execute, seal, deliver and file
any and all documents, instruments, papers and writings, including but not
limited to filing Articles Supplementary with the State Department of
Assessments and Taxation of Maryland, and to do any and all other acts,
including but not limited to changing the foregoing resolutions upon advice
of the Company's counsel prior to filing said Articles Supplementary, in
the name of the Company and on its behalf, as may be necessary or desirable
in connection with or in furtherance of the foregoing resolutions, such
determination to be conclusively evidenced by said officer taking any such
actions.
SECOND: The shares of Common Stock of the Corporation classified
pursuant to the resolutions set forth herein have been classified by the
Corporation's Board of Directors
<PAGE>
under the authority contained in the Corporation's Articles of Incorporation.
THIRD: The total number of shares of capital stock which the
Corporation is presently authorized to issue remains Ten Billion
(10,000,000,000) shares of Common Stock, of which Seven Hundred Million
(700,000,000) shares of the par value of One Mill ($.001) per share each are
Class A Common Stock; Seven Hundred Million (700,000,000) shares of the par
value of One Mill ($.001) per share each are Class B Common Stock; Six Hundred
Million (600,000,000) shares of the par value of One Mill ($.001) per share each
are Class C Common Stock; Six Hundred Million (600,000,000) shares of the par
value of One Mill ($.001) per share each are Class D Common Stock; Five Hundred
Million (500,000,000) shares of the par value of One Mill ($.001) per share each
are Class E Common Stock; Five Hundred Million (500,000,000) shares of the par
value of One Mill ($.001) per share each are Class E - Special Series 1 Common
Stock; Five Hundred Million (500,000,000) shares of the par value of One Mill
($.001) per share each are Class F Common Stock; Five Hundred Million
(500,000,000) shares of the par value of One Mill ($.001) per share each are
Class F - Special Series 1 Common Stock; Four Hundred Million (400,000,000)
shares of the par value of One Mill ($.001) per share each are Class G Common
Stock; Four Hundred Million (400,000,000) shares of the par value of One Mill
($.001) per share each are Class H Common Stock; Four Hundred Million
(400,000,000) shares of the par value of One Mill ($.001) per share each are
Class I Common Stock; Four Hundred Million (400,000,000) shares of the par value
of One Mill ($ .001) per share each are Class J Common Stock; Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class K Common Stock; Four Hundred Million (400,000,000) shares of the par
value of One Mill ($.001) per share each are Class L Common Stock; Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class M Common Stock; Four Hundred Million (400,000,000) shares of the par
value of One Mill ($.001) per share each are Class N Common Stock; Four Hundred
Million (400,000,000) shares of the par value of One Mill ($.001) per share each
are Class O Common Stock; and Four Hundred Million (400,000,000) shares of the
par value of One Mill ($.001) per share each are Class P Common Stock. The
aggregate par value of all Common Stock having par value is unchanged at Ten
Million Dollars ($10,000,000).
The total number of authorized and unclassified shares of capital
stock of the Company remaining after the actions described above is One Billion
Four Hundred Million (1,400,000,000) shares of capital stock of the par value of
One Mill ($0.001) per share and of the aggregate par value of One Million Four
Hundred Thousand Dollars ($1,400,000).
-2-
<PAGE>
IN WITNESS WHEREOF, M.S.D. & T. FUNDS, INC. has caused these presents
to be signed in its name and on its behalf by its President and its corporate
seal to be hereunto affixed and attested by its Secretary as of this 23/rd/ day
of March, 2000.
[CORPORATE SEAL] M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
-----------------------
Leslie B. Disharoon
President
Attest:
/s/ W. Bruce McConnel
- ---------------------
W. Bruce McConnel
Secretary
-3-
<PAGE>
CERTIFICATE
-----------
THE UNDERSIGNED, President of M.S.D. & T. FUNDS, INC., who executed on
behalf of said Corporation the attached Articles Supplementary of said
Corporation, of which this certificate is made a part, hereby acknowledges, in
the name and on behalf of said Corporation, the attached Articles Supplementary
to be the corporate act of said Corporation, and certifies that to the best of
his knowledge, information and belief the matters and facts set forth in the
attached Articles Supplementary with respect to authorization and approval are
true in all material respects, under the penalties for perjury.
Dated as of March 23, 2000 /s/ Leslie B. Disharoon
-----------------------
Leslie B. Disharoon
President
<PAGE>
Exhibit (d)(2)
Addendum No. 1 To Advisory Agreement
------------------------------------
This Addendum, dated as of __________, 2000, is entered into between
M.S.D. & T. FUNDS, INC., a Maryland corporation (the "Company"), and MERCANTILE-
SAFE DEPOSIT & TRUST COMPANY ("Mercantile").
WHEREAS, the Company and Mercantile have entered into an Advisory
Agreement dated as of July 24, 1998, pursuant to which the Company appointed
Mercantile to act as investment adviser to the Company for the Prime Money
Market, Government Money Market, Tax-Exempt Money Market, Growth & Income,
International Equity, Limited Maturity Bond, Maryland Tax-Exempt Bond,
Diversified Real Estate, Equity Income, Equity Growth, Total Return Bond,
National Tax-Exempt Bond and Intermediate Tax-Exempt Bond Funds;
WHEREAS, Section 2 of the Advisory Agreement provides that in the event
the Company establishes one or more additional investment portfolios with
respect to which it desires to retain Mercantile to act as the investment
adviser under the Advisory Agreement, the Company shall so notify Mercantile in
writing, and if Mercantile is willing to render such services, it shall notify
the Company in writing, and the compensation to be paid to Mercantile shall be
that which is agreed to in writing by the Company and Mercantile; and
WHEREAS, the Company has notified Mercantile that it has established a
new portfolio, namely, the Capital Opportunities Fund (the "New Fund"), and that
it desires to retain Mercantile to act as the investment adviser therefor, and
Mercantile has notified the Company that it is willing to serve as investment
adviser for the New Fund;
NOW THEREFORE, the parties hereto, intending to be legally bound,
hereby agree as follows:
1. Appointment. The Company hereby appoints Mercantile to act as
------------
investment adviser to the Company for the New Fund for the period and on the
terms set forth in the Advisory Agreement. Mercantile hereby accepts such
appointment and agrees to render the services set forth in the Advisory
Agreement, for the compensation herein provided.
2. Compensation. For the services provided and expenses assumed
-------------
pursuant to the Advisory Agreement with respect to the New Fund, the New Fund
will pay Mercantile on the first business day of each month, and Mercantile will
accept as full compensation therefor, a fee at the annual rate of 1.30% of the
first $1 billion of the New Fund's average daily net assets, plus 1.20% of such
Fund's average daily net assets in excess of $1 billion during the preceding
month.
<PAGE>
The fee attributable to the New Fund shall be the obligation of the
New Fund and not the obligation of any other Fund of the Company.
3. Capitalized Terms. From and after the date hereof, the term "Funds"
------------------
as used in the Advisory Agreement shall be deemed to include the New Fund.
Capitalized terms used herein and not otherwise defined shall have the meanings
ascribed to them in the Advisory Agreement.
4. Miscellaneous. Except to the extent supplemented hereby, the
--------------
Advisory Agreement shall remain unchanged and in full force and effect and is
hereby ratified and confirmed in all respects as supplemented hereby.
IN WITNESS WHEREOF, the undersigned have executed this Addendum as of
the date and year first above written.
M.S.D. & T. FUNDS, INC.
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY
By:
-----------------------------
Name:
-----------------------------
Title:
-----------------------------
<PAGE>
Exhibit (d)(4)
SUB-ADVISORY AGREEMENT
(Capital Opportunities Fund)
AGREEMENT made as of ____________, 2000 between MERCANTILE-SAFE DEPOSIT &
TRUST COMPANY (the "Adviser"), a Maryland trust company, and DELAWARE MANAGEMENT
COMPANY (the "Sub-Adviser"), a series of Delaware Management Business Trust, a
Delaware business trust.
WHEREAS, M.S.D. & T. Funds, Inc. ("M.S.D. & T.") is registered as an open-end,
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"); and
WHEREAS, the Adviser has been appointed investment adviser to M.S.D. & T.'s
Capital Opportunities Fund (the "Fund"); and
WHEREAS, the Adviser desires to retain the Sub-Adviser to assist it in the
provision of a continuous investment program for the Fund and the Sub-Adviser is
willing to do so; and
WHEREAS, the Board of Directors of the Fund and the Fund's sole shareholder
approved this Agreement, and the Sub-Adviser is willing to furnish such services
upon the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein
contained, it is agreed between the parties hereto as follows:
1. Appointment. The Adviser hereby appoints the Sub-Adviser to act as sub-
-----------
adviser to the Fund as permitted by the Adviser's Advisory Agreement with M.S.D.
& T. pertaining to the Fund. Intending to be legally bound, the Sub-Adviser
accepts such appointment and agrees to render the services herein set forth for
the compensation herein provided.
2. Sub-Advisory Services. Subject to the supervision of M.S.D. & T.'s Board
---------------------
of Directors, the Sub-Adviser will assist the Adviser in providing a continuous
investment program for the Fund, including research and management with respect
to all securities and investments and cash equivalents in the Fund. The Sub-
Adviser will provide services under this Agreement in accordance with the Fund's
investment objective, policies and restrictions as stated in the Fund's
prospectus and statement of additional information and resolutions of
M.S.D. & T.'s Board of Directors applicable to the Fund. The Adviser hereby
undertakes to provide the Sub-Adviser with copies of such prospectus, statement
of additional information, and resolutions as the same became available from
time to time.
Without limiting the generality of the foregoing, the Sub-Adviser further
agrees that it will:
<PAGE>
(a) determine from time to time what securities and other investments
will be purchased, retained or sold for the Fund, including, with the assistance
of the Adviser, the Fund's investments in options and futures contracts;
provided, however, that the Sub-Adviser shall not be responsible for taking
- -------- -------
action with respect to any proxies, notices, reports or other communications
relating to any of the Fund's portfolio securities;
(b) manage in consultation with the Adviser the Fund's temporary investments
in securities;
(c) place orders for the Fund either directly with the issuer or with any
broker or dealer;
(d) manage the Fund's overall cash position;
(e) attend regular business and investment-related meetings with
M.S.D. & T.'s Board of Directors and the Adviser if requested to do so by
M.S.D. & T. and/or the Adviser; and
(f) maintain books and records with respect to the securities transactions
for the Fund, furnish to the Adviser and M.S.D. & T.'s Board of Directors such
periodic and special reports as they may request with respect to the Fund, and
provide in advance to the Adviser all reports to the Board of Directors for
examination and review within a reasonable time prior to M.S.D. & T. Board
meetings. The Adviser hereby undertakes to provide the Sub-Adviser with at least
fourteen days prior written notice of the date, time and location of all
M.S.D.& T. Board meetings pertaining to the Fund.
3. Subcontractors. It is understood that the Sub-Adviser may from time to
--------------
time engage or associate itself with such person or persons as the Sub-Adviser
may believe to be particularly fitted to assist the Sub-Adviser in the
performance of certain ministerial or administrative services required by this
Agreement; provided, however, that such person or persons shall have been
-------- -------
approved by the Board of Directors of M.S.D. & T., that the compensation of such
person or persons shall be paid by the Sub-Adviser and that the Sub-Adviser
shall be as fully responsible to the Adviser and M.S.D. & T. for the acts and
omissions of any subcontractor as it is for its own acts and omissions.
4. Covenants by Sub-Adviser. The Sub-Adviser agrees with respect to the
------------------------
services provided to the Fund that it:
(a) will conform with all Rules and Regulations of the Securities and
Exchange Commission ("SEC") applicable to it;
(b) will telecopy trade information to the Adviser on the first business
day following the day of the trade and cause broker confirmations to be sent
directly to the Adviser; and
<PAGE>
(c) will treat confidentially and as proprietary information of
M.S.D. & T. all records and other information relative to the Fund and prior,
present or potential shareholders, and will not use such records and
information for any purpose other than performance of its responsibilities
and duties hereunder (except after prior notification to and approval in
writing by M.S.D. & T., which approval shall not be unreasonably withheld
and may not be withheld and will be deemed granted where the Sub-Adviser
may be exposed to civil or criminal contempt proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, or when so requested by M.S.D. & T.).
5. Services Not Exclusive.
----------------------
(a) The services furnished by the Sub-Adviser hereunder are deemed not to
be exclusive, and nothing in this Agreement shall (i) prevent the Sub-Adviser or
any affiliated person (as defined in the 1940 Act) of the Sub-Adviser from
acting as investment adviser or manager for any other person or persons,
including other management investment companies with investment objectives and
policies the same as or similar to those of the Fund or (ii) limit or restrict
the Sub-Adviser or any such affiliated person from buying, selling or trading
any securities or other investments (including any securities or other
investments which the Fund is eligible to buy) for its or their own accounts or
for the accounts of others for whom it or they may be acting; provided, however,
-------- -------
that the Sub-Adviser agrees that it will not undertake any activities which, in
its reasonable judgment, will adversely affect the performance of its
obligations to the Fund under this Agreement.
(b) Nothing contained herein, however, shall prohibit the Sub-Adviser from
advertising or soliciting the public generally with respect to products or
services, regardless of whether such advertisement or solicitation may
include prior, present or potential shareholders of M.S.D. & T.
6. Portfolio Transactions. Investment decisions for the Fund shall be made
----------------------
by the Sub-Adviser independently from those for any other investment companies
and accounts advised or managed by the Sub-Adviser. The Fund and such investment
companies and accounts may, however, invest in the same securities. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and/or another investment company or account, the transaction
will be averaged as to price, and available investments allocated as to amount,
in a manner which the Sub-Adviser believes to be equitable to the Fund and such
other investment company or account. In some instances, this investment
procedure may adversely affect the price paid or received by the Fund or the
size of the position obtained or sold by the Fund. To the extent permitted by
law, the Sub-Adviser may aggregate the securities to be sold or purchased for
the Fund with those to be sold or purchased for other investment companies or
accounts in order to obtain best execution.
The Sub-Adviser shall place orders for the purchase and sale of portfolio
securities and will solicit broker-dealers to execute transactions in accordance
with the Fund's policies and restrictions regarding brokerage allocations. The
Sub-Adviser shall place orders pursuant to its investment determinations for the
Fund either directly with the issuer or with any
<PAGE>
broker or dealer selected by the Sub-Adviser. In executing portfolio
transactions and selecting brokers or dealers, the Sub-Adviser shall use its
reasonable best efforts to seek the most favorable execution of orders, after
taking into account all factors the Sub-Adviser deems relevant, including the
breadth of the market in the security, the price of the security, the financial
condition and execution capability of the broker or dealer, and the
reasonableness of the commission, if any, both for the specific transaction and
on a continuing basis. Consistent with this obligation, the Sub-Adviser may, to
the extent permitted by law, purchase and sell portfolio securities to and from
brokers and dealers who provide brokerage and research services (within the
meaning of Section 28(e) of the Securities Exchange Act of 1934) to or for the
benefit of the Fund and/or other accounts over which the Sub-Adviser or any of
its affiliates exercises investment discretion. The Sub-Adviser is authorized to
pay to a broker or dealer who provides such brokerage and research services a
commission for executing a portfolio transaction for the Fund which is in excess
of the amount of commission another broker or dealer would have charged for
effecting that transaction if the 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 Sub-Adviser's overall responsibilities to the Fund
and to M.S.D. & T. In no instance will portfolio securities be purchased from or
sold to the Sub-Adviser, or the Fund's principal underwriter, or any affiliated
person thereof except as permitted by the Securities and Exchange Commission.
7. Books and Records. In compliance with the requirements of Rule 31a-3
-----------------
under the 1940 Act, the Sub-Adviser hereby agrees that all records which it
maintains for M.S.D. & T. are the property of M.S.D. & T. and further agrees to
surrender promptly to M.S.D. & T. any of such records upon M.S.D. & T.'s
request; provided, however, that the Sub-Adviser may make and retain photocopies
-------- -------
of such records in order to comply with applicable regulatory requirements. The
Sub-Adviser further agrees to preserve for the periods prescribed by Rule 31a-2
under the 1940 Act the records required to be maintained by Rule 31a-1 under the
1940 Act.
8. Expenses. During the term of this Agreement, the Sub-Adviser will pay all
--------
expenses incurred by it in connection with its activities under this Agreement
other than the cost of securities, commodities and other investments (including
brokerage commissions and other transaction charges, if any) purchased for the
Fund.
9. Compensation. For the services provided and the expenses assumed with
------------
respect to the Fund pursuant to this Agreement, the Sub-Adviser will be entitled
to a fee, computed daily and payable quarterly, from the Adviser, calculated at
the annual rate of 0.70% of the first $1 billion of the Fund's average daily net
assets, plus 0.60% of the Fund's average daily net assets in excess of $1
billion.
10. Standard of Care; Limitation of Liability. The Sub-Adviser shall
-----------------------------------------
exercise due care and diligence and use the same skill and care in providing its
services hereunder as it uses in providing services to other investment
companies, but shall not be liable for any action taken or omitted by the Sub-
Adviser in the absence of bad faith, willful misconduct, negligence or reckless
disregard of its duties.
<PAGE>
11. Reference to Sub-Adviser. Neither the Adviser nor any affiliate or agent
------------------------
of the Adviser shall make reference to or use the name of the Sub-Adviser or any
of its affiliates, or any of their clients, except references concerning the
identity of and services provided by the Sub-Adviser to the Fund, which
references shall not differ in substance from those included in the current
registration statement pertaining to the Fund, this Agreement and the Advisory
Agreement between the Adviser and M.S.D. & T. with respect to the Fund, in any
advertising or promotional materials without the prior approval of the Sub-
Adviser, which approval shall not be unreasonably withheld or delayed. The
Adviser hereby agrees to make all reasonable efforts to cause M.S.D. & T. and
any affiliate thereof to satisfy the foregoing obligation.
12. Duration and Termination. Unless sooner terminated, this Agreement shall
------------------------
continue until _____________, _____ and thereafter shall continue automatically
for successive annual periods, provided such continuance is specifically
approved at least annually by M.S.D. & T.'s Board of Directors or vote of the
lesser of (a) 67% of the shares of the Fund represented at a meeting if holders
of more than 50% of the outstanding shares of the Fund are present in person or
by proxy or (b) more than 50% of the outstanding shares of the Fund, provided
that in either event its continuance also is approved by a majority of M.S.D. &
T.'s Directors who are not "interested persons" (as defined in the 1940 Act) of
any party to this Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable at any time
without penalty, on 60 days' notice, by the Adviser, the Sub-Adviser or by
M.S.D. & T.'s Board of Directors or by vote of the lesser of (a) 67% of the
shares of the Fund represented at a meeting if holders of more than 50% of the
outstanding shares of the Fund are present in person or by proxy or (b) more
than 50% of the outstanding shares of the Fund. This Agreement will terminate
automatically in the event of its assignment (as defined in the 1940 Act).
13. Amendment of this Agreement. No provision of this Agreement may be
---------------------------
changed, waived, discharged or terminated orally, but only by an instrument in
writing signed by the party against which enforcement of the change, waiver,
discharge or termination is sought. No amendment of this Agreement shall be
effective with respect to the Fund until approved by the vote of a majority of
the outstanding voting securities of the Fund.
14. Notice. Any notice, advice or report to be given pursuant to this
------
Agreement shall be delivered or mailed:
To Sub-Adviser at:
-----------------
One Commerce Square
Philadelphia, PA 19103
To the Adviser at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
<PAGE>
To M.S.D. & T. at:
-----------------
Two Hopkins Plaza
Baltimore, MD 21201
15. Miscellaneous. The captions in this Agreement are included for
-------------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect. If any
provision of this Agreement shall be held or made invalid by a court decision,
statute, rule or otherwise, the remainder of this Agreement shall not be
affected thereby.
This Agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective successors and shall be governed by Maryland
law.
16. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
DELAWARE MANAGEMENT COMPANY,
a series of Delaware Management Business Trust
By:
--------------------------------
Name:
--------------------------------
Title:
--------------------------------
<PAGE>
Exhibit (e)(3)
Form of Schedule A
to the
Distribution Agreement
between M.S.D. & T. Funds, Inc. and BISYS Fund Services
(formerly known as The Winsbury Company Limited Partnership)
dated October 1, 1993
Name of Fund Name of Fund
- ------------ ------------
Prime Money Market Fund Diversified Real Estate Fund
Government Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
International Equity Fund Capital Opportunities Fund
M.S.D. & T. FUNDS, INC.
By:_____________________________________
Title: President
Date: July __, 2000
BISYS FUND SERVICES
By:_____________________________________
Title: President
Date: July __, 2000
<PAGE>
Exhibit (g)(4)
CUSTODY AGREEMENT
(Capital Opportunities Fund)
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, OH 45265
Gentlemen:
Pursuant to Article XIV, Paragraph 14.4, of the Custody Agreement
dated May 28, 1993 that we have entered into with you, we are writing to request
that you render custody services under the terms of said Agreement with respect
to the Capital Opportunities Fund, an additional portfolio which we are
establishing. Your compensation for the services provided under said Agreement
for said additional portfolio shall be determined in accordance with the Exhibit
C attached to said Agreement. Please execute a copy of this letter where
indicated to signify your agreement to provide said services.
Sincerely,
Dated: July __, 2000 M.S.D. & T. FUNDS, INC.
By:______________________________
Name:____________________________
Title:___________________________
ACKNOWLEDGED AND AGREED:
THE FIFTH THIRD BANK
By:___________________________ Dated: July __, 2000
Name:_________________________
Title:________________________
<PAGE>
Exhibit (h)(2)
TRANSFER AGENCY AGREEMENT
(Capital Opportunities Fund)
______________, 2000
BISYS Fund Services Ohio, Inc.
3435 Stelzer Road
Columbus, OH 43219
Gentlemen:
We are writing to request that you render transfer agency and dividend
disbursing agency services under the terms of the Transfer Agency Agreement
dated as of August 23, 1999 that we have entered into with you, with respect to
the Capital Opportunities Fund, an additional portfolio which we are
establishing. Your compensation for the services provided under said Agreement
for said additional portfolio shall be determined in accordance with Section 2
of said Agreement. Please execute a copy of this letter where indicated to
signify your agreement to provide said services.
Sincerely,
M.S.D. & T. FUNDS, INC.
By: ___________________________
Title: President
ACKNOWLEDGED AND AGREED:
BISYS FUND SERVICES OHIO, INC.
By: _________________________
Title: President
<PAGE>
Exhibit (h)(5)
Schedule A
to the Administration Agreement
between Mercantile-Safe Deposit & Trust Company
and M.S.D. & T. Funds, Inc.
dated May 28, 1993
Name of Fund Name of Fund
- ------------ ------------
Prime Money Market Fund Diversified Real Estate Fund
Government Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
International Equity Fund Capital Opportunities Fund
M.S.D. & T. FUNDS, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Date: July __, 2000
MERCANTILE-SAFE DEPOSIT & TRUST
COMPANY
By:_________________________________
Name:_______________________________
Title:______________________________
Date: July __, 2000
<PAGE>
Exhibit (h)(8)
Schedule A
to the Fund Accounting Agreement
between BISYS Fund Services Ohio, Inc.
(formerly known as The Winsbury Service Corporation)
and M.S.D. & T. Funds, Inc.
dated October 1, 1993
Name of Fund Name of Fund
- ------------ ------------
Prime Money Market Fund Diversified Real Estate Fund
Government Money Market Fund Equity Income Fund
Tax-Exempt Money Market Fund Equity Growth Fund
Growth & Income Fund Total Return Bond Fund
Limited Maturity Bond Fund National Tax-Exempt Bond Fund
Maryland Tax-Exempt Bond Fund Intermediate Tax-Exempt Bond Fund
International Equity Fund Capital Opportunities Fund
M.S.D. & T. FUNDS, INC.
By:_____________________________
Name:___________________________
Title:__________________________
Date: ____________________, 2000
BISYS FUND SERVICES OHIO, INC.
By:_____________________________
Name:___________________________
Title:__________________________
Date: ____________________, 2000
<PAGE>
Form of
Schedule B
to the Fund Accounting Agreement
between BISYS Fund Services Ohio, Inc.
(formerly known as The Winsbury Service Corporation)
and M.S.D. & T. Funds, Inc.
dated October 1, 1993
Name of Fund Compensation
- ------------ ------------
Prime Money Market Fund Annual rate of two one-hundredths of
one percent (.02%) of the Prime Money
Market Fund's average daily net assets.
Government Money Market Fund Annual rate of two one-hundredths of
one percent (.02%) of the Government
Money Market Fund's average daily net
assets.
Tax-Exempt Money Market Fund Annual rate of three one-hundredths of
one percent (.03%) of the Tax-Exempt
Money Market Fund's average daily net
assets.
Growth & Income Fund Annual rate of three one-hundredths of
one percent (.03%) of the Growth &
Income Fund's average daily net assets.
Limited Maturity Bond Fund Annual rate of three one-hundredths of
one percent (.03%) of the Limited
Maturity Bond Fund's average daily net
assets.
Maryland Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the Maryland Tax
Exempt Bond Fund's average daily net
assets.
B-1
<PAGE>
Name of Fund Compensation
- ------------ ------------
International Equity Fund Annual rate of five one-hundredths of
one percent (.05%) of the International
Equity Fund's average daily net assets.
Diversified Real Estate Fund Annual rate of three one- hundredths of
one percent (.03%) of the Diversified
Real Estate Fund's average daily net
assets.
Equity Income Fund Annual rate of three one-hundredths of
one percent (.03%) of the Equity Income
Fund's average daily net assets.
Equity Growth Fund Annual rate of three one-hundredths of
one percent (.03%) of the Equity Growth
Fund's average daily net assets.
Total Return Bond Fund Annual rate of three one-hundredths of
one percent (.03%) of the Total Return
Bond Fund's average daily net assets.
National Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the National Tax-
Exempt Bond Fund's average daily net
assets.
Intermediate Tax-Exempt Bond Fund Annual rate of four one-hundredths of
one percent (.04%) of the Intermediate
Tax-Exempt Bond Fund's average daily
net assets.
Capital Opportunities Fund Annual rate of three one-hundredths of
one percent (.03%) of the Capital
Opportunities Fund's average daily net
assets.
B-2
<PAGE>
Multiple Classes of Shares:
- --------------------------
Each class of shares within a Fund that maintains multiple classes of shares
having different net asset values or paying different daily dividends are
subject to a minimum annual fee of $10,000 per additional class.
M.S.D.&T. FUNDS, INC.
By:__________________________________
Name:________________________________
Title:_______________________________
Date: ______________________, 2000
BISYS FUND SERVICES OHIO, INC.
By:_________________________________
Name:_______________________________
Title:______________________________
Date: _____________________, 2000
B-3
<PAGE>
Exhibit (h)(9)
BLUE SKY SERVICES AGREEMENT
---------------------------
AGREEMENT made this 23rd day of August, 1999, between M.S.D. & T. FUNDS,
INC. (the "Company"), a Maryland corporation having its principal place of
business at Two Hopkins Plaza, Baltimore, Maryland 21201 and BISYS FUND SERVICES
OHIO, INC. ("BISYS"), an Ohio corporation having its principal place of business
at 3435 Stelzer Road, Suite 1000, Columbus, Ohio 43219.
WHEREAS, the Company is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Company wishes to retain BISYS to provide services in
connection with the registration and qualification of the Company's shares for
sale in the various states as more particularly described herein;
NOW THEREFORE, in consideration of the mutual premises and covenants herein
set forth, the parties agree as follows:
1. Services. BISYS shall provide the services described in Schedule A
--------
attached hereto.
2. Compensation. BISYS shall be entitled to receive compensation as
------------
described in Schedule B attached hereto.
3. Effective Date. This Agreement shall become effective as of the
--------------
date first written above (the "Effective Date").
4. Term. The initial term of this Agreement (the "Initial Term") shall
----
be for a period commencing on the Effective Date and, unless sooner
terminated as provided herein, ending on the date that is one year
after the Effective Date. Thereafter, if not terminated, this
Agreement shall be renewed automatically for successive periods of one
year; provided however, that this Agreement may be terminated by the
Company at any time, without the payment of any penalty, by vote of a
majority of the entire Board of Directors or a vote of a "majority of
the outstanding voting securities" (as defined in the 1940 Act) on 60
days' written notice to BISYS, or by BISYS at any time without the
payment of any penalty, on 60 days' written notice to the Company.
Fees incurred by BISYS but unpaid by the Company upon such termination
shall be immediately due and payable upon and notwithstanding such
termination.
5. Indemnification. BISYS shall use its best efforts to ensure the
---------------
accuracy of all services performed under this Agreement. Each party
agrees to indemnify and hold the other party (including its
affiliates, partners, directors, officers, employees, representatives
and agents) harmless from and against any liability,
<PAGE>
cost or other expense (including, but not limited to, the payment of
reasonable attorney's fees and costs) incurred by the indemnified
party as a result of any claim made by any third party arising out of
or relating to the terms and conditions of this Agreement insofar as
such claims are based upon or arise out of negligence or wrongful acts
or failure to act whether by omission or commission of the non-
indemnified party, its employees, agents, representatives or assigns,
in connection with the terms and conditions of this Agreement.
6. Uncontrollable Events. BISYS assumes no responsibility hereunder and
---------------------
shall not be liable for any damage, loss of data, delay or any other
loss whatsoever caused by events beyond its reasonable control.
7. Confidentiality. All information acquired pursuant to this Agreement
---------------
by BISYS about the Company, or by the Company about BISYS, shall be
considered confidential. Except for use in performance of their
respective duties under this Agreement, neither party shall use such
confidential information for any purpose and all such records of, and
data derived from, such use, shall, in turn, be treated as
confidential information. Neither BISYS nor the Company shall give,
sell or in any way transfer such confidential information to any other
person or entity except as contemplated hereunder or as required by
law, and shall not permit any other person to obtain, use or gain
access to such confidential information without the other's consent.
In no event shall the Company or BISYS use the other's name,
trademark, service mark, logo or other written materials without the
prior written consent of the other.
8. Headings. Paragraph headings in this Agreement are included for
--------
convenience only and are not to be used to construe or interpret this
Agreement.
9. Governing Law. This Agreement shall be governed by, and its
-------------
provisions shall be construed in accordance with, the laws of the
State of Ohio.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
fully executed as of the effective and year first written above.
M.S.D. & T. FUNDS, INC.
By: /s/ Leslie B. Disharoon
------------------------------
Title: President
---------------------------
BISYS FUND SERVICES OHIO, INC.
By: /s/ J. David Huber
------------------------------
Title:
____________________________
-2-
<PAGE>
SCHEDULE A
TO THE BLUE SKY SERVICES AGREEMENT
BETWEEN
M.S.D. & T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
SERVICES
--------
BISYS shall provide the following services relating to the registration and
qualification of the Company's shares for sale in the various states:
(1) file initial registrations for new funds/portfolios;
(2) file renewal registrations for existing funds/portfolios;
(3) monitor blue sky fees and conduct fee analysis upon request;
(4) perform monthly random registration audits and annual renewal audits;
(5) maintain internal technical support specialist with responsibility for
maintaining the Blue 2 System and interfacing with the Company's
Transfer Agent when necessary;
(6) maintain internal 1940 Act attorney with responsibility for analyzing
legal issues related to state registration and who shall consult with
counsel to the Company with respect to any material legal issues;
(7) communicate relevant changes in state regulations and industry
proposals; and
(8) review and audit the blue sky state files and data provided by the
Company's Administrator as a one time new client audit to be completed
within 30 days of the Effective Date.
A-1
<PAGE>
SCHEDULE B
TO THE BLUE SKY SERVICES AGREEMENT
BETWEEN
M.S.D. & T. FUNDS, INC.
AND
BISYS FUND SERVICES OHIO, INC.
FEES
----
Annual Fee: BISYS shall be entitled to receive an annual fee for
- ----------
blue sky services equal to $75.00 per state permit.
Initial Start-Up Fee: BISYS shall be entitled to receive a one time
- --------------------
conversion fee in the amount of $3,500 that shall be
due and payable thirty (30) days following the
Effective Date.
State Registration Fees: BISYS shall be reimbursed for actual registration fees
- -----------------------
paid to qualify the Company's shares for sale in each
state.
Check Fee: BISYS shall be entitled to receive the sum of $8.00 per
- ---------
check in connection with the payment to the various
states of registration fees.
Out of Pocket Fees: BISYS shall be entitled to be reimbursed for reasonable
- ------------------
out-of-pocket expenses.
B-1
<PAGE>
Exhibit (i)
DRINKER BIDDLE & REATH LLP
One Logan Square
18/th/ & Cherry Streets
Philadelphia, PA 19103-6996
215-988-2700
215-988-2757 Fax
www.dbr.com
April 14, 2000
M.S.D. & T. Funds, Inc.
Two Hopkins Plaza
Baltimore, MD 21201
Re: M.S.D. & T. Funds, Inc. -- Class P Common Stock
-----------------------------------------------
Ladies and Gentleman:
We have acted as counsel for M.S.D.& T. Funds, Inc., a Maryland
corporation (the "Company"), in connection with the preparation and filing of
Post-Effective Amendment No. 25 (the "Amendment") to the Company's Registration
Statement on Form N-1A under the Securities Act of 1933. The Amendment seeks to
register an indefinite number of Class P shares of common stock (the "Class P
Common Stock"), par value $.001 per share, representing interests in the
Company's Capital Opportunities Fund. You have asked for our opinion on certain
matters relating to the Class P Common Stock.
We have reviewed the Company's Articles of Incorporation and Bylaws,
resolutions of the Company's Board, certificates of public officials and such
other legal and factual matters as we have deemed appropriate. This opinion is
based exclusively on the Maryland General Corporation Law and the federal law of
the United States of America.
We have also assumed the following for purposes of this opinion:
1. The shares of Class P Common Stock will be issued in accordance
with the Articles of Incorporation and Bylaws of the Company and resolutions of
the Company's Board and shareholders relating to the creation, authorization and
issuance of Class P Common Stock.
<PAGE>
M.S.D. & T. Funds, Inc.
April 14, 2000
Page 2
2. The Board will not change the number of shares of Class P Common
Stock, or the preferences, limitations or relative rights of the Class P Common
Stock after any shares of Class P Common Stock have been issued.
Based upon and subject to the foregoing, we are of the opinion that:
1. The Company is authorized to issue Four Hundred Million
(400,000,000) shares of Class P Common Stock.
2. The shares of Class P Common Stock will be, when issued in
accordance with, and sold for the consideration described in, the Amendment
(provided that (i) the price of such shares is not less than the par value
thereof and (ii) the number of shares of Class P Common Stock issued does not
exceed the authorized number of shares of Class P Common Stock as of the date of
issuance of the shares), validly issued, fully paid and non-assessable by the
Company.
We consent to the filing of this opinion as an exhibit to the
Amendment to be filed by the Company with the Securities and Exchange
Commission.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
---------------------------------------
DRINKER BIDDLE & REATH LLP
<PAGE>
Exhibit (j)(1)
CONSENT OF COUNSEL
We hereby consent (i) to the use of our name and to the reference to
our firm under the captions "Management of the Company" and "Counsel" in the
Statement of Additional Information included in Post-Effective Amendment No. 25
to the Registration Statement (File Nos. 33-27491 and 811-5782) on Form N-1A of
M.S.D. & T. Funds, Inc. under the Securities Act of 1933 and the Investment
Company Act of 1940 and (ii) to the incorporation by reference our firm's
opinion of counsel dated September 28, 1999 filed as an exhibit to Post-
Effective Amendment No. 24 to the Registration Statement on Form N-1A of M.S.D.
& T. Funds, Inc. under the Securities Act of 1933 and the Investment Company Act
of 1940. This consent does not constitute a consent under Section 7 of the
Securities Act of 1933, and in consenting to the use of our name, the references
to our firm under such captions and the incorporation by reference of our firm's
opinion, we have not certified any part of the Registration Statement and do not
otherwise come within the categories of persons whose consent is required under
Section 7 or the rules and regulations of the Securities and Exchange Commission
thereunder.
/s/ Drinker Biddle & Reath LLP
----------------------------------------
DRINKER BIDDLE & REATH LLP
Philadelphia, Pennsylvania
April 14, 2000
<PAGE>
Exhibit (l)(8)
PURCHASE AGREEMENT
------------------
M.S.D. & T. Funds, Inc. (the "Company"), a Maryland corporation, and BISYS
Fund Services Ohio, Inc. ("BISYS"), an Ohio corporation, hereby agree as
follows:
1. The Company hereby offers BISYS and BISYS hereby purchases one (1)
share of Class P Common Stock at $10.00 per share (such share of Common Stock in
the Company representing an interest in the Company's Capital Opportunities Fund
(the "Fund") and being hereinafter known as the "Share"). BISYS hereby
acknowledges purchase of the Share and the Company hereby acknowledges receipt
from BISYS of funds in the amount of $10.00 in full payment for the Share.
2. BISYS represents and warrants to the Company that the Share is being
acquired for investment purposes and not for the purpose of distribution.
3. BISYS agrees that if it or any direct or indirect transferee of the
Share redeems the Share prior to the fifth anniversary of the date the Fund
begins investment activities, BISYS will pay to the Company an amount equal to
the number resulting from multiplying the Fund's total unamortized
organizational expenses by a fraction, the numerator of which is equal to the
number of shares redeemed by BISYS or such transferee and the denominator of
which is equal to the number of shares outstanding as of the date of such
redemption, as long as the administrative position of the staff of the
Securities and Exchange Commission requires such reimbursement.
4. All persons dealing with any class of shares of the Company must look
solely to the net assets belonging to such class for enforcement of any claims
against the Company.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the ______ day of July, 2000.
M.S.D. & T. FUNDS, INC.
By:
______________________________
Name:
____________________________
Title:
___________________________
BISYS FUND SERVICES OHIO, INC.
By:
______________________________
Name:
____________________________
Title:
___________________________
<PAGE>
Exhibit (p)(1)
M.S.D. & T. FUNDS, INC.
(the "Company")
CODE OF ETHICS
--------------
I. Legal Requirement.
-----------------
Rule 17j-1(a) under the Investment Company Act of 1940, as amended (the
"1940 Act"), makes it unlawful for any officer or director of the Company in
connection with the purchase or sale by such person of a security "held or to be
acquired" by the Company:
1. To employ any device, scheme or artifice to defraud the Company;
2. To make to the Company any untrue statement of a material fact or
omit to state to the Company a material fact necessary in order
to make the statements made, in light of the circumstances under
which they are made, not misleading;
3. To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon the Company;
or
4. To engage in any manipulative practice with respect to the
Company's investment portfolios.
II. Purpose of the Code of Ethics.
-----------------------------
The Company expects that its officers and directors will conduct their
personal investment activities in accordance with (1) the duty at all times to
place the interests of the Company's shareholders first, (2) the requirement
that all personal securities transactions be conducted consistent with this Code
of Ethics and in such a manner as to avoid any actual or potential conflict of
interest or any abuse of an individual's position of trust and responsibility,
and (3) the fundamental standard that investment company personnel should not
take inappropriate advantage of their positions.
In view of the foregoing, the provisions of Section 17(j) of the 1940 Act,
the "Report of the Advisory Group on Personal Investing" issued by the
Investment Company Institute on May 9, 1994 and the Securities and Exchange
Commission's September 1994 Report on "Personal Investment Activities of
Investment Company Personnel," the Company has determined to adopt this Code of
Ethics on behalf of the Company to specify a code of conduct for certain types
of personal securities transactions which might involve conflicts of interest or
an appearance of impropriety, and to establish reporting requirements and
enforcement procedures.
<PAGE>
III. Definitions.
-----------
A. An "Access Person" means: (1) each director or officer of the Company;
(2) each employee (if any) of the Company (or of any company in a
control relationship to the Company) who in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by the
Company or whose functions relate to the making of any recommendations
with respect to such purchases or sales; and (3) any natural person in
a control relationship to the Company who obtains information
concerning recommendations made to the Company with regard to the
purchase or sale of a security.
For purposes of this Code of Ethics, an "Access Person" does not
include any person who is subject to the securities transaction pre-
clearance requirements and securities transaction reporting
requirements of the Code of Ethics adopted by the Company's investment
adviser or principal underwriter in compliance with Rule 17j-1 of the
1940 Act and Rule 204-2(a)(12) of the Investment Advisers Act of 1940
or Section 15(f) of the Securities Exchange Act of 1934, as
applicable.
B. "Restricted Director" or "Restricted Officer" means each director or
officer of the Company who is not also a director, officer, partner,
employee or controlling person of the Company's investment adviser,
administrator, custodian, transfer agent, or distributor.
C. An Access Person's "immediate family" includes a spouse, minor
children and adults living in the same household as the Access Person.
D. A security is "held or to be acquired" if within the most recent 15
days it (1) is or has been held by the Company, or (2) is being or has
been considered by the Company or its investment adviser for purchase
by the Company. A purchase or sale includes the writing of an option
to purchase or sell.
E. "Exempt Security" means:
1. Securities which the Company's investment portfolios are not
permitted to purchase under the investment objectives and
policies set forth in the Company's then current prospectus(es)
under the Securities Act of 1933 or the Company's registration
statement on Form N-1A.
2. Securities issued by the Government of the United States (i.e.,
U.S. Treasury securities), short-term debt securities which are
"government securities" within the meaning of section 2(a)(16) of
the 1940 Act (which includes securities of the U.S. Government
and its instrumentalities),
-2-
<PAGE>
bankers' acceptances, bank certificates of deposit, commercial
paper, and shares of registered open-end investment companies.
3. Securities purchased or sold in any account over which the Access
Person has no direct or indirect influence or control.
4. Securities purchased or sold in a transaction which is non-
volitional on the part of either the Access Person or the
Company.
5. Securities acquired as a part of an automatic dividend
reinvestment plan.
6. Securities acquired upon the exercise of rights issued by an
issuer pro rata to all holders of a class of its securities, to
--- ----
the extent such rights were acquired from such issuer, and sales
of such rights so acquired.
IV. Policies of the Company Regarding Personal Securities Transactions.
------------------------------------------------------------------
A. General Policy.
--------------
No Access Person of the Company shall engage in any act, practice or
course of business that would violate the provisions of Rule 17j-1(a)
set forth above, or in connection with any personal investment
activity, engage in conduct inconsistent with this Code of Ethics.
B. Specific Policies.
-----------------
1. Restrictions on Personal Securities Transactions By Access
----------------------------------------------------------
Persons Other Than Restricted Directors and Restricted Officers.
---------------------------------------------------------------
a. No Access Person who is not a Restricted Director or
Restricted Officer may buy or sell securities other than
Exempt Securities for his or her personal portfolio or the
portfolio of a member of his or her immediate family without
obtaining oral authorization from the Compliance Officer of
the Company's investment adviser prior to effecting such
-----
security transaction.
A written authorization for such security transaction will
be provided by the investment adviser's Compliance Officer
to the person receiving the authorization (if granted) and
to the Company's administrator to memorialize the oral
authorization that was granted.
-3-
<PAGE>
Note: If an Access Person has questions as to whether
purchasing or selling a security for his or her
personal portfolio or the portfolio of a member of his
or her immediate family requires prior oral
authorization, the Access Person should consult the
investment adviser's Compliance Officer for clearance
or denial of clearance to trade prior to effecting any
-----
securities transactions.
b. Pre-clearance approval under paragraph (a) will expire at
the close of business on the trading day after the date on
which oral authorization is received, and the Access Person
is required to renew clearance for the transaction if the
trade is not completed before the authority expires.
c. No clearance will be given to an Access Person other than a
Restricted Director or Restricted Officer to purchase or
sell any security (1) on a day when any portfolio of the
Company has a pending "buy" or "sell" order in that same
security until that order is executed or withdrawn or (2)
when the Compliance Officer has been advised by the
investment adviser that the same security is being
considered for purchase or sale for any portfolio of the
Company.
2. Restrictions on Personal Securities Transactions by Restricted
--------------------------------------------------------------
Directors and Restricted Officers.
---------------------------------
The Company recognizes that a Restricted Director and a
Restricted Officer do not have on-going, day-to-day involvement
with the operations of the Company. In addition, it has been the
practice of the Company to give information about securities
purchased or sold by the Company or considered for purchase or
sale by the Company to Restricted Directors and Restricted
Officers in materials circulated more than 15 days after such
securities are purchased or sold by the Company or are considered
for purchase or sale by the Company. Accordingly, the Company
believes that less stringent controls are appropriate for
Restricted Directors and Restricted Officers, as follows:
a. The securities pre-clearance requirement contained in
paragraph IV.B.1.a. above shall only apply to a Restricted
Director or Restricted Officer if he or she knew or, in the
ordinary course of fulfilling his or her official duties as
a director or officer, should have known, that during the
fifteen day period before the transaction in a security
other than an Exempt Security or at the time of the
transaction that the security purchased or sold by him or
her other than an Exempt Security was also purchased or sold
by
-4-
<PAGE>
the Company or considered for the purchase or sale by the
Company.
b. If the pre-clearance provisions of the preceding paragraph
apply, no clearance will be given to a Restricted Director
or Restricted Officer to purchase or sell any security (1)
on a day when any portfolio of the Company has a pending
"buy" or "sell" order in that same security until that order
is executed or withdrawn or (2) when the Compliance Officer
has been advised by the investment adviser that the same
security is being considered for purchase or sale for any
portfolio of the Company.
V. Procedures.
----------
A. In order to provide the Company with information to enable it to
determine with reasonable assurance whether the provisions of this
Code are being observed by its Access Persons:
1. Each Access Person of the Company other than a Restricted
Director or Restricted Officer shall direct his or her broker to
supply to the Compliance Officer of the Company's administrator,
on a timely basis, duplicate copies of confirmations of all
securities transactions in which the person has, or by reason of
such transaction acquires any direct or indirect beneficial
ownership/1/ and copies of periodic statements for all securities
accounts.
2. Each Access Person of the Company, other than a director who is
not an "interested person" (as defined in the 1940 Act), shall
submit reports in the
_______________________
1. You will be treated as the "beneficial owner" of a security under this
policy only if you have a direct or indirect pecuniary interest in the
security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly, to profit, or to share the profit, from the transaction.
(b) An indirect pecuniary interest is any nondirect financial interest,
but is specifically defined in the rules to include securities held by
members of your immediate family sharing the same household;
securities held by a partnership of which you are a general partner;
securities held by a trust of which you are the settlor if you can
revoke the trust without the consent of another person, or a
beneficiary if you have or share investment control with the trustee;
and equity securities which may be acquired upon exercise of an option
or other right, or through conversion.
For interpretive guidance on this test, you should consult counsel.
-5-
<PAGE>
form attached hereto as Exhibit A to the Company's administrator,
showing all transactions in securities other than Exempt Securities in
which the person has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership./2/ Such reports shall be
filed no later than 10 days after the end of each calendar quarter.
3. Each director who is not an "interested person" of the Company shall
submit the same quarterly report as required under paragraph 2 to the
administrator, but only for a transaction in a security other than an
Exempt Security where he or she knew at the time of the transaction
or, in the ordinary course of fulfilling his or her official duties as
a director or officer, should have known that during the 15-day period
immediately preceding or after the date of the transaction, such
security is or was purchased or sold, or considered for purchase or
sale, by the Company.
4. The administrator of the Company shall notify each Access Person of
the Company who may be required to make reports pursuant to this Code
that such person is subject to this reporting requirement and shall
deliver a copy of this Code to each such person.
5. The administrator of the Company shall review the reports received,
and as appropriate compare the reports with the pre-clearance
authorization received, and report to the Company's Board of
Directors:
a. with respect to any transaction that appears to evidence a
possible violation of this Code; and
b. apparent violations of the reporting requirement stated herein.
6. The Board of Directors shall consider reports made to it hereunder and
shall determine whether the policies established in Sections IV and V
of this Code of Ethics have been violated, and what sanctions, if any,
should be imposed on the violator, including but not limited to a
letter of censure, suspension or termination of the employment of the
violator, or the unwinding of the transaction and the disgorgement of
any profits to the Company. The Board of Directors shall review the
operation of this Code of Ethics at least once a year.
7. The Company's investment adviser and principal underwriter shall
adopt, maintain and enforce separate codes of ethics with respect to
their personnel in compliance with Rule 17j-1 and Rule 204-2(a)(12) of
the Investment Advisers Act of 1940 or Section 15(f) of the Securities
Exchange Act of 1934, as applicable, and shall forward to the
administrator and the Company's counsel copies of such codes and all
________________________
2. See footnote 1 above.
-6-
<PAGE>
future amendments and modifications thereto.
8. At each quarterly Board of Directors' meeting the investment adviser
and principal underwriter of the Company shall report to the Company's
Board of Directors:
a. any reported securities transaction that occurred during the
prior quarter that may have been inconsistent with the provisions
of the codes of ethics adopted by the Company's investment
adviser or principal underwriter; and
b. all disciplinary actions/3/ taken in response to such violations.
9. At least once a year, the Company's investment adviser and principal
underwriter shall provide to the Board of Directors a report which
contains (a) a summary of existing procedures concerning personal
investing by advisory persons and any changes in the procedures during
the past year and (b) an evaluation of current compliance procedures
and a report on any recommended changes in existing restrictions or
procedures based upon the Company's experience under this Code of
Ethics, industry practices, or developments in applicable laws and
regulations.
10. This Code, the codes of the investment adviser and principal
underwriter, a copy of each report by an Access Person, any written
report hereunder by the Company's administrator, investment adviser or
principal underwriter and lists of all persons required to make
reports shall be preserved with the Company's records for the period
required by Rule 17j-1.
VI. Certification.
-------------
Each Access Person will be required to certify annually that he or she has
read and understood this Code of Ethics, and will abide by them. Each Access
Person will further certify that they have disclosed or reported all personal
securities transactions required to be disclosed or reported under the Code of
Ethics. A form of such certification is attached hereto as Exhibit B.
The Board of Directors of
M.S.D. & T. FUNDS, INC.
_______________________
3. Disciplinary action includes but is not limited to any action that has a
material financial effect upon the employee, such as fining, suspending, or
demoting the employee, imposing a substantial fine or requiring the
disgorgement of profits.
-7-
<PAGE>
Exhibit A
M.S.D. & T. FUNDS, INC.
Securities Transaction Report
For the Calendar Quarter Ended
___________________________________
(month/day/year)
To: Mercantile-Safe Deposit and Trust Company, as Administrator of the
above listed Fund
During the quarter referred to above, the following transactions were
effected in securities of which I had, or by reason of such transactions
acquired, direct or indirect beneficial ownership, and which are required to be
reported pursuant to the Code of Ethics of the Company:
<TABLE>
<CAPTION>
Number of
Shares or Nature of
Date of Principal Dollar Amount Transaction Broker/Dealer or Bank
Security Transaction Amount of Transaction (Purchase, Sale, Other) Price Through Whom Effected
- -------- ----------- ------ -------------- ----------------------- ----- ---------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
This report (i) excludes transactions with respect to which I had no
direct or indirect influence or control, (ii) excludes other transactions not
required to be reported, and (iii) is not an admission that I have or had any
direct or indirect beneficial ownership in the securities listed above.
Signature:
________________________
Print Name:
_______________________
A-1
<PAGE>
Exhibit B
M.S.D. & T. FUNDS, INC.
ANNUAL CERTIFICATE
Pursuant to the requirements of the Code of Ethics of M.S.D. & T.
FUNDS, INC., the undersigned hereby certifies as follows:
1. I have read the Company's Code of Ethics.
2. I understand the Code of Ethics and acknowledge that I am subject
to it.
3. Since the date of the last Annual Certificate (if any) given
pursuant to the Code of Ethics, I have reported all personal
securities transactions required to be reported under the
requirements of the Code of Ethics.
Date: ______________________
Print Name
______________________
Signature
B-1
<PAGE>
Exhibit (p)(2)
Mercantile-Safe Deposit and Trust Company
as Investment Adviser to the
M.S.D.&T. Funds, Inc.
CODE OF ETHICS
I. PREAMBLE.
--------
Certain officers, directors and employees of Mercantile-Safe Deposit and Trust
Company (the "Adviser") may in varying degrees participate in or be aware of
decisions made to implement the investment policies of M.S.D.&T. Funds, Inc., a
registered investment company (the "Funds"). The Adviser's relationship to the
Funds mandates adherence to the highest standards of conduct and integrity. This
Code of Ethics (this "Code") is intended to ensure adherence to such standards,
and compliance with the provisions of Rule 17j-1 under the Investment Company
Act of 1940 relating to the securities activities of advisory personnel who
perform services for investment companies regulated under that Act.
II. APPLICABILITY.
-------------
The provisions of this Code apply to all access persons (as defined below) of
the Adviser.
III. DEFINITIONS.
-----------
A. "Access Person" means any director, officer or advisory person of the
Adviser who, with respect to any Fund, makes any recommendation,
participates in the determination of which recommendations shall be
made, or whose principal function or duties relate to the
determination of which recommendation shall be made to any Fund; or
who, in connection with his or her duties, obtains any information
concerning securities recommendations being made by the Adviser to any
Fund.
B. "Act" means the Investment Company Act of 1940.
C. "Advisory Person" of the Adviser means:
1. Any employee of the Adviser (or of any company in a control
relationship to the Adviser) who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a security by any
Fund, or whose functions relate to the making of any
recommendations with respect to such purchase or sales; and
2. Any natural person in a control relationship to the Adviser who
obtains information concerning recommendations made to any Fund
with regard to the purchase or sale of a security.
<PAGE>
D. "Beneficial Ownership" of a security means a direct or indirect
pecuniary interest in the security.
(a) A direct pecuniary interest is the opportunity, directly or
indirectly to profit, or to share the profit, from the
transaction.
(b) An indirect pecuniary interest is any non-direct financial
interest, but is specifically defined in the SEC rules to include
securities held by members of your immediate family who share in
the same household; securities held by a partnership of which you
are a general partner; securities by a trust of which you are a
settlor if you can revoke the trust, or a beneficiary if you have
or share investment control with a trustee; and equity securities
which may be acquired on an exercise of an option or other right,
or through conversion.
E. "Purchase or sale of a security" includes, among other things, the
writing of an option to purchase or sell a security.
F. "SEC" means the Securities and Exchange Commission.
G. "Security" means all registered and unregistered securities (including
options, warrants and other rights), except that it does not include
securities issued by the United States Government, its agencies or
instrumentalities, bankers' acceptances, bank certificates of deposit,
commercial paper and shares of registered open-end investment
companies.
H. "Security held or to be acquired by any Fund" means any security
which, within the most recent 15 days:
1. Is or has been held by any Fund, or
2. Is being or has been considered by any Fund or the Adviser for
purchase by a Fund.
IV. STANDARDS OF CONDUCT.
A. Legal Requirement.
-----------------
It is unlawful for any access person, in connection with the purchase
or sale of a security held or to be acquired by any fund:
1. To employ any device, scheme or artifice to defraud any Fund;
2. To make to any Fund any untrue statement of a material fact or
omit to state to any Fund a material fact necessary in order to
make the statements made, in light of the circumstances under
which they are made, not misleading;
-2-
<PAGE>
3. To engage in any act, practice or course of business which
operates or would operate as a fraud or deceit upon any Fund; or
4. To engage in any manipulative practice with respect to any Fund.
B. Specific Prohibited Transactions:
--------------------------------
1. Disclosure of Material Positions or Recent Trading. At no time
may any access person recommend the holding, purchase or sale of
any security by any Fund without first disclosing the existence
of any material (in relationship to personal financial
circumstances) position (long or short) in such security held by,
or recent trading in such security by, any such access person.
Such disclosure shall be made to Dennis Kreiner or an officer
designated by him.
V. REPORTING REQUIREMENTS
----------------------
A. Requirement. In order to reasonably assure that the Advisor has
-----------
adequate information to enable it to determine whether the foregoing
standards of conduct are being observed by its access persons, except
as otherwise provided herein, every access person shall make a report
containing the information described in Section V(B) to Dennis Kreiner
or an officer designated by him with respect to each transaction in
any security in which such access person has, or by reason of such
transaction acquires, beneficial ownership. Dennis Kreiner or an
officer designated by him shall identify all access persons who are
under a duty to make such reports and shall inform such persons of
such duty.
B. Report. Each report required to be made hereunder by an access person
------
shall be in the form attached hereto as Exhibit A and shall be
delivered by the access person, whether or not a reportable securities
transaction occurred during the quarterly period covered by the
report, to Dennis Kreiner or an officer designated by him not later
than 10 days after the end of each calendar quarter.
C. Exception. Notwithstanding Paragraph V(A), no person shall be
---------
required to make a report with respect to transactions effected for
any account over which such person does not have any direct or
indirect influence or control.
D. Review, Investigation and Record Maintenance. Dennis Kreiner or an
--------------------------------------------
officer designated by him shall:
1. Review all reports required to be made by access persons pursuant
to this Code;
2. Promptly investigate any failure to submit reports as required by
this Code and any reported securities transaction that may have
been inconsistent with the provisions of this Code;
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<PAGE>
3. Submit periodic status reports with respect to each investigation
made pursuant to subparagraph (b) above to the Chairman of the
Adviser;
4. Maintain for periods required by applicable law, including Rule
17j-1 under the Act, copies of this Code (and all amendments
hereto), the names of all persons required to make reports
hereunder, each report submitted by such persons and records of
any violation of this Code and of any action taken as a result of
such violation; and
5. In connection with the annual review of the Adviser's investment
advisory contract by each Fund's board of directors, report to
such board of directors on matters related to compliance with
this Code.
VI. SANCTIONS. Violations of this Code or any provision hereof shall be
---------
grounds for appropriate sanctions, including dismissal. All material violations
of this Code and any sanctions imposed with respect hereto shall be reported to
the governing Boards of the Funds.
VII. INTERPRETATIONS. Any questions regarding the applicability, meaning or
---------------
administration of the Code shall be referred by the person concerned in advance
of any contemplated transaction to Dennis Kreiner or to an officer designated by
him.
VIII. ACCEPTANCE. Each access person shall receive a copy of this Code and any
----------
amendments thereto. Each officer and employee of the Adviser to whom this Code
is applicable shall sign a statement that he has read this Code and will abide
by it. The signed statement shall be kept in the files of the Adviser. A form
of the statement is attached hereto as Exhibit B.
IX. EFFECTIVE DATE. The provisions of this Code shall be effective on and
--------------
after July 1, 1991, and amendments shall become effective when promulgated.
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<PAGE>
Mercantile-Safe Deposit and Trust Company
As Investment Adviser to the
M.S.D.&T. Funds, Inc.
Securities Transaction Report
For the Calendar Quarter Ended June 30, 1994
To: Dennis Kreiner
During the quarter referred to above, the following securities transactions were
effected to my "personal accounts" (as defined in Mercantile-Safe Deposit and
Trust Company's Code of Ethics as Adviser to the M.S.D.&T. Funds Inc.):
<TABLE>
<CAPTION>
Number of Nature of
shares or Transaction
Date of Principal Dollar Amount of (Purchase, Sale, Broker/Dealer or Bank
Security Transaction Amount Transaction Other) Price Through Which Effected
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
</TABLE>
This report (1) excludes transactions with respect to which I had no direct or
indirect influence or control, (2) excludes other transactions not required to
be reported under the Code of Ethics (including transactions in which my
personal accounts did not have, or by reason of the transaction acquire, any
direct or indirect beneficial ownership of a security), and (3) is not an
admission that I have or had any direct or indirect beneficial ownership in the
securities listed above.
The undersigned hereby certifies that he or she has read and will abide by the
Code of Ethics dated as of July 1, 1991, or as subsequently amended, and that he
or she knows such failure may constitute a violation of federal and state
securities laws and regulations which may subject him or her to civil
liabilities and criminal penalties. The undersigned acknowledges that failure to
observe the provisions of said Code shall be a basis for any appropriate
sanction, including dismissal.
Date: _______________ Signature:________________________
Printed Name:_____________________
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<PAGE>
Exhibit B
STATEMENT REGARDING CODE OF ETHICS
The undersigned hereby certifies that he or she has read and will abide by the
Code of Ethics, and that he or she knows such failure may constitute a violation
of federal and state securities laws and regulations which may subject him or
her to civil liabilities and criminal penalties. The undersigned acknowledges
that failure to observe the provisions of said Code shall be a basis for any
appropriate sanction, including dismissal.
Date:_________________________ ____________________________________
Name
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<PAGE>
ADDENDUM TO CODE OF ETHICS
FOR ACCESS PERSONS
---------------------------------------
The purpose of the Code is to prevent abuses that can arise from personal
securities holdings and transactions by persons who make recommendations or
decisions concerning securities held or acquired by the Fund or who in the
regular course of their duties have access to information about Fund holdings
and transactions. Only a few of you will be involved in the recommendation or
decision process. Most have been included as "access persons" only because you
may, from time to time, have information about the composition of the Fund's
portfolio. In considering how to avoid conflicts in your personal holdings and
securities transactions, you should apply judgment and common sense as to
whether particular holdings or transactions could affect the exercise of your
judgment on behalf of the Fund (or impact the value of the Fund's portfolio) at
times when you make Fund recommendations or decisions or when you have
information about Fund holdings or transactions, in light of your particular
degree of responsibility for and knowledge of such holdings or transactions.
Personal transactions which may not be abusive include transactions for your
benefit which you do not control (so-called "nonvolitional" transactions),
transactions where any potential harm to the Fund is remote because the
securities are traded in a "highly institutional" market, or transactions that
are not related economically to the securities to be purchased, sold or held by
the Fund. Company counsel will be available to assist you in these matters and
with the reporting process.
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<PAGE>
Exhibit (p)(3)
CODE OF ETHICS
--------------
DELAWARE MANAGEMENT BUSINESS TRUST
DELAWARE DISTRIBUTORS, L.P.
DELAWARE SERVICE COMPANY, INC.
DELAWARE MANAGEMENT TRUST COMPANY
DELAWARE INTERNATIONAL ADVISERS LTD.
DELAWARE CAPITAL MANAGEMENT, INC.
DELAWARE INVESTMENT RETIREMENT SERVICES, INC.
CREDO
- -----
It is the duty of all Fund employees, officers and directors to conduct
themselves with integrity, and at all times to place the interests of the
shareholders first. In the interest of this credo all personal securities
transactions will be conducted consistent with the Code of Ethics and in such a
manner as to avoid any actual or potential conflict of interest or any abuse of
an individual's position of trust and responsibility. The fundamental standard
of this Code is that personnel should not take any inappropriate advantage of
their positions.
The Securities and Exchange Commission has adopted Rule 17j-1 under the
Investment Company Act of 1940. This Rule makes it unlawful for certain persons,
including any employee, officer or director of the Fund, in connection with the
purchase or sale by such person of a security held or to be acquired/1/ by the
Fund:
(1) To employ any device, scheme or artifice to defraud the Fund;
(2) To make to the Fund any untrue statement of a material fact or omit to
state to the Fund a material fact necessary in order to make the statements
made, in light of the circumstances in which they are made, not misleading;
(3) To engage in any act, practice or course of business that operates or
would operate as a fraud or deceit upon the Fund; or
(4) To engage in any manipulative practice with respect to the Fund.
_______________________________
/1/ A security is deemed to be "held or to be acquired" if within the most
recent fifteen days it (i) is or had been held by the Fund or (ii) is being or
had been considered by the Fund or its investment adviser for purchase by the
Fund.
<PAGE>
The Rule also requires that the Fund and Delaware Management Business Trust
shall adopt a written code of ethics containing provisions reasonably necessary
to prevent persons from engaging in acts in violation of the above standard and
shall use reasonable diligence and institution procedures reasonably necessary
to prevent violations of the Code.
This Code of Ethics is being adopted by Delaware Management Business Trust
("DMBT") Delaware Management Business Trust ("DMST"), Delaware Distributors,
L.P., Delaware Service Company, Inc., Delaware Management Trust Company,
Delaware International Advisers Ltd. ("International") and Delaware Capital
Management, Inc. ("DCM"), Delaware Investment Retirement Services, Inc.
("DIRSI"), (collectively "Delaware") in the Credo set forth above, and the
recommendations of the Investment Company Institute's Advisory Group on Personal
Investing.
DEFINITIONS
- -----------
"Affiliated person" means any employee of the Funds or any subsidiary of
Delaware Management Holdings, Inc. and any other person so designated by the
Compliance Department.
"Access person" means any director, officer, general partner or advisory person
of the Fund and shall include all Interested Directors, Portfolio Mangers, other
Investment Personnel and all Advisory Persons.
"Advisory person" mean (i) any employee, officer or interested director of
Delaware, who in connection with his/her regular functions or duties, normally
makes, participates in, or obtains current information regarding the purchase or
sale of a security by the Fund, or whose functions relate to the making of any
recommendations with respect to such purchases or sales and (ii) any natural
person in a control relationship to any such company who regularly obtains
current information concerning recommendations made with regard to the purchase
or sale of a security by the Fund.
"Investment personnel" means portfolio managers, securities analysts and
traders, and those personnel who provide information and advice to a portfolio
manager or who help execute the portfolio manager's decisions.
A security is being "considered for purchase or sale" or is "being purchased or
sold" when a recommendation to purchase or sell the security has been made and
communicated to the Order Room and with respect to the person making the
recommendation, when such person seriously considers making or when such person
knows or should know that another Advisory Person is seriously considering such
a recommendation.
"Beneficial ownership" shall be as defined in Section 16 of the Securities
Exchange Act of 1934 and the rules and regulations thereunder. Generally
speaking, a person who, directly or indirectly, through any contract,
arrangement, understanding, relationship or otherwise, has or shares a direct or
indirect pecuniary interest in a security, is a "beneficial owner" of the
security. For instance:
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<PAGE>
- A person is normally regarded as the beneficial owner of securities
held by members of his or her immediate family sharing the same
household; and
- Ownership of derivative securities such as options, warrants or
convertible securities which confer the right to acquire the
underlying security at a fixed price constitutes beneficial ownership
of the underlying security itself.
"Control" shall mean investment discretion in whole or in part of an account
regardless of beneficial ownership. Such as an account for which a person has
power of attorney or authority to effect transactions.
"Security" shall have the meaning as set forth in Section 2(a)(36) of the
Investment Company Act of 1940, except that it shall not include securities
issued or guaranteed by the government of the United States or by any of it's
federal agencies, bankers' acceptances, bank certificates of deposit, commercial
paper and shares of open-end registered investment companies.
The purchase, sale or exercise of a derivative security shall constitute the
purchase or sale of the underlying security. However, the purchase or sale of
the debt instrument of an issuer which does not give the holder the right to
purchase the issuer's stock at a fixed price, does not constitute a purchase or
sale of the issuer's stock.
PROHIBITED ACTIVITIES
---------------------
AFFILIATED PERSONS, ACCESS PERSONS, INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
- -------------------------------------------------------------------------------
The following restrictions apply to all Portfolio Managers, Investment
Personnel, Access Persons and Affiliated Persons. Access Persons include
Interested Directors and the Funds.
(a) No Affiliated or Access Person shall engage in any act, practice or course
of conduct, which would violate the provision of Rule 17j-1 set forth
above.
(b) No Affiliated or Access Person shall purchase or sell, directly or
indirectly, any security which to his/her knowledge is being actively
considered for purchase or sale by Delaware; except that this prohibition
shall not apply to:
(A) purchases or sales that are nonvolitional on the part of either the
Person or the Fund;
(B) purchases which are part of an automatic dividend reinvestment plan;
(C) purchases effected upon the exercise of rights issued by an issuer pro
rata to all holders of a class of its securities, to the extend such
rights were acquired from such issuer, and sales or such rights so
acquired;
(D) other purchases and sales specifically approved by the President or
Chief Executive Officer, with the advice of the General Counsel and
the Compliance
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<PAGE>
Officer and deemed appropriate because of unusual or unforeseen
circumstances. A list of securities excepted will be maintained by the
Compliance Department.
(c) No Affiliated or Access Person may execute a buy or sell order for an
account in which he or she has beneficial ownership or control until the
third trading day following the execution of a Delaware buy or sell order
in that same security.
(d) Despite any fault or impropriety, any Affiliated or Access Person who
executes a buy or sell for an account in which he/she has beneficial
ownership or control either (i) before the third trading day following the
execution of a Delaware order in the same security, or (ii) when there are
pending orders for a Delaware transaction as reflected on the Trader Order
Scan, shall forfeit any profits made (in the event of purchases) or loss
avoided (in the event of sales), whether realized or unrealized, in the
period from the date of the personal transaction to the end of the
proscribed trading period. Payment of the amount forfeited shall be made
by check or in cash to a charity of the person's choice and a copy of the
check or receipt must be forwarded to the Compliance Department.
(e) Each Affiliated or Access Person's personal transactions must be precleared
by using the Personal Transaction Preclearance Form. The form must be
submitted prior to entering any orders for personal transactions.
Preclearance is only valid for the day the form is submitted. If the order
is not executed the same day, the preclearance form must be resubmitted.
Regardless of preclearance, all transactions remain subject to the
provisions of (d) above.
INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
- -------------------------------------------
The following additional restrictions apply to all Investment Personnel and
Portfolio Managers.
(a) All Investment Personnel are prohibited from purchasing any initial public
offering.
(b) All Investment Personnel are prohibited from purchasing any private
placement without express PRIOR written consent by the Compliance
Department. All private placement holdings are subject to disclosure to the
Compliance Department. Any Investment Person that holds a private placement
must receive permission from the Compliance or Legal Departments prior to
any participation by such person in Delaware's consideration of an
investment in the same issuer.
(c) Short term trading resulting in a profit is prohibited. All opening
positions must be held for a period of 60 days, in the aggregate, before
they can be closed at a profit. Any short term trading profits are subject
to the disgorgement procedures outlined above and at the maximum level of
profit obtained. The closing of positions at a loss is not prohibited.
(d) All Investment Personnel are prohibited from receiving anything of more
than ade minimis value from any person or entity that does business with or
on behalf of any fund or client. Things of value may include, but not be
limited to, travel expenses, special deals or incentives.
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<PAGE>
(e) All Investment Personnel require PRIOR written approval from the Legal or
Compliance Department before they may serve on the board of directors of
any public company.
PORTFOLIO MANAGERS
- ------------------
The following additional restrictions apply to Portfolio Managers
(a) No Portfolio Manager may execute a buy or sell order for an account for
which he/she has beneficial ownership within seven calendar days before or
after an investment company or separate account that he/she manages trades
in that security.
(b) Despite any fault or impropriety, any Portfolio Manager who executes a
personal transaction within seven calendar days before or after an
investment company or separate account that he/she manages trades in that
security, shall forfeit any profits made (in the event or purchases) or
loss avoided (in the event of sales), whether realized or unrealized, in
the period from the date of the personal transaction to the end of the
prescribed trading period. Payment of the amount forfeited shall be made
by check or in cash to a charity of the person's choice and a copy of the
check or receipt must be forwarded to the Compliance Department.
REQUIRED REPORTS
AFFILIATED PERSONS, ACCESS PERSONS, INVESTMENT PERSONNEL, PORTFOLIO MANAGERS AND
- --------------------------------------------------------------------------------
DISINTERESTED DIRECTORS
- -----------------------
The following reports are required to be made by all Affiliated Persons, Access
Persons, Investment Personnel and Portfolio Managers. Access Persons,
Investment Personnel and Portfolio Managers are Affiliated Persons by
definition.
(a) All Affiliated Persons must disclose brokerage relationships at employment
and at the time of opening any new account.
(b) All Affiliated Persons will direct their brokers to supply to the
Compliance Department, on a timely basis, duplicate copies of all
confirmation and statements for all securities accounts. (In the U.K., all
contract notes and periodic statements)
(c) Each quarter, no later than the tenth day after the end of the calendar
quarter, each Affiliated Person will submit to the Compliance Department a
personal transaction summary showing all transactions in securities in
accounts which such person has or acquires any direct or indirect
beneficial ownership. Each Director who is not an interested person shall
submit the quarterly reports only for transactions where at the time of the
transaction the director knew, or in the ordinary course of fulfilling his
official duties as a director should have known, that during the fifteen
day period immediately
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<PAGE>
preceding the date of the transaction by the director, such security was
purchased or sold by the Fund or was being considered for purchase or sale
by the Fund.
Every report will contain the following information:
(i) the date of the transaction, the name and the number of shares and
the principal amount of each security involved;
(ii) the nature of the transaction (i.e., purchase, sale or any other type
of acquisition or disposition);
(iii) the price at which the transaction was effected;
(iv) the name of the broker, dealer or bank effecting the transaction.
(d) If any security involved in a personal transaction is purchased or sold by
a Fund within fifteen days of the personal transaction, the Compliance
Department will request and the Affiliated Person will provide additional
information relating to the circumstances surrounding the personal
transaction.
(e) All Affiliated Persons will certify annually that they have read and
complied with this Code of Ethics and all disclosure and reporting
requirements contained therein.
INVESTMENT PERSONNEL AND PORTFOLIO MANAGERS
- -------------------------------------------
In addition to the above reporting requirements, all Investment Personnel, which
includes Portfolio Managers by definition, must disclose all personal securities
holdings on commencement of employment and thereafter on an annual basis.
ADMINISTRATIVE PROCEDURES
(a) The Legal Department of Delaware will identify all Affiliated Persons,
Access Persons, Investment Personnel and Portfolio Managers.
(b) The Legal Department shall promptly report to the President or Chief
Executive Officer of Delaware Management Business Trust any apparent
violations of the prohibitions or reporting requirements contained in this
Code of Ethics. Such Chief Executive Officer or President, or both in
conjunction, will review the reports made and determine whether or not the
Code of Ethics has been violated and shall determine what sanctions, if
any, should be imposed.
When the Legal Department finds that a transaction otherwise reportable above
could not reasonably be found to have resulted in a fraud, deceit or
manipulative practice in violation of Rule 17j-1(a), it may, in it's discretion,
lodge a written memorandum of such finding in lieu of reporting the transaction.
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