THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
TRUST SHARES
PROSPECTUS
JANUARY 31, 1995
(REVISED MARCH 1, 1995)
- THE U.S. GOVERNMENT SECURITIES
FUND
- THE STOCK FUND
- THE VIRGINIA MUNICIPAL BOND FUND
- THE MARYLAND MUNICIPAL BOND FUND
- THE TREASURY MONEY MARKET FUND
- THE MONEY MARKET FUND
- THE TAX-FREE MONEY MARKET FUND
THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
TRUST SHARES
PROSPECTUS
The Virtus Funds (the "Trust"), an open-end, management investment company (a
mutual fund) is comprised of the seven separate investment portfolios set forth
below (collectively, the "Funds," individually, a "Fund"), each having a
distinct investment objective and policies. With the exception of The Tax-Free
Money Market Fund, which offers a single class of Shares, the Funds are offered
in two separate classes of shares known as Trust Shares and Investment Shares.
- The U.S. Government Securities Fund (formerly U.S. Government Income
Fund)
- The Stock Fund (formerly Value Equity Fund)
- The Virginia Municipal Bond Fund
- The Maryland Municipal Bond Fund
- The Treasury Money Market Fund
- The Money Market Fund
- The Tax-Free Money Market Fund
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND
ARE NOT ENDORSED OR GUARANTEED BY, SIGNET TRUST COMPANY OR SIGNET BANK OR ANY OF
THEIR AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES OF THE U.S. GOVERNMENT SECURITIES FUND, THE STOCK FUND,
THE VIRGINIA MUNICIPAL BOND FUND, AND THE MARYLAND MUNICIPAL BOND FUND INVOLVES
INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE TREASURY MONEY
MARKET FUND, THE MONEY MARKET FUND, AND THE TAX-FREE MONEY MARKET FUND ATTEMPT
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE CAN BE NO
ASSURANCE THAT THESE FUNDS WILL BE ABLE TO DO SO.
This prospectus relates only to the Trust Shares of those Funds offering classes
and to shares of The Tax-Free Money Market Fund and contains the information you
should read and know before you invest in any of the Funds. Keep this prospectus
for future reference.
The Funds have also filed a Combined Statement of Additional Information for the
Trust Shares of the Funds offering classes and to shares of the Tax-Free Money
Market Fund, dated January 31, 1995 (revised March 1, 1995), with the Securities
and Exchange Commission. The information contained in the Combined Statement of
Additional Information is incorporated by reference into this prospectus. You
may request a copy of the Combined Statement of Additional Information free of
charge, obtain other information, or make inquiries about any of the Funds by
writing to the Trust or calling 1-800-723-9512.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1995
(Revised March 1, 1995)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- ------------------------------------------------------
Special Considerations 1
SUMMARY OF FUND EXPENSES--TRUST SHARES
AND TAX-FREE MONEY MARKET SHARES 2
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 3
- ------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND 10
- ------------------------------------------------------
The U.S. Government Securities Fund 10
Acceptable Investments 10
CMOs 10
ARMS 11
The Stock Fund 11
Acceptable Investments 11
Common Stocks 11
Other Corporate Securities 11
Commercial Paper 11
Bank Instruments 11
American Depositary Receipts ("ADRs") 11
U.S. Government Securities 11
Put and Call Options 12
Financial Futures and Options on Futures 12
Risks 12
Portfolio Turnover 12
Investment Considerations 13
The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund 13
Acceptable Investments 13
Characteristics 13
The Treasury Money Market Fund 14
Acceptable Investments 14
The Money Market Fund 14
Acceptable Investments 14
Bank Instruments 14
Short-Term Credit Facilities 14
Asset-Backed Securities 14
Ratings 14
The Tax-Free Money Market Fund 15
Acceptable Investments 15
Participation Interests 15
Ratings 15
Investment Limitations 15
PORTFOLIO INVESTMENTS AND STRATEGIES 15
- ------------------------------------------------------
Regulatory Compliance 15
Borrowing Money 16
Selling Short 16
Restricted and Illiquid Securities 16
When-Issued and Delayed Delivery Transactions 16
Investing in Securities of Other
Investment Companies 16
Diversification 17
Non-Diversification 17
Investing in New Issuers 17
Repurchase Agreements 17
Lending of Portfolio Securities 17
Acquiring Securities 18
Investment Risks 18
Variable Rate Demand Notes 18
Credit Enhancement 18
Demand Features 18
Participation Interests 19
Variable Rate Municipal Securities 19
Municipal Leases 19
Temporary Investments 19
Municipal Securities 19
Investment Risks 20
Futures Contracts and Options to Buy or
Sell Such Contracts 20
THE VIRTUS FUNDS INFORMATION 20
- ------------------------------------------------------
Management of the Trust 20
Board of Trustees 20
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Distribution of Shares of the Funds 21
Distribution Plan 21
Administrative Arrangements 22
Glass-Steagall Act 22
Administration of the Funds 22
Administrative Services 22
Custodian 22
Transfer Agent and Dividend Disbursing Agent 23
Independent Auditors 23
Expenses of the Funds and Trust Shares 23
Brokerage Transactions 23
NET ASSET VALUE 23
- ------------------------------------------------------
INVESTING IN SHARES 24
- ------------------------------------------------------
Share Purchases 24
By Check 24
By Wire 24
Minimum Investment Required 24
What Shares Cost 24
Certificates and Confirmations 24
Dividends 25
Capital Gains 25
REDEEMING SHARES 25
- ------------------------------------------------------
By Telephone 25
By Mail 26
SHAREHOLDER INFORMATION 26
- ------------------------------------------------------
Voting Rights 26
Massachusetts Partnership Law 27
EFFECT OF BANKING LAWS 27
- ------------------------------------------------------
TAX INFORMATION 28
- ------------------------------------------------------
Federal Income Tax 28
Virginia Taxes 28
Maryland Taxes 28
Other State and Local Taxes 29
PERFORMANCE INFORMATION 29
- ------------------------------------------------------
OTHER CLASSES OF SHARES 30
- ------------------------------------------------------
ADDRESSES 31
- ------------------------------------------------------
SYNOPSIS
- --------------------------------------------------------------------------------
The Trust, an open-end, management investment company, was established as a
Massachusetts business trust under a Declaration of Trust dated June 20, 1990.
The Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. As of the
date of this prospectus, the Trustees have established a single class of shares
for The Tax-Free Money Market Fund, and two classes of shares, Trust Shares and
Investment Shares, for each of the other Funds in the Trust.
As of the date of this prospectus, the Trust is comprised of the following seven
portfolios:
- The U.S. Government Securities Fund--seeks to provide current income by
investing in a professionally managed, diversified portfolio limited
primarily to U.S. government securities;
- The Stock Fund--seeks to provide growth of capital and income by
investing in common stocks of high quality companies;
- The Virginia Municipal Bond Fund--seeks to provide current income which
is exempt from federal regular income tax and the personal income tax
imposed by the Commonwealth of Virginia by investing in a portfolio of
Virginia municipal securities;
- The Maryland Municipal Bond Fund--seeks to provide current income which
is exempt from federal regular income tax and the personal income tax
imposed by the State of Maryland by investing in a portfolio of Maryland
municipal securities;
- The Treasury Money Market Fund--seeks to provide current income
consistent with stability of principal by investing in short-term U.S.
Treasury obligations;
- The Money Market Fund--seeks to provide current income consistent with
stability of principal by investing in money market instruments; and
- The Tax-Free Money Market Fund--seeks to provide current income exempt
from federal income tax consistent with stability of principal, by
investing in municipal securities.
This prospectus relates only to the Trust Shares ("Trust Shares") of those Funds
offering classes and to the single class of shares ("Tax-Free Money Market
Shares") of The Tax-Free Money Market Fund (Trust Shares and Tax-Free Money
Market Shares are sometimes collectively referred to as "Shares"). For
information on how to purchase Shares please refer to "Investing in Shares." A
minimum initial investment of $1,000 is required for shares of The Tax-Free
Money Market Fund, and a minimum investment of $10,000 is required for Trust
Shares of the other Funds in the Trust. Shares are sold and redeemed at net
asset value. Information on redeeming Shares may be found under "Redeeming
Shares." The Funds are advised by Signet Asset Management.
SPECIAL CONSIDERATIONS
Investors should be aware of the following general considerations: the market
value of fixed-income securities, which constitute a major part of the
investments of several Funds, may vary inversely in response to changes in
prevailing interest rates. One or more Funds may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements, lending portfolio securities and entering
into futures contracts and related options as hedges. These risks and those
associated with investing in mortgage-backed securities, when-issued securities,
options, variable rate securities and equity securities are described under
"Investment Objective and Policies of Each Fund" and "Portfolio Investments and
Strategies."
SUMMARY OF FUND EXPENSES--TRUST SHARES AND
TAX-FREE MONEY MARKET SHARES
- --------------------------------------------------------------------------------
The following Fee Table and Example summarize the various costs and expenses
that a shareholder of Trust Shares and Tax-Free Money Market Shares will bear,
either directly or indirectly.
<TABLE>
<CAPTION>
THE THE THE THE
TAX-FREE THE TREASURY MARYLAND VIRGINIA THE U.S.
MONEY MONEY MONEY MUNICIPAL MUNICIPAL THE GOVERNMENT
MARKET MARKET MARKET BOND BOND STOCK SECURITIES
FUND FUND FUND FUND FUND FUND FUND
-------- ------ -------- --------- --------- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Shareholder Transaction Expenses.................... None None None None None None None
</TABLE>
ANNUAL TRUST SHARES AND TAX-FREE MONEY MARKET SHARES OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL TRUST SHARES
TRUST SHARES AND TAX-FREE
AND TAX-FREE MONEY MARKET
MONEY MARKET SHARES OPERATING
NET SHARES EXPENSES NET OF
MANAGEMENT 12B-1 OTHER ANY WAIVERS OR
FEES(1) FEES(2) EXPENSES(3)(4) REIMBURSEMENTS(5)
---------- ------------ -------------- -------------------
<S> <C> <C> <C> <C>
The Money Market Fund................................. 0.25% None 0.30% 0.55%
The Treasury Money Market Fund........................ 0.32% None 0.27% 0.59%
The Tax-Free Money Market Fund........................ 0.04% 0.00% 0.32% 0.36%
The Maryland Municipal Bond Fund...................... 0.24% None 0.68% 0.92%
The Virginia Municipal Bond Fund...................... 0.48% None 0.42% 0.90%
The Stock Fund........................................ 0.52% None 0.43% 0.95%
The U.S. Government Securities Fund................... 0.43% None 0.31% 0.74%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee for The Money Market
Fund, The Treasury Money Market Fund, The Tax-Free Money Market Fund, The
Maryland Municipal Bond Fund, The Virginia Municipal Bond Fund, The Stock
Fund, and The U.S. Government Securities Fund is 0.50%, 0.50%, 0.50%, 0.75%,
0.75%, 0.75% and 0.75%, respectively.
(2) As of the date of this prospectus, The Tax-Free Money Market Fund is not
paying or accruing 12b-1 fees. The Tax-Free Money Market Fund will not
accrue or pay 12b-1 fees until a separate class of shares has been created
for certain institutional investors. The Tax-Free Money Market Fund can pay
up to 0.35% as a 12b-1 fee to the distributor. See "Management of the
Trust--Distribution Plans."
(3) Includes administration fees. See "Management of the Trust--Administration
of the Funds."
(4) Total other expenses for the Tax-Free Money Market Fund would have been
0.56% absent the voluntary reimbursement of other operating expenses by the
Adviser. The Adviser can terminate this reimbursement at any time at its
sole discretion.
(5) The total Trust Shares Operating Expenses for The Money Market Fund, The
Treasury Money Market Fund, The Maryland Municipal Bond Fund, The Virginia
Municipal Bond Fund, The Stock Fund and The U.S. Government Securities Fund
would have been 0.80%, 0.77%, 1.43%, 1.17%, 1.18% and 1.06%, respectively,
and the total Operating Expenses for The Tax-Free Money Market Fund would
have been 1.06%, absent the waivers and reimbursements described above in
notes 1, 2, and 4.
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period. The Funds
charge no contingent deferred sales charges for Trust Shares or Tax-Free Money
Market Shares.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
The Money Market Fund...................................................... $ 6 $ 18 $ 31 $ 69
The Treasury Money Market Fund............................................. $ 6 $ 19 $ 33 $ 74
The Tax-Free Money Market Fund............................................. $ 4 $ 12 $ 20 $ 46
The Maryland Municipal Bond Fund........................................... $ 9 $ 29 $ 51 $ 113
The Virginia Municipal Bond Fund........................................... $ 9 $ 29 $ 50 $ 111
The Stock Fund............................................................. $10 $ 30 $ 53 $ 117
The U.S. Government Securities Fund........................................ $ 8 $ 24 $ 41 $ 92
</TABLE>
The purpose of the foregoing Example is to assist an investor in understanding
the various costs and expenses that a shareholder of Trust Shares and Tax-Free
Money Market Shares will bear, either directly or indirectly. For a more
complete description of the various costs and expenses, see "The Virtus Funds
Information" and "Investing in Shares." Wire-transferred redemptions of less
than $5,000 may be subject to additional fees.
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUNDS' FISCAL YEAR ENDING SEPTEMBER 30, 1995.
The information set forth in the foregoing table and Example relates only to
Trust Shares of those Funds offering separate classes, and Tax-Free Money Market
Shares. Investment Shares of those Funds offering separate classes are subject
to certain of the same expenses as Trust Shares with the addition of a maximum
contingent deferred sales charge of 2.00%, and a 12b-1 fee of up to 0.25 of 1%
of the Investment Shares' average daily net assets of The Maryland Municipal
Bond Fund, The Virginia Municipal Bond Fund, The Stock Fund and The U.S.
Government Securities Fund, and of up to 0.35 of 1% of the Investment Shares'
average daily net assets of The Money Market Fund, The Treasury Money Market
Fund, and The Tax-Free Money Market Fund. See "Other Classes of Shares."
THE U.S. GOVERNMENT SECURITIES FUND
(FORMERLY U.S. GOVERNMENT INCOME FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.90 $10.95 $10.54 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.63 0.67 0.75 0.78
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.94) 0.03 0.50 0.54
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.31) 0.70 1.25 1.32
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.63) (0.67)(d) (0.75) (0.78)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions -- (0.08) (0.09) --
- ----------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.13)(c) -- -- --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.76) (0.75) (0.84) (0.78)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $ 9.83 $10.90 $10.95 $10.54
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (3.12%) 6.94% 12.42% 14.00%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.74% 0.63% 0.52% 0.64%(a)
- ----------------------------------------------------------------------
Net investment income 6.19% 6.17% 7.01% 8.03%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.32% 0.43% 0.65% 0.93%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $107,103 $112,334 $95,610 $27,565
- ----------------------------------------------------------------------
Portfolio turnover rate 227% 154% 201% 101%
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.90 $10.95 $10.54 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.61 0.66 0.75 0.78
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.94) 0.03 0.50 0.54
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.33) 0.69 1.25 1.32
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.61) (0.66)(d) (0.75) (0.78)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions -- (0.08) (0.09) --
- ----------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.13)(c) -- -- --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.74) (0.74) (0.84) (0.78)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $ 9.83 $10.90 $10.95 $10.54
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (3.36%) 6.82% 12.42% 14.00%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.99% 0.77% 0.52% 0.64%(a)
- ----------------------------------------------------------------------
Net investment income 5.94% 5.91% 7.01% 8.03%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.32% 0.43% 0.65% 0.93%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $112,439 $119,187 $40,274 $10
- ----------------------------------------------------------------------
Portfolio turnover rate 227% 154% 201% 101%
- ----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(d) Amount includes distributions in excess of net investment income of $0.007
per share.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE STOCK FUND
(FORMERLY VALUE EQUITY FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.39 $12.02 $11.86 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.20 0.28 0.26 0.32
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.40) 0.51 0.46 1.85
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.20) 0.79 0.72 2.17
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.19) (0.26) (0.25) (0.31)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.20) (0.16) (0.31) --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.39) (0.42) (0.56) (0.31)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $11.80 $12.39 $12.02 $11.86
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (1.50%) 6.42% 6.31% 22.68%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.95% 0.66% 0.95% 0.80%(a)
- ----------------------------------------------------------------------
Net investment income 1.68% 2.09% 2.25% 3.05%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.55% 0.34% 0.38%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $70,374 $65,841 $49,581 $37,032
- ----------------------------------------------------------------------
Portfolio turnover rate 205% 67% 38% 84%
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.39 $12.02 $11.86 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.17 0.24 0.26 0.32
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.39) 0.54 0.46 1.85
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.22) 0.78 0.72 2.17
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.17) (0.25) (0.25) (0.31)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.20) (0.16) (0.31) --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.37) (0.41) (0.56) (0.31)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $11.80 $12.39 $12.02 $11.86
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (1.72%) 6.31% 6.31% 22.68%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.20% 0.87% 0.95% 0.80%(a)
- ----------------------------------------------------------------------
Net investment income 1.40% 1.81% 2.25% 3.05%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.55% 0.34% 0.38%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $26,739 $18,691 $2,290 $488
- ----------------------------------------------------------------------
Portfolio turnover rate 205% 67% 38% 84%
- ----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE VIRGINIA MUNICIPAL BOND FUND
(FORMERLY VIRGINIA MUNICIPAL BOND FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.26 $10.46 $10.18 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.48 0.53 0.54 0.57
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.92) 0.89 0.29 0.18
- ------------------------------------------------------------------------ ----- ----- ----- -----
Total from investment operations (0.44) 1.42 0.83 0.75
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48)(e) (0.53) (0.54) (0.57)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.06) (0.09) (0.01) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.02)(c) -- -- --
- ------------------------------------------------------------------------ ----- ----- ----- -----
Total distributions (0.56) (0.62) (0.55) (0.57)
- ------------------------------------------------------------------------ ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.26 $11.26 $10.46 $10.18
- ------------------------------------------------------------------------ ----- ----- ----- -----
TOTAL RETURN** (4.01%) 13.62% 8.51% 7.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.90% 0.75% 0.83% 0.47%(a)
- ------------------------------------------------------------------------
Net investment income 4.47% 4.85% 5.14% 6.08%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.27% 0.50% 0.86% 1.70%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,165 $41,204 $20,852 $8,546
- ------------------------------------------------------------------------
Portfolio turnover rate 29% 17% 51% 27%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.26 $10.46 $10.18 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.45 0.51 0.54 0.57
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.92) 0.89 0.29 0.18
- ------------------------------------------------------------------------ ----- ----- ----- -----
Total from investment operations (0.47) 1.40 0.83 0.75
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)(d) (0.51) (0.54) (0.57)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.06) (0.09) (0.01) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.02)(c) -- -- --
- ------------------------------------------------------------------------ ----- ----- ----- -----
Total distributions (0.53) (0.60) (0.55) (0.57)
- ------------------------------------------------------------------------ ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.26 $11.26 $10.46 $10.18
- ------------------------------------------------------------------------ ----- ----- ----- -----
TOTAL RETURN** (4.25%) 13.49% 8.51% 7.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 1.15% 0.90% 0.83% 0.47%(a)
- ------------------------------------------------------------------------
Net investment income 4.22% 4.68% 5.14% 6.08%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.27% 0.50% 0.86% 1.70%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $74,706 $63,492 $20,883 $6,031
- ------------------------------------------------------------------------
Portfolio turnover rate 29% 17% 51% 27%
- ------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment), to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE MARYLAND MUNICIPAL BOND FUND
(FORMERLY MARYLAND MUNICIPAL BOND FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.39 $10.10 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.48 0.50 0.54 0.53
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.97) 0.85 0.29 0.10
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.49) 1.35 0.83 0.63
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.50) (0.54) (0.53)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.10) -- -- --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.58) (0.50) (0.54) (0.53)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.17 $11.24 $10.39 $10.10
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (4.50%) 13.37% 8.31% 6.64%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.92% 0.86% 0.59% 0.60%(a)
- ----------------------------------------------------------------------
Net investment income 4.46% 4.64% 5.11% 5.66%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.51% 0.77% 1.91% 1.05%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $11,301 $12,014 $6,004 $556
- ----------------------------------------------------------------------
Portfolio turnover rate 27% 23% 34% 35%
- ----------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
----------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.39 $10.10 $10.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.45 0.49 0.54 0.53
- ----------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.97) 0.85 0.29 0.10
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total from investment operations (0.52) 1.34 0.83 0.63
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45) (0.49) (0.54) (0.53)
- ----------------------------------------------------------------------
Distributions to shareholders from net realized gain on investment
transactions (0.10) -- -- --
- ---------------------------------------------------------------------- ----- ----- ----- -----
Total distributions (0.55) (0.49) (0.54) (0.53)
- ---------------------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $10.17 $11.24 $10.39 $10.10
- ---------------------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** (4.74%) 13.24% 8.31% 6.64%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 1.17% 1.00% 0.59% 0.60%(a)
- ----------------------------------------------------------------------
Net investment income 4.22% 4.50% 5.11% 5.66%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.51% 0.77% 1.91% 1.05%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,580 $33,907 $4,053 $2,940
- ----------------------------------------------------------------------
Portfolio turnover rate 27% 23% 34% 35%
- ----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE TREASURY MONEY MARKET FUND
(FORMERLY TREASURY MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.03) (0.04) (0.06)
- ---------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.16% 2.64% 3.61% 5.90%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 0.59% 0.58% 0.70% 0.51%(a)
- ----------------------------------------------------------
Net investment income 3.30% 2.60% 3.49% 5.65%(a)
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 0.18% 0.20% 0.11% 0.27%(a)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $304,285 $152,921 $163,451 $129,959
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.03 0.02 0.04 0.06
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02) (0.04) (0.06)
- ---------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 2.90% 2.52% 3.61% 5.90%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 0.84% 0.70% 0.70% 0.51%(a)
- ----------------------------------------------------------
Net investment income 2.86% 2.47% 3.49% 5.65%(a)
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 0.18% 0.20% 0.11% 0.27%(a)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $21,883 $20,382 $12,960 $548
- ----------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
THE MONEY MARKET FUND
(FORMERLY MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.03) (0.04) (0.06)
- ---------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.35% 2.89% 3.79% 5.92%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 0.55% 0.50% 0.64% 0.51%(a)
- ----------------------------------------------------------
Net investment income 3.25% 2.83% 3.64% 5.99%(a)
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.30% 0.29% 0.36%(a)
- ----------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $132,445 $134,397 $136,616 $57,432
- ----------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ---------------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- ----------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.03) (0.04) (0.06)
- ---------------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ---------------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.10% 2.77% 3.79% 5.92%
- ----------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------
Expenses 0.80% 0.64% 0.64% 0.51%(a)
- ----------------------------------------------------------
Net investment income 3.07% 2.68% 3.64% 5.99%(a)
- ----------------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.30% 0.29% 0.36%(a)
- ----------------------------------------------------------
SUPPLEMENT DATA
- ----------------------------------------------------------
Net assets, end of period (000 omitted) $15,236 $9,905 $5,803 $1
- ----------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
THE TAX-FREE MONEY MARKET FUND
(FORMERLY TAX-FREE MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1994*
--------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.01
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ---------------------------------------------------------------------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ---------------------------------------------------------------------- ---------
TOTAL RETURN** 0.45%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.36%(a)
- ----------------------------------------------------------------------
Net investment income 2.65%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.70%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $21,967
- ----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from July 27, 1994 (date of initial public
investment) to September 30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
- --------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appear in the
"Portfolio Investments and Strategies" section of this Prospectus and in the
Combined Statement of Additional Information.
THE U.S. GOVERNMENT SECURITIES FUND
The investment objective of The U.S. Government Securities Fund is to provide
current income.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in securities which are primary or direct obligations of the U.S.
government or its instrumentalities or which are guaranteed by the U.S.
government, its agencies, or instrumentalities. The Fund may also invest in
certain collateralized mortgage obligations ("CMOs") and adjustable rate
mortgage securities ("ARMS"), both of which represent or are supported by direct
or indirect obligations of the U.S. government or its instrumentalities. The
Fund will invest, under normal circumstances, at least 65% of the value of its
total assets in U.S. government securities (including such CMOs and ARMS).
The U.S. government securities in which the Fund invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government National Mortgage Association; and Student Loan
Marketing Association.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed, in a variety of ways, by the U.S. government or its agencies
or instrumentalities. Some of these obligations such as Government National
Mortgage Association mortgage-backed securities and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers' Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers' Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers' Home
Administration, Federal Farm Credit Banks, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation are backed by the credit
of the agency or instrumentality issuing the obligations.
CMOS. The Fund may also invest in CMOs which are rated AAA or better by a
nationally recognized rating agency and which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) privately issued
securities which are collateralized by pools of mortgages in which each mortgage
is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest are supported by the credit of an agency
or instrumentality of the U.S. government. The mortgage-related securities
provide for a periodic payment consisting of both interest and principal. The
interest portion of these payments will be distributed by the Fund as income,
and the capital portion will be reinvested.
ARMS. ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued by
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") and
are actively traded. The underlying mortgages which collateralize ARMS issued by
GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or
Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC
or FNMA are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
THE STOCK FUND
The investment objective of The Stock Fund is to provide growth of capital and
income.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
in common stocks of large, medium and small capitalization companies which are
either listed on the New York or American Stock Exchanges or trade in the
over-the-counter markets. The Fund's investment approach is based upon the
conviction that, over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of publicly held corporations. The securities in which the
Fund invests include, but are not limited to, the following securities.
COMMON STOCKS. The Fund invests primarily in common stocks of companies
selected by the Fund's investment adviser on the basis of investment research
techniques, including assessment of earnings and dividend growth prospects of
the companies. Factors such as product position, market share, potential
earnings growth, or asset values will be considered by the investment adviser.
At least 65% of the Fund's portfolio will be invested in common stocks, unless
it is in a defensive position.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, warrants, rights, and convertible securities of these companies.
The Fund will only invest in convertible securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors
Service, Inc. ("Moody's"). Bonds rated BBB by S&P or Baa by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds.
COMMERCIAL PAPER. The Fund may invest in commercial paper rated A-1 by S&P, or
Prime-1 by Moody's, or F-1 by Fitch Investors Services ("Fitch") and money
market instruments (including commercial paper) which are unrated but of
comparable quality, including Canadian Commercial Paper ("CCPs") and Europaper.
BANK INSTRUMENTS. The Fund may invest in instruments of domestic and foreign
banks and savings and loans (such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances) if they have capital,
surplus, and undivided profits over $100,000,000, or if the principal amount of
the instrument is insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC") or the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC.
These instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits
("ETDs").
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs are receipts typically issued by an
American bank or trust company that evidences ownership of underlying securities
issued by a foreign issuer.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued and/or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities including those obligations purchased on a
when-issued or delayed delivered basis.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options on all or any portion of its portfolio to generate
income for the Fund. The Fund will write call options on securities either held
in its portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in stock prices. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Fund's rate of portfolio turnover may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses which
must be borne directly by the Fund and, thus,
indirectly by its shareholders. In addition, a high rate of portfolio turnover
may result in the realization of larger amounts of capital gains which, when
distributed to the Fund's shareholders, are taxable to them. (Further
information is contained in the Fund's Statement of Additional Information
within the sections "Brokerage Transactions" and "Tax Status"). Nevertheless,
transactions for the Fund's portfolio will be based only upon investment
considerations and will not be limited by any other considerations when the
Fund's investment adviser deems it appropriate to make changes in the Fund's
portfolio.
INVESTMENT CONSIDERATIONS. As with other mutual funds that invest primarily in
equity securities, the Fund is subject to market risks. That is, the possibility
exists that common stocks will decline over short or even extended periods of
time. The United States equity market tends to be cyclical, experiencing both
periods when stock prices generally increase and periods when stock prices
generally decrease. However, because the Fund invests a portion of its assets in
small capitalization stocks, there are some additional risk factors associated
with investments in the Fund. In particular, stocks in the small capitalization
sector of the United States equity market have historically been more volatile
in price than larger capitalization stocks, such as those included in the
Standard & Poor's 500 Composite Stock Price Index ("Standard & Poor's 500
Index"). This is because, among other things, small companies have less certain
growth prospects than larger companies; have a lower degree of liquidity in the
equity market; and tend to have a greater sensitivity to changing economic
conditions.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND MUNICIPAL BOND FUND
The investment objective of The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund is to provide current income which is exempt from federal
regular income tax and the personal income tax imposed by the Commonwealth of
Virginia and the State of Maryland, respectively. (Federal regular income tax
does not include the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.)
ACCEPTABLE INVESTMENTS. Each Fund pursues its investment objective by investing
in a professionally managed portfolio of securities at least 65% of which is
comprised of Virginia municipal bonds or Maryland municipal bonds, as the case
may be. Each Fund will invest its assets so that, under normal circumstances, at
least 80% of its annual interest income is exempt from federal regular and
Virginia or Maryland state income taxes, respectively, or that at least 80% of
its net assets are invested in obligations, the interest income from which is
exempt from federal regular and Virginia or Maryland state income taxes,
respectively.
The municipal securities in which each Fund invests are debt obligations,
including industrial development bonds, issued on behalf of the Commonwealth of
Virginia or the State of Maryland, as the case may be, or the political
subdivisions or agencies of each respective state. In addition, each Fund may
invest in debt obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia, or any
political subdivision or agency or any of these and participation interests in
any of the above obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the relevant Fund
and/or the investment adviser to the relevant Fund, exempt from federal regular
income tax and the personal income tax imposed by the Commonwealth of Virginia
or the State of Maryland, as the case may be.
CHARACTERISTICS. The debt securities in which each Fund invests will only
be rated investment grade or of comparable quality at the time of purchase.
The municipal securities which each Fund buys have essentially the same
characteristics assigned by Moody's and S&P to investment grade bonds.
Investment grade bonds are rated Baa, A, Aa, Aaa by Moody's or BBB, A, AA,
AAA by S&P. Bonds rated "Baa" by Moody's or "BBB" by S&P have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. In certain cases, the Funds' adviser may
choose bonds which are unrated, if it judges the bonds to have the same
characteristics as investment grade bonds. If a security's rating is
reduced below the required minimum after a Fund has purchased it, that Fund
is not required to sell the security, but may consider doing so. A
description of the ratings categories is contained in the Appendix to the
Combined Statement of Additional Information.
THE TREASURY MONEY MARKET FUND
The investment objective of The Treasury Money Market Fund is to provide current
income consistent with stability of principal.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
only in a portfolio of short-term U.S. Treasury obligations which are issued by
the U.S. government and are fully guaranteed as to principal and interest by the
United States. They mature in 397 days or less from the date of acquisition
unless they are purchased under a repurchase agreement that provides for
repurchase by the seller within one year from the date of acquisition. The
average maturity of these securities computed on a dollar-weighted basis, will
be 90 days or less.
THE MONEY MARKET FUND
The investment objective of The Money Market Fund is to provide current income
consistent with stability of principal.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of money market instruments maturing in 397
days or less. The average maturity of these securities, computed on a
dollar-weighted basis, will be 90 days or less. The Fund invests in high quality
money market instruments that are either rated in the highest short-term rating
category by one or more nationally recognized statistical rating organizations
("NRSROs") or of comparable quality to securities having such ratings. Examples
of these instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank Instruments may include ECDs,
Yankee CDs and ETDs. The Fund will treat securities credit enhanced with a
bank's letter of credit as Bank Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated, A-1 or A-1+ by
S&P, Prime-1 by Moody's or F-1 (+ or --) by Fitch are all considered rated in
the highest short-term rating category. The Fund will follow applicable
regulations in determining whether a security rated by more than one NRSRO can
be treated as being in the highest short-term rating category; currently, such
securities must be rated by two NRSROs in their highest rating category. See
"Regulatory Compliance."
THE TAX-FREE MONEY MARKET FUND
The investment objective of The Tax-Free Money Market Fund is current income
exempt from federal income tax consistent with stability of principal and
liquidity.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
in a portfolio of municipal securities (as defined below) maturing in 13 months
or less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
The Fund invests primarily in debt obligations issued by or on behalf of states,
territories, and possessions of the United States, including the District of
Columbia, and any political subdivision or financing authority of any of these,
the income from which is, in the opinion of qualified legal counsel, exempt from
federal income tax ("municipal securities"). Examples of municipal securities
include, but are not limited to:
- tax and revenue anticipation notes issued to finance working capital
needs in anticipation of receiving taxes or other revenues;
- bond anticipation notes that are intended to be refinanced through a
later issuance of longer-term bonds;
- municipal commercial paper and other short-term notes;
- variable rate demand notes;
- municipal bonds (including bonds having serial maturities and
pre-refunded bonds) and leases;
- construction loan notes insured by the Federal Housing Administration and
financed by the Federal or Government National Mortgage Associations; and
- participation, trust, and partnership interests in any of the foregoing
obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in municipal
securities from financial institutions such as commercial and investment
banks, savings and loan associations, and insurance companies. These
interests may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax. The Fund invests in these participation interests in
order to obtain credit enhancement or demand features that would not be
available through direct ownership of the underlying municipal securities.
RATINGS. The municipal securities in which the Fund invests must be rated in one
of the two highest short-term rating categories by one or more NRSRO or be of
comparable quality to securities having such ratings. The Fund will follow
applicable regulations in determining whether a security rated by more than one
NRSRO can be treated as being in one of the two highest short-term rating
categories; currently, such securities must be rated by two NRSROs in one of
their two highest rating categories. See "Regulatory Compliance."
INVESTMENT LIMITATIONS
The Funds' investment limitations are discussed below under "Borrowing Money",
"Selling Short", "Restricted and Illiquid Securities", "Diversification",
"Investing in New Issuers", and "Acquiring Securities."
PORTFOLIO INVESTMENTS AND STRATEGIES
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REGULATORY COMPLIANCE
The Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money
Market Fund may follow non-fundamental operational policies that are more
restrictive than their fundamental investment limitations, as set forth in this
prospectus and their Combined Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of and
regulations under the Investment Company Act of 1940, as amended. In particular,
the Funds will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will also determine the effective maturity of their respective investments,
as well as their ability to consider a security as having received the requisite
short-term ratings by NRSROs, according to Rule 2a-7. The Funds may change these
operational policies to reflect changes in the laws and regulations without the
approval of their shareholders.
BORROWING MONEY
Except for The Tax-Free Money Market Fund the Funds will not borrow money
directly or through reverse repurchase agreements (arrangements in which a Fund
sells a portfolio instrument for a percentage of its cash value with an
agreement to buy it back on a set date) or pledge securities except, under
certain circumstances, a Fund may borrow money up to one-third of the value of
its total assets and pledge up to 15% of the value of those assets to secure
such borrowings. The Tax-Free Money Market Fund may borrow up to one-third of
the value of its total assets, including the amount borrowed. The Tax-Free Money
Market Fund will not purchase any securities while borrowings in excess of 5% of
the value of its total assets are outstanding. These policies cannot be changed
without the approval of holders of a majority of a Fund's Shares.
SELLING SHORT
With respect to The U.S. Government Securities Fund and The Stock Fund, the
Funds will not make short sales of securities, except in certain limited
circumstances. This policy cannot be changed without the approval of holders of
a majority of a Fund's Shares.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may invest pursuant to its investment objective and
policies but which are subject to restriction on resale under federal securities
law. The Funds will not invest more than 10% of the value of their assets in
securities subject to restrictions on resale under the Securities Act of 1933
(except for certain restricted securities which meet the criteria for liquidity
as established by the Board of Trustees). In the case of The U.S. Government
Securities Fund, The Stock Fund and The Money Market Fund this exception
specifically extends to commercial paper issued under Section 4(2) of the
Securities Act of 1933. This policy cannot be changed without the approval of
holders of a majority of a Fund's Shares.
The U.S. Government Securities Fund, The Stock Fund, The Virginia Municipal Bond
Fund and The Maryland Municipal Bond Fund will not invest more than 15% of their
net assets in illiquid securities. The Treasury Money Market Fund, The Money
Market Fund, and The Tax-Free Money Market Fund will not invest more than 10% of
their net assets in illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.
Each Fund may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, a Fund may enter in transactions to sell
its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. A Fund may realize short-term profits or losses upon the sale of such
commitments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds, except for The Tax-Free Money Market Fund, may invest in the
securities of other investment companies, but will not own more than 3% of the
total outstanding voting stock of any investment company, invest more than 5% of
total assets in any one investment company, or invest more than 10% of total
assets in investment companies in general. The Funds will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. It should be
noted that investment companies incur certain
expenses, and therefore, any investment by a Fund in shares of another
investment company would be subject to certain duplicate expenses, particularly
transfer agent and custodian fees. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment companies.
DIVERSIFICATION
With respect to 75% of the value of total assets, The U.S. Government Securities
Fund, The Stock Fund and The Money Market Fund will not invest more than 5% in
securities of any one issuer other than cash or securities issued or guaranteed
by the government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities. This policy cannot be
changed without the approval of holders of a majority of a Fund's Shares.
NON-DIVERSIFICATION
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Tax-Free Money Market Fund are non-diversified
investment companies, as defined by the Investment Company Act of 1940, as
amended. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in the Funds, therefore, will
entail greater risk than would exist in a diversified investment company because
the higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of each Fund's portfolio. Any economic,
political or regulatory developments affecting the value of the securities in
each Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified among more
issuers.
To meet federal tax requirements for qualifications as a "regulated investment
company" the Funds will limit their investments so at the close of each quarter
of each fiscal year: (a) with regard to at least 50% of their respective total
assets no more than 5% of their respective total assets are invested in the
securities of a single issuer, and (b) no more than 25% of their respective
total assets are invested in the securities of a single issuer.
INVESTING IN NEW ISSUERS
The U.S. Government Securities Fund, The Stock Fund, The Money Market Fund, and
The Tax-Free Money Market Fund will not invest more than 5% of their total
assets in securities of issuers that have records of less than three years of
continuous operations including the operation of any predecessor. The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund will not invest more
than 5% of their total assets in industrial development bonds, the principal and
interest of which are paid by companies (or guarantors, where applicable) which
have an operating history of less than three years.
REPURCHASE AGREEMENTS
The securities in which the Funds invest may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, that Fund could
receive more or less than the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, The U.S. Government Securities Fund, The
Stock Fund, The Treasury Money Market Fund and The Money Market Fund, may lend
portfolio securities on a short-term or a long-term basis up to one-third of the
value of their respective total assets to broker/dealers, banks, or other
institutional borrowers of securities. A Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Board of Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
ACQUIRING SECURITIES
The U.S. Government Securities Fund and The Stock Fund will not acquire more
than 10% of the outstanding voting securities of any one issuer. This policy
cannot be changed without the approval of holders of a majority of the Fund's
shares.
INVESTMENT RISKS
The Stock Fund and The Money Market Fund's ECDs, ETDs, Yankee CDs, and Europaper
are subject to different risks than domestic obligations of domestic banks or
corporations. Examples of these risks include international economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholding or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for a Fund.
VARIABLE RATE DEMAND NOTES
The Money Market Fund and The Tax-Free Money Market Fund may invest in variable
rate demand notes. Variable rate demand notes are long-term corporate debt
instruments that have variable or floating interest rates and provide the Funds
with the right to tender the security for repurchase at its stated principal
amount plus accrued interest. Such securities typically bear interest at a rate
that is intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to annually), and
is normally based on a published interest rate or interest rate index. Most
variable rate demand notes allow a Fund to demand the repurchase of the security
on not more than seven days' prior notice. Other notes only permit the Funds to
tender the security at the time of each interest rate adjustment or at other
fixed intervals. See "Demand Features." The Funds treat variable rate demand
notes as maturing on the later of the date of the next interest adjustment or
the date on which a Fund may next tender the security for repurchase.
CREDIT ENHANCEMENT
Certain of The Money Market Fund's and The Tax-Free Money Market Fund's
acceptable investments may have been credit enhanced by a guaranty, letter of
credit or insurance. A Fund typically evaluates the credit quality and ratings
of credit enhanced securities based upon the financial condition and ratings of
the party providing the credit enhancement (the "credit enhancer"), rather than
the issuer. Generally, a Fund will not treat credit enhanced securities as
having been issued by the credit enhancer for diversification purposes. However,
under certain circumstances applicable regulations may require a Fund to treat
the securities as having been issued by both the issuer and credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security.
DEMAND FEATURES
The Money Market Fund and The Tax-Free Money Market Fund may acquire securities
that are subject to puts and standby commitments ("demand features") to purchase
the securities at their principal amount (usually with accrued interest) within
a fixed period (usually seven days) following a demand by a Fund. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities or by another third party, and may not be transferred separately
from the underlying security. A Fund uses these arrangements to provide itself
with liquidity and not to protect against changes in the market value of the
underlying securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable even
after a payment default on the underlying security may be treated as a form of
credit enhancement.
PARTICIPATION INTERESTS
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase participation interests from financial
institutions such as commercial banks, savings and loan associations and
insurance companies. These participation interests give the Funds an undivided
interest in municipal securities. The financial institutions from which the
Funds purchase participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests are
of good quality. The Board of Trustees will determine that participation
interests meet the prescribed quality standards for the Funds.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the municipal securities which The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund purchase may have variable interest rates. Variable
interest rates are ordinarily stated as a percentage of the prime rate of a bank
or some similar standard, such as the 91-day U.S. Treasury bill rate. Many
variable rate municipal securities are subject to repayment of principal on
demand by the Funds (usually in not more than seven days). While some variable
rate municipal securities without this demand feature may not be considered
liquid by the Fund's adviser, the Fund's investment limitations provide that it
will invest no more than 15% of its total assets in illiquid securities. All
variable rate municipal securities will meet the quality standards for the
Funds. The investment adviser has been instructed by the Board of Trustees to
monitor the pricing, quality and liquidity of the variable rate municipal
securities, including participation interests, held by the Funds on the basis of
published financial information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
municipal leases which are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Municipal
leases may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. In the event of failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute.
TEMPORARY INVESTMENTS
From time to time, during periods of other than normal market conditions, The
Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The Tax-Free
Money Market Fund may invest in short-term tax-exempt or taxable temporary
investments. These temporary investments include: notes issued by or on behalf
of municipal or corporate issuers; tax-free commercial paper; other temporary
municipal securities; obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; and repurchase agreements (arrangements in
which an organization selling a Fund a security agrees at the time of sale to
repurchase it at a mutually agreed upon time and price).
Except for The Tax-Free Money Market Fund, there are no rating requirements
applicable to temporary investments. However, the investment adviser will limit
temporary investments to those it considers to be of good quality. Temporary
investments held by The Tax-Free Money Market Fund must be rated in one of the
two highest short-term rating categories by one or more NRSRO.
Although each Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax
or Virginia or Maryland personal income tax.
MUNICIPAL SECURITIES
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest principally in municipal securities. Municipal
securities are generally issued to finance public works, such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
streets, and water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt of or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS. Yields on municipal securities depend on a variety of factors,
including: the general conditions of the municipal bond market; the size of the
particular offering; the maturity of the obligations; and the rating of the
issue. Further, with respect to The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund, any adverse economic conditions or developments
affecting the Commonwealth of Virginia, the state of Maryland, or their
municipalities could impact a Fund's portfolio. The ability of The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, and The Tax-Free Money
Market Fund to achieve their investment objectives also depends on the
continuing ability of the issuers of municipal securities and participation
interests, or the guarantors of either, to meet their obligations for the
payment of interest and principal when due. With respect to The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund, investing in Virginia
and Maryland municipal securities which meet a Fund's quality standards may not
be possible if the Commonwealth of Virginia, the state of Maryland, or their
municipalities do not maintain their current credit ratings. In addition,
certain Virginia or Maryland constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could result
in adverse consequences affecting Virginia and Maryland municipal securities. In
addition, from time to time, the supply of municipal securities acceptable for
purchase by The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund,
and The Tax-Free Money Market Fund, could become limited.
The Tax-Free Money Market Fund may invest in municipal securities which are
repayable out of revenue streams generated from economically related projects or
facilities and/or whose issuers are located in the same state. Sizable
investments in these municipal securities could involve an increased risk to the
Fund should any of these related projects or facilities experience financial
difficulties.
Obligations of issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
laws enacted in the future by Congress, state legislators, or referenda
extending the time for payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the ability of states
or municipalities to levy taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any issuer to pay,
when due, the principal of and interest on its municipal securities may be
materially affected.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund reserve
the right to enter into interest rate futures contracts as a hedge without
shareholder action. Before the Funds begin using this investment technique,
shareholders will be notified.
THE VIRTUS FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the Trust and for exercising
all of the powers of the Trust except those
reserved for the shareholders. The Executive Committee of the Board of Trustees
handles the Board's responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Trust are made by Virtus
Capital Management, Inc., the Trust's investment adviser (the "Adviser"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for each Fund and is responsible for the
purchase or sale of portfolio instruments, for which it receives an annual fee
from the assets of each Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net assets
as follows: The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund--.50%; and The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal
Bond Fund--.75%. The fee paid by The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal
Bond Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by other mutual funds with similar
objectives and policies. The investment advisory contract provides for the
voluntary waiver of expenses by the Adviser from time to time. The Adviser
can terminate this voluntary waiver of expenses at any time with respect to
a Fund at its sole discretion. The Adviser has also undertaken to reimburse
the Funds for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Virtus Capital Management, Inc., a Maryland
corporation formed in 1995, is a wholly-owned subsidiary of Signet Banking
Corporation. Signet Banking Corporation is a multi-state, multi-bank
holding company which has provided investment management services since
1956. Virtus Capital Management, Inc. on March 1, 1995 succeeded to the
business of the Trust's former investment adviser, Signet Asset Management
(a division of Signet Trust Company), by virtue of a corporate
reorganization within the Signet holding company system. Signet Asset
Management had managed The Virtus Funds since their inception in 1990.
Since those persons at Signet Asset Management who were responsible for
managing the Funds' assets have similar responsibilities to the Funds as
employees of Virtus Capital Management, Inc., the reorganization will have
no effect on the operations of the Fund. As successor to the business of
Signet Asset Management, Virtus Capital Management, Inc., which is a
registered investment adviser, will manage, in addition to the Funds, three
equity common trust funds with $39 million in assets and three fixed income
common trust funds with $221 million in assets. As part of their regular
banking operations, Signet Bank may make loans to public companies. Thus,
it may be possible, from time to time, for the Funds to hold or acquire the
securities of issuers which are also lending clients of Signet Bank. The
lending relationship will not be a factor in the selection of securities.
E. Christian Goetz has managed The U.S. Government Securities Fund since
August, 1991, and The Maryland Municipal Bond Fund and The Virginia
Municipal Bond Fund since November 1994. Mr. Goetz is a Chartered Financial
Analyst, and is currently Vice President of Signet Trust Company and
Director of Fixed Income Investments for Virtus Capital Management, Inc.,
where he has been a fixed income portfolio manager since 1990. Prior to
joining Signet, Mr. Goetz had been a foreign and domestic bond portfolio
manager with Central Fidelity Bank, Richmond, Virginia, since 1988.
Garry M. Allen has managed The Stock Fund since July 1994. Mr. Allen is a
Chartered Financial Analyst, and has since March 1994 been Senior Vice
President of Signet Trust Company and Chief Investment Officer for Virtus
Capital Management, Inc. Prior to joining Signet, Mr. Allen had been
Managing Director of U.S. Equities (November 1990 to March 1994) and
Director, International Asset Management (June 1985 to November 1990) of
The Virginia Retirement System.
DISTRIBUTION OF SHARES OF THE FUNDS
Federated Securities Corp. is the principal distributor for Shares of the Funds.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. Under a distribution plan adopted in accordance with
Investment Company Act Rule 12b-1 on behalf of The Tax-Free Money Market Fund
(the "Plan"), the distributor may select
financial institutions such as fiduciaries, custodians for public funds,
investment advisers and brokers/ dealers to provide distribution and/or
administrative services as agents for their clients or customers. Administrative
services may include, but are not limited to, the following functions: providing
office space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding The Tax-Free Money Market Fund;
assisting clients in changing dividend options, account designations, and
addresses; and providing such other services as The Tax-Free Money Market Fund
reasonably requests for its shares.
The distributor will pay financial institutions a fee based upon shares subject
to the Plan and owned by their clients or customers. The schedules of such fees
and the basis upon which such fees will be paid will be determined from time to
time by the Trustees, provided that for any period the total amount of these
fees shall not exceed an annual rate of .35 of 1% of the average net asset value
of Tax-Free Money Market Shares subject to the Plan held during the period by
clients or customers of financial institutions. Any fees paid by the distributor
under the Plan will be reimbursed from the assets of The Tax-Free Money Market
Fund. The Plan will not be activated unless and until a second class of shares
of The Tax-Free Money Market Fund, which will not have a Rule 12b-1 Plan, is
created.
The distributor, in its sole discretion, may uniformly offer to pay all brokers
or dealers selling shares of The Tax-Free Money Market Fund additional amounts
predicated upon the amount of shares of The Tax-Free Money Market Fund or
certain other Funds of The Virtus Funds sold by the broker or dealer. Such
payments, if made, will be in addition to amounts paid under the distribution
plan and will not be an expense of The Tax-Free Money Market Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Trust for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Trust.
GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings and loan association) from being an
underwriter or distributor of most securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
administrative capacities described above or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
appropriate changes in the administrative services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate each Fund and the separate classes. Such
services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY
ADMINISTRATIVE FEE NET ASSETS OF THE TRUST
----------------------------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund; however, this requirement was waived by the administrator for the year
ended September 30, 1994. Federated Administrative Services may voluntarily
waive a portion of its fee.
CUSTODIAN. Signet Trust Company, Richmond, Virginia, is custodian for the
securities and cash of the Funds. Under the Custodian Agreement, Signet Trust
Company holds the Funds' portfolio securities in safekeeping and keeps all
necessary records and documents relating to its duties.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the Shares of the Funds and
dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS. The independent auditors for the Funds are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUNDS AND TRUST SHARES
Each Fund pays all of its own expenses and its allocable share of the Trust's
expenses.
The Trust's expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust; Trustees fees; auditors' fees; the cost of
meetings of Trustees; legal fees of the Trust; association membership dues and
such nonrecurring and extraordinary items as may arise.
Each Fund's expenses for which holders of Shares may pay their allocable portion
include, but are not limited to: registering each Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such nonrecurring and extraordinary items as may
arise.
At present, no expenses are allocated to Trust Shares as a class. However, the
Board of Trustees reserves the right to allocate certain other expenses to the
shareholders of a particular class as they deem appropriate ("Class Expenses").
In any case, Class Expenses would be limited to: transfer agent fees as
identified by the transfer agent as attributable to holders of Shares; printing
and postage expenses related to preparing and distributing materials such as
shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to states; expenses related to administrative personnel
and services as required to support holders of Shares of each Fund; legal fees
relating solely to Shares; and Trustees' fees incurred as a result of issues
relating solely to Shares.
BROKERAGE TRANSACTIONS. When selecting brokers and dealers to handle the
purchase and sale of portfolio instruments, the Adviser looks for prompt
execution of the order at a favorable price. In working with dealers, the
Adviser will generally utilize those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the order can
be obtained elsewhere. In selecting among firms believed to meet these criteria,
the Adviser may give consideration to those firms which have sold or are selling
shares of the Trust. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Board of Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, each Fund attempts to stabilize the net asset value
of its Shares at $1.00 by valuing its portfolio securities using the amortized
cost method. The net asset value for Shares is determined by adding the interest
of the Shares in the value of all securities and other assets of the Fund,
subtracting the interest of the Shares in the liabilities of the Fund and those
attributable to Shares and dividing the remainder by the total number of Shares
outstanding. Of course, these Funds cannot guarantee that their net asset value
will always remain at $1.00 per Share.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, net asset
value per Share fluctuates and is determined by adding the interest of the
Shares in the market value of all securities and other assets of the Fund,
subtracting the interest of the Shares in the liabilities of the Fund and those
attributable to Shares, and dividing the remainder by the total number of Shares
outstanding. The net asset value for Shares may exceed that of Investment Shares
due to the variance in daily net income realized by each class. Such variance
will reflect only accrued net income to which the shareholders of a particular
class are entitled.
INVESTING IN SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Funds are sold on days on which the New York Stock Exchange is
open for business except on Lee-Jackson-King Day, Columbus Day and Veterans'
Day. Shares of the Funds may be purchased through Signet Trust Company. In
connection with the sale of Shares of the Funds, the distributor may from time
to time offer certain items of nominal value to any shareholder or investor. The
Funds reserve the right to reject any purchase request.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, an investor may write or call Signet Trust Company
to place an order to purchase Shares of the Funds. (Call 804-771-7470). Purchase
orders must be received by Signet Trust Company before 4:00 p.m. (Eastern time).
Payment for Shares of the Funds may be made by check or by wire. Orders are
considered received after payment by check is converted into federal funds and
received by Signet Trust Company. Payment must be received by Signet Trust
Company on the next business day after placing the order. For orders received by
11:00 a.m. (Eastern time), shareholders will begin earning dividends on that day
provided payment by wire is received by Signet Trust Company by 2:00 p.m.
(Eastern time) on that day.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, an investor
may write or call Signet Trust Company to place an order to purchase Shares of
the Fund. (Call 804-771-7470). Purchase orders must be received by Signet Trust
Company before 4:00 p.m. (Eastern time). Payment for Shares of the Funds may be
made by check or by wire. Payment must be received by Signet Trust Company the
next business day.
BY CHECK. Purchases of Shares by check must be made payable to Signet Trust
Company and sent to Signet Trust Company, 7 North Eighth Street, Richmond, VA
23219.
BY WIRE. With respect to The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund, payment by wire must be received by Signet
Trust Company before 2:00 p.m. (Eastern time) the next business day after
placing the order. With respect to The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, payment by wire must be received by Signet Trust Company the next business
day. Shares of the Funds cannot be purchased by Federal Reserve Wire on Columbus
Day, Veterans' Day or Lee-Jackson-King Day.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $10,000 for those Funds offering
Trust Shares, and $1,000 for The Tax-Free Money Market Fund.
WHAT SHARES COST
Shares of the Funds are sold at their net asset value next determined after an
order is received. There is no sales charge imposed by the Funds at the time of
purchase.
On Monday through Friday, The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund calculate
net asset value at 4:00 p.m. (Eastern time), while The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund, calculate net
asset value at 1:00 p.m. (Eastern time), and 4:00 p.m. (Eastern time), except
on: (i) days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares of a Fund are tendered for redemption and no orders
to purchase shares are received; or (iii) the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting Signet Trust Company in writing.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, monthly confirmations are sent to report
transactions such as purchases and redemptions as well as dividends paid during
the month. With respect to The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, detailed
confirmations of each purchase or redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS
With respect to The U.S. Government Securities Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund, The
Money Market Fund, and The Tax-Free Money Market Fund, dividends are declared
daily and paid monthly.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, Shares purchased by wire before 2:00 p.m. (Eastern
time) begin earning dividends that day. Shares purchased by check begin earning
dividends on the day after the check is converted by Signet Trust Company into
federal funds.
With respect to The Stock Fund, dividends are declared and paid quarterly.
Unless cash payments are requested by shareholders in writing to a Fund,
dividends are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date net asset value without a sales charge.
CAPITAL GAINS
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, capital gains, if any, could result in an increase
in dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, a Fund realizes net long-term capital gains, it will
distribute them at least once every 12 months.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, capital gains
realized by a Fund, if any, will be distributed at least once every 12 months.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Each Fund redeems Shares at their net asset value next determined after Signet
Trust Company receives the redemption request. Redemptions will be made on days
on which a Fund computes its net asset value. Telephone or written requests for
redemption must be received in proper form by Signet Trust Company.
BY TELEPHONE. A shareholder may redeem Shares of a Fund by calling Signet Trust
Company to request the redemption. (Call 804-771-7470) Shares will be redeemed
at the net asset value next determined after a Fund receives the redemption
request from Signet Trust Company.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, redemption requests received before 11:00 a.m.
(Eastern time) will be wired the same day, but will not be entitled to that
day's dividend. A redemption request must be received by Signet Trust Company
before 4:00 p.m. (Eastern time). Redemption requests through registered
broker/dealers must be received by Signet Trust Company before 3:00 p.m.
(Eastern time). Signet Trust Company is responsible for promptly submitting
redemption requests and providing proper written redemption instructions to a
Fund. Other registered broker/dealers may charge customary fees and commissions
for this service.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, a redemption
request must be received by Signet Trust Company before 4:00 p.m. (Eastern time)
in order for Shares to be redeemed at that day's net asset value. Redemption
requests through registered broker/dealers must be received by Signet Trust
Company before 3:00 p.m. (Eastern time) in order for Shares to be redeemed at
that day's net asset value. Signet Trust Company is responsible for promptly
submitting redemption requests and
providing proper written redemption instructions to a Fund. Other registered
broker/dealers may charge customary fees and commissions for this service.
If, at any time, a Fund should determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
An authorization form permitting a Fund to accept telephone redemption requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through Signet Trust Company. Telephone redemption instructions may be
recorded. If reasonable procedures are not followed by a Fund, it may be liable
for losses due to unauthorized or fraudulent telephone instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of a Fund by sending a written request
to Signet Trust Company. The written request should include the shareholder's
name, the Fund name, the class of shares, the account number, and the Share or
dollar amount requested. If share certificates have been issued, they must be
properly endorsed and should be sent by registered or certified mail with the
written request to Signet Trust Company.
Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with a Fund, or a
redemption payable other than to the shareholder of record must have signatures
on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF
which is administered by the FDIC;
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and their transfer agent reserve the
right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the operation of the Trust or a Fund and for
the election of Trustees under certain circumstances. As of January 11, 1995,
Bova & Co, Richmond, Virginia, owned approximately 10,523,663 Trust Shares of
The U.S. Government Securities Fund (100%); approximately 5,612,531 Trust Shares
of The Stock Fund (96%); approximately 3,278,593 Trust Shares of The Virginia
Municipal Bond Fund (100%); approximately 960,850 Trust Shares of The Maryland
Municipal Bond Fund (100%); approximately 417,604,382 Trust Shares of The
Treasury Money Market Fund (100%); approximately 116,586,184 Trust Shares of The
Money Market Fund (100%); and approximately 17,601,826 shares of The Tax-Free
Money Market Fund (64.6%), and
therefore, may, for certain purposes, be deemed to control the Funds and be able
to affect the outcome of certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such a customer. Signet Trust Company is subject to such
banking laws and regulations.
Signet Trust Company believes, based on the advice of its counsel, that Virtus
Capital Management, Inc., may perform the services for any Fund contemplated by
its advisory agreement with the Trust without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Virtus Capital Management, Inc. from continuing to
perform all or a part of the above services for its customers and/or a Fund. If
it were prohibited from engaging in these customer-related activities, the
Trustees would consider alternative advisers and means of continuing available
investment services. In such event, changes in the operation of a Fund may
occur, including possible termination of any automatic or other Fund share
investment and redemption services then being provided by Virtus Capital
Management, Inc. It is not expected that existing shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
Virtus Capital Management, Inc. is found) as a result of any of these
occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds anticipate that they will pay no federal income tax because each Fund
expects to meet requirements of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Treasury Money Market Fund and The Money Market Fund, unless otherwise exempt,
shareholders are required to pay federal income tax on any dividends and other
distributions received. This applies whether dividends and distributions are
received in cash or as additional shares. Shareholders of The U.S. Government
Securities Fund, The Stock Fund, The Treasury Money Market Fund and The Money
Market Fund are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
Shareholders of The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund and The Tax-Free Money Market Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax Reform Act of
1986, dividends representing net interest earned on certain "private activity"
bonds issued after August 17, 1986, may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations. The Tax-Free Money Market Fund may purchase all types of municipal
bonds, including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Funds representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares.
VIRGINIA TAXES. Under existing Virginia laws, distributions made by the Fund
will not be subject to Virginia income taxes to the extent that such
distributions qualify as exempt-interest dividends under the Internal Revenue
Code of 1986, as amended, and represent (i) interest from obligations issued by
or on behalf of the Commonwealth of Virginia or any political subdivision
thereof; or (ii) interest from obligations issued by a territory or possession
of the United States or any political subdivision thereof which federal law
exempts from state income taxes. Conversely, to the extent that distributions
made by the Fund are attributable to other types of obligations, such
distributions will be subject to Virginia income taxes.
MARYLAND TAXES. Under existing Maryland laws, distributions made by the Fund
will not be subject to Maryland state or local income taxes to the extent that
such distributions qualify as exempt-interest dividends under the Internal
Revenue Code, and represent (i) interest on tax-exempt obligations of Maryland
or its political subdivisions or authorities; (ii) interest on obligations of
the United States or an authority, commission, instrumentality, possession or
territory of the United States; or (iii) gain realized by the Fund from the sale
or exchange of bonds issued by Maryland, a political subdivision of Maryland, or
the United States Government (excluding obligations issued by the District of
Columbia, a territory or possession of the United States, or a department,
agency, instrumentality, or political subdivision of the District, territory or
possession). Conversely, to the extent that distributions made by the Fund are
derived from other types of obligations, such distributions will be subject to
Maryland income taxes.
OTHER STATE AND LOCAL TAXES. With respect to The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, distributions representing net interest
received on tax-exempt municipal securities are not necessarily free from income
taxes of any other state or local taxing authority. State laws differ on this
issue and shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, The U.S. Government Securities Fund and The Stock Fund may
advertise total return and yield. The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund may advertise total return, yield and
tax-equivalent yield. The Treasury Money Market Fund and The Money Market Fund
may advertise yield and effective yield. The Tax-Free Money Market Fund may
advertise its yield, effective yield, and tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund is calculated
by dividing the net investment income per Share (as defined by the Securities
and Exchange Commission) earned by Shares over a thirty-day period by the
maximum offering price per share of Shares of a Fund on the last day of the
period. This number is then annualized using semi-annual compounding. The yield
does not necessarily reflect income actually earned by Shares and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
The yields of Shares of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund represent the annualized rate of income
earned on an investment in Shares over a seven-day period. It is the annualized
dividends earned during the period on the investment, shown as a percentage of
the investment. The effective yield is calculated similarly to the yield, but,
when annualized, the income earned on an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The tax-equivalent yield of the Shares for The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that the
Shares would have had to earn to equal its actual yield, assuming a specific tax
rate. The tax-equivalent yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Shares are sold without any sales load or other similar non-recurring charges.
With respect to The U.S. Government Securities Fund and The Stock Fund, total
return and yield will be calculated separately for Trust Shares and Investment
Shares. Because Investment Shares may be subject to a redemption fee and are
subject to a 12b-1 fee, the total return and yield for Trust Shares for the same
period will exceed that of Investment Shares.
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, total return, yield and tax-equivalent yield will be calculated separately
for Trust Shares and Investment Shares. Because Investment Shares may be subject
to a contingent deferred sales charge and are subject to a 12b-1 fee, the total
return and yield for Trust Shares for the same period will exceed that of
Investment Shares.
With respect to The Treasury Money Market Fund and The Money Market Fund, yield
and effective yield will be calculated separately for Trust Shares and
Investment Shares. Because Investment Shares are subject to 12b-1 fees the yield
and effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Funds may advertise their performance using certain
financial publications and/or compare their performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Investment Shares, the other class of shares offered by those Funds offering
separate classes, are sold to customers of Signet Bank, N.A. and Signet
Financial Services, Inc. at net asset value at a minimum initial investment of
$1,000. Under certain circumstances, Investment Shares may be subject to a 2.00%
contingent deferred sales charge. Investment Shares may be exchanged for
Investment Shares of the Funds at net asset value. Investment Shares are
distributed to such institutions pursuant to a Rule 12b-1 Plan whereby brokers
and administrators are paid a fee of .35 of 1% for The Treasury Money Market
Fund and The Money Market Fund and .25 of 1% for The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund of the Investment Shares' average net asset value.
The amount of dividends payable to Shares will exceed those payable to
Investment Shares by the difference between class expenses and distribution
expenses borne by shares of each respective class.
The stated advisory fee is the same for both classes of each of the Funds.
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The U.S. Government Securities Fund Federated Investors Tower
The Stock Fund Pittsburgh, Pennsylvania 15222-3779
The Treasury Money Market Fund
The Money Market Fund
The Virginia Municipal Bond Fund
The Maryland Municipal Bond Fund
The Tax-Free Money Market Fund
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Virtus Capital Management, Inc. 707 East Main Street
Suite 1300
Richmond, Virginia 23219
- ------------------------------------------------------------------------------------------------
Custodian
Signet Trust Company 7 North Eighth Street
Richmond, Virginia 23219
- ------------------------------------------------------------------------------------------------
Transfer Agent, and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
</TABLE>
31
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VIRTUS CAPITAL MANAGEMENT, INC.
A Subsidiary of Signet Banking Corporation
Investment Adviser
FEDERATED SECURITIES CORP. IS THE DISTRIBUTOR OF THE FUNDS.
3042108A-I (2/95)
THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
INVESTMENT SHARES
PROSPECTUS
JANUARY 31, 1995
(REVISED MARCH 1, 1995)
- THE U.S. GOVERNMENT SECURITIES
FUND
- THE STOCK FUND
- THE VIRGINIA MUNICIPAL BOND FUND
- THE MARYLAND MUNICIPAL BOND FUND
- THE TREASURY MONEY MARKET FUND
- THE MONEY MARKET FUND
- THE TAX-FREE MONEY MARKET FUND
THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
INVESTMENT SHARES
PROSPECTUS
The Virtus Funds (the "Trust"), an open-end management investment company (a
mutual fund), is comprised of the seven separate investment portfolios set forth
below (collectively, the "Funds," individually, a "Fund"), each having a
distinct investment objective and policies. With the exception of the Tax-Free
Money Market Fund, which offers a single class of shares, the Funds are offered
in two separate classes of shares known as Investment Shares and Trust Shares.
- The U.S. Government Securities Fund (formerly U.S. Government Income
Fund)
- The Stock Fund (formerly Value Equity Fund)
- The Virginia Municipal Bond Fund
- The Maryland Municipal Bond Fund
- The Treasury Money Market Fund
- The Money Market Fund
- The Tax-Free Money Market Fund
THE SHARES OFFERED BY THIS PROSPECTUS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND
ARE NOT ENDORSED OR GUARANTEED BY, SIGNET TRUST COMPANY OR SIGNET BANK OR ANY OF
THEIR AFFILIATES. SUCH SHARES ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENT AGENCY.
INVESTMENT IN THE SHARES OF THE U.S. GOVERNMENT SECURITIES FUND, THE STOCK FUND,
THE VIRGINIA MUNICIPAL BOND FUND, AND THE MARYLAND MUNICIPAL BOND FUND INVOLVES
INVESTMENT RISKS INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. THE TREASURY MONEY
MARKET FUND, THE MONEY MARKET FUND, AND THE TAX-FREE MONEY MARKET FUND ATTEMPT
TO MAINTAIN A STABLE NET ASSET VALUE OF $1.00 PER SHARE; THERE CAN BE NO
ASSURANCE THAT THESE FUNDS WILL BE ABLE TO DO SO.
This prospectus relates only to the Investment Shares of those Funds offering
classes and to shares of The Tax-Free Money Market Fund and contains the
information you should read and know before you invest in any of the Funds. Keep
this prospectus for future reference.
The Funds have also filed a Combined Statement of Additional Information for the
Investment Shares of the Funds offering classes and to shares of The Tax-Free
Money Market Fund, dated January 31, 1995 (revised March 1, 1995), with the
Securities and Exchange Commission. The information contained in the Combined
Statement of Additional Information is incorporated by reference into this
prospectus. You may request a copy of the Combined Statement of Additional
Information free of charge, obtain other information, or make inquiries about
any of the Funds by writing to the Trust or calling toll-free 1-800-723-9512.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Prospectus dated January 31, 1995
(Revised March 1, 1995)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
SYNOPSIS 1
- ------------------------------------------------------
Special Considerations 1
SUMMARY OF FUND EXPENSES--INVESTMENT SHARES
AND TAX-FREE MONEY MARKET SHARES 2
- ------------------------------------------------------
FINANCIAL HIGHLIGHTS 3
- ------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND 10
- ------------------------------------------------------
The U.S. Government Securities Fund 10
Acceptable Investments 10
CMOs 10
ARMS 11
The Stock Fund 11
Acceptable Investments 11
Common Stocks 11
Other Corporate Securities 11
Commercial Paper 11
Bank Instruments 11
American Depositary Receipts ("ADRs") 11
U.S. Government Securities 11
Put and Call Options 12
Financial Futures and Options on Futures 12
Risks 12
Portfolio Turnover 12
Investment Considerations 13
The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund 13
Acceptable Investments 13
Characteristics 13
The Treasury Money Market Fund 14
Acceptable Investments 14
The Money Market Fund 14
Acceptable Investments 14
Bank Instruments 14
Short-Term Credit Facilities 14
Asset-Backed Securities 14
Ratings 14
The Tax-Free Money Market Fund 15
Acceptable Investments 15
Participation Interests 15
Ratings 15
Investment Limitations 15
PORTFOLIO INVESTMENTS AND STRATEGIES 15
- ------------------------------------------------------
Regulatory Compliance 15
Borrowing Money 16
Selling Short 16
Restricted and Illiquid Securities 16
When-Issued and Delayed Delivery Transactions 16
Investing in Securities of Other
Investment Companies 16
Diversification 17
Non-Diversification 17
Investing in New Issuers 17
Repurchase Agreements 17
Lending of Portfolio Securities 17
Acquiring Securities 18
Investment Risks 18
Variable Rate Demand Notes 18
Credit Enhancement 18
Demand Features 18
Participation Interests 19
Variable Rate Municipal Securities 19
Municipal Leases 19
Temporary Investments 19
Municipal Securities 19
Investment Risks 20
Futures Contracts and Options to Buy or
Sell Such Contracts 20
THE VIRTUS FUNDS INFORMATION 21
- ------------------------------------------------------
Management of the Trust 21
Board of Trustees 21
Investment Adviser 21
Advisory Fees 21
Adviser's Background 21
Distribution of Shares of the Funds 22
Distribution Plan 22
Administrative Arrangements 22
Glass-Steagall Act 22
Administration of the Funds 23
Administrative Services 23
Custodian 23
Transfer Agent and Dividend Disbursing Agent 23
Independent Auditors 23
Expenses of the Funds and Investment Shares 23
Brokerage Transactions 23
NET ASSET VALUE 24
- ------------------------------------------------------
INVESTING IN SHARES 24
- ------------------------------------------------------
Share Purchases 24
By Check 24
By Wire 24
Systematic Investment Program 25
Minimum Investment Required 25
What Shares Cost 25
Certificates and Confirmations 25
Dividends 25
Capital Gains 25
EXCHANGE PRIVILEGE 26
- ------------------------------------------------------
By Telephone 26
REDEEMING SHARES 26
- ------------------------------------------------------
By Telephone 26
By Mail 27
Contingent Deferred Sales Charge 28
Systematic Withdrawal Program 29
Accounts with Low Balances 29
SHAREHOLDER INFORMATION 29
- ------------------------------------------------------
Voting Rights 29
Massachusetts Partnership Law 29
EFFECT OF BANKING LAWS 30
- ------------------------------------------------------
TAX INFORMATION 30
- ------------------------------------------------------
Federal Income Tax 30
Virginia Taxes 31
Maryland Taxes 31
Other State and Local Taxes 31
PERFORMANCE INFORMATION 31
- ------------------------------------------------------
OTHER CLASSES OF SHARES 32
- ------------------------------------------------------
ADDRESSES 33
- ------------------------------------------------------
SYNOPSIS
- --------------------------------------------------------------------------------
The Trust, an open-end, management investment company, was established as a
Massachusetts business trust under a Declaration of Trust dated June 20, 1990.
The Declaration of Trust permits the Trust to offer separate series of shares of
beneficial interest representing interests in separate portfolios of securities.
The shares in any one portfolio may be offered in separate classes. As of the
date of this prospectus, the Trustees have established a single class of shares
for The Tax-Free Money Market Fund, and two classes of shares, Investment Shares
and Trust Shares, for each of the other Funds in the Trust.
As of the date of this prospectus, the Trust is comprised of the following seven
portfolios:
- The U.S. Government Securities Fund--seeks to provide current income by
investing in a professionally managed, diversified portfolio limited
primarily to U.S. government securities;
- The Stock Fund--seeks to provide growth of capital and income by
investing in common stocks;
- The Virginia Municipal Bond Fund--seeks to provide current income which
is exempt from federal regular income tax and the personal income tax
imposed by the Commonwealth of Virginia by investing in a portfolio of
Virginia municipal securities;
- The Maryland Municipal Bond Fund--seeks to provide current income which
is exempt from federal regular income tax and the personal income tax
imposed by the State of Maryland by investing in a portfolio of Maryland
municipal securities;
- The Treasury Money Market Fund--seeks to provide current income
consistent with stability of principal by investing in short-term U.S.
Treasury obligations;
- The Money Market Fund--seeks to provide current income consistent with
stability of principal by investing in money market instruments; and
- The Tax-Free Money Market Fund--seeks to provide current income exempt
from federal income tax consistent with stability of principal, by
investing in municipal securities.
This prospectus relates only to the Investment Shares ("Investment Shares") of
those Funds offering classes and to the single class of shares ("The Tax-Free
Money Market Shares") of The Tax-Free Money Market Fund (Investment Shares and
The Tax-Free Money Market Shares are sometimes collectively referred to as
"Shares"). For information on how to purchase Shares please refer to "Investing
in Shares." A minimum initial investment of $1,000 is required for each Fund. A
contingent deferred sales charge may be imposed on all Shares of The U.S.
Government Securities Fund, The Stock Fund, The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund purchased after October 1, 1992 (other than
Shares purchased through reinvestment of dividends and capital gains
distributions), which are redeemed within five years of their purchase dates.
Information on redeeming Shares may be found under "Redeeming Investment
Shares." The Funds are advised by Signet Asset Management.
SPECIAL CONSIDERATIONS
Investors should be aware of the following general considerations: the market
value of fixed-income securities, which constitute a major part of the
investments of several Funds, may vary inversely in response to changes in
prevailing interest rates. One or more Funds may make certain investments and
employ certain investment techniques that involve other risks, including
entering into repurchase agreements, lending portfolio securities and entering
into futures contracts and related options as hedges. These risks and those
associated with investing in mortgage-backed securities, when-issued securities,
options, variable rate securities and equity securities are described under
"Investment Objective and Policies of Each Fund" and "Portfolio Investments and
Strategies."
SUMMARY OF FUND EXPENSES--INVESTMENT SHARES
AND TAX-FREE MONEY MARKET SHARES
- --------------------------------------------------------------------------------
The following Fee Table and Example summarize the various costs and expenses
that a shareholder of Investment Shares and Tax-Free Money Market Shares will
bear, either directly or indirectly.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<CAPTION>
THE THE THE THE
TAX-FREE THE TREASURY MARYLAND VIRGINIA THE U.S.
MONEY MONEY MONEY MUNICIPAL MUNICIPAL THE GOVERNMENT
MARKET MARKET MARKET BOND BOND STOCK SECURITIES
FUND FUND FUND FUND FUND FUND FUND
--------- ------- --------- ---------- ---------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Contingent Deferred Sales Charge (as a
percentage of amount redeemed, if
applicable)(1)............................. None None None 2.00% 2.00% 2.00% 2.00%
</TABLE>
ANNUAL INVESTMENT SHARES AND TAX-FREE MONEY MARKET SHARES OPERATING EXPENSES (AS
A PERCENTAGE OF AVERAGE NET ASSETS)
<TABLE>
<CAPTION>
TOTAL INVESTMENT
SHARES AND TAX-FREE
MONEY MARKET SHARES
NET OPERATING EXPENSES
MANAGEMENT 12B-1 OTHER NET OF ANY WAIVERS OR
FEES(2) FEES(3) EXPENSES(4)(5) REIMBURSEMENTS(6)
----------- -------- --------------- ---------------------
<S> <C> <C> <C> <C>
The Money Market Fund................................... 0.25% 0.25% 0.30% 0.80%
The Treasury Money Market Fund.......................... 0.32% 0.25% 0.27% 0.84%
The Tax-Free Money Market Fund.......................... 0.04% 0.00% 0.32% 0.36%
The Maryland Municipal Bond Fund........................ 0.24% 0.25% 0.68% 1.17%
The Virginia Municipal Bond Fund........................ 0.48% 0.25% 0.42% 1.15%
The Stock Fund.......................................... 0.52% 0.25% 0.43% 1.20%
The U.S. Government Securities Fund..................... 0.43% 0.25% 0.31% 0.99%
</TABLE>
(1) A contingent deferred sales charge of 2% will be imposed on The Money Market
Fund, The Treasury Money Market Fund, and The Tax-Free Money Market Fund
only in limited circumstances in which Shares being redeemed are acquired in
exchange for Investment Shares in those Virtus Funds which charge a
contingent deferred sales charge. The contingent deferred sales charge is
2.00% of the lesser of the original purchase price or the net asset value of
Shares redeemed within five years of purchase date.
(2) The management fee has been reduced to reflect the voluntary waiver by the
investment adviser. The adviser can terminate this voluntary waiver at any
time at its sole discretion. The maximum management fee for The Money Market
Fund, The Treasury Money Market Fund, The Tax-Free Money Market Fund, The
Maryland Municipal Bond Fund, The Virginia Municipal Bond Fund, The Stock
Fund, and The U.S. Government Securities Fund is 0.50%, 0.50%, 0.50%, 0.75%,
0.75%, 0.75% and 0.75%, respectively.
(3) Fees paid by Investment Shares of each Fund for distribution and/or
administrative services provided with respect to Investment Shares. Total
payments of up to 0.25 of 1% (except The Money Market Fund and The Treasury
Money Market Fund which have total payments of up to 0.35 of 1%) of the
average daily net assets attributable to Investment Shares are permitted
under the Distribution Plans. As of the date of this prospectus, The
Tax-Free Money Market Fund is not paying or accruing 12b-1 fees. The
Tax-Free Money Market Fund will not accrue or pay 12b-1 fees until a
separate class of shares has been created for certain institutional
investors. The Tax-Free Money Market Fund can pay up to 0.35% as a 12b-1 fee
to the distributor. See "Management of the Trust--Distribution Plans."
(4) Includes administration fees. See "Management of the Trust--Administration
of the Funds."
(5) Total other expenses for The Tax-Free Money Fund, would have been 0.56%
absent the voluntary reimbursement of other operating expenses by the
Adviser. The Adviser can terminate this reimbursement at any time at its
sole discretion.
(6) The total Investment Shares Operating Expenses for The Money Market Fund,
The Treasury Money Market Fund, The Maryland Municipal Bond Fund, The
Virginia Municipal Bond Fund, The Stock Fund and The U.S. Government
Securities Fund would have been 1.05%, 1.02%, 1.68%, 1.42%, 1.43% and 1.31%,
respectively, and the total Operating Expenses for The Tax-Free Money Market
Fund would have been 1.06%, absent the waivers and reimbursements described
above in notes 2, 3, and 5.
EXAMPLE:
You would pay the following expenses on a $1,000 investment, assuming (1) 5%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 1 YEAR(+) 3 YEARS 3 YEARS(+) 5 YEARS 5 YEARS(+) 10 YEARS(+)
------- ---------- -------- ----------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Money Market Fund.......................... $ 8 $ 8 $ 26 $26 $ 44 $44 $ 99
The Treasury Money Market Fund................. $ 9 $ 9 $ 27 $27 $ 47 $47 $104
The Tax-Free Money Market Fund................. $ 4 $ 4 $ 12 $12 $ 20 $20 $ 46
The Maryland Municipal Bond Fund............... $33 $ 12 $ 60 $37 $ 89 $64 $142
The Virginia Municipal Bond Fund............... $32 $ 12 $ 59 $37 $ 87 $63 $140
The Stock Fund................................. $33 $ 12 $ 60 $38 $ 90 $66 $145
The U.S. Government Securities Fund............ $31 $ 10 $ 54 $32 $ 79 $55 $121
</TABLE>
+ Reflects expenses on the same investment, assuming no redemption.
The purpose of the foregoing Example is to assist an investor in understanding
the various costs and expenses that a shareholder of Investment Shares and
Tax-Free Money Market Shares will bear, either directly or indirectly. For a
more complete description of the various costs and expenses, see "The Virtus
Funds Information" and "Investing in Shares." Wire-transferred redemptions of
less than $5,000 may be subject to additional fees.
THE ABOVE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. THIS EXAMPLE
IS BASED ON ESTIMATED DATA FOR THE FUNDS' FISCAL YEAR ENDING SEPTEMBER 30, 1995.
The information set forth in the foregoing table and Example relates only to
Investment Shares of those Funds offering separate classes, and The Tax-Free
Money Market Shares. Trust Shares of those Funds offering separate classes are
subject to certain of the same expenses as Investment Shares, except they bear
no contingent deferred sales charge or 12b-1 fee. See "Other Classes of Shares."
THE U.S. GOVERNMENT SECURITIES FUND
(FORMERLY U.S. GOVERNMENT INCOME FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.90 $10.95 $10.54 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.61 0.66 0.75 0.78
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.94) 0.03 0.50 0.54
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.33) 0.69 1.25 1.32
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.61) (0.66)(d) (0.75) (0.78)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions -- (0.08) (0.09) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.13)(c) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.74) (0.74) (0.84) (0.78)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $ 9.83 $10.90 $10.95 $10.54
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (3.36%) 6.82% 12.42% 14.00%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.99% 0.77% 0.52% 0.64%(a)
- ------------------------------------------------------------------------
Net investment income 5.94% 5.91% 7.01% 8.03%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.32% 0.43% 0.65% 0.93%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $112,439 $119,187 $40,274 $10
- ------------------------------------------------------------------------
Portfolio turnover rate 227% 154% 201% 101%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.90 $10.95 $10.54 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.63 0.67 0.75 0.78
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.94) 0.03 0.50 0.54
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.31) 0.70 1.25 1.32
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.63) (0.67)(d) (0.75) (0.78)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions -- (0.08) (0.09) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.13)(c) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.76) (0.75) (0.84) (0.78)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $ 9.83 $10.90 $10.95 $10.54
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (3.12%) 6.94% 12.42% 14.00%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.74% 0.63% 0.52% 0.64%(a)
- ------------------------------------------------------------------------
Net investment income 6.19% 6.17% 7.01% 8.03%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.32% 0.43% 0.65% 0.93%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $107,103 $112,334 $95,610 $27,565
- ------------------------------------------------------------------------
Portfolio turnover rate 227% 154% 201% 101%
- ------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(d) Amount includes distributions in excess of net investment income of $0.007
per share.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE STOCK FUND
(FORMERLY VALUE EQUITY FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.39 $12.02 $11.86 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.17 0.24 0.26 0.32
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.39) 0.54 0.46 1.85
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.22) 0.78 0.72 2.17
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.17) (0.25) (0.25) (0.31)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.20) (0.16) (0.31) --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.37) (0.41) (0.56) (0.31)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $11.80 $12.39 $12.02 $11.86
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (1.72%) 6.31% 6.31% 22.68%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 1.20% 0.87% 0.95% 0.80%(a)
- ------------------------------------------------------------------------
Net investment income 1.40% 1.81% 2.25% 3.05%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.55% 0.34% 0.38%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $26,739 $18,691 $2,290 $488
- ------------------------------------------------------------------------
Portfolio turnover rate 205% 67% 38% 84%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $12.39 $12.02 $11.86 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.20 0.28 0.26 0.32
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.40) 0.51 0.46 1.85
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.20) 0.79 0.72 2.17
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.19) (0.26) (0.25) (0.31)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.20) (0.16) (0.31) --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.39) (0.42) (0.56) (0.31)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $11.80 $12.39 $12.02 $11.86
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (1.50%) 6.42% 6.31% 22.68%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.95% 0.66% 0.95% 0.80%(a)
- ------------------------------------------------------------------------
Net investment income 1.68% 2.09% 2.25% 3.05%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23% 0.55% 0.34% 0.38%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $70,374 $65,841 $49,581 $37,032
- ------------------------------------------------------------------------
Portfolio turnover rate 205% 67% 38% 84%
- ------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE VIRGINIA MUNICIPAL BOND FUND
(FORMERLY VIRGINIA MUNICIPAL BOND FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------- ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.26 $10.46 $10.18 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.45 0.51 0.54 0.57
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.92) 0.89 0.29 0.18
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.47) 1.40 0.83 0.75
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45)(d) (0.51) (0.54) (0.57)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.06) (0.09) (0.01) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.02)(c) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.53) (0.60) (0.55) (0.57)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $10.26 $11.26 $10.46 $10.18
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (4.25%) 13.49% 8.51% 7.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 1.15% 0.90% 0.83% 0.47%(a)
- ------------------------------------------------------------------------
Net investment income 4.22% 4.68% 5.14% 6.08%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.27% 0.50% 0.86% 1.70%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $74,706 $63,492 $20,883 $6,031
- ------------------------------------------------------------------------
Portfolio turnover rate 29% 17% 51% 27%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.26 $10.46 $10.18 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.48 0.53 0.54 0.57
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.92) 0.89 0.29 0.18
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.44) 1.42 0.83 0.75
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48)(e) (0.53) (0.54) (0.57)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.06) (0.09) (0.01) --
- ------------------------------------------------------------------------
Distributions to shareholders in excess of net realized gain
on investment transactions (0.02)(c) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.56) (0.62) (0.55) (0.57)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $10.26 $11.26 $10.46 $10.18
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (4.01%) 13.62% 8.51% 7.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.90% 0.75% 0.83% 0.47%(a)
- ------------------------------------------------------------------------
Net investment income 4.47% 4.85% 5.14% 6.08%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.27% 0.50% 0.86% 1.70%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,165 $41,204 $20,852 $8,546
- ------------------------------------------------------------------------
Portfolio turnover rate 29% 17% 51% 27%
- ------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment), to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment ratios shown above.
(c) Distributions are determined in accordance with income tax regulations which
may differ from generally accepted accounting principles. These
distributions do not represent a return of capital for federal income tax
purposes.
(d) Amount includes distributions to shareholders in excess of net investment
income of $0.0001 per share.
(e) Amount includes distributions to shareholders in excess of net investment
income of $0.0002 per share.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE MARYLAND MUNICIPAL BOND FUND
(FORMERLY MARYLAND MUNICIPAL BOND FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.39 $10.10 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.45 0.49 0.54 0.53
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.97) 0.85 0.29 0.10
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.52) 1.34 0.83 0.63
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.45) (0.49) (0.54) (0.53)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.10) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.55) (0.49) (0.54) (0.53)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $10.17 $11.24 $10.39 $10.10
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (4.74%) 13.24% 8.31% 6.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 1.17% 1.00% 0.59% 0.60%(a)
- ------------------------------------------------------------------------
Net investment income 4.22% 4.50% 5.11% 5.66%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.51% 0.77% 1.91% 1.05%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,580 $33,907 $4,053 $2,940
- ------------------------------------------------------------------------
Portfolio turnover rate 27% 23% 34% 35%
- ------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ------------------------------------------------------------------------ ------ ------ ------ ------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.24 $10.39 $10.10 $10.00
- ------------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ------------------------------------------------------------------------
Net investment income 0.48 0.50 0.54 0.53
- ------------------------------------------------------------------------
Net realized and unrealized gain (loss) on investments (0.97) 0.85 0.29 0.10
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total from investment operations (0.49) 1.35 0.83 0.63
- ------------------------------------------------------------------------
LESS DISTRIBUTIONS
- ------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48) (0.50) (0.54) (0.53)
- ------------------------------------------------------------------------
Distributions to shareholders from net realized gain on
investment transactions (0.10) -- -- --
- ------------------------------------------------------------------------ ---- ---- ---- ----
Total distributions (0.58) (0.50) (0.54) (0.53)
- ------------------------------------------------------------------------ ---- ---- ---- ----
NET ASSET VALUE, END OF PERIOD $10.17 $11.24 $10.39 $10.10
- ------------------------------------------------------------------------ ---- ---- ---- ----
TOTAL RETURN** (4.50%) 13.37% 8.31% 6.64%
- ------------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ------------------------------------------------------------------------
Expenses 0.92% 0.86% 0.59% 0.60%(a)
- ------------------------------------------------------------------------
Net investment income 4.46% 4.64% 5.11% 5.66%(a)
- ------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.51% 0.77% 1.91% 1.05%(a)
- ------------------------------------------------------------------------
SUPPLEMENTAL DATA
- ------------------------------------------------------------------------
Net assets, end of period (000 omitted) $11,301 $12,014 $6,004 $556
- ------------------------------------------------------------------------
Portfolio turnover rate 27% 23% 34% 35%
- ------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
Further information about the Fund's performance is contained in the Fund's
annual report dated September 30, 1994, which can be obtained free of charge.
THE TREASURY MONEY MARKET FUND
(FORMERLY TREASURY MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ----------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.03 0.02 0.04 0.06
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.02) (0.04) (0.06)
- ----------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 2.90% 2.52% 3.61% 5.90%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.84% 0.70% 0.70% 0.51%(a)
- -----------------------------------------------------
Net investment income 2.86% 2.47% 3.49% 5.65%(a)
- -----------------------------------------------------
Expense waiver/reimbursement (b) 0.18% 0.20% 0.11% 0.27%(a)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $21,883 $20,382 $12,960 $548
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ----------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.03) (0.04) (0.06)
- ----------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.16% 2.64% 3.61% 5.90%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.59% 0.58% 0.70% 0.51%(a)
- -----------------------------------------------------
Net investment income 3.30% 2.60% 3.49% 5.65%(a)
- -----------------------------------------------------
Expense waiver/reimbursement (b) 0.18% 0.20% 0.11% 0.27%(a)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $304,285 $152,921 $163,451 $129,959
- -----------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
THE MONEY MARKET FUND
(FORMERLY MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
INVESTMENT SHARES 1994 1993 1992 1991*
- ----------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.03) (0.04) (0.06)
- ----------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.10% 2.77% 3.79% 5.92%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.80% 0.64% 0.64% 0.51%(a)
- -----------------------------------------------------
Net investment income 3.07% 2.68% 3.64% 5.99%(a)
- -----------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.30% 0.29% 0.36%(a)
- -----------------------------------------------------
SUPPLEMENT DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $15,236 $9,905 $5,803 $1
- -----------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------------------------
TRUST SHARES 1994 1993 1992 1991*
- ----------------------------------------------------- ----- ----- ----- -----
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $1.00 $1.00 $1.00 $1.00
- -----------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- -----------------------------------------------------
Net investment income 0.03 0.03 0.04 0.06
- -----------------------------------------------------
LESS DISTRIBUTIONS
- -----------------------------------------------------
Dividends to shareholders from net investment
income (0.03) (0.03) (0.04) (0.06)
- ----------------------------------------------------- ----- ----- ----- -----
NET ASSET VALUE, END OF PERIOD $1.00 $1.00 $1.00 $1.00
- ----------------------------------------------------- ----- ----- ----- -----
TOTAL RETURN** 3.35% 2.89% 3.79% 5.92%
- -----------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- -----------------------------------------------------
Expenses 0.55% 0.50% 0.64% 0.51%(a)
- -----------------------------------------------------
Net investment income 3.25% 2.83% 3.64% 5.99%(a)
- -----------------------------------------------------
Expense waiver/reimbursement (b) 0.25% 0.30% 0.29% 0.36%(a)
- -----------------------------------------------------
SUPPLEMENTAL DATA
- -----------------------------------------------------
Net assets, end of period (000 omitted) $132,445 $134,397 $136,616 $57,432
- -----------------------------------------------------
</TABLE>
* Reflects operations for the period from October 16, 1990 (date of initial
public investment) to September 30, 1991.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
THE TAX-FREE MONEY MARKET FUND
(FORMERLY TAX-FREE MONEY MARKET FUND)
FINANCIAL HIGHLIGHTS
- --------------------------------------------------------------------------------
(FOR A SHARE OUTSTANDING THROUGHOUT EACH PERIOD)
The following table has been audited by Deloitte & Touche LLP, the Fund's
independent auditors. Their report dated November 11, 1994, on the Fund's
Financial Statements is incorporated by reference to the Annual Report dated
September 30, 1994. This table should be read in conjunction with the Fund's
Financial Statements and Notes thereto, which may be obtained from the Fund.
<TABLE>
<CAPTION>
PERIOD ENDED
SEPTEMBER 30,
1994*
--------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.00
- ----------------------------------------------------------------------
INCOME FROM INVESTMENT OPERATIONS
- ----------------------------------------------------------------------
Net investment income 0.01
- ----------------------------------------------------------------------
LESS DISTRIBUTIONS
- ----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.01)
- ---------------------------------------------------------------------- ---------
NET ASSET VALUE, END OF PERIOD $ 1.00
- ---------------------------------------------------------------------- ---------
TOTAL RETURN** 0.45%
- ----------------------------------------------------------------------
RATIOS TO AVERAGE NET ASSETS
- ----------------------------------------------------------------------
Expenses 0.36%(a)
- ----------------------------------------------------------------------
Net investment income 2.65%(a)
- ----------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.70%(a)
- ----------------------------------------------------------------------
SUPPLEMENTAL DATA
- ----------------------------------------------------------------------
Net assets, end of period (000 omitted) $21,967
- ----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from July 27, 1994 (date of initial public
investment) to September 30, 1994.
** Based on net asset value, which does not reflect the sales load or contingent
deferred sales charge, if applicable.
(a) Computed on an annualized basis.
(b) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
INVESTMENT OBJECTIVE AND POLICIES OF EACH FUND
- --------------------------------------------------------------------------------
The investment objective and policies of each Fund appear below. The investment
objective of a Fund cannot be changed without the approval of holders of a
majority of that Fund's shares. While there is no assurance that a Fund will
achieve its investment objective, it endeavors to do so by following the
investment policies described in this prospectus.
Unless indicated otherwise, the investment policies of a Fund may be changed by
the Trustees without approval of shareholders. Shareholders will be notified
before any material change in these policies becomes effective.
Additional information about investment limitations, strategies that one or more
Funds may employ, and certain investment policies mentioned below, appear in the
"Portfolio Investments and Strategies" section of this Prospectus and in the
Combined Statement of Additional Information.
THE U.S. GOVERNMENT SECURITIES FUND
The investment objective of The U.S. Government Securities Fund is to provide
current income.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in securities which are primary or direct obligations of the U.S.
government or its instrumentalities or which are guaranteed by the U.S.
government, its agencies, or instrumentalities. The Fund may also invest in
certain collateralized mortgage obligations ("CMOs") and adjustable rate
mortgage securities ("ARMS"), both of which represent or are supported by direct
or indirect obligations of the U.S. government or its instrumentalities. The
Fund will invest, under normal circumstances, at least 65% of the value of its
total assets in U.S. government securities (including such CMOs and ARMS).
The U.S. government securities in which the Fund invests include:
- direct obligations of the U.S. Treasury, such as U.S. Treasury bills,
notes and bonds; and
- notes, bonds, and discount notes of U.S. government agencies or
instrumentalities, such as the: Farm Credit System, including the
National Bank for Cooperatives, Farm Credit Banks, and Banks for
Cooperatives; Farmers Home Administration; Federal Home Loan Banks;
Federal Home Loan Mortgage Corporation; Federal National Mortgage
Association; Government
National Mortgage Association; and Student Loan Marketing Association.
The obligations of U.S. government agencies or instrumentalities which the Fund
may buy are backed, in a variety of ways, by the U.S. government or its agencies
or instrumentalities. Some of these obligations such as Government National
Mortgage Association mortgage-backed securities and obligations of the Farmers
Home Administration, are backed by the full faith and credit of the U.S.
Treasury. Obligations of the Farmers' Home Administration are also backed by the
issuer's right to borrow from the U.S. Treasury. Obligations of Federal Home
Loan Banks and the Farmers' Home Administration are backed by the discretionary
authority of the U.S. government to purchase certain obligations of agencies or
instrumentalities. Obligations of Federal Home Loan Banks, Farmers' Home
Administration, Federal Farm Credit Banks, Federal National Mortgage
Association, and Federal Home Loan Mortgage Corporation are backed by the credit
of the agency or instrumentality issuing the obligations.
CMOS. The Fund may also invest in CMOs which are rated AAA or better by a
nationally recognized rating agency and which are issued by private entities
such as investment banking firms and companies related to the construction
industry. The CMOs in which the Fund may invest may be: (i) privately issued
securities which are collateralized by pools of mortgages in which each mortgage
is guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. government; (ii) privately issued securities which
are collateralized by pools of mortgages in which payment of principal and
interest are guaranteed by the issuer and such guarantee is collateralized by
U.S. government securities; and (iii) other privately issued securities in which
the proceeds of the issuance are invested in mortgage-backed securities and
payment of the principal and interest are supported by the credit of an agency
or instrumentality of the U.S. government. The mortgage-related securities
provide for a periodic payment consisting of both interest and principal. The
interest portion of these payments will be distributed by the Fund as income,
and the capital portion will be reinvested.
ARMS. ARMS are pass-through mortgage securities with adjustable rather than
fixed interest rates. The ARMS in which the Fund invests are issued by
Government National Mortgage Association ("GNMA"), Federal National Mortgage
Association ("FNMA"), and Federal Home Loan Mortgage Corporation ("FHLMC") and
are actively traded. The underlying mortgages which collateralize ARMS issued by
GNMA are fully guaranteed by the Federal Housing Administration ("FHA") or
Veterans Administration ("VA"), while those collateralizing ARMS issued by FHLMC
or FNMA are typically conventional residential mortgages conforming to strict
underwriting size and maturity constraints.
Unlike conventional bonds, ARMS pay back principal over the life of the ARMS
rather than at maturity. Thus, a holder of the ARMS, such as the Fund, would
receive monthly scheduled payments of principal and interest, and may receive
unscheduled principal payments representing payments on the underlying
mortgages. At the time that a holder of the ARMS reinvests the payments and any
unscheduled prepayments of principal that it receives, the holder may receive a
rate of interest which is actually lower than the rate of interest paid on the
existing ARMS. As a consequence, ARMS may be a less effective means of "locking
in" long-term interest rates than other types of U.S. government securities.
THE STOCK FUND
The investment objective of The Stock Fund is to provide growth of capital and
income.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
in common stocks of large, medium and small capitalization companies which are
either listed on the New York or American Stock Exchanges or trade in the
over-the-counter markets. The Fund's investment approach is based upon the
conviction that, over the long term, the economy will continue to expand and
develop and that this economic growth will be reflected in the growth of the
revenues and earnings of publicly held corporations. The securities in which the
Fund invests include, but are not limited to, the following securities.
COMMON STOCKS. The Fund invests primarily in common stocks of companies
selected by the Fund's investment adviser on the basis of investment research
techniques, including assessment of earnings and dividend growth prospects of
the companies. Factors such as product position, market share, potential
earnings growth, or asset values will be considered by the investment adviser.
At least 65% of the Fund's portfolio will be invested in common stocks, unless
it is in a defensive position.
OTHER CORPORATE SECURITIES. The Fund may invest in preferred stocks, corporate
bonds, notes, warrants, rights, and convertible securities of these companies.
The Fund will only invest in convertible securities rated BBB or higher by
Standard & Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investor's
Service, Inc. ("Moody's"). Bonds rated BBB by S&P or Baa by Moody's have
speculative characteristics. Changes in economic conditions or other
circumstances are more likely to lead to weakened capacity to make principal and
interest payments than higher rated bonds.
COMMERCIAL PAPER. The Fund may invest in commercial paper rated A-1 by S&P, or
Prime-1 by Moody's, or F-1 by Fitch Investors Services ("Fitch") and money
market instruments (including commercial paper) which are unrated but of
comparable quality, including Canadian Commercial Paper ("CCPs") and Europaper.
BANK INSTRUMENTS. The Fund may invest in instruments of domestic and foreign
banks and savings and loans (such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances) if they have capital,
surplus, and undivided profits over $100,000,000, or if the principal amount of
the instrument is insured by the Bank Insurance Fund ("BIF"), which is
administered by the Federal Deposit Insurance Corporation ("FDIC") or the
Savings Association Insurance Fund ("SAIF"), which is administered by the FDIC.
These instruments may include Eurodollar Certificates of Deposit ("ECDs"),
Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar Time Deposits
("ETDs").
AMERICAN DEPOSITARY RECEIPTS ("ADRS"). ADRs are receipts typically issued by an
American bank or trust company that evidences ownership of underlying securities
issued by a foreign issuer.
U.S. GOVERNMENT SECURITIES. The Fund may invest in securities issued and/or
guaranteed as to payment of principal and interest by the U.S. government, its
agencies or instrumentalities including those obligations purchased on a
when-issued or delayed delivered basis.
PUT AND CALL OPTIONS. The Fund may purchase put options on its portfolio
securities. These options will be used as a hedge to attempt to protect
securities which the Fund holds against decreases in value. The Fund may also
write covered call options on all or any portion of its portfolio to generate
income for the Fund. The Fund will write call options on securities either held
in its portfolio or which it has the right to obtain without payment of further
consideration or for which it has segregated cash or U.S. government securities
in the amount of any additional consideration.
The Fund may purchase and write over-the-counter options on portfolio securities
in negotiated transactions with the buyers or writers of the options when
options on the portfolio securities held by the Fund are not traded on an
exchange. The Fund purchases and writes options only with investment dealers and
other financial institutions (such as commercial banks or savings and loan
associations) deemed creditworthy by the Fund's adviser.
Over-the-counter options are two party contracts with price and terms negotiated
between buyer and seller. In contrast, exchange traded options are third party
contracts with standardized strike prices and expiration dates and are purchased
from a clearing corporation. Exchange-traded options have a continuous liquid
market while over-the-counter options may not. The Fund will not buy call
options or write put options without further notification to shareholders.
FINANCIAL FUTURES AND OPTIONS ON FUTURES. The Fund may purchase and sell
financial futures contracts to hedge all or a portion of its portfolio against
changes in stock prices. Financial futures contracts call for the delivery of
particular debt instruments at a certain time in the future. The seller of the
contract agrees to make delivery of the type of instrument called for in the
contract and the buyer agrees to take delivery of the instrument at the
specified future time.
The Fund may also write call options and purchase put options on financial
futures contracts as a hedge to attempt to protect securities in its portfolio
against decreases in value. When the Fund writes a call option on a futures
contract, it is undertaking the obligation of selling a futures contract at a
fixed price at any time during a specified period if the option is exercised.
Conversely, as purchaser of a put option on a futures contract, the Fund is
entitled (but not obligated) to sell a futures contract at the fixed price
during the life of the option.
The Fund may not purchase or sell futures contracts or related options if
immediately thereafter the sum of the amount of margin deposits on the Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Fund's total assets. When the Fund purchases futures
contracts, an amount of cash and cash equivalents, equal to the underlying
commodity value of the futures contracts (less any related margin deposits),
will be deposited in a segregated account with the Fund's custodian (or the
broker, if legally permitted) to collateralize the position and thereby insure
that the use of such futures contract is unleveraged.
RISKS. When the Fund uses financial futures and options on financial
futures as hedging devices, there is a risk that the prices of the
securities subject to the futures contracts may not correlate perfectly
with the prices of the securities in the Fund's portfolio. This may cause
the futures contract and any related options to react differently than the
portfolio securities to market changes. In addition, the Fund's investment
adviser could be incorrect in its expectations about the direction or
extent of market factors such as stock price movements. In these events,
the Fund may lose money on the futures contract or option.
It is not certain that a secondary market for positions in futures
contracts or for options will exist at all times. Although the investment
adviser will consider liquidity before entering into options transactions,
there is no assurance that a liquid secondary market on an exchange or
otherwise will exist for any particular futures contract or option at any
particular time. The Fund's ability to establish and close out futures and
options positions depends on this secondary market.
PORTFOLIO TURNOVER. Although the Fund does not intend to invest for the purpose
of seeking short-term profits, securities in its portfolio will be sold whenever
the Fund's adviser believes it is appropriate to do so in light of the Fund's
investment objective, without regard to the length of time a particular security
may have been held. The Fund's rate of portfolio turnover may exceed that of
certain other mutual funds with the same investment objective. A higher rate of
portfolio turnover involves correspondingly greater transaction expenses which
must be borne directly by the Fund and, thus,
indirectly by its shareholders. In addition, a high rate of portfolio turnover
may result in the realization of larger amounts of capital gains which, when
distributed to the Fund's shareholders, are taxable to them. (Further
information is contained in the Fund's Statement of Additional Information
within the sections "Brokerage Transactions" and "Tax Status"). Nevertheless,
transactions for the Fund's portfolio will be based only upon investment
considerations and will not be limited by any other considerations when the
Fund's investment adviser deems it appropriate to make changes in the Fund's
portfolio.
INVESTMENT CONSIDERATIONS. As with other mutual funds that invest primarily in
equity securities, the Fund is subject to market risks. That is, the possibility
exists that common stocks will decline over short or even extended periods of
time. The United States equity market tends to be cyclical, experiencing both
periods when stock prices generally increase and periods when stock prices
generally decrease. However, because the Fund invests a portion of its assets in
small capitalization stocks, there are some additional risk factors associated
with investments in the Fund. In particular, stocks in the small capitalization
sector of the United States equity market have historically been more volatile
in price than larger capitalization stocks, such as those included in the
Standard & Poor's 500 Composite Stock Price Index ("Standard & Poor's 500
Index"). This is because, among other things, small companies have less certain
growth prospects than larger companies; have a lower degree of liquidity in the
equity market; and tend to have a greater sensitivity to changing economic
conditions.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND MUNICIPAL BOND FUND
The investment objective of The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund is to provide current income which is exempt from federal
regular income tax and the personal income tax imposed by the Commonwealth of
Virginia and the State of Maryland, respectively. (Federal regular income tax
does not include the federal individual alternative minimum tax or the federal
alternative minimum tax for corporations.)
ACCEPTABLE INVESTMENTS. Each Fund pursues its investment objective by investing
in a professionally managed portfolio of securities at least 65% of which is
comprised of Virginia municipal bonds or Maryland municipal bonds, as the case
may be. Each Fund will invest its assets so that, under normal circumstances, at
least 80% of its annual interest income is exempt from federal regular and
Virginia or Maryland state income taxes, respectively, or that at least 80% of
its net assets are invested in obligations, the interest income from which is
exempt from federal regular and Virginia or Maryland state income taxes,
respectively.
The municipal securities in which each Fund invests are debt obligations,
including industrial development bonds, issued on behalf of the Commonwealth of
Virginia or the State of Maryland, as the case may be, or the political
subdivisions or agencies of each respective state. In addition, each Fund may
invest in debt obligations issued by or on behalf of any state, territory or
possession of the United States, including the District of Columbia, or any
political subdivision or agency or any of these and participation interests in
any of the above obligations, the interest from which is, in the opinion of bond
counsel for the issuers or in the opinion of officers of the relevant Fund
and/or the investment adviser to the relevant Fund, exempt from federal regular
income tax and the personal income tax imposed by the Commonwealth of Virginia
or the State of Maryland, as the case may be.
CHARACTERISTICS. The debt securities in which each Fund invests will only
be rated investment grade or of comparable quality at the time of purchase.
The municipal securities which each Fund buys have essentially the same
characteristics assigned by Moody's and S&P to investment grade bonds.
Investment grade bonds are rated Baa, A, Aa, Aaa by Moody's, or BBB, A, AA,
AAA by S&P. Bonds rated "Baa" by Moody's or "BBB" by S&P have speculative
characteristics. Changes in economic conditions or other circumstances are
more likely to lead to weakened capacity to make principal and interest
payments than higher rated bonds. In certain cases, the Funds' adviser may
choose bonds which are unrated, if it judges the bonds to have the same
characteristics as investment grade bonds. If a security's rating is
reduced below the required minimum after a Fund has purchased it, that Fund
is not required to sell the security, but may consider doing so. A
description of the ratings categories is contained in the Appendix to the
Combined Statement of Additional Information.
THE TREASURY MONEY MARKET FUND
The investment objective of The Treasury Money Market Fund is to provide current
income consistent with stability of principal.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
only in a portfolio of short-term U.S. Treasury obligations which are issued by
the U.S. government and are fully guaranteed as to principal and interest by the
United States. They mature in 397 days or less from the date of acquisition
unless they are purchased under a repurchase agreement that provides for
repurchase by the seller within one year from the date of acquisition. The
average maturity of these securities computed on a dollar-weighted basis, will
be 90 days or less.
THE MONEY MARKET FUND
The investment objective of The Money Market Fund is to provide current income
consistent with stability of principal.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
primarily in a diversified portfolio of money market instruments maturing in 397
days or less. The average maturity of these securities, computed on a
dollar-weighted basis, will be 90 days or less. The Fund invests in high quality
money market instruments that are either rated in the highest short-term rating
category by one or more nationally recognized statistical rating organization
("NRSROs") or of comparable quality to securities having such ratings. Examples
of these instruments include, but are not limited to:
- domestic issues of corporate debt obligations, including variable rate
demand notes;
- commercial paper (including Canadian Commercial Paper and Europaper);
- certificates of deposit, demand and time deposits, bankers' acceptances
and other instruments of domestic and foreign banks and other deposit
institutions ("Bank Instruments");
- short-term credit facilities, such as demand notes;
- asset-backed securities;
- obligations issued or guaranteed as to payment of principal and interest
by the U.S. government or one of its agencies or instrumentalities
("Government Securities"); and
- other money market instruments.
The Fund invests only in instruments denominated and payable in U.S. dollars.
BANK INSTRUMENTS. The Fund only invests in Bank Instruments either issued
by an institution having capital, surplus and undivided profits over $100
million or insured by BIF or SAIF. Bank Instruments may include ECDs,
Yankee CDs and ETDs. The Fund will treat securities credit enhanced with a
bank's letter of credit as Bank Instruments.
SHORT-TERM CREDIT FACILITIES. Demand notes are short-term borrowing
arrangements between a corporation and an institutional lender (such as the
Fund) payable upon demand by either party. The notice period for demand
typically ranges from one to seven days, and the party may demand full or
partial payment. The Fund may also enter into, or acquire participations
in, short-term revolving credit facilities with corporate borrowers. Demand
notes and other short-term credit arrangements usually provide for floating
or variable rates of interest.
ASSET-BACKED SECURITIES. Asset-backed securities are securities issued by
special purpose entities whose primary assets consist of a pool of loans or
accounts receivable. The securities may take the form of beneficial
interest in a special purpose trust, limited partnership interests or
commercial paper or other debt securities issued by a special purpose
corporation. Although the securities often have some form of credit or
liquidity enhancement, payments on the securities depend predominately upon
collections of the loans and receivables held by the issuer.
RATINGS. An NRSRO's highest rating category is determined without regard for
sub-categories and gradations. For example, securities rated A-1 or A-1+ by S&P,
Prime-1 by Moody's or F-1 (+ or --) by Fitch are all considered rated in the
highest short-term rating category. The Fund will follow applicable regulations
in determining whether a security rated by more than one NRSRO can be treated as
being in the highest short-term rating category; currently, such securities must
be rated by two NRSROs in their highest rating category. See "Regulatory
Compliance."
THE TAX-FREE MONEY MARKET FUND
The investment objective of The Tax-Free Money Market Fund is current income
exempt from federal income tax consistent with stability of principal and
liquidity.
ACCEPTABLE INVESTMENTS. The Fund pursues its investment objective by investing
in a portfolio of municipal securities (as defined below) maturing in 13 months
or less. As a matter of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's annual interest income will be
exempt from federal income tax (including alternative minimum tax). The average
maturity of the securities in the Fund's portfolio, computed on a
dollar-weighted basis, will be 90 days or less.
The Fund invests primarily in debt obligations issued by or on behalf of states,
territories, and possessions of the United States, including the District of
Columbia, and any political subdivision or financing authority of any of these,
the income from which is, in the opinion of qualified legal counsel, exempt from
federal income tax ("municipal securities"). Examples of municipal securities
include, but are not limited to:
- tax and revenue anticipation notes issued to finance working capital
needs in anticipation of receiving taxes or other revenues;
- bond anticipation notes that are intended to be refinanced through a
later issuance of longer-term bonds;
- municipal commercial paper and other short-term notes;
- variable rate demand notes;
- municipal bonds (including bonds having serial maturities and
pre-refunded bonds) and leases;
- construction loan notes insured by the Federal Housing Administration and
financed by the Federal or Government National Mortgage Associations; and
- participation, trust, and partnership interests in any of the foregoing
obligations.
PARTICIPATION INTERESTS. The Fund may purchase interests in municipal
securities from financial institutions such as commercial and investment
banks, savings and loan associations, and insurance companies. These
interests may take the form of participations, beneficial interests in a
trust, partnership interests or any other form of indirect ownership that
allows the Fund to treat the income from the investment as exempt from
federal income tax. The Fund invests in these participation interests in
order to obtain credit enhancement or demand features that would not be
available through direct ownership of the underlying municipal securities.
RATINGS. The municipal securities in which the Fund invests must be rated in one
of the two highest short-term rating categories by one or more NRSRO or be of
comparable quality to securities having such ratings. The Fund will follow
applicable regulations in determining whether a security rated by more than one
NRSRO can be treated as being in one of the two highest short-term rating
categories; currently, such securities must be rated by two NRSROs in one of
their two highest rating categories. See "Regulatory Compliance."
INVESTMENT LIMITATIONS
The Funds' investment limitations are discussed below under "Borrowing Money",
"Selling Short", "Restricted and Illiquid Securities", "Diversification",
"Investing in New Issuers", and "Acquiring Securities."
PORTFOLIO INVESTMENTS AND STRATEGIES
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REGULATORY COMPLIANCE
The Treasury Money Market Fund, The Money Market Fund and The Tax-Free Money
Market Fund may follow non-fundamental operational policies that are more
restrictive than their fundamental investment limitations, as set forth in this
prospectus and their Combined Statement of Additional Information, in order to
comply with applicable laws and regulations, including the provisions of and
regulations under the Investment Company Act of 1940, as amended. In particular,
the Funds will comply with the various requirements of Rule 2a-7, which
regulates money market mutual funds. The
Treasury Money Market Fund, The Money Market Fund, and The Tax-Free Money Market
Fund will also determine the effective maturity of their respective investments,
as well as their ability to consider a security as having received the requisite
short-term ratings by NRSROs, according to Rule 2a-7. The Funds may change these
operational policies to reflect changes in the laws and regulations without the
approval of their shareholders.
BORROWING MONEY
Except for The Tax-Free Money Market Fund the Funds will not borrow money
directly or through reverse repurchase agreements (arrangements in which a Fund
sells a portfolio instrument for a percentage of its cash value with an
agreement to buy it back on a set date) or pledge securities except, under
certain circumstances, a Fund may borrow money up to one-third of the value of
its total assets and pledge up to 15% of the value of those assets to secure
such borrowings. The Tax-Free Money Market Fund may borrow up to one-third of
the value of its total assets, including the amount borrowed. The Tax-Free Money
Market Fund will not purchase any securities while borrowings in excess of 5% of
the value of its total assets are outstanding. These policies cannot be changed
without the approval of holders of a majority of a Fund's Shares.
SELLING SHORT
With respect to The U.S. Government Securities Fund and The Stock Fund, the
Funds will not make short sales of securities, except in certain limited
circumstances. This policy cannot be changed without the approval of holders of
a majority of a Fund's Shares.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities. Restricted securities are any
securities in which a Fund may invest pursuant to its investment objective and
policies, but which are subject to restriction on resale under federal
securities law. The Funds will not invest more than 10% of the value of their
assets in securities subject to restrictions on resale under the Securities Act
of 1933 (except for certain restricted securities which meet the criteria for
liquidity as established by the Board of Trustees). In the case of The U.S.
Government Securities Fund, The Stock Fund and The Money Market Fund this
exception specifically extends to commercial paper issued under Section 4(2) of
the Securities Act of 1933. This policy cannot be changed without the approval
of holders of a majority of a Fund's Shares.
The U.S. Government Securities Fund, The Stock Fund, The Virginia Municipal Bond
Fund, and The Maryland Municipal Bond Fund will not invest more than 15 % of
their net assets in illiquid securities. The Treasury Money Market Fund, The
Money Market Fund, and The Tax-Free Money Market Fund will not invest more than
10% of their net assets in illiquid securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Each Fund may purchase securities on a when-issued or delayed delivery basis.
These transactions are arrangements in which a Fund purchases securities with
payment and delivery scheduled for a future time. The seller's failure to
complete these transactions may cause a Fund to miss a price or yield considered
to be advantageous. Settlement dates may be a month or more after entering into
these transactions, and the market values of the securities purchased may vary
from the purchase prices. Accordingly, a Fund may pay more or less than the
market value of the securities on the settlement date.
The Trust may dispose of a commitment prior to settlement if the adviser deems
it appropriate to do so. In addition, the Trust may enter in transactions to
sell its purchase commitments to third parties at current market values and
simultaneously acquire other commitments to purchase similar securities at later
dates. The Trust may realize short-term profits or losses upon the sale of such
commitments.
INVESTING IN SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds, except for The Tax-Free Money Market Fund, may invest in the
securities of other investment companies, but will not own more than 3% of the
total outstanding voting stock of any investment company, invest more than 5% of
total assets in any one investment company, or invest more than 10% of total
assets in investment companies in general. The Funds will invest in other
investment companies primarily for the purpose of investing short-term cash
which has not yet been invested in other portfolio instruments. It should be
noted that investment companies incur certain
expenses, and therefore, any investment by a Fund in shares of another
investment company would be subject to certain duplicate expenses, particularly
transfer agent and custodian fees. The adviser will waive its investment
advisory fee on assets invested in securities of open-end investment companies.
DIVERSIFICATION
With respect to 75% of the value of total assets, The U.S. Government Securities
Fund, The Stock Fund and The Money Market Fund will not invest more than 5% in
securities of any one issuer other than cash or securities issued or guaranteed
by the government of the United States or its agencies or instrumentalities and
repurchase agreements collateralized by such securities. This policy cannot be
changed without the approval of holders of a majority of a Fund's Shares.
NON-DIVERSIFICATION
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, and The Tax-Free Money Market Fund are non-diversified
investment companies, as defined by the Investment Company Act of 1940, as
amended. As such, there is no limit on the percentage of assets which can be
invested in any single issuer. An investment in the Funds, therefore, will
entail greater risk than would exist in a diversified investment company because
the higher percentage of investments among fewer issuers may result in greater
fluctuation in the total market value of each Fund's portfolio. Any economic,
political or regulatory developments affecting the value of the securities in
each Fund's portfolio will have a greater impact on the total value of the
portfolio than would be the case if the portfolio were diversified among more
issuers.
To meet federal tax requirements for qualifications as a "regulated investment
company" the Funds will limit their investments so at the close of each quarter
of each fiscal year: (a) with regard to at least 50% of their respective total
assets no more than 5% of their respective total assets are invested in the
securities of a single issuer, and (b) no more than 25% of their respective
total assets are invested in the securities of a single issuer.
INVESTING IN NEW ISSUERS
The U.S. Government Securities Fund, The Stock Fund, The Money Market Fund, and
The Tax-Free Money Market Fund will not invest more than 5% of their total
assets in securities of issuers that have records of less than three years of
continuous operations including the operation of any predecessor. The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund will not invest more
than 5% of their total assets in industrial development bonds, the principal and
interest of which are paid by companies (or guarantors, where applicable) which
have an operating history of less than three years.
REPURCHASE AGREEMENTS
The securities in which the Funds invest may be purchased pursuant to repurchase
agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell U.S. government
securities or other securities to a Fund and agree at the time of sale to
repurchase them at a mutually agreed upon time and price. To the extent that the
original seller does not repurchase the securities from a Fund, that Fund could
receive more or less than the repurchase price on any sale of such securities.
LENDING OF PORTFOLIO SECURITIES
In order to generate additional income, The U.S. Government Securities Fund, The
Stock Fund, The Treasury Money Market Fund and The Money Market Fund, may lend
portfolio securities on a short-term or a long-term basis up to one-third of the
value of their respective total assets to broker/dealers, banks, or other
institutional borrowers of securities. A Fund will only enter into loan
arrangements with broker/dealers, banks, or other institutions which the
investment adviser has determined are creditworthy under guidelines established
by the Board of Trustees and will receive collateral in the form of cash or U.S.
government securities equal to at least 100% of the value of the securities
loaned.
There is the risk that when lending portfolio securities, the securities may not
be available to the Fund on a timely basis and the Fund may, therefore, lose the
opportunity to sell the securities at a desirable price. In addition, in the
event that a borrower of securities would file for bankruptcy or become
insolvent, disposition of the securities may be delayed pending court action.
ACQUIRING SECURITIES
The U.S. Government Securities Fund and The Stock Fund will not acquire more
than 10% of the outstanding voting securities of any one issuer. This policy
cannot be changed without the approval of holders of a majority of the Fund's
shares.
INVESTMENT RISKS
The Stock Fund and The Money Market Fund's ECDs, ETDs, Yankee CDs, and Europaper
are subject to different risks than domestic obligations of domestic banks or
corporations. Examples of these risks include international economic and
political developments, foreign governmental restrictions that may adversely
affect the payment of principal or interest, foreign withholding or other taxes
on interest income, difficulties in obtaining or enforcing a judgment against
the issuing entity, and the possible impact of interruptions in the flow of
international currency transactions. Different risks may also exist for ECDs,
ETDs, and Yankee CDs because the banks issuing these instruments, or their
domestic or foreign branches, are not necessarily subject to the same regulatory
requirements that apply to domestic banks, such as reserve requirements, loan
limitations, examinations, accounting, auditing, recordkeeping, and the public
availability of information. These factors will be carefully considered by the
Fund's adviser in selecting investments for a Fund.
VARIABLE RATE DEMAND NOTES
The Money Market Fund and The Tax-Free Money Market Fund may invest in variable
rate demand notes. Variable rate demand notes are long-term corporate debt
instruments that have variable or floating interest rates and provide the Funds
with the right to tender the security for repurchase at its stated principal
amount plus accrued interest. Such securities typically bear interest at a rate
that is intended to cause the securities to trade at par. The interest rate may
float or be adjusted at regular intervals (ranging from daily to annually), and
is normally based on a published interest rate or interest rate index. Most
variable rate demand notes allow a Fund to demand the repurchase of the security
on not more than seven days' prior notice. Other notes only permit the Funds to
tender the security at the time of each interest rate adjustment or at other
fixed intervals. See "Demand Features." The Funds treat variable rate demand
notes as maturing on the later of the date of the next interest adjustment or
the date on which a Fund may next tender the security for repurchase.
CREDIT ENHANCEMENT
Certain of The Money Market Fund's and The Tax-Free Money Market Fund's
acceptable investments may have been credit enhanced by a guaranty, letter of
credit or insurance. A Fund typically evaluates the credit quality and ratings
of credit enhanced securities based upon the financial condition and ratings of
the party providing the credit enhancement (the "credit enhancer"), rather than
the issuer. Generally, a Fund will not treat credit enhanced securities as
having been issued by the credit enhancer for diversification purposes. However,
under certain circumstances applicable regulations may require a Fund to treat
the securities as having been issued by both the issuer and credit enhancer. The
bankruptcy, receivership or default of the credit enhancer will adversely affect
the quality and marketability of the underlying security.
DEMAND FEATURES
The Money Market Fund and The Tax-Free Money Market Fund may acquire securities
that are subject to puts and standby commitments ("demand features") to purchase
the securities at their principal amount (usually with accrued interest) within
a fixed period (usually seven days) following a demand by a Fund. The demand
feature may be issued by the issuer of the underlying securities, a dealer in
the securities or by another third party, and may not be transferred separately
from the underlying security. A Fund uses these arrangements to provide itself
with liquidity and not to protect against changes in the market value of the
underlying securities. The bankruptcy, receivership or default by the issuer of
the demand feature, or a default on the underlying security or other event that
terminates the demand feature before its exercise, will adversely affect the
liquidity of the underlying security. Demand features that are exercisable even
after a payment default on the underlying security may be treated as a form of
credit enhancement.
PARTICIPATION INTERESTS
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase participation interests from financial
institutions such as commercial banks, savings and loan associations and
insurance companies. These participation interests give the Funds an undivided
interest in municipal securities. The financial institutions from which the
Funds purchase participation interests frequently provide or secure irrevocable
letters of credit or guarantees to assure that the participation interests are
of good quality. The Board of Trustees will determine that participation
interests meet the prescribed quality standards for the Funds.
VARIABLE RATE MUNICIPAL SECURITIES
Some of the municipal securities which The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund purchase may have variable interest rates. Variable
interest rates are ordinarily stated as a percentage of the prime rate of a bank
or some similar standard, such as the 91-day U.S. Treasury bill rate. Many
variable rate municipal securities are subject to repayment of principal on
demand by the Funds (usually in not more than seven days). While some variable
rate municipal securities without this demand feature may not be considered
liquid by the Fund's adviser, the Fund's investment limitations provide that it
will invest no more than 15% of its total assets in illiquid securities. All
variable rate municipal securities will meet the quality standards for the
Funds. The investment adviser has been instructed by the Board of Trustees to
monitor the pricing, quality and liquidity of the variable rate municipal
securities, including participation interests, held by the Funds on the basis of
published financial information and reports of the rating agencies and other
analytical services.
MUNICIPAL LEASES
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund may purchase municipal securities in the form of
municipal leases which are obligations issued by state and local governments or
authorities to finance the acquisition of equipment and facilities. Municipal
leases may take the form of a lease, an installment purchase contract, a
conditional sales contract, or a participation certificate in any of the above.
Lease obligations may be subject to periodic appropriation. If the entity does
not appropriate funds for future lease payments, the entity cannot be compelled
to make such payments. In the event of failure of appropriation, unless the
participation interests are credit enhanced, it is unlikely that the
participants would be able to obtain an acceptable substitute.
TEMPORARY INVESTMENTS
From time to time, during periods of other than normal market conditions, The
Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The Tax-Free
Money Market Fund may invest in short-term tax-exempt or taxable temporary
investments. These temporary investments include: notes issued by or on behalf
of municipal or corporate issuers; tax-free commercial paper; other temporary
municipal securities; obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities; other debt securities; commercial paper;
certificates of deposit of banks; and repurchase agreements (arrangements in
which an organization selling a Fund a security agrees at the time of sale to
repurchase it at a mutually agreed upon time and price).
Except for The Tax-Free Money Market Fund, there are no rating requirements
applicable to temporary investments. However, the investment adviser will limit
temporary investments to those it considers to be of good quality. Temporary
investments held by The Tax-Free Money Market Fund must be rated in one of the
two highest short-term rating categories by one or more NRSRO.
Although each Fund is permitted to make taxable, temporary investments, there is
no current intention of generating income subject to federal regular income tax
or Virginia or Maryland personal income tax.
MUNICIPAL SECURITIES
The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund, and The
Tax-Free Money Market Fund invest principally in municipal securities. Municipal
securities are generally issued to finance public works, such as airports,
bridges, highways, housing, hospitals, mass transportation projects, schools,
streets, and water and sewer works. They are also issued to repay outstanding
obligations, to raise funds for general operating expenses and to make loans to
other public institutions and facilities.
Municipal securities include industrial development bonds issued by or on behalf
of public authorities to provide financing aid to acquire sites or construct and
equip facilities for privately or publicly owned corporations. The availability
of this financing encourages these corporations to locate within the sponsoring
communities and thereby increases local employment.
The two principal classifications of municipal securities are "general
obligation" and "revenue" bonds. General obligation bonds are secured by the
issuer's pledge of its full faith and credit and taxing power for the payment of
principal and interest. Interest on and principal of revenue bonds, however, are
payable only from the revenue generated by the facility financed by the bond or
other specified sources of revenue. Revenue bonds do not represent a pledge of
credit or create any debt off or charge against the general revenues of a
municipality or public authority. Industrial development bonds are typically
classified as revenue bonds.
INVESTMENT RISKS. Yields on municipal securities depend on a variety of factors,
including: the general conditions of the municipal bond market; the size of the
particular offering; the maturity of the obligations; and the rating of the
issue. Further, with respect to The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund, any adverse economic conditions or developments
affecting the Commonwealth of Virginia, the state of Maryland, or their
municipalities could impact a Fund's portfolio. The ability of The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund, and The Tax-Free
Money-Market Fund to achieve their investment objectives also depends on the
continuing ability of the issuers of municipal securities and participation
interests, or the guarantors of either, to meet their obligations for the
payment of interest and principal when due. With respect to The Virginia
Municipal Bond Fund and The Maryland Municipal Bond Fund, investing in Virginia
and Maryland municipal securities which meet a Fund's quality standards may not
be possible if the Commonwealth of Virginia, the state of Maryland, or their
municipalities do not maintain their current credit ratings. In addition,
certain Virginia or Maryland constitutional amendments, legislative measures,
executive orders, administrative regulations and voter initiatives could result
in adverse consequences affecting Virginia and Maryland municipal securities. In
addition, from time to time, the supply of municipal securities acceptable for
purchase by The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund,
and The Tax-Free Money Market Fund, could become limited.
The Tax-Free Money Market Fund may invest in municipal securities which are
repayable out of revenue streams generated from economically related projects or
facilities and/or whose issuers are located in the same state. Sizable
investments in these municipal securities could involve an increased risk to the
Fund should any of these related projects or facilities experience financial
difficulties.
Obligations of issuers of municipal securities are subject to the provisions of
bankruptcy, insolvency, and other laws affecting the rights and remedies of
creditors. In addition, the obligations of such issuers may become subject to
laws enacted in the future by Congress, state legislators, or referenda
extending the time for payment of principal and/or interest, or imposing other
constraints upon enforcement of such obligations or upon the ability of states
or municipalities to levy taxes. There is also the possibility that, as a result
of litigation or other conditions, the power or ability of any issuer to pay,
when due, the principal of and interest on its municipal securities may be
materially affected.
FUTURES CONTRACTS AND OPTIONS TO BUY OR SELL SUCH CONTRACTS
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund reserve
the right to enter into interest rate futures contracts as a hedge without
shareholder action. Before the Funds begin using this investment technique,
shareholders will be notified.
THE VIRTUS FUNDS INFORMATION
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MANAGEMENT OF THE TRUST
BOARD OF TRUSTEES. The Board of Trustees (the "Board" or the "Trustees") is
responsible for managing the business affairs of the Trust and for exercising
all of the powers of the Trust except those reserved for the shareholders. The
Executive Committee of the Board of Trustees handles the Board's
responsibilities between meetings of the Board.
INVESTMENT ADVISER. Investment decisions for the Trust are made by Virtus
Capital Management, Inc., the Trust's investment adviser (the "Adviser"),
subject to direction by the Trustees. The Adviser continually conducts
investment research and supervision for each Fund and is responsible for the
purchase or sale of portfolio instruments, for which it receives an annual fee
from the assets of each Fund.
ADVISORY FEES. The Adviser receives an annual investment advisory fee at
annual rates equal to percentages of the relevant Fund's average net assets
as follows: The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund--.50%; and The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal
Bond Fund--.75%. The fee paid by The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal
Bond Fund, while higher than the advisory fee paid by other mutual funds in
general, is comparable to fees paid by other mutual funds with similar
objectives and policies. The investment advisory contract provides for the
voluntary waiver of expenses by the Adviser from time to time. The Adviser
can terminate this voluntary waiver of expenses at any time with respect to
a Fund at its sole discretion. The Adviser has also undertaken to reimburse
the Funds for operating expenses in excess of limitations established by
certain states.
ADVISER'S BACKGROUND. Virtus Capital Management, Inc., a Maryland
corporation formed in 1995, is a wholly-owned subsidiary of Signet Banking
Corporation. Signet Banking Corporation is a multi-state, multi-bank
holding company which has provided investment management services since
1956. Virtus Capital Management, Inc. on March 1, 1995 succeeded to the
business of the Trust's former investment adviser, Signet Asset Management
(a division of Signet Trust Company), by virtue of a corporate
reorganization within the Signet holding company system. Signet Asset
Management had managed The Virtus Funds since their inception in 1990.
Since those persons at Signet Asset Management who were responsible for
managing the Funds' assets have similar responsibilities to the Funds as
employees of Virtus Capital Management, Inc., the reorganization will have
no effect on the operations of the Fund. As successor to the business of
Signet Asset Management, Virtus Capital Management, Inc., which is a
registered investment adviser, will manage, in addition to the Funds, three
equity common trust funds with $39 million in assets and three fixed income
common trust funds with $221 million in assets. As part of their regular
banking operations, Signet Bank may make loans to public companies. Thus,
it may be possible, from time to time, for the Funds to hold or acquire the
securities of issuers which are also lending clients of Signet Bank. The
lending relationship will not be a factor in the selection of securities.
E. Christian Goetz has managed The U.S. Government Securities Fund since
August, 1991, and The Maryland Municipal Bond Fund and The Virginia
Municipal Bond Fund since November 1994. Mr. Goetz is a Chartered Financial
Analyst, and is currently Vice President of Signet Trust Company and
Director of Fixed Income Investments for Virtus Capital Management, Inc.,
where he has been a fixed income portfolio manager since 1990. Prior to
joining Virtus Capital Management, Inc., Mr. Goetz had been a foreign and
domestic bond portfolio manager with Central Fidelity Bank, Richmond,
Virginia, since 1988.
Garry M. Allen has managed The Stock Fund since July 1994. Mr. Allen is a
Chartered Financial Analyst, and has since March 1994 been Senior Vice
President of Signet Trust Company and Chief Investment Officer for Virtus
Capital Management, Inc. Prior to joining Virtus Capital Management, Inc.,
Mr. Allen had been Managing Director of U.S. Equities (November 1990 to
March 1994) and Director, International Asset Management (June 1985 to
November 1990) of The Virginia Retirement System.
DISTRIBUTION OF SHARES OF THE FUNDS
Federated Securities Corp. is the principal distributor for Shares of the Funds.
It is a Pennsylvania corporation organized on November 14, 1969, and is the
principal distributor for a number of investment companies. Federated Securities
Corp. is a subsidiary of Federated Investors.
DISTRIBUTION PLAN. According to the provisions of a distribution plan adopted
pursuant to Investment Company Act Rule 12b-1, the distributor may select
brokers and dealers to provide distribution and administrative services as to
Shares of the Funds. The distributor may also select administrators (including
financial institutions, fiduciaries, custodians for public funds and investment
advisers) to provide administrative services. Administrative services may
include, but are not limited to, the following functions: providing office
space, equipment, telephone facilities, and various personnel including
clerical, supervisory, and computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing purchase and redemption
transactions and automatic investments of client account cash balances;
answering routine client inquiries regarding Shares; assisting clients in
changing dividend options, account designations, and addresses; and providing
such other services as each Fund reasonably requests for its Shares.
Brokers, dealers, and administrators will receive fees based upon Shares owned
by their clients or customers. The schedules of such fees and the basis upon
which such fees will be paid will be determined from time to time by the Board
of Trustees, provided that for any period the total amount of fees representing
an expense to the Trust shall not exceed an annual rate of .25 of 1% of the
average net asset value of Shares of The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, and .35 of 1% of the average net asset value of Shares of The Treasury
Money Market Fund, The Money Market Fund, and The Tax-Free Money Market Fund
held in the accounts during the period for which the brokers, dealers, and
administrators provide services. Any fees paid by the distributor with respect
to Shares of a Fund pursuant to the distribution plan will be reimbursed by the
Trust from the assets of the Shares of that Fund.
The distributor will, periodically, uniformly offer to pay cash or promotional
incentives in the form of trips to sales seminars at luxury resorts, tickets or
other items to all dealers selling shares of the Funds. Such payments will be
predicated upon the amount of shares of the Funds that are sold by the dealer.
Such payments, if made, will be in addition to amounts paid under the
distribution plan and will not be an expense of a Fund.
ADMINISTRATIVE ARRANGEMENTS. The distributor may pay financial institutions a
fee based upon the average net asset value of Shares of their customers invested
in the Trust for providing administrative services. This fee, if paid, will be
reimbursed by the Adviser and not the Trust.
GLASS-STEAGALL ACT. The Glass-Steagall Act prohibits a depository institution
(such as a commercial bank or a savings and loan association) from being an
underwriter or distributor of most securities. In the event the Glass-Steagall
Act is deemed to prohibit depository institutions from acting in the
administrative capacities described above or should Congress relax current
restrictions on depository institutions, the Board of Trustees will consider
appropriate changes in the administrative services.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
ADMINISTRATION OF THE FUNDS
ADMINISTRATIVE SERVICES. Federated Administrative Services, a subsidiary of
Federated Investors, provides the Funds with certain administrative personnel
and services necessary to operate each Fund and the separate classes. Such
services include shareholder servicing and certain legal and accounting
services. Federated Administrative Services provides these at an annual rate as
specified below:
<TABLE>
<CAPTION>
MAXIMUM AVERAGE AGGREGATE DAILY NET
ADMINISTRATIVE FEE ASSETS OF THE TRUST
----------------------------------- -----------------------------------
<S> <C>
.150 of 1% on the first $250 million
.125 of 1% on the next $250 million
.100 of 1% on the next $250 million
.075 of 1% on assets in excess of $750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
per Fund; however, this requirement was waived by the administrator for the year
ended September 30, 1994. Federated Administrative Services may voluntarily
waive a portion of its fee.
CUSTODIAN. Signet Trust Company, Richmond, Virginia, is custodian for the
securities and cash of the Funds. Under the Custodian Agreement, Signet Trust
Company holds the Funds' portfolio securities in safekeeping and keeps all
necessary records and documents relating to its duties.
TRANSFER AGENT AND DIVIDEND DISBURSING AGENT. Federated Services Company,
Pittsburgh, Pennsylvania, is transfer agent for the Shares of the Funds and
dividend disbursing agent for the Funds.
INDEPENDENT AUDITORS. The independent auditors for the Funds are Deloitte &
Touche LLP, Pittsburgh, Pennsylvania.
EXPENSES OF THE FUNDS AND INVESTMENT SHARES
Each Fund pays all of its own expenses and its allocable share of the Trust's
expenses.
The Trust's expenses for which holders of Shares pay their allocable portion
include, but are not limited to: the cost of organizing the Trust and continuing
its existence; registering the Trust; Trustees fees; auditors' fees; the cost of
meetings of Trustees; legal fees of the Trust; association membership dues and
such nonrecurring and extraordinary items as may arise.
Each Fund's expenses for which holders of Shares may pay their allocable portion
include, but are not limited to: registering each Fund and Shares of the Fund;
investment advisory services; taxes and commissions; custodian fees; insurance
premiums; auditors' fees; and such nonrecurring and extraordinary items as may
arise.
In addition, the Board of Trustees reserves the right to allocate certain other
expenses to holders of Shares as it deems appropriate ("Class Expenses"). In any
case, Class Expenses would be limited to: distribution fees; transfer agent fees
as identified by the transfer agent as attributable to holders of Shares;
printing and postage expenses related to preparing and distributing materials
such as shareholder reports, prospectuses and proxies to current shareholders;
registration fees paid to the Securities and Exchange Commission and
registration fees paid to state securities commissions; expenses related to
administrative personnel and services as required to support holders of Shares;
legal fees relating solely to Shares; and Trustees' fees incurred as a result of
issues relating solely to Shares.
BROKERAGE TRANSACTIONS. When selecting brokers and dealers to handle the
purchase and sale of portfolio instruments, the Adviser looks for prompt
execution of the order at a favorable price. In working with dealers, the
Adviser will generally utilize those who are recognized dealers in specific
portfolio instruments, except when a better price and execution of the order can
be obtained elsewhere. In selecting among firms believed to meet these criteria,
the Adviser may give consideration to those firms which have sold or are selling
shares of the Trust. The Adviser makes decisions on portfolio transactions and
selects brokers and dealers subject to review by the Board of Trustees.
NET ASSET VALUE
- --------------------------------------------------------------------------------
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, each Fund attempts to stabilize the net asset value
of its Shares at $1.00 by valuing its portfolio securities using the amortized
cost method. The net asset value for Shares is determined by adding the interest
of the Shares in the value of all securities and other assets of the Fund,
subtracting the interest of the Shares in the liabilities of the Fund and those
attributable to Shares and dividing the remainder by the total number of Shares
outstanding. Of course, these Funds cannot guarantee that their net asset value
will always remain at $1.00 per Share.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, net asset
value per Share fluctuates and is determined by adding the interest of the
Shares in the market value of all securities and other assets of the Fund,
subtracting the interest of the Shares in the liabilities of the Fund and those
attributable to Shares, and dividing the remainder by the total number of Shares
outstanding. The net asset value for Trust Shares may exceed that of Shares due
to the variance in daily net income realized by each class. Such variance will
reflect only accrued net income to which the shareholders of a particular class
are entitled.
INVESTING IN SHARES
- --------------------------------------------------------------------------------
SHARE PURCHASES
Shares of the Funds are sold on days on which the New York Stock Exchange is
open for business except on Lee-Jackson-King Day, Columbus Day and Veterans'
Day. Shares of the Funds may be purchased through Signet Financial Services,
Inc. In connection with the sale of Shares of the Funds, the distributor may
from time to time offer certain items of nominal value to any shareholder or
investor. The Funds reserve the right to reject any purchase request.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, an investor may write or call Signet Financial
Services, Inc. to place an order to purchase Shares of the Funds. (Call
toll-free 1-800-723-9512). Purchase orders must be received by Signet Financial
Services, Inc. before 4:00 p.m. (Eastern time). Payment for Shares of the Funds
may be made by check or by wire. Orders are considered received after payment by
check is converted into federal funds and received by Signet Financial Services,
Inc. Payment must be received by Signet Financial Services, Inc. on the next
business day after placing the order. For orders received by 11:00 a.m. (Eastern
time), shareholders will begin earning dividends on that day provided payment by
wire is received by Signet Financial Services, Inc. by 2:00 p.m. (Eastern time)
on that day.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, an investor
may write or call Signet Financial Services, Inc. to place an order to purchase
Shares of the Fund. (Call toll-free 1-800-723-9512). Purchase orders must be
received by Signet Financial Services, Inc. before 4:00 p.m. (Eastern time) in
order for Shares to be purchased at that day's public offering price. Payment
for Shares of the Funds may be made by check or by wire. Payment must be
received by Signet Financial Services, Inc. within five days of placing the
order.
BY CHECK. Purchases of Shares by check must be made payable to Signet Financial
Services, Inc. and sent to Signet Financial Services, Inc., P.O. Box 26301,
Richmond, VA 23260.
BY WIRE. With respect to The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund, payment by wire must be received by Signet
Financial Services, Inc. before 2:00 p.m. (Eastern time) by the next business
day after placing the order. With respect to The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, payment by wire must be received by Signet Financial
Services, Inc. by the fifth business day after placing the order. Shares of the
Funds cannot be purchased by Federal Reserve Wire on Columbus Day, Veterans' Day
or Lee-Jackson-King Day.
SYSTEMATIC INVESTMENT PROGRAM
Once an account has been opened, holders of Shares may add to their investment
on a regular basis in a minimum amount of $100. Under this program, funds may be
automatically withdrawn periodically from the shareholder's checking account and
invested in Shares at the net asset value next determined after an order is
received by Signet Financial Services, Inc., plus the applicable sales charge. A
Shareholder may apply for participation in this program through Signet Financial
Services, Inc.
MINIMUM INVESTMENT REQUIRED
The minimum initial investment in Shares is $1,000. Subsequent investments must
be in amounts of at least $100. No minimum investment is required for officers,
directors and employees (and their spouses and immediate family members) of
Signet Banking Corporation or its subsidiaries.
WHAT SHARES COST
Shares of the Funds are sold at their net asset value next determined after an
order is received. There is no sales charge imposed by the Funds at the time of
purchase.
On Monday through Friday, The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund calculate
net asset value at 4:00 p.m. (Eastern time), while The Treasury Money Market
Fund, The Money Market Fund, and The Tax-Free Money Market Fund calculate net
asset value at 1:00 p.m. (Eastern time), and 4:00 p.m. (Eastern time), except
on: (i) days on which there are not sufficient changes in the value of a Fund's
portfolio securities that its net asset value might be materially affected; (ii)
days during which no shares of a Fund are tendered for redemption and no orders
to purchase shares are received; or (iii) the following holidays: New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
CERTIFICATES AND CONFIRMATIONS
As transfer agent for the Funds, Federated Services Company maintains a share
account for each shareholder of record. Share certificates are not issued unless
requested by contacting Signet Financial Services, Inc. in writing.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, monthly confirmations are sent to report
transactions such as purchases and redemptions as well as dividends paid during
the month. With respect to The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, detailed
confirmations of each purchase or redemption are sent to each shareholder. In
addition, monthly confirmations are sent to report dividends paid during that
month.
DIVIDENDS
With respect to The U.S. Government Securities Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury Money Market Fund, The
Money Market Fund, and The Tax-Free Money Market Fund, dividends are declared
daily and paid monthly.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, Shares purchased by wire before 2:00 p.m. (Eastern
time) begin earning dividends that day. Shares purchased by check begin earning
dividends on the day after the check is converted by Signet Trust Company into
federal funds.
With respect to The Stock Fund, dividends are declared and paid quarterly.
Unless cash payments are requested by shareholders in writing to a Fund,
dividends are automatically reinvested in additional Shares of the Fund on
payment dates at the ex-dividend date net asset value without a sales charge.
CAPITAL GAINS
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, capital gains, if any, could result in an increase
in dividends. Capital losses could result in a decrease in dividends. If, for
some extraordinary reason, a Fund realizes net long-term capital gains, it will
distribute them at least once every 12 months.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, capital gains
realized by a Fund, if any, will be distributed at least once every 12 months.
EXCHANGE PRIVILEGE
- --------------------------------------------------------------------------------
Holders of Shares have easy access to Shares of the other funds comprising the
Trust through an exchange program, and exchanges may be made at net asset value
without paying a redemption fee or sales charge upon such exchange.
Shareholders who exercise this exchange privilege must exchange shares having a
net asset value of at least $1,000. Prior to any exchange, the shareholder must
receive a copy of the current prospectus of the participating fund into which an
exchange is to be made.
Upon receipt by Signet Financial Services, Inc. of proper instructions and all
necessary supporting documents, Shares submitted for exchange will be redeemed
at the next-determined net asset value and invested in Investment Shares of the
other participating fund. If the exchanging shareholder does not have an account
in the participating fund whose Shares are being acquired, a new account will be
established with the same registration and reinvestment options for dividends
and capital gains as the account from which Shares are exchanged, unless
otherwise specified by the shareholder. In the case where the new account
registration is not identical to that of the existing account, a signature
guarantee is required. (See "Redeeming Shares By Mail.") Exercise of this
privilege is treated as a sale for federal income tax purposes and, depending on
the circumstances, a short- or long-term capital gain or loss may be realized.
The Fund reserves the right to modify or terminate the exchange privilege at any
time. Shareholders will be notified prior to any modification or termination of
this privilege. Shareholders may obtain further information on the exchange
privilege by calling Signet Financial Services, Inc.
BY TELEPHONE. Shareholders may provide instructions for exchanges between
participating funds by calling Signet Financial Services, Inc. toll-free at
1-800-723-9512. It is recommended that investors request this privilege at the
time of their initial application. Information on this service can be obtained
through Signet Financial Services, Inc. Shares may be exchanged by telephone
only between fund accounts having identical shareholder registrations. Exchange
instructions given by telephone may be electronically recorded. If reasonable
procedures are not followed by a Fund, it may be liable for losses due to
unauthorized or fraudulent telephone instructions.
Any Shares held in certificate form cannot be exchanged by telephone but must be
forwarded to Signet Financial Services, Inc. and deposited to the shareholder's
mutual fund account before being exchanged.
Telephone exchange instructions must be received by Signet Financial Services,
Inc. before 3:00 p.m. (Eastern time) for Shares to be exchanged the same day.
The telephone exchange privilege may be modified or terminated at any time.
Shareholders will be notified of such modification or termination. Shareholders
of a Fund may have difficulty in making exchanges by telephone through banks,
brokers, and other financial institutions during times of drastic economic or
market changes. If a shareholder cannot contact his bank, broker, or financial
institution by telephone, it is recommended that an exchange request be made in
writing and sent by overnight mail to Signet Financial Services, Inc.
REDEEMING SHARES
- --------------------------------------------------------------------------------
Each Fund redeems Shares at their net asset value, less any applicable
contingent deferred sales charge, next determined after Signet Financial
Services, Inc. receives the redemption request. Redemptions will be made on days
on which a Fund computes its net asset value. Telephone or written requests for
redemption must be received in proper form by Signet Financial Services, Inc.
BY TELEPHONE. A shareholder may redeem Shares of a Fund by calling Signet
Financial Services, Inc. to request the redemption. (Call toll free
1-800-444-7123). Shares will be redeemed at the net asset value next determined
after a Fund receives the redemption request from Signet Financial Services,
Inc.
With respect to The Treasury Money Market Fund, The Money Market Fund, and The
Tax-Free Money Market Fund, redemption requests received before 11:00 a.m.
(Eastern time) will be wired the same day, but will not be entitled to that
day's dividend. A redemption request must be received by Signet Financial
Services, Inc. before 4:00 p.m. (Eastern time). Redemption requests through
registered broker/dealers must be received by Signet Financial Services, Inc.
before 3:00 p.m. (Eastern time). Signet Financial Services, Inc. is responsible
for promptly submitting redemption requests and providing proper written
redemption instructions to a Fund. Other registered broker/dealers may charge
customary fees and commissions for this service.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund, a redemption
request must be received by Signet Financial Services, Inc. before 4:00 p.m.
(Eastern time) in order for Shares to be redeemed at that day's net asset value.
Redemption requests through registered broker/dealers must be received by Signet
Financial Services, Inc. before 3:00 p.m. (Eastern time) in order for Shares to
be redeemed at that day's net asset value. Signet Financial Services, Inc. is
responsible for promptly submitting redemption requests and providing proper
written redemption instructions to a Fund. Other registered broker/dealers may
charge customary fees and commissions for this service.
If, at any time, a Fund should determine it necessary to terminate or modify
this method of redemption, shareholders would be promptly notified.
An authorization form permitting a Fund to accept telephone redemption requests
must first be completed. It is recommended that investors request this privilege
at the time of their initial application. If not completed at the time of
initial application, authorization forms and information on this service can be
obtained through Signet Financial Services, Inc. Telephone redemption
instructions may be recorded. If reasonable procedures are not followed by a
Fund, it may be liable for losses due to unauthorized or fraudulent telephone
instructions.
In the event of drastic economic or market changes, a shareholder may experience
difficulty in redeeming by telephone. If such a case should occur, another
method of redemption, such as "By Mail," should be considered.
BY MAIL. Shareholders may redeem Shares of a Fund by sending a written request
to Signet Financial Services, Inc. The written request should include the
shareholder's name, the Fund name, the class of shares, the account number, and
the Share or dollar amount requested. If share certificates have been issued,
they must be properly endorsed and should be sent by registered or certified
mail with the written request to Signet Financial Services, Inc. P.O. Box 26301,
Richmond, VA 23260.
Shareholders requesting a redemption of $50,000 or more, a redemption of any
amount to be sent to an address other than that on record with a Fund, or a
redemption payable other than to the shareholder of record must have signatures
on written redemption requests guaranteed by:
- a trust company or commercial bank whose deposits are insured by BIF,
which is administered by the Federal Deposit Insurance Corporation
("FDIC");
- a member of the New York, American, Boston, Midwest, or Pacific Stock
Exchanges;
- a savings bank or savings and loan association whose deposits are insured
by the SAIF, which is administered by the FDIC; or
- any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Funds do not accept signatures guaranteed by a notary public.
The Funds and their transfer agent have adopted standards for accepting
signature guarantees from the above institutions. The Funds may elect in the
future to limit eligible signature guarantors to institutions that are members
of a signature guarantee program. The Funds and their transfer agent reserve the
right to amend these standards at any time without notice.
Normally, a check for the proceeds is mailed to the shareholder within one
business day, but in no event more than seven days, after receipt of a proper
written redemption request.
CONTINGENT DEFERRED SALES CHARGE--THE U.S. GOVERNMENT SECURITIES FUND,
THE STOCK FUND, THE VIRGINIA MUNICIPAL BOND FUND AND
THE MARYLAND MUNICIPAL BOND FUND
Shareholders redeeming Shares from accounts in the Funds listed above within
five years of the purchase date of those Shares will be charged a contingent
deferred sales charge by the Fund's distributor. The charge will be based upon
the lesser of the original purchase price or the net asset value of the Shares
redeemed, as follows:
<TABLE>
<CAPTION>
CONTINGENT DEFERRED
AMOUNT OF PURCHASE SALES CHARGE
------------------------------------ --------------------
<S> <C>
Under $100,000 2.0%
$100,000-$249,999 1.5%
$250,000-$399,999 1.0%
$400,000-$499,999 0.5%
$500,000 or more None
</TABLE>
Separate purchases will not be aggregated for purposes of determining the
applicable contingent deferred sales charge. In instances in which Fund Shares
have been acquired in exchange for Investment Shares in other Virtus Funds, (i)
the purchase price is the price of the Shares when originally purchased and (ii)
the five year period will begin on the date of the original purchase. The
contingent deferred sales charge will not be imposed on Shares acquired (i)
through the reinvestment of dividends or distribution of capital gains, (ii)
prior to October 1, 1992, or (iii) in exchange for Shares acquired prior to
October 1, 1992. In computing the contingent deferred sales charge, if any,
redemptions are deemed to have occurred in the following order: 1) Shares
acquired through the reinvestment of dividends and long-term capital gains, 2)
Shares purchased prior to October 1, 1992 (including Shares acquired in exchange
for Shares purchased prior to October 1, 1992), 3) Shares purchased more than
five years before the date of redemption, and 4) Shares purchased after October
1, 1992 and redeemed within five years of the date of purchase, determined on a
first-in, first-out basis.
The contingent deferred sales charge will not be imposed on redemption of Shares
(i) following the death or disability (as defined in the Internal Revenue Code)
of a shareholder; (ii) to the extent that the redemption represents a minimum
required distribution from an IRA or other retirement plan to a shareholder who
has attained the age of 70 1/2; (iii) owned by the Trust Division of Signet
Trust Company or other affiliates of Signet Banking Corporation representing
funds which are held in a fiduciary, agency, custodial, or similar capacity;
(iv) owned by directors and employees of the Fund, Signet Banking Corporation or
Federated Securities Corp. or their affiliates, or any bank or investment dealer
who has a sales agreement with Federated Securities Corp. with regard to the
Fund, and their spouses and children under 21; owned by non-trust customers
("customers") of fee-based planners, investment advisers or banking institutions
(collectively, "Institutions") where such Institutions have an agreement with,
and such customers have a brokerage account with, Signet Financial Services,
Inc.; (vi) purchased through the Imprint Program sponsored by Signet Financial
Services, Inc.; or (vii) if the proceeds from the redemption are used to
purchase a Strive variable annuity within 10 days of the redemption.
The contingent deferred sales charge is not charged when Fund Shares are
exchanged for shares of any other portfolio of The Virtus Funds or when
redemptions are made by the Fund to liquidate accounts with low balances.
CONTINGENT DEFERRED SALES CHARGE--THE TREASURY MONEY MARKET FUND,
THE MONEY MARKET FUND AND THE TAX-FREE MONEY MARKET FUND
A contingent deferred sales charge will be imposed only in certain instances in
which the Shares of The Treasury Money Market Fund, The Money Market Fund, or
The Tax-Free Money Market Fund being redeemed were acquired in exchange for
Shares of those other Virtus Funds which charge a contingent deferred sales
charge ("CDSC Shares"). If Shares of The Treasury Money Market Fund, The Money
Market Fund, or The Tax-Free Money Market Fund were acquired in exchange for
CDSC Shares, redemption of the Shares of The Treasury Money Market Fund, The
Money Market Fund, or The Tax-
Free Money Market Fund within five years of the purchase of the CDSC Shares,
will have the same consequences as described under "Contingent Deferred Sales
Charge--The U.S. Government Securities Fund, The Stock Fund, The Virginia
Municipal Bond Fund, and The Maryland Municipal Bond Fund."
SYSTEMATIC WITHDRAWAL PROGRAM
Shareholders who desire to receive payments of a predetermined amount may take
advantage of the Systematic Withdrawal Program. Under this program, Shares are
redeemed at net asset value, less any applicable contingent deferred sales
charge, to provide for periodic withdrawal payments in an amount directed by the
shareholder. Depending upon the amount of the withdrawal payments, the amount of
dividends paid and capital gains distributions with respect to Shares, and the
fluctuation of the net asset value of Shares redeemed under this program,
redemptions may reduce, and eventually deplete, the shareholder's investment in
Shares of a Fund. For this reason, payments under this program should not be
considered as yield or income on the shareholder's investment in Shares of a
Fund. To be eligible to participate in this program, a shareholder must have an
account value of at least $10,000. A shareholder may apply for participation in
this program through Signet Financial Services, Inc.
ACCOUNTS WITH LOW BALANCES
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem Shares in any account, except retirement plans, and pay the proceeds to
the shareholder if the account balance falls below the required minimum value of
$1,000 due to shareholder redemptions. This requirement does not apply, however,
if the balance falls below $1,000 because of changes in a Fund's net asset
value. Before Shares are redeemed to close an account, the shareholder is
notified in writing and allowed 30 days to purchase additional Shares to meet
the minimum requirement.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
VOTING RIGHTS
Each Share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of all classes of
each portfolio in the Trust have equal voting rights, except that in matters
affecting only a particular Fund or class, only shareholders of that Fund or
class are entitled to vote. As a Massachusetts business trust, the Trust is not
required to hold annual shareholder meetings. Shareholder approval will be
sought only for certain changes in the operation of the Trust or a Fund and for
the election of Trustees under certain circumstances. As of January 11, 1995,
Stephens Inc., Little Rock, Arkansas, owned approximately 2,784,480 Investment
Shares of The U.S. Government Securities Fund (26%); approximately 2,035,032
Investment Shares of The Virginia Municipal Bond Fund (30%); approximately
22,352,342 Investment Shares of The Treasury Money Market Fund (67%);
approximately 9,248,672 Investment Shares of The Money Market Fund (32%); and
Bova & Co, Richmond, Virginia, owned approximately 17,601,826 shares of The
Tax-Free Money Market Fund (65%), and therefore, may, for certain purposes, be
deemed to control the respective Fund and be able to affect the outcome of
certain matters presented for a vote of shareholders.
Trustees may be removed by the Trustees or by shareholders at a special meeting.
A special meeting of the shareholders shall be called by the Trustees upon the
written request of shareholders owning at least 10% of the Trust's outstanding
shares.
MASSACHUSETTS PARTNERSHIP LAW
Under certain circumstances, shareholders may be held personally liable as
partners under Massachusetts law for acts or obligations of the Trust. To
protect shareholders, the Trust has filed legal documents with Massachusetts
that expressly disclaim the liability of shareholders for such acts or
obligations of the Trust. These documents require notice of this disclaimer to
be given in each agreement, obligation, or instrument the Trust or its Trustees
enter into or sign.
In the unlikely event a shareholder is held personally liable for obligations of
the Trust, the Trust is required to use its property to protect or compensate
the shareholder. On request, the Trust will defend any claim made and pay any
judgment against a shareholder for any act or obligation of the Trust.
Therefore, financial loss resulting from liability as a shareholder will occur
only if the Trust cannot meet its obligations to indemnify shareholders and pay
judgments against them from its assets.
EFFECT OF BANKING LAWS
- --------------------------------------------------------------------------------
Banking laws and regulations presently prohibit a bank holding company
registered under the federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, or distributing securities. However, such banking
laws and regulations do not prohibit such a holding company affiliate or banks
generally from acting as investment adviser, transfer agent or custodian to such
an investment company or from purchasing shares of such a company as agent for
and upon the order of such a customer. Signet Trust Company is subject to such
banking laws and regulations.
Signet Trust Company believes, based on the advice of its counsel, that Virtus
Capital Management, Inc. may perform the services for any Fund contemplated by
its advisory agreement with the Trust without violation of the Glass-Steagall
Act or other applicable banking laws or regulations. Changes in either federal
or state statutes and regulations relating to the permissible activities of
banks and their subsidiaries or affiliates, as well as further judicial or
administrative decisions or interpretations of such or future statutes and
regulations, could prevent Virtus Capital Management, Inc. from continuing to
perform all or a part of the above services for its customers and/or a Fund. If
it were prohibited from engaging in these customer-related activities, the
Trustees would consider alternative advisers and means of continuing available
investment services. In such event, changes in the operation of a Fund may
occur, including possible termination of any automatic or other Fund share
investment and redemption services then being provided by Virtus Capital
Management, Inc. It is not expected that existing shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
Virtus Capital Management, Inc. is found) as a result of any of these
occurrences.
State securities laws governing the ability of depository institutions to act as
underwriters or distributors of securities may differ from interpretations given
to the Glass-Steagall Act and, therefore, banks and financial institutions may
be required to register as dealers pursuant to state law.
TAX INFORMATION
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
The Funds anticipate that they will pay no federal income tax because each Fund
expects to meet requirements of the Internal Revenue Code applicable to
regulated investment companies and to receive the special tax treatment afforded
to such companies.
Each Fund will be treated as a single, separate entity for federal income tax
purposes so that income (including capital gains) and losses realized by a Fund
will not be combined for tax purposes with those realized by any of the other
Funds.
With respect to The U.S. Government Securities Fund, The Stock Fund, The
Treasury Money Market Fund and The Money Market Fund, unless otherwise exempt,
shareholders are required to pay federal income tax on any dividends and other
distributions received. This applies whether dividends and distributions are
received in cash or as additional shares. Shareholders of The U.S. Government
Securities Fund, The Stock Fund, The Treasury Money Market Fund and The Money
Market Fund are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
Shareholders of The Virginia Municipal Bond Fund, The Maryland Municipal Bond
Fund and The Tax-Free Money Market Fund are not required to pay the federal
regular income tax on any dividends received from the Fund that represent net
interest on tax-exempt municipal bonds. However, under the Tax reform Act of
1986, dividends representing net interest earned on certain "private activity"
bonds issued after August 17, 1986, may be included in calculating the federal
individual alternative minimum tax or the federal alternative minimum tax for
corporations. The Virginia Municipal Bond Fund, The Maryland Municipal Bond Fund
and The Tax-Free Money Market Fund may purchase all types of municipal bonds,
including private activity bonds.
The alternative minimum tax applies when it exceeds the regular tax for the
taxable year. Alternative minimum taxable income is equal to the regular taxable
income of the taxpayer increased by certain "tax preference" items not included
in regular taxable income and reduced by only a portion of the deductions
allowed in the calculation of the regular tax.
Dividends of the Funds representing net interest income earned on some temporary
investments and any realized net short-term gains are taxed as ordinary income.
These tax consequences apply whether dividends are received in cash or as
additional shares.
VIRGINIA TAXES. Under existing Virginia laws, distributions made by the Fund
will not be subject to Virginia income taxes to the extent that such
distributions qualify as exempt-interest dividends under the Internal Revenue
Code of 1986, as amended, and represent (i) interest from obligations issued by
or on behalf of the Commonwealth of Virginia or any political subdivision
thereof; or (ii) interest from obligations issued by a territory or possession
of the United States or any political subdivision thereof which federal law
exempts from state income taxes. Conversely, to the extent that distributions
made by the Fund are attributable to other types of obligations, such
distributions will be subject to Virginia income taxes.
MARYLAND TAXES. Under existing Maryland laws, distributions made by the Fund
will not be subject to Maryland state or local income taxes to the extent that
such distributions qualify as exempt-interest dividends under the Internal
Revenue Code, and represent (i) interest on tax-exempt obligations of Maryland
or its political subdivisions or authorities; (ii) interest on obligations of
the United States or an authority, commission, instrumentality, possession or
territory of the United States; or (iii) gain realized by the Fund from the sale
or exchange of bonds issued by Maryland, a political subdivision of Maryland, or
the United States Government (excluding obligations issued by the District of
Columbia, a territory or possession of the United States, or a department,
agency, instrumentality, or political subdivision of the District, territory or
possession). Conversely, to the extent that distributions made by the Fund are
derived from other types of obligations, such distributions will be subject to
Maryland income taxes.
OTHER STATE AND LOCAL TAXES. With respect to The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund, distributions representing net interest
received on tax-exempt municipal securities are not necessarily free from income
taxes of any other state or local taxing authority. State laws differ on this
issue and shareholders are urged to consult their own tax advisers.
PERFORMANCE INFORMATION
- --------------------------------------------------------------------------------
From time to time, The U.S. Government Securities Fund and The Stock Fund may
advertise total return and yield. The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund may advertise total return, yield and
tax-equivalent yield. The Treasury Money Market Fund and The Money Market Fund
may advertise yield and effective yield. The Tax-Free Money Market Fund may
advertise its yield, effective yield, and tax-equivalent yield.
Total return represents the change, over a specified period of time, in the
value of an investment in a Fund after reinvesting all income and capital gains
distributions. It is calculated by dividing that change by the initial
investment and is expressed as a percentage.
The yield of Shares of The U.S. Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund and The Maryland Municipal Bond Fund is calculated
by dividing the net investment income per Share (as defined by the Securities
and Exchange Commission) earned by Shares over a thirty-day period by the
maximum offering price per share of Shares of a Fund on the last day of the
period. This number is then annualized using semi-annual compounding. The yield
does not necessarily reflect income actually earned by Shares and, therefore,
may not correlate to the dividends or other distributions paid to shareholders.
The yield of Shares of The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund represent the annualized rate of income
earned on an investment in Shares over a seven-day period. It is the annualized
dividends earned during the period on the investment, shown as a percentage of
the investment. The effective yield is calculated similarly to the yield, but,
when
annualized, the income earned on an investment in Shares is assumed to be
reinvested daily. The effective yield will be slightly higher than the yield
because of the compounding effect of this assumed reinvestment.
The tax-equivalent yield of the Shares for The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money Market Fund is calculated
similarly to the yield, but is adjusted to reflect the taxable yield that the
Shares would have had to earn to equal its actual yield, assuming a specific tax
rate. The tax-equivalent yield does not necessarily reflect income actually
earned by Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
With respect to The U.S. Government Securities Fund and The Stock Fund, total
return and yield will be calculated separately for Investment Shares and Trust
Shares. Because Investment Shares may be subject to a redemption fee and are
subject to a 12b-1 fee, the total return and yield for Trust Shares for the same
period will exceed that of Investment Shares.
With respect to The Virginia Municipal Bond Fund and The Maryland Municipal Bond
Fund, total return, yield and tax-equivalent yield will be calculated separately
for Investment Shares and Trust Shares. Because Investment Shares may be subject
to a contingent deferred sales charge and are subject to a 12b-1 fee, the total
return and yield for Trust Shares for the same period will exceed that of
Investment Shares.
With respect to The Treasury Money Market Fund and The Money Market Fund, yield
and effective yield will be calculated separately for Investment Shares and
Trust Shares. Because Investment Shares are subject to 12b-1 fees the yield and
effective yield for Trust Shares, for the same period, will exceed that of
Investment Shares.
From time to time, the Funds may advertise their performance using certain
financial publications and/or compare their performance to certain indices.
OTHER CLASSES OF SHARES
- --------------------------------------------------------------------------------
Trust Shares, the other class of shares offered by those Funds offering separate
classes, are sold to trusts, fiduciaries and institutions at net asset value at
a minimum initial investment of $10,000. Trust Shares are not sold pursuant to a
Rule 12b-1 Plan.
The amount of dividends payable to Trust Shares will exceed those payable to
Investment Shares by the difference between class expenses and distribution
expenses borne by shares of each respective class.
The stated advisory fee is the same for both classes of each of the Funds.
[THIS PAGE INTENTIONALLY LEFT BLANK]
ADDRESSES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
The U.S. Government Securities Fund Federated Investors Tower
The Stock Fund Pittsburgh, Pennsylvania 15222-3779
The Treasury Money Market Fund
The Money Market Fund
The Virginia Municipal Bond Fund
The Maryland Municipal Bond Fund
The Tax-Free Money Market Fund
- ------------------------------------------------------------------------------------------------
Distributor
Federated Securities Corp. Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Investment Adviser
Virtus Capital Management, Inc. 707 East Main Street
Suite 1300
Richmond, Virginia 23219
- ------------------------------------------------------------------------------------------------
Custodian
Signet Trust Company 7 North Eighth Street
Richmond, Virginia 23219
- ------------------------------------------------------------------------------------------------
Transfer Agent, and Dividend Disbursing Agent
Federated Services Company Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
- ------------------------------------------------------------------------------------------------
Independent Auditors
Deloitte & Touche LLP 2500 One PPG Place
Pittsburgh, Pennsylvania 15222
- ------------------------------------------------------------------------------------------------
</TABLE>
VIRTUS CAPITAL MANAGEMENT, INC.
A Subsidiary of Signet Banking Corporation
Investment Adviser
FEDERATED SECURITIES CORP. IS THE DISTRIBUTOR OF THE FUNDS.
3042108A-R (2/95)
THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
TRUST SHARES
CONSISTS OF SEVEN PORTFOLIOS:
THE U. S. GOVERNMENT SECURITIES FUND;
THE STOCK FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND
Combined Statement of Additional Information
This Combined Statement of Additional
Information should be read with the Combined
Prospectus for the Trust Shares January 31,
1995. This Statement is not a Prospectus itself.
To receive a copy of the prospectus, write to or
call the Trust.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
STATEMENT DATED JANUARY 31, 1995
(Revised March 1, 1995)
FEDERATED
INVESTORS
Distr
ibuto
r
A
subsi
diary
of
Feder
ated
Inves
tors
GENERAL INFORMATION Bank Instruments 6
ABOUT THE TRUST 1 U.S. Government
INVESTMENT OBJECTIVE AND Obligations 6
POLICIES OF THE FUNDS 1THE TAX-FREE MONEY
THE U.S. GOVERNMENT MARKET FUND 6
SECURITIES FUND 1PORTFOLIO INVESTMENTS
Types of Investments 1AND STRATEGIES 6
U.S. Government Repurchase Agreements 6
Obligations 1 Reverse Repurchase
Collateralized Agreements 6
Mortgage When-Issued and
Obligations (CMOs) 2 Delayed Delivery
THE STOCK FUND 2 Transactions 6
Convertible Lending of Portfolio
Securities 2 Securities 7
Warrants 2 Restricted and
Futures And Options Illiquid Securities 7
Transactions 2 Participation
Financial Futures Interests 7
Contracts 2 Variable Rate
Put Options on Municipal Securities 8
Financial Futures Municipal Leases 8
Contracts 3 Temporary Investments 8
Call Options on Adjustable Rate
Financial Futures Mortgage Securities 8
Contracts 3 Portfolio Turnover 9
"Margin" in Futures
Transactions 3
Purchasing Put
Options on
Portfolio
Securities 4
Writing Covered Call
Options On
Portfolio
Securities 4
Over-the-Counter
Options 4
U.S. Government
Obligations 4
Commercial Paper 4
Bank Instruments 4
THE VIRGINIA MUNICIPAL
BOND FUND AND THE
MARYLAND MUNICIPAL BOND
FUND 5
Acceptable Investments 5
Characteristics 5
Types of Acceptable
Investments 5
THE TREASURY MONEY
MARKET FUND 5
Types of Investments 5
THE MONEY MARKET FUND 6
Types of Investments 6
Issuing Senior INVESTMENT ADVISORY
Securities and SERVICES 18
Borrowing Money 9 Adviser to the Trust 18
Selling Short and Advisory Fees 18
Buying on Margin 9 State Expense
Pledging Assets 9 Limitations 18
Lending Cash or ADMINISTRATIVE SERVICES 18
Securities 9CUSTODIAN 19
Investing in BROKERAGE TRANSACTIONS 19
Restricted PURCHASING SHARES 19
Securities 10 Distribution Plan 19
Investing in Conversion to Federal
Commodities 10 Funds 20
Investing in Real ADMINISTRATIVE
Estate 10ARRANGEMENTS 20
Diversification of
Investments 10
Concentration of
Investments 10
Underwriting 10
Investing in Illiquid
Securities 11
Investing in
Securities of Other
Investment
Companies 11
Investing in New
Issuers 11
Investing in Issuers
Whose Securities
are Owned by
Officers and
Trustees of the
Trust 11
Investing in Minerals 11
Arbitrage
Transactions 11
Purchasing Securities
to Exercise Control 11
Investing in Warrants 12
Investing in Put
Options 12
Writing Covered Call
Options 12
Selling Short 12
Dealing in Puts and
Calls 12
THE VIRTUS FUNDS
MANAGEMENT 13
Officers and Trustees 13
The Funds 16
Fund Ownership 17
Officers and Trustees
Compensation 17
Trustee Liability 18
Determining Market Service, Short-
Value of Securities 20 Term Loan Ratings 31
Use of the Amortized
Cost Method 21
Monitoring Procedures 21
Investment
Restrictions 21
Valuing Municipal
Securities 22
Use of Amortized Cost 22
REDEEMING SHARES 22
Redemption in Kind 22
TAX STATUS 22
The Funds' Tax Status 22
Shareholders' Tax
Status 23
Capital Gains 23
TOTAL RETURN 23
YIELD 23
EFFECTIVE YIELD 24
TAX-EQUIVALENT YIELD 24
Tax-Equivalency
Tables 24
PERFORMANCE COMPARISONS 26
The U.S. Government
Securities Fund 27
The Stock Fund 27
The Virginia Municipal
Bond Fund and The
Maryland Municipal
Bond Fund 28
The Treasury Money
Market Fund 28
The Money Market Fund 28
The Tax-Free Money
Market Fund 28
Financial Statements 29
APPENDIX 30
Standard and Poor's
Ratings Group
Municipal Bond
Rating Definitions 30
Moody's Investors
Service, Inc.
Municipal Bond
Rating Definitions 30
Fitch Investors
Service, Inc.,
Long-Term Debt
Ratings 30
Standard & Poor's
Corporation,
Municipal Note
Ratings 31
Moody's Investors
GENERAL INFORMATION ABOUT THE TRUST
The Trust was established as a Massachusetts business
trust under a Declaration of Trust dated June 20,
1990. As of the date of this Statement, the Trust
consists of seven separate portfolios of securities
(collectively, the "Funds", individually, a "Fund")
which are as follows: The U. S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, The Money Market Fund, and The Tax-
Free Money Market Fund. On October 1, 1992, the name
of the Trust was changed from "The SBK Select Series"
to "Signet Select Funds." On August 15, 1994, the name
of the Trust was changed from "Signet Select Funds" to
"The Medalist Funds." On February 15, 1995, the name
of the Trust was changed from "The Medalist Funds" to
"The Virtus Funds."
With the exception of The Tax-Free Money Market Fund,
which offers a single class of shares, the Funds are
offered in two classes, Investment Shares and Trust
Shares. This Combined Statement of Additional
Information relates only to the Trust Shares of those
Funds offering classes and to shares of The Tax-Free
Money Market Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The prospectus discusses the objective of each Fund
and the policies it employs to achieve those
objectives. The following discussion supplements the
description of the Funds' investment policies in the
Combined prospectus.
The Funds' respective investment objectives cannot be
changed without approval of shareholders. The
investment policies described below may be changed by
the Trustees without shareholder approval.
Shareholders will be notified before any material
change in these policies becomes effective.
Additional information about investment limitations,
strategies that one or more Funds may employ, and
certain investment policies mentioned below appear in
the prospectus section "Portfolio Investments and
Strategies."
THE U.S. GOVERNMENT SECURITIES FUND
TYPES OF INVESTMENTS
The Fund invests primarily in securities which are
guaranteed as to payment of principal and interest by
the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest generally include
direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by U.S.
government agencies or instrumentalities. These
securities are backed by: the full faith and
credit of the U.S. Treasury; the issuer's right
to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government
to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency
or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which
may not always receive financial support from
the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home
Administration; and Federal National Mortgage
Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an
ownership interest in federal agency mortgage
pass-through securities such as those issued by
the Government National Mortgage Association.
The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage
loan pools.
The market for such CMOs has expanded
considerably since its inception. The size of
the primary issuance market and the active
participation in the secondary market by
securities dealers and other investors make
government-related pools highly liquid.
THE STOCK FUND
The Fund invests primarily in the securities of high
quality companies, including common stocks, preferred
stocks, corporate bonds, notes, warrants and
convertible securities.
Convertible Securities
Convertible securities are fixed income
securities which may be exchanged or converted
into a predetermined number of the issuer's
underlying common stock at the option of the
holder during a specified time period.
Convertible securities may take the form of
convertible preferred stock, convertible bonds
or debentures, units consisting of "usable"
bonds and warrants or a combination of the
features of several of these securities. The
investment characteristics of each convertible
security vary widely, which allows convertible
securities to be employed for different
investment objectives.
The Fund will exchange or convert the
convertible securities held in its portfolio
into shares of the underlying common stock in
instances in which, in the investment adviser's
opinion, the investment characteristics of the
underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise,
the Fund may hold or trade convertible
securities. In selecting convertible securities
for the Fund, the Fund's adviser evaluates the
investment characteristics of the convertible
security as a fixed income instrument, and the
investment potential of the underlying equity
security for capital appreciation. In evaluating
these matters with respect to a particular
convertible security, the Fund's adviser
considers numerous factors, including the
economic and political outlook, the value of the
security relative to other investment
alternatives, trends in the determinants of the
issuer's profits, and the issuer's management
capability and practices.
Warrants
Warrants are basically options to purchase
common stock at a specific price (usually at a
premium above the market value of the optioned
common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging
from less than a year to twenty years or may be
perpetual. However, most warrants have
expiration dates after which they are worthless.
In addition, if the market price of the common
stock does not exceed the warrant's exercise
price during the life of the warrant, the
warrant will expire as worthless. Warrants have
no voting rights, pay no dividends, and have no
rights with respect to the assets of the
corporation issuing them. The percentage
increase or decrease in the market price of the
warrant may tend to be greater than the
percentage increase or decrease in the market
price of the optioned common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net
asset value of shares of the Fund, the Fund may
attempt to hedge all or a portion of its
portfolio by buying and selling financial
futures contracts, buying put options on
portfolio securities and listed put options on
futures contracts, and writing call options on
futures contracts. The Fund may also write
covered call options on portfolio securities to
attempt to increase its current income. The Fund
will maintain its positions in securities,
option rights, and segregated cash subject to
puts and calls until the options are exercised,
closed, or have expired. An option position on
financial futures contracts may be closed out
only on an exchange which provides a secondary
market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two
parties: the seller, who agrees to make delivery
of the specific type of security called for in
the contract ("going short") and the buyer, who
agrees to take delivery of the security ("going
long") at a certain time in the future.
Financial futures contracts call for the
delivery of shares of common stocks represented
in a particular index.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on
financial futures contracts.Unlike entering
directly into a futures contract, which requires
the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a
put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or
before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities
decrease in value during the term of an option,
the related futures contracts will also decrease
in value and the option will increase in value.
In such an event, the Fund will normally close
out its option by selling an identical option.
If the hedge is successful, the proceeds
received by the Fund upon the sale of the second
option will be large enough to offset both the
premium paid by the Fund for the original option
plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put
option to close out the position. To do so, it
would simultaneously enter into a futures
contract of the type underlying the option (for
a price less than the strike price of the
option) and exercise the option. The Fund would
then deliver the futures contract in return for
payment of the strike price. If the Fund neither
closes out nor exercises an option, the option
will expire on the date provided in the option
contract, and only the premium paid for the
contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on
futures, the Fund may write listed call options
on futures contracts to hedge its portfolio.
When the Fund writes a call option on a futures
contract, it is undertaking the obligation of
assuming a short futures position (selling a
futures contract) at the fixed strike price at
any time during the life of the option if the
option is exercised. As stock prices fall,
causing the prices of futures to go down, the
Fund's obligation under a call option on a
future (to sell a futures contract) costs less
to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price
goes down below the strike price, the buyer of
the option has no reason to exercise the call,
so that the Fund keeps the premium received for
the option. This premium can substantially
offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring
as interest rates rise.
Prior to the expiration of a call written by the
Fund, or exercise of it by the buyer, the Fund
may close out the option by buying an identical
option. If the hedge is successful, the cost of
the second option will be less than the premium
received by the Fund for the initial option. The
net premium income of the Fund will then
substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in
futures contracts it has sold or call options it
has written on futures contracts if, in the
aggregate, the value of the open positions
(marked to market) exceeds the current market
value of its securities portfolio plus or minus
the unrealized gain or loss on those open
positions, adjusted for the correlation of
volatility between the hedged securities and the
futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt
action to close out a sufficient number of open
contracts to bring its open futures and options
positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the
Fund does not pay or receive money upon the
purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally
permitted). The nature of initial margin in
futures transactions is different from that of
margin in securities transactions in that
futures contract initial margin does not involve
the borrowing of funds by the Fund to finance
the transactions. 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.
A futures contract held by the Fund is valued
daily at the official settlement price of the
exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation
margin," equal to the daily change in value of
the futures contract. This process is known as
"marking to market." Variation margin does not
represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the
broker of the amount one would owe the other if
the futures contract expired. In computing its
daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and
maintain margin when it writes call options on
futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio
securities to protect against price movements in
particular securities in its portfolio. A put
option gives the Fund, in return for a premium,
the right to sell the underlying security to the
writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options On Portfolio Securities
The Fund may also write covered call options to
generate income. As writer of a call option, the
Fund has the obligation upon exercise of the
option during the option period to deliver the
underlying security upon payment of the exercise
price. The Fund may only sell call options
either on securities held in its portfolio or on
securities which it has the right to obtain
without payment of further consideration (or has
segregated cash in the amount of any additional
consideration).
Over-the-Counter Options
The Fund may purchase and write over-the-counter
options on portfolio securities in negotiated
transactions with the buyers or writers of the
options for those options on portfolio
securities held by the Fund and not traded on an
exchange.
Over-the-counter options are two party contracts
with price and terms negotiated between buyer
and seller. In contrast, exchange-traded options
are third party contracts with standardized
strike prices and expiration dates and are
purchased from a clearing corporation. Exchange-
traded options have a continuous liquid market
while over-the-counter options may not.
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest are those set forth
under "The U.S. Government Securities Fund-U.S.
Government Obligations."
COMMERCIAL PAPER
The Fund may invest in commercial paper rated at least
A-1 by Standard & Poor's Ratings Group ("S&P"), Prime-
1 by Moody's Investors Service, Inc. ("Moody's"), or F-
1 by Fitch Investors Service ("Fitch") and money
market instruments (including commercial paper) which
are unrated but of comparable quality, including
Canadian Commercial Paper ("CCPs") and Europaper. In
the case where commercial paper, CCPs or Europaper
have received different ratings from different rating
services, such commercial paper, CCPs or Europaper is
an acceptable investment so long as at least one
rating is one of the preceding high quality ratings
and provided the investment adviser has determined
that such investment presents minimal credit risks.
BANK INSTRUMENTS
The Fund may invest in the instruments of banks and
savings and loans whose deposits are insured by the
Bank Insurance Fund ("BIF"), which is administered by
the Federal Deposit Insurance Corporation ("FDIC"), or
the Savings Association Insurance Fund ("SAIF"), which
is administered by the FDIC, such as certificates of
deposit, demand and time deposits, savings shares, and
bankers' acceptances. These instruments are not
necessarily guaranteed by those organizations.
In addition to domestic bank obligations such as
certificates of deposit, demand and time deposits,
savings shares, and bankers' acceptances, the Fund may
invest in:
o Eurodollar Certificates of Deposit ("ECDs")
issued by foreign branches of U.S. or foreign
banks;
o Eurodollar Time Deposits ("ETDs"), which are
U.S. dollar-denominated deposits in foreign
branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-
denominated deposits issued by branches of major
Canadian banks located in the United States; and
o Yankee Certificates of Deposit ("Yankee CDs"),
which are U.S. dollar-denominated certificates
of deposit issued by U.S. branches of foreign
banks and held in the United States.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND
MUNICIPAL BOND FUND
ACCEPTABLE INVESTMENTS
The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund pursue their investment objectives
by investing in professionally managed portfolios of
securities at least 65% of which are comprised of
Virginia (in the case of The Virginia Municipal Bond
Fund) or Maryland (in the case of The Maryland
Municipal Bond Fund) municipal securities. The Funds
will invest their assets so that, under normal
circumstances, at least 80% of their annual interest
income is exempt from federal regular and Virginia (in
the case of The Virginia Municipal Bond Fund) or
Maryland (in the case of The Maryland Municipal Bond
Fund) state income taxes or that at least 80% of their
total assets are invested in obligations, the interest
income from which is exempt from federal regular and
Virginia (in the case of The Virginia Municipal Bond
Fund) or Maryland (in the case of The Maryland
Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds
invest have the characteristics set forth in the
prospectus. An unrated municipal security will
be determined by a Fund's adviser to meet the
quality standards established by the Fund's
Board of Trustees if it is of comparable quality
to the rated municipal securities which the Fund
purchases. The Trustees consider the
creditworthiness of the issuer of a municipal
security, the issuer of a participation interest
if the Fund has the right to demand payment from
the issuer of the interest or the guarantor of
payment by either of those issuers.
If Moody's or S&P's ratings change because of
changes in those organizations or in their
rating systems, a Fund will try to use
comparable ratings as standards in accordance
with the investment policies described in the
Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of Virginia and Maryland municipal securities
are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity
dates;
o tax anticipation notes sold to finance working
capital needs of municipalities in anticipation
of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of
the issuance of longer-term bonds in the future;
o revenue anticipation notes sold in expectation
of receipt of federal income available under the
Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a
later date (payment of principal and interest on
prerefunded bonds is assured through the first
call date by the deposit in escrow of U.S.
government securities); or
o general obligation bonds secured by a
municipality's pledge of taxation.
THE TREASURY MONEY MARKET FUND
TYPES OF INVESTMENTS
The Fund invests only in short-term U.S. Treasury
obligations. Short-term U.S. Treasury obligations as
used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or
instrumentality thereof, and fully guaranteed as to
principal and interest by the United States, maturing
in 397 days or less from the date of acquisition
unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one
year from the date of acquisition. The Fund may also
retain Fund assets in cash.
THE MONEY MARKET FUND
TYPES OF INVESTMENTS
The Fund invests primarily in money market instruments
maturing in 397 days or less and which include, but
are not limited to, commercial paper and demand master
notes, domestic and foreign bank instruments, U.S.
government obligations, and corporate debt
obligations.
Bank Instruments
The types of bank instruments in which the Fund
invests are those set forth under "The Stock
Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest are those set forth
under "The U.S. Government Securities Fund-U.S.
Government Obligations."
THE TAX-FREE MONEY MARKET FUND
The Fund invests in a portfolio of municipal
securities maturing in 13 months or less. As a matter
of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's
annual interest income will be exempt from federal
income tax (including alternative minimum tax). The
average maturity of the securities in the Fund's
portfolio, computed on a dollar-weighted basis, will
be 90 days or less.
PORTFOLIO INVESTMENTS AND STRATEGIES
REPURCHASE AGREEMENTS
The Funds or their custodian will take possession of
the securities subject to repurchase agreements and
these securities will be marked to market daily. In
the event that a defaulting seller filed for
bankruptcy or became insolvent, disposition of such
securities by a Fund might be delayed pending court
action. The Funds believe that under the regular
procedures normally in effect for custody of a Fund's
portfolio securities subject to repurchase agreements,
a court of competent jurisdiction would rule in favor
of a Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase
agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed
by the adviser to be creditworthy pursuant to
guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase
agreements. These transactions are similar to
borrowing cash. In a reverse repurchase agreement a
Fund transfers possession of a portfolio instrument to
another person, such as a financial institution,
broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on
a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon
rate. The use of reverse repurchase agreements may
enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that a Fund will
be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid
assets of a Fund, in a dollar amount sufficient to
make payment for the obligations to be purchased, are
segregated at the trade date. These securities are
marked to market daily and are maintained until the
transaction is settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is
considered to be an advantageous price or yield for a
Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid
assets of a Fund sufficient to make payment for the
securities to be purchased are segregated on a Fund's
records at the trade date. These assets are marked to
market daily and are maintained until the transaction
has been settled. The Funds may engage in these
transactions to an extent that would cause the
segregation of an amount up to 20% of the total value
of their assets. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than
20% of the total value of their respective assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when The U.S. Government
Securities Fund, The Stock Fund and The Money Market
Fund lend portfolio securities must be valued daily
and, should the market value of the loaned securities
increase, the borrower must furnish additional
collateral to the particular Fund. During the time
portfolio securities are on loan, the borrower pays a
Fund any dividends or interest paid on such
securities. Loans are subject to termination at the
option of a Fund or the borrower. A Fund may pay
reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated
portion of the interest earned on the cash or
equivalent collateral to the borrower or placing
broker. The U.S. Government Securities Fund and The
Stock Fund do not have the right to vote securities on
loan, but would terminate the loan and regain the
right to vote if that were considered important with
respect to the investment.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities.
Restricted securities are any securities in which a
Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to
restriction on resale under federal securities law.
However, The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will limit investments in
illiquid securities, including certain restricted
securities determined by the Trustees not to be
liquid, and repurchase agreements providing for
settlement in more than seven days after notice, to
15% of its net assets. In the case of The Virginia
Municpal Bond Fund and The Maryland Municipal Bond
Fund, illiquid securities will include participation
interests and variable rate municipal securities
without a demand feature or with a demand feature of
longer than seven days and which the adviser believes
cannot be sold within seven days. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will limit investments in illiquid
securities, including certain securities determined by
the Trustees not to be liquid, and repurchase
agreements providing for settlement in more than seven
days after notice, and in the case of The Money Market
Fund, specifically including non-negotiable fixed
income time deposits with maturities over seven days,
to 10% of their net assets.
The U.S. Government Securities Fund, The Stock Fund
and The Money Market Fund may invest in commercial
paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) commercial paper
is restricted as to disposition under federal
securities law and is generally sold to institutional
investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section
4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with
the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for
liquidity established by the Board of Trustees are
quite liquid. The Funds intend, therefore, to treat
the restricted securities which meet the criteria for
liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by a
Fund's investment adviser, as liquid and not subject
to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2)
commercial paper is liquid, the Funds intend to not
subject such paper to the limitation applicable to
restricted securities.
PARTICIPATION INTERESTS
The financial institutions from which The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund,
and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure
from other financial institutions irrevocable letters
of credit or guarantees and give a Fund the right to
demand payment on specified notice (normally within
thirty days for The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund and seven days for
The Tax-Free Money Market Fund) from the issuer of the
letter of credit or guarantee. These financial
institutions may charge certain fees in connection
with their repurchase commitments, including a fee
equal to the excess of the interest paid on the
municipal securities over the negotiated yield at
which the participation interests were purchased by a
Fund. By purchasing participation interests, a Fund is
buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-
free benefits of the underlying securities.
In the acquisition of participation interests, a
Fund's investment adviser will consider the following
quality factors:
o the quality of the underlying municipal security
(of which a Fund takes possession);
o the quality of the issuer of the participation
interest; and
o a guarantee or letter of credit from a high-
quality financial institution supporting the
participation interest.
VARIABLE RATE MUNICIPAL SECURITIES
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money Market
Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market
value of municipal securities from their original
purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate
municipal securities than for fixed income
obligations.
Many municipal securities with variable interest rates
purchased by the The Tax-Free Money Market Fund are
subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's
demand. For purposes of determining the Fund's average
maturity, the maturities of these variable rate demand
municipal securities (including participation
interests) are the longer of the periods remaining
until the next readjustment of their interest rates or
the periods remaining until their principal amounts
can be recovered buy exercising the right to demand
payment. The terms of these variable rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests or a
guarantor of either issuer.
MUNICIPAL LEASES
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money Market
Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or nonprofit entity. The lease payments
and other rights under the lease provide for and
secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In
particular, lease obligations may be subject to
periodic appropriation. If the entity does not
appropriate funds for future lease payments, the
entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate
trustee cannot accelerate lease obligations upon
default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely
that the trustee would be able to obtain an acceptable
substitute source of payment.
In determining the liquidity of municipal lease
securities, the adviser, under the authority delegated
by the Board of Trustees, will base its determination
on the following factors: (a) whether the lease can be
terminated by the lessee; (b) the potential recovery,
if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general
credit strength (e.g., its debts, administrative,
economic and financial characteristics, and
prospects); (d) the likelihood that the lessee will
discontinue appropriating funding for the leased
property because the property is no longer deemed
essential to its operations (e.g., the potential for
an "event of nonappropriation"); and (e) any credit
enhancement of legal recourse provided upon an event
of nonappropriation or other termination of the lease.
TEMPORARY INVESTMENTS
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund and The Tax-Free Money Market Fund
may also invest in temporary investments during times
of unusual market conditions for defensive purposes
and to maintain liquidity.
From time to time, such as when suitable securities
are not available to the respective Fund, a Fund may
invest a portion of its assets in cash. Any portion of
a Fund's assets maintained in cash will reduce the
amount of assets in securities held in the respective
Fund, and could thereby reduce a Fund's yield.
ADJUSTABLE RATE MORTGAGE SECURITIES
The U.S. Government Securities Fund invests in
adjustable rate mortgage securities ("ARMS"). Not
unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with
changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline
during periods of rapidly rising rates, ARMS may also
have less potential for capital appreciation than
other similar investments (e.g. investments with
comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a
premium, mortgage foreclosures and unscheduled
principal payment may result in some loss of a
holder's principal investment to the extent of the
premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase
current and total returns and would accelerate the
recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
PORTFOLIO TURNOVER
The Funds will not attempt to set or meet a portfolio
turnover rate since any turnover would be incidental
to transactions undertaken in an attempt to achieve a
Fund's investment objective. The Stock Fund may
experience greater portfolio turnover than would be
expected with a portfolio of higher-rated securities.
A high portfolio turnover will result in increased
transaction costs to the Fund. For the fiscal years
ended September 30, 1994, 1993, and 1992, the
portfolio turnover rates were 227%, 154%, and 201%,
respectively, for The U.S. Government Securities Fund;
205%, 67%, and 38%, respectively, for The Stock Fund;
29%, 17%, and 51%, respectively, for The Virginia
Municipal Bond Fund; and 27%, 23%, and 34%,
respectively, for The Maryland Municipal Bond Fund.
INVESTMENT LIMITATIONS
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities
except that a Fund may borrow money directly or
through reverse repurchase agreements in amounts
up to one-third of the value of its net assets,
including the amount borrowed. The Funds will
not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather
as a temporary, extraordinary, or emergency
measure or to facilitate management of the
portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio
securities is deemed to be inconvenient or
disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5%
of its total assets are outstanding. With
respect to The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The
Treasury Money Market Fund, and The Money Market
Fund, during the period any reverse repurchase
agreements are outstanding, the Funds will
restrict the purchase of portfolio securities to
money market instruments maturing on or before
the expiration date of the reverse repurchase
agreements, but only to the extent necessary to
assure completion of the reverse repurchase
agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on
margin but they may obtain such short-term
credits as may be necessary for clearance of
transactions. With respect to The U.S.
Government Securities Fund and The Stock Fund,
the deposit or payment by the Fund of initial or
variation margin in connection with financial
futures contracts or related options
transactions is not considered the purchase of a
security on margin. The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The
Treasury Money Market Fund, The Money Market
Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or
hypothecate any assets except to secure
permitted borrowings. In these cases the Funds,
except The Tax-Free Money Market Fund, may
pledge assets having a market value not
exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of
a Fund at the time of the pledge. Margin
deposits for the purchase and sale of financial
futures contracts and related options are not
deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Stock
Fund, The Treasury Money Market Fund and The
Money Market Fund, will not lend any of their
assets, except portfolio securities up to one-
third of the value of their total assets. This
shall not prevent a Fund from purchasing or
holding bonds, debentures, notes, certificates
of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging
in other transactions where permitted by a
Fund's investment objective, policies, and
limitations or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will not lend any
of their assets, except that they may acquire
publicly or nonpublicly issued municipal
securities or temporary investments or enter
into repurchase agreements as permitted by a
Fund's investment objective, policies,
limitations and Declaration of Trust.
The Tax-Free Money Market Fund will not lend any
of its assets except that it may purchase or
hold portfolio securities permitted by its
investment objective, policies and limitations,
or Declaration of Trust.
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the
Funds will not invest more than 10% of their net
assets in securities subject to restrictions on
resale under the Securities Act of 1933 (except
certain restricted securities which meet the
criteria for liquidity as established by the
Board of Trustees. With respect to The U.S.
Government Securities Fund, The Stock Fund and
The Money Market Fund, this exception
specifically extends to commercial paper issued
under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which
meet the criteria for liquidity as established
by the Board of Trustees).
The Tax-Free Money Market Fund will not invest
more than 10% of its total assets in securities
subject to restrictions on resale under federal
securities law, except for restricted securities
determined to be liquid under criteria
established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities,
commodity contracts or commodity futures
contracts except for financial futures contracts
in the case of The Stock Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate,
although The U.S. Government Securities Fund and
The Stock Fund may invest in securities secured
by real estate or interests in real estate or
issued by companies, including real estate
investment trusts, which invest in real estate
or interests therein. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The
Money Market Fund, and The Tax-Free Money Market
Fund may invest in securities of issuers whose
business involves the purchase or sale of real
estate or in securities which are secured by
real estate or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total
assets, The U.S. Government Securities Fund, The
Stock Fund and The Money Market Fund will not
purchase securities issued by any one issuer
(other than cash, cash items or securities
issued or guaranteed by the government of the
United States or its agencies or
instrumentalities and repurchase agreements
collateralized by such securities), if as a
result more than 5% of the value of its total
assets would be invested in the securities of
that issuer. The U.S. Government Fund and The
Stock Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Stock
Fund and The Money Market Fund will not invest
25% or more of the value of their total assets
in any one industry. With respect to The Money
Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of
deposit), U.S. government obligations, or
instruments secured by these money market
instruments, such as repurchase agreements for
U.S. government obligations, shall not be
considered investments in any one industry.
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will not purchase
securities if, as a result of such purchase, 25%
or more of the value of its total assets would
be invested in any one industry or in industrial
development bonds or other securities, the
interest on which is paid from revenues of
similar types of projects. However, these Funds
may invest as temporary investments more than
25% of the value of its assets in cash or cash
items, securities issued or guaranteed by the
U.S. government, its agencies, or
instrumentalities, or instruments secured by
these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest
25% or more of the value of its total assets in
any one industry, except that it may invest more
than 25% of its total assets in securities
issued or guaranteed by the U.S. government, its
agencies or instrumentalities and industrial
development bonds as long as they are not from
the same facility or similar types of
facilities. The Tax-Free Money Market Fund does
not intend to purchase securities that would
increase the percentage of its assets invested
in the securities of governmental subdivisions
located in any one state, territory, or U.S.
possession to 25% or more.
Underwriting
The Funds will not underwrite any issue of
securities, except as a Fund may be deemed to be
an underwriter under the Securities Act of 1933
in connection with the sale of securities in
accordance with its investment objective,
policies, and limitations.
The above limitations cannot be changed with respect
to a Fund without approval of a majority of that
Fund's Shares. The following limitations may be
changed by the Trustees without shareholder approval.
Shareholders will be notified before any material
change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Stock
Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest
more than 15% of the value of their net assets
in illiquid securities, including repurchase
agreements providing for settlement in more than
seven days after notice, and certain restricted
securities determined by the Trustees not to be
liquid; and, in the case of The Virginia
Municipal Bond Fund and The Maryland Municipal
Bond Fund, specifically including participation
interests and variable rate municipal securities
without a demand feature or with a demand
feature of longer than seven days and which the
adviser believes cannot be sold within seven
days. The Treasury Money Market Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
will not invest more than 10% of the value of
their net assets in illiquid securities,
including repurchase agreements providing for
settlement more than seven days after notice and
certain securities determined by the Trustees
not to be liquid; and, in the case of The Money
Market Fund, specifically including non-
negotiable fixed income time deposits with
maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment
in other investment companies to no more than 3%
of the total outstanding voting stock of any
investment company, invest no more than 5% of
total assets in any one investment company, or
invest more than 10% of total assets in
investment companies in general. The U.S.
Government Securities Fund, The Stock Fund, The
Treasury Money Market Fund and The Money Market
Fund will purchase securities of closed-end
investment companies only in open market
transactions involving only customary broker's
commissions. However, these limitations are not
applicable if the securities are acquired in a
merger, consolidation, reorganization, or
acquisition of assets. With respect to The
Treasury Money Market Fund and The Money Market
Fund, the Funds will limit their investments and
the securities of other investment companies to
those of The Money Market Funds having
investment objectives and policies similar to
their own. The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund will invest in
other investment companies primarily for the
purposes of investing short-term cash which has
not yet been invested in other portfolio
instruments. The adviser will waive its
investment advisory fee on assets invested in
securities of open-end investment companies.
Investing in New Issuers
The U.S. Government Securities Fund, The Stock
Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 5%
of the value of their total assets in securities
of issuers which have records of less than three
years of continuous operations, including the
operation of any predecessor. The Virginia
Municipal Bond Fund and The Maryland Municipal
Bond Fund will not invest more than 5% of the
value of its total assets in industrial
development bonds where the payment of principal
and interest is the responsibility of companies
(or in the alternative guarantors, where
applicable) which have records of less than
three years of continuous operations, including
the operation of any predecessor.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Trust
A Fund will not purchase or retain the
securities of any issuer if the officers and
Trustees of the Trust or its investment adviser
owning individually more than 1/2 of 1% of the
issuer's securities together own more than 5% of
the issuer's securities.
Investing in Minerals
A Fund will not purchase interests in oil, gas,
or other mineral exploration or development
programs or leases, although it may purchase the
securities of issuers which invest in or sponsor
such programs.
Arbitrage Transactions
A Fund will not enter into transactions for the
purpose of engaging in arbitrage.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company
for the purpose of exercising control or
management.
Investing in Warrants
The Funds will not invest in warrants, except
that The Stock Fund may invest not more than 5%
of its net assets in warrants, including those
acquired in units or attached to other
securities. To comply with certain state
restrictions, the Fund will limit its investment
in such warrants not listed on the New York or
American Stock Exchanges to 2% of its net
assets. (If state restrictions change, this
latter restriction may be revised without notice
to shareholders.) For purposes of this
investment restriction, warrants will be valued
at the lower of cost or market, except that
warrants acquired by the Fund in units with or
attached to securities may be deemed to be
without value.
Investing in Put Options
Neither The U.S. Government Securities Fund nor
The Stock Fund will purchase put options on
securities unless the securities are held in a
Fund's portfolio and not more than 5% of the
value of either Fund's total assets would be
invested in premiums on open and put option
positions.
Writing Covered Call Options
Neither The U.S. Government Securities Fund nor
The Stock Fund will write call options on
securities unless the securities are held in
their portfolio or unless either Fund is
entitled to them in deliverable form without
further payment or after segregating cash in the
amount of any further payment.
Selling Short
Neither The U.S. Government Securities Fund nor
The Stock Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal
amount of such securities, or (2) it has
segregated an amount of its other assets equal
to the lesser of the market value of the
securities sold short or the amount required to
acquire such securities. The segregated amount
will not exceed 10% of either Fund's net assets.
While in a short position, the Fund will retain
the securities, rights, or segregated assets.
Dealing in Puts and Calls
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money
Market Fund will not invest in puts, calls,
straddles, spreads, or any combination of them
except that The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund may purchase
put options on municipal securities in an amount
up to 5% of its total assets or may purchase
municipal securities accompanied by agreements
of sellers to repurchase them at a Fund's
option.
Except with respect to the Funds' policy of
borrowing money, if a percentage limitation is
adhered to at the time of investment, a later
increase or decrease in percentage resulting
from any change in value or net assets will not
result in a violation of such restriction.
The U.S. Government Securities Fund and The
Stock Fund have no present intent to borrow
money, pledge securities or invest in restricted
or illiquid securities in excess of 5% of the
value of their respective net assets in the
coming fiscal year. These Funds (1) will limit
the aggregate value of the assets underlying
covered call options or put options written by a
Fund to not more than 25% of its net assets, (2)
will limit the premiums paid for options
purchased by a Fund to 20% of its net assets,
and (3) will limit the margin deposits on
futures contracts entered into by a Fund to 5%
of its net assets. (If state requirements
change, these restrictions may be revised
without shareholder notification.)
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund have no present
intent to issue senior securities or borrow
money, pledge securities, invest in restricted
or illiquid securities or engage in when-issued
and delayed delivery transactions in excess of
5% of the value of its net assets during the
fiscal period.
The Treasury Money Market Fund and The Money
Market Fund do not expect to issue senior
securities or borrow money, pledge securities,
engage in whenissued and delayed delivery
transactions or reverse repurchase agreements,
for The Money Market Fund only, in excess of 5%
of the value of their net assets during the
coming fiscal year.
The Tax-Free Money Market Fund does not intend
to borrow money or pledge securities in excess
of 5% of the value of its net assets during the
coming fiscal year.
To comply with registration requirements in a
certain state, The Virginia Municipal Bond Fund,
The Maryland Municipal Bond Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
will not invest in real estate limited
partnerships.
THE VIRTUS FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses,
principal occupations, and present positions,
including any affiliation with Virtus Capital
Management, Inc., Signet Trust Company, Federated
Investors, Federated Securities Corp., Federated
Services Company, and Federated Administrative
Services or the Funds (as defined below).
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated Research;
Chairman and Director, Federated Research Corp.;
Chairman, Passport Research, Ltd.; Director, AEtna Life
and Casualty Company; Chief Executive Officer and
Director, Trustee, or Managing General Partner of the
Funds. Mr. Donahue is the father of J. Christopher
Donahue, Vice President of the Trust.
Thomas G. Bigley
28th Floor
One Oxford Centre
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the Board,
Children's Hospital of Pittsburgh; Director, Trustee or
Managing General Partner of the Funds; formerly, Senior
Partner, Ernst & Young LLP.
_________________________________________________________
___________________________________________________
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior Vice-
President, John R. Wood and Associates, Inc., Realtors;
President, Northgate Village Development Corporation;
Partner or Trustee in private real estate ventures in
Southwest Florida; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, Naples
Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee, Michael
Baker, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman and
Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund,
Inc.; Director, Trustee, or Managing General Partner of
the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian and
Montefiore Hospitals; Professor of Medicine and Trustee,
University of Pittsburgh; Director of Corporate Health,
University of Pittsburgh Medical Center; Director,
Trustee, or Managing General Partner of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer &
Flaherty; Director, Eat'N Park Restaurants, Inc., and
Statewide Settlement Agency, Inc.; Director, Trustee, or
Managing General Partner of the Funds; formerly, Counsel,
Horizon Financial, F.A., Western Region.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
President and Treasurer
Vice President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer, Federated
Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated Services
Company and Federated Shareholder Services; Chairman,
Treasurer, and Trustee, Federated Administrative
Services; Trustee or Director of some of the Funds; Vice
President and Treasurer of the Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of
Massachusetts; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer &
Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N Park
Restaurants, Inc.; Director, Trustee, or Managing General
Partner of the Funds; formerly, Vice Chairman, Horizon
Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant;
Trustee, Carnegie Endowment for International Peace, RAND
Corporation, Online Computer Library Center, Inc., and
U.S. Space Foundation; Chairman, Czecho Slovak Management
Center; Director, Trustee, or Managing General Partner of
the Funds; President Emeritus, University of Pittsburgh;
formerly, Chairman, National Advisory Council for
Environmental Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director, Trustee,
or Managing General Partner of the Funds.
Craig P. Churman
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services;
Vice President and Assistant Treasurer of some of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President of the Trust
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services
Company, and Federated Shareholder Services; President
or Vice President of the Funds; Director, Trustee, or
Managing General Partner of some of the Funds. Mr.
Donahue is the son of John F. Donahue, Chairman and
Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated
Investors; Director, Federated Research Corp.; Chairman
and Director, Federated Securities Corp.; President or
Vice President of some of the Funds; Director or Trustee
of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and Trustee,
Federated Investors; Vice President, Secretary, and
Trustee, Federated Advisers, Federated Management, and
Federated Research; Vice President and Secretary,
Federated Research Corp. and Passport Research, Ltd.;
Trustee, Federated Services Company; Executive Vice
President, Secretary, and Trustee, Federated
Administrative Services; Secretary and Trustee, Federated
Shareholder Services; Executive Vice President and
Director, Federated Securities Corp.; Vice President and
Secretary of the Funds.
* This Trustee is deemed to be an "interested person"
of the Trust as defined in the Investment Company
Act of 1940, as amended.
@ Member of the Trust Executive Committee. The
Executive Committee of the Board of Trustees
handles the responsibilities of the Board of
Trustees between meetings of the Board.
THE FUNDS
As referred to in the list of Trustees and Officers,
"Funds" includes the following investment companies:
American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal
Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated
Government Trust; Federated Growth Trust; Federated
High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First
Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility
Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance
Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income
Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust,
Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint
Funds; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The
Virtus Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the
outstanding shares of each Fund.
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM
PAID TO TRUSTEES FROM
TRUST TRUST+
TRUST AND FUND COMPLEX
John F. Donahue,
Chairman and Trustee $ -0- $ -0-
for the Trust and
69
investment companies
Thomas G. Bigley,
Trustee $498
$24,991 for the Trust and
50
investment companies
John T. Conroy, Jr.,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
William J. Copeland,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
James E. Dowd,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
Lawrence D. Ellis, M.D.,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Edward L. Flaherty, Jr.,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
Edward C. Gonzales,
President and Trustee $ -0- $ -0-
for the Trust and
18
investment companies
Peter E. Madden,
Trustee $1,517.50
$104,880 for the Trust and
65
investment companies
Gregor F. Meyer,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Wesley W. Posvar,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Marjorie P. Smuts,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
+The aggregate compensation is provided for the Trust
which is comprised of eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the
Trustees will not be liable for errors of judgment or
mistakes of fact or law. However, they are not
protected against any liability to which they would
otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE TRUST
The Trust's investment adviser is Virtus Capital
Management, Inc. which is a division of Signet Trust
Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls
maintained by Signet Bank to restrict the flow of non-
public information, Fund investments are typically
made without any knowledge of Signet Bank's or its
affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund,
or any shareholder of any of the Funds for any losses
that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted
by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its
contract with the Trust.
ADVISORY FEES
For its advisory services, Virtus Capital Management,
Inc. receives an annual investment advisory fee as
described in the prospectus. During the fiscal years
ended September 30, 1994, 1993, and 1992 , the adviser
earned fees from: The U.S. Government Securities Fund,
of $1,734,083, $1,375,434, and $662,158, of which
$734,744, $784,857, and $571,943 were voluntarily
waived; The Stock Fund $703,937, $512,930, and
$348,390, of which $214,366, $372,554, and $157,500
were voluntarily waived; The Virginia Municipal Bond
Fund $861,187, $519,326, and $203,123, of which
$314,920, $345,108, and $203,123 were voluntarily
waived; The Maryland Municipal Bond Fund $355,431,
$233,787, and $91,829, of which $241,790, $231,723,
and $91,829 were voluntarily waived; The Treasury
Money Market Fund $1,388,302, $922,509, and $809,409,
of which $508,090, $369,003, and $176,525 were
voluntarily waived; and The Money Market Fund
$709,679, $729,525, and $387,183 of which $354,839,
$431,083, and $222,685 were voluntarily waived. For
the period from July 27, 1994 to September 30, 1994
the adviser earned $21,033 from The Tax-Free Money
Market Fund, of which $19,388 was voluntarily waived.
State Expense Limitations
The adviser has undertaken to comply with the
expense limitation established by certain states
for investment companies whose shares are
registered for sale in those states. If a Fund's
normal operating expenses (including the
investment advisory fee, but not including
brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year
of the first $30 million of average net assets,
2% per year of the next $70 million of average
net assets, and 1 1/2% per year of the remaining
average net assets, the adviser will reimburse
the Fund for its expenses over the limitation.
If a Fund's monthly projected operating expenses
exceed this limitation, the investment advisory
fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be
reimbursed by the adviser will be limited, in
any single fiscal year, by the amount of the
investment advisory fee. This arrangement is not
part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a
subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for
the fees set forth in the prospectus. For the fiscal
years ended September 30, 1994, 1993, and 1992, the
Funds incurred costs for administrative services as
follows: The U.S. Government Securities Fund incurred
$269,932, $233,156, and $122,622; The Stock Fund
incurred $109,075, $86,960, and $65,066; The Virginia
Municipal Bond Fund incurred $133,956, $87,752 and
$50,000; The Maryland Municipal Bond Fund incurred
$55,254, $49,614, and $50,000; The Treasury Money
Market Fund incurred $319,857, $235,278, and $226,433;
The Money Market Fund incurred $165,549, $186,110, and
$107,640; of which $0, $0, and $0 were voluntarily
waived for The U.S. Government Securities Fund; $0,
$0, and $0 were voluntarily waived for The Stock Fund;
$0, $0, and $33,416 were voluntarily waived for The
Virginia Municipal Bond Fund; $0, $0, and $50,000 were
voluntarily waived for The Maryland Municipal Bond
Fund; $0, $0, and $0 were voluntarily waived for The
Treasury Money Market Fund; and $0, $0, and $0 were
voluntarily waived for The Money Market Fund. For the
period from July 27, 1994, to September 30, 1994, The
Tax-Free Money Market Fund paid $8,904 for
administrative services, of which $0 was voluntarily
waived.
CUSTODIAN
Signet Trust Company is custodian for the securities
and cash of the Funds. Under the Custodian Agreement,
Signet Trust Company holds the Funds' portfolio
securities in safekeeping and keeps all necessary
records and documents relating to its duties. The
custodian receives a fee at an annual rate of .05 of
1% on the first $10 million of average net assets of
each of the six respective portfolios and .025 of 1%
on average net assets in excess of $10 million. There
is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be
at least $1,000 per Fund.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the
purchase and sale of portfolio instruments, the
adviser looks for prompt execution of the order at a
favorable price. In working with dealers, the adviser
will generally use those who are recognized dealers in
specific portfolio instruments, except when a better
price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio
transactions and selects brokers and dealers subject
to guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer
brokerage and research services. These services may be
furnished directly to the Funds or to the adviser and
may include:
o advice as to the advisability of investing in
securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations;
and
o similar services.
The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer
brokerage and research services to execute securities
transactions. They determine in good faith that
commissions charged by such persons are reasonable in
relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by
the adviser in advising the Funds and other accounts.
To the extent that receipt of these services may
supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to
reduce their expenses.
For the fiscal year ended September 30, 1994, The
Stock Fund paid $552,066 in commissions on brokerage
transactions.
PURCHASING SHARES
Shares of the Funds are sold at their net asset value
without a sales charge on days the New York Stock
Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the
prospectus under "Investing in Shares."
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Funds
pursuant to Rule 12b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that
the Funds' distributor, Federated Securities Corp.,
shall act as the distributor of Shares, and it permits
the payment of fees to brokers and dealers for
distribution and administrative services and to
administrators for administrative services. The Plan
is designed to (i) stimulate brokers and dealers to
provide distribution and administrative support
services to the Funds and their holders of Shares and
(ii) stimulate administrators to render administrative
support services to the Funds and their holders of
Shares. These services are to be provided by a
representative who has knowledge of the holder of
Shares' particular circumstances and goals, and
include, but are not limited to: providing office
space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and
computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic
investments of client account cash balances; answering
routine client inquiries regarding the Funds;
assisting clients in changing dividend options,
account designations, and addresses; and providing
such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through
the Plan include, but are not limited to the
following: (1) an efficient and effective
administrative system; (2) a more efficient use of
assets of holders of Shares by having them rapidly
invested in the Funds with a minimum of delay and
administrative detail; and (3) an efficient and
reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the Board of Trustees expects
that the Funds will be able to achieve a more
predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more
efficient portfolio management and assist the Funds in
seeking to achieve their respective investment
objectives. By identifying potential investors in
Shares whose needs are served by a particular Fund's
objective, and properly servicing these accounts, the
Funds may be able to curb sharp fluctuations in rates
of redemptions and sales.
For the fiscal years ended September 30, 1994, 1993,
and 1992, the Funds paid fees to brokers and
administrators (financial institutions) pursuant to
the Plan as follows: The U.S. Government Securities
Fund , of $299,048, $111,353, and $0; The Stock Fund
$59,836, $14,672, and $0; The Virginia Municipal Bond
Fund, of $190,877, $55,569, and $0; The Maryland
Municipal Bond Fund, of $89,447, $31,414, and $0; The
Treasury Money Market Fund, of $52,221, $20,462, and
$0; The Money Market Fund, of $26,424, $11,499, and
$0. For the period from July 27, 1994 to September 30,
1994 the Tax-Free Money Market Fund paid no fees
pursuant to the Plan.
CONVERSION TO FEDERAL FUNDS
It is the policy of The Treasury Money Market Fund,
The Money Market Fund, and The Tax-Free Money Market
Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all
payments from shareholders must be in federal funds or
be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing
checks and converting them to federal funds.
ADMINISTRATIVE ARRANGEMENTS
For the fiscal years ended September 30, 1994, 1993
and 1992, the distributor paid no administrative fees
to brokers and administrators (financial
institutions).
DETERMINING NET ASSET VALUE
Net asset values of The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund generally change
each day. The Treasury Money Market Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
attempt to stabilize the value of their Shares at
$1.00. The days on which the net asset value is
calculated by these Funds are described in the
prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market value of The U.S. Government Securities
Fund's portfolio securities are determined as follows:
o according to the mean between the over-the-
counter bid and asked prices provided by an
independent pricing service, if available, or at
fair value as determined in good faith by the
Fund's Board of Trustees; or
o for short-term obligations with remaining
maturities of 60 days or less at the time of
purchase at amortized cost unless the Board of
Trustees determines that particular
circumstances of the security indicate
otherwise.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted
prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading
characteristics, and other market data.
The market value of The Stock Fund's portfolio
securities is determined as follows:
o for equity securities, according to the last
sale price on a national securities exchange, if
available;
o in the absence of recorded sales for listed
equity securities, according to the mean between
the last closing bid and asked prices;
o for unlisted equity securities, the latest bid
prices;
o for bonds and other fixed income securities, as
determined by an independent pricing service;
o for short-term obligations, according to the
mean between bid and asked prices as furnished
by an independent pricing service or for short-
term obligations with remaining maturities of 60
days or less at the time of purchase at
amortized cost; or
o for all other securities, at fair value as
determined in good faith by the Board of
Trustees.
The U.S. Government Securities Fund and The Stock Fund
will value futures contracts, options, and put options
on futures and at their market values established by
the exchanges at the close of option trading on such
exchanges unless the Board of Trustees determine in
good faith that another method of valuing option
positions is necessary to appraise their fair value.
Over-the-counter put options will be valued at the
mean between the bid and the asked prices.
USE OF THE AMORTIZED COST METHOD
With respect to The Treasury Money Market Fund, The
Money Market Fund, and The Tax-Free Money Market Fund,
the Trustees have decided that the best method for
determining the value of portfolio instruments is
amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as
adjusted for amortization of premium or accumulation
of discount rather than at current market value.
A Fund's use of the amortized cost method of valuing
portfolio instruments depends on its compliance with
certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the
Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution
and redemption, at $1.00 per Share, taking into
account current market conditions and a Fund's
investment objective.
Under the Rule, a Fund is permitted to purchase
instruments which are subject to demand features or
standby commitments. As defined by the Rule, a demand
feature entitles a Fund to receive the principal
amount of the instrument from the issuer or a third
party on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more
than 30 days' notice. A standby commitment entitles a
Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the
underlying instrument plus accrued interest at the
time of exercise.
The Funds acquire instruments subject to demand
features and standby commitments to enhance the
instrument's liquidity. The Funds treat demand
features and standby commitments as a part of the
underlying instruments, because the Funds do not
acquire them for speculative purposes and cannot
transfer them separately from the underlying
instruments. Therefore, although the Rule defines
demand features and standby commitments as "puts", the
Fund does not consider them to be separate investments
for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the
relationship between the amortized cost value
per share and the net asset value per share
based upon available indications of market
value. The Trustees will decide what, if any,
steps should be taken if there is a difference
of more than .5 of 1% between the two. The
Trustees will take any steps they consider
appropriate (such as redemption in kind or
shortening the average portfolio maturity) to
minimize any material dilution or other unfair
results arising from differences between the two
methods of determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its
investments to instruments that, in the opinion
of the Trustees, present minimal credit risks
and have received the requisite rating from one
or more nationally recognized statistical rating
organizations. If the instruments are not rated,
the Trustees must determine that they are of
comparable quality. The Rule also requires a
Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days)
appropriate to the objective of maintaining a
stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining
maturity of more than 397 days can be purchased
by a Fund.
Should the disposition of a portfolio security
result in a dollar-weighted average portfolio
maturity of more than 90 days, a Fund will
invest its available cash to reduce the average
maturity to 90 days or less as soon as possible.
A Fund may attempt to increase yield by trading
portfolio securities to take advantage of short-term
market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the
net asset value is affected by any unrealized
appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated
daily yield on Shares, computed by dividing the
annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be
higher than a similar computation made by using a
method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated
daily yield on Shares computed the same way may tend
to be lower than a similar computation made by using a
method of calculation based upon market prices and
estimates.
VALUING MUNICIPAL SECURITIES
With respect to The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money
Market Fund, the Board of Trustees uses an independent
pricing service to value municipal securities. The
independent pricing service takes into consideration:
yield; stability; risk; quality; coupon rate;
maturity; type of issue; trading characteristics;
special circumstances of a security or trading market;
and any other factors or market data it considers
relevant in determining valuations for normal
institutional size trading units of debt securities
and does not rely exclusively on quoted prices.
USE OF AMORTIZED COST
With respect to The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund, the Board of
Trustees has decided that the fair value of debt
securities purchased by a Fund with remaining
maturities of 60 days or less at the time of purchase
shall be their amortized cost value, unless the
particular circumstances of the security indicate
otherwise. Under this method, portfolio instruments
and assets are valued at the acquisition cost as
adjusted for amortization of premium or accumulation
of discount rather than at current market value. The
Executive Committee continually assesses this method
of valuation and recommends changes where necessary to
assure that the Fund's portfolio instruments are
valued at their fair value as determined in good faith
by the Trustees.
REDEEMING SHARES
Each Fund redeems Shares at the next computed net
asset value after a Fund receives the redemption
request. Redemption procedures are explained in the
prospectus under "Redeeming Trust Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash,
it reserves the right under certain circumstances to
pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with
applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in
determining net asset value and selecting the
securities in a manner the Board of Trustees determine
to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of
the Investment Company Act of 1940 under which a Fund
is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any
class' net asset value during any 90-day period.
Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing
60 days' notice to shareholders.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they
expect to meet the requirements of Subchapter M of the
Internal Revenue Code applicable to regulated
investment companies and to receive the special tax
treatment afforded to such companies. To qualify for
this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from
dividends, interest, and gains from the sale of
securities;
o derive less than 30% of its gross income from
the sale of securities held less than three
months;
o invest in securities within certain statutory
limits; and
o distribute to its shareholders at least 90% of
its net income earned during the year.
SHAREHOLDERS' TAX STATUS
With respect to The U.S. Government Securities Fund,
The Stock Fund, The Treasury Money Market Fund and The
Money Market Fund, shareholders are subject to federal
income tax on dividends received as cash or additional
shares. No portion of any income dividend paid by a
Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any
short-term capital gains, are taxable as ordinary
income.
With respect to The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money
Market Fund, no portion of any income dividend paid by
a Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Capital gains experienced by The Treasury Money
Market Fund and The Money Market Fund could
result in an increase in dividends. Capital
losses could result in a decrease in dividends.
If, for some extraordinary reason, these Funds
realize net long-term capital gains, such net
long-term capital gains will be distributed at
least once every 12 months.
With respect to The U.S. Government Securities Fund
and The Stock Fund, long-term capital gains
distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders
have held Shares.
With respect to The Maryland Municipal Bond Fund, The
Virginia Municipal Bond Fund, and The Tax-Free Money
Market Fund, capital gains or losses may be realized
by a Fund on the sale of portfolio securities and as a
result of discounts from par value on securities held
to maturity. Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as
such, whether they are taken in cash or reinvested,
and regardless of the length of time the shareholder
has owned the Shares.
TOTAL RETURN
The average annual total return for The U.S.
Government Securities Fund, The Stock Fund, Virginia
Municipal Bond Fund, and The Maryland Municipal Bond
Fund, for the fiscal year ended September 30, 1994 and
for the period from October 12, 1990 (effective date
of each Fund's registration statement) to September
30, 1994 was (3.12%) and 7.43%; (1.50%) and 8.23%;
(4.01%) and 6.34%; (4.50% ) and 5.87% for Trust Shares
and (5.32%) and 6.77%; (3.71%) and 7.66%; (6.21%) and
5.71%; (6.60%) and 5.24% for Investment Shares.
The average annual total return for Shares of each
Fund is the average compounded rate of return for a
given period that would equate a $1,000 initial
investment to the ending redeemable value of that
investment. The ending redeemable value is computed by
multiplying the number of shares owned at the end of
the period by the net asset value per share at the end
of the period. The number of shares owned at the end
of the period is based on the number of shares
purchased at the beginning of the period with $1,000,
adjusted over the period by any additional shares,
assuming the monthly/quarterly reinvestment of all
dividends and distributions.
YIELD
The yield for the seven-day period ended September 30,
1994 for the The Treasury Money Market Fund and The
Money Market Fund were for 4.10% and 4.34% for Trust
Shares and 3.85% and 4.09% for Investment Shares,
respectively. The yield for the seven-day period ended
September 30, 1994 for the The Tax-Free Money Market
Fund was 2.98%.
The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund's yield for the thirty-day period
ended September 30, 1994 were 5.31%, 0.78%, 4.73% and
5.08% for Trust Shares and 5.06% , 0.53%, 4.47% and
4.82% for Investment Shares.
The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund calculate yield
daily, based upon the seven days ending on the day of
the calculation, called the "base period." This yield
is computed by:
o determining the net change in the value of a
hypothetical account with a balance of one share
at the beginning of the base period, with the
net change excluding capital changes but
including the value of any additional Shares
purchased with dividends earned from the
original one share and all dividends declared on
the original and any purchased Shares;
o dividing the net change in the account's value
by the value of the account at the beginning of
the base period to determine the base period
return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund is determined by
dividing the net investment income per share (as
defined by the Securities and Exchange Commission)
earned by the class of shares over a thirty-day period
by the maximum offering price per share of the class
of shares on the last day of the period. The yield of
the Investment Shares of the Fund is determined each
day by dividing the net investment income per share
(as defined by the Securities and Exchange Commission)
earned by the class of shares over a thirty-day period
by the maximum offering price per share of the class
of shares on the last day of the period. This value is
then annualized using semiannual compounding. This
means that the amount of income generated during the
thirty-day period is assumed to be generated each
month over a 12-month period and is reinvested every
six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
With respect to The U.S. Government Securities Fund
and The Stock Fund, the yield will be calculated
separately for Investment Shares and Trust Shares.
Because Investment Shares are subject to a 12b-1 fee,
the net yield for Trust Shares for the same period
will exceed that of Investment Shares.
To the extent that financial institutions and
broker/dealers charge fees in connection with services
provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders
paying those fees.
EFFECTIVE YIELD
The effective yield for the seven-day period ended
September 30, 1994 for the The Treasury Money Market
Fund and The Money Market Fund was 4.18% and 4.44% for
Trust Shares and 3.92% and 4.18% for Investment
Shares, respectively. The effective yield for the
period ended September 30, 1994 for The Tax-Free Money
Market Fund was 3.03%.
The effective yield of The Treasury Money Market Fund,
The Money Market Fund, and The Tax-Free Money Market
Fund is computed by compounding the unannualized base
period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for both classes of shares
for The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money Market
Fund is calculated similarly to the yield, but is
adjusted to reflect the taxable yield that either
class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that
income earned by the Fund is 100% tax-exempt.
The tax-equivalent yield for the Trust Shares for the
thirty-day period ended September 30, 1994, was 7.14%
for The Virginia Municipal Bond Fund and 7.88% for The
Maryland Municipal Bond Fund. The tax-equivalent yield
for the Investment Shares was 6.75% for The Virginia
Municipal Bond Fund and 7.47% for The Maryland
Municipal Bond Fund for the same period. The tax-
equivalent yield for The Tax-Free Money Market Fund
for the same period was 4.14%%.
Tax-Equivalency Tables
Both classes of shares may also use a tax-
equivalency table in advertising and sales
literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains
free from federal regular income tax, and is
often free from state and local taxes as well.
As the tables below indicate, a "tax-free"
investment is an attractive choice for
investors, particularly in times of narrow
spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995
COMMONWEALTH OF VIRGINIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
20.75% 33.75% 36.75% 41.75% 45.35%
JOINT $1- $39,001 $94,251 $143,601 OVER
RETURN: 39,000 94,250 143,600 256,500 $256,500
SINGLE $1 $23,351 $56,551 $117,951 OVER
RETURN: 23,350 56,550 117.,950 256,500 $256,500
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
6.50% 8.20% 9.81% 10.28% 11.16% 11.89%
7.00% 8.83% 10.57% 11.07% 12.02% 12.81%
7.50% 9.46% 11.32% 11.86% 12.88% 13.72%
8.00% 10.09% 12.08% 12.65% 13.73% 14.64%
NOTE: THE MAXIMUM MARGINAL
TAX RATE FOR EACH BRACKET
WAS USED IN CALCULATING THE
TAXABLE YIELD EQUIVALENT.
FURTHERMORE, ADDITIONAL
STATE AND LOCAL TAXES PAID
ON COMPARABLE TAXABLE
INVESTMENTS WERE NOT USED
TO INCREASE FEDERAL
DEDUCTIONS.
The charts above are for illustrative purposes only. They
are not an indicator of past or future performance of
either class of shares.
*Some portion of the Fund's income may be subject to the
federal alternative minimum tax and state and local
taxes.
TAXABLE YIELD EQUIVALENT FOR 1995
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX
BRACKET:
22.50% 32.50% 38.50% 40.00% 45.00% 48.60%
JOINT $1- $39,001 $94,251 $100,001 $143,601 OVER
RETURN: 39,000 94,250 100,000 143,600 $256,500$256,500
SINGLE $1- $23,351 $56,551 $100,000 $117,951 OVER
RETURN: 23,350 56,550 100,000 117,950 256,500 $256,500
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
2.00% 2.58% 3.10% 3.25% 3.33% 3.64% 3.89%
2.50% 3.23% 3.88% 4.07% 4.17% 4.55% 4.86%
3.00% 3.87% 4.65% 4.88% 5.00% 5.45% 5.84%
3.50% 4.52% 5.43% 5.69% 5.83% 6.36% 6.81%
4.00% 5.16% 6.20% 6.50% 6.67% 7.27% 7.78%
4.50% 5.81% 6.98% 7.32% 7.50% 8.18% 8.75%
5.00% 6.45% 7.75% 8.13% 8.33% 9.09% 9.73%
5.50% 7.10% 8.53% 8.94% 9.17% 10.00% 10.70%
6.00% 7.74% 9.30% 9.76% 10.00% 10.91% 11.67%
6.50% 8.39% 10.08% 10.57% 10.83% 11.82% 12.65%
NOTE: THE MAXIMUM MARGINAL
TAX RATE FOR EACH BRACKET
WAS USED IN CALCULATING THE
TAXABLE YIELD EQUIVALENT.
FURTHERMORE, ADDITIONAL
STATE AND LOCAL TAXES PAID
ON COMPARABLE TAXABLE
INVESTMENT WERE NOT USED TO
INCREASE FEDERAL
DEDUCTIONS. THE LOCAL
INCOME TAX RATE IS ASSUMED
TO BE 50% OF THE STATE RATE
FOR ALL COUNTIES EXCLUDING
ALLEGHENY, BALTIMORE,
MONTGOMERY, PRINCE
GEORGE'S, TALBOT, AND
WORCHESTER.
The charts above are for illustrative purposes only.
They are not an indicator of past or future
performance of either class of shares.
*Some portion of the Fund's income may be subject to
the federal alternative minimum tax and state and
local taxes.
PERFORMANCE COMPARISONS
Each Fund's performance of both classes of shares
depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is
invested;
o changes in interest rates on money market
instruments, in the case of The Treasury Money
Market Fund and The Money Market Fund, or
changes in interest rates and market value of
portfolio securities in the case of U.S.
Government Income Fund, The Stock Fund, The
Virginia Municipal Bond Fund and Maryland
Municipal Bond Fund;
o changes in each Fund's or each class of Shares'
expenses;
o the relative amount of The Treasury Money Market
Fund's and The Money Market Fund's cash flow;
and
o various other factors.
In the case of The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund, either class of
shares' performance fluctuates on a daily basis
largely because net earnings and offering price per
Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of
yield and total return.
From time to time, each Fund may advertise its
performance compared to similar funds or portfolios
using certain indices, reporting services, and
financial publications. These may include the
following:
THE U.S. GOVERNMENT SECURITIES FUND:
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX
is comprised of approximately 66 issues of U.S.
Treasury securities maturing between 1 and 4.99
years, with coupon rates of 4.25% or more. These
total return figures are calculated for one,
three, six, and twelve month periods and year-to-
date and include the value of the bond plus
income and any price appreciation or
depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX
quotes total returns for U.S. Treasury issues
(excluding flower bonds) which have maturities
of three to five years. These total returns are
year-to-date figures which are calculated each
month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
income into account any change in net asset
value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking
in the U.S. Government funds category in
advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is
comprised of approximately 24 issues of
intermediate-term U.S. government and U.S.
Treasury securities with maturities between 3
and 4.99 years and coupon rates above 4.25%.
Index returns are calculated as total returns
for periods of one, three, six and twelve months
as well as year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX
is an unmanaged index comprised of the most
recently issued 3-year U.S. Treasury notes.
Index returns are calculated as total returns
for periods of one, three, six, and twelve
months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is
an unmanaged index comprised of all publicly
issued, non-convertible domestic debt of the
U.S. government, or any agency thereof, or any
quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes
and bonds with a minimum outstanding principal
of $1 million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street
Journal, Bloomberg Financial Markets, and
Telerate.. MORNINGSTAR, INC., an independent
rating service, is the publisher of the bi-
weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES
rates more than 1,000 NASDAQ-listed mutual funds
of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and
ratings are effective for two weeks.
THE STOCK FUND:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
into account any change in net asset value over
a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the
"growth and income funds" category in
advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents
share prices of selected blue-chip industrial
corporations as well as public utility and
transportation companies. The DJIA indicates
daily changes in the average price of stocks in
any of its categories. It also reports total
sales for each group of industries. Because it
represents the top corporations of America, the
DJIA index is a leading economic indicator for
the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500
COMMON STOCKS, a composite index of common
stocks in industry, transportation, and
financial and publicutility companies, compares
total returns of funds whose portfolios
areinvested primarily in common stocks. In
addition, the Standard & Poor's index assumes
reinvestment of all dividends paid by stocks
listed on the index. Taxes due on any of these
distributions are not included, nor are
brokerage or other fees calculated in the
Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating
service, is the publisher of the bi-weekly
MUTUAL FUND VALUES. MUTUAL FUND VALUES rates
more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted
returns.The maximum rating is five stars, and
ratings are effective for two weeks.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND
MUNICIPAL BOND FUND:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
into account any change in net asset value over
a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the
"general municipal bond funds" category in
advertising and sales literature.
o MORNINGSTAR, INC., an independent rating
service, is the publisher of the bi-weekly
MUTUAL FUND VALUES. MUTUAL FUND VALUES rates
more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted
returns.The maximum rating is five stars, and
ratings are effective for two weeks.
THE TREASURY MONEY MARKET FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "short-term U.S. government
funds" category in advertising and sales
literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly
quote of the most representative yields for
selected securities, issued by the U.S.
Treasury, maturing in 30 days.
THE MONEY MARKET FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami,
Florida, is a financial reporting service which
publishes weekly average rates of 50 leading
bank and thrift institution money market deposit
accounts. The rates published in the index are
an average of the personal account rates offered
on the Wednesday prior to the date of
publication by ten of the largest banks and
thrifts in each of the five largest Standard
Metropolitan Statistical Areas. Account minimums
range upward from $2,500 in each institution and
compounding methods vary. If more than one rate
is offered, the lowest rate is used. Rates are
subject to change at any time specified by the
institution. Investors may use such indices or
reporting services in addition to either class
of shares' prospectus to obtain a more complete
view of the Share's performance before
investing. Of course, when comparing performance
of either class of shares to any index, factors
such as portfolio composition and prevailing
market conditions should be considered in
assessing the significance of such comparisons.
THE TAX-FREE MONEY MARKET FUND
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes
annualized yields of hundreds of money market
funds on a weekly basis, and through its Money
Market Insight publication, reports monthly and
12-month-to-date investment results for the same
money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money
market funds in various categories based on the
latest available seven-day compound effective
yield. From time to time, the Fund will quote
its Money ranking in advertising and sales
literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is
an index of selected municipal notes, maturing
in six months, whose yields are chosen as
representative of this market. Calculations are
made weekly and monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL
PAPER is an index of selected tax-exempt
commercial paper issues, maturing in one month,
whose yields are chosen as representative of
this particular market. It is a weekly quote of
the most representative yields for selected
securities, issued by the U.S. Treasury,
maturing in 30 days. Calculations are made
weekly and monthly. Ehrlich-Bober & Co., Inc.
also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both
classes of shares may quote total returns which are
calculated on non-standardized base periods. These
total returns also represent the historic change in
the value of an investment in either class of shares
based on monthly reinvestment of dividends over a
specified period of time.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended
September 30, 1994, are incorporated herein by
reference from the Funds' Annual Report dated
September 30, 1994. A copy of the Annual Report for a
Fund may be obtained without charge by contacting
Signet Trust Company at the address located on the
back cover of the combined prospectus of by calling
804-771-7470.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING
DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher
rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible
to the adverse effect of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC-Debt rated BB, B, CCC and CC is regarded,
on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have
some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures
to adverse conditions.
CI-The rating CI is reserved for income bonds on which no
interest is being paid.
D-Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING
DEFINITIONS
AAA-Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edge." 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 which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group,
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long term risks appear somewhat
larger than in Aaa securities.
A-Bonds which are rated A 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 some time in the future. Baa-Bonds which are
rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear
adequate for the present but certain protective elements
may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have
speculative characteristics as well.
BA-Bonds which are Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B-Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements
of danger with respect to principal or interest.
CA-Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which
is unlikely to be affected by reasonably foreseeable
events.
AA-Bonds considered to be investment grade and of very
high quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as
strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
NR-NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with
a rating symbol to indicate the relative position of a
credit within the rating category. Plus and minus signs,
however, are not used in AAA category.
STANDARD & POOR'S CORPORATION, MUNICIPAL NOTE RATINGS
SP-1-Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+)
designation.
SP-2-Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, SHORT-TERM LOAN RATINGS
MIG1/VMIG1-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.
MIG2/VMIG2-This designation denotes high quality. Margins
of protection are ample although not so large as in the
preceding group.
2102608B-R (2/95)
THE VIRTUS FUNDS
(FORMERLY THE MEDALIST FUNDS)
INVESTMENT SHARES
CONSISTS OF SEVEN PORTFOLIOS:
THE U. S. GOVERNMENT SECURITIES FUND;
THE STOCK FUND;
THE VIRGINIA MUNICIPAL BOND FUND;
THE MARYLAND MUNICIPAL BOND FUND;
THE TREASURY MONEY MARKET FUND;
THE MONEY MARKET FUND; AND
THE TAX-FREE MONEY MARKET FUND
Combined Statement of Additional Information
This Combined Statement of Additional
Information should be read with the Combined
Prospectus for the Investment Shares
("Investment Shares") of The Virtus Funds (the
"Trust") and The Tax-Free Money Market Fund,
dated January 31, 1995. This Statement is not a
prospectus itself. To receive a copy of the
prospectus, write to or call the Trust.
FEDERATED INVESTORS TOWER
PITTSBURGH, PA 15222-3779
STATEMENT DATED JANUARY 31, 1995
(Revised March 1, 1995)
FEDERATED
INVESTORS
Distr
ibuto
r
A
subsi
diary
of
Feder
ated
Inves
tors
GENERAL INFORMATION Compensation 17
ABOUT THE TRUST 1 Trustee Liability 18
INVESTMENT OBJECTIVE AND INVESTMENT ADVISORY
POLICIES OF THE FUNDS 1SERVICES 18
THE U.S. GOVERNMENT Adviser to the Trust 18
SECURITIES FUND 1 Advisory Fees 18
Types of Investments 1
THE STOCK FUND 1
Commercial Paper 4
Bank Instruments 4
THE VIRGINIA MUNICIPAL
BOND FUND AND THE
MARYLAND MUNICIPAL BOND
FUND 4
Acceptable Investments 4
Types of Acceptable
Investments 5
THE TREASURY MONEY
MARKET FUND 5
Types of Investments 5
THE MONEY MARKET FUND 5
Types of Investments 5
THE TAX-FREE MONEY
MARKET FUND 5
PORTFOLIO INVESTMENTS
AND STRATEGIES 6
Repurchase Agreements 6
Reverse Repurchase
Agreements 6
When-Issued and
Delayed Delivery
Transactions 6
Lending of Portfolio
Securities 6
Restricted and
Illiquid Securities 6
Participation
Interests 7
Variable Rate
Municipal Securities 7
Municipal Leases 7
Temporary Investments 8
Adjustable Rate
Mortgage Securities 8
Portfolio Turnover 8
INVESTMENT LIMITATIONS 8
THE VIRTUS FUNDS
MANAGEMENT 12
Officers and Trustees 12
The Funds 16
Fund Ownership 16
Officers and Trustees
CUSTODIAN 19
BROKERAGE TRANSACTIONS 19
PURCHASING SHARES 19
Distribution Plan 19
Conversion to Federal
Funds 20
ADMINISTRATIVE
ARRANGEMENTS 20
DETERMINING NET ASSET
VALUE 20
Determining Market
Value of Securities 20
Use of the Amortized
Cost Method 21
Valuing Municipal
Securities 22
Use of Amortized Cost 22
REDEEMING SHARES 22
Redemption in Kind 22
TAX STATUS 22
The Funds' Tax Status 22
Shareholders' Tax
Status 22
TOTAL RETURN 23
YIELD 23
EFFECTIVE YIELD 24
TAX-EQUIVALENT YIELD 24
PERFORMANCE COMPARISONS 27
The U.S. Government
Securities Fund: 27
The Stock Fund: 27
The Virginia Municipal
Bond Fund and The
Maryland Municipal
Bond Fund: 28
The Treasury Money
Market Fund: 28
The Money Market Fund: 28
The Tax-Free Money
Market Fund: 28
Financial Statements 29
APPENDIX 30
GENERAL INFORMATION ABOUT THE TRUST
The Trust was established as a Massachusetts business
trust under a Declaration of Trust dated June 20,
1990. As of the date of this Statement, the Trust
consists of seven separate portfolios of securities
(collectively, the "Funds", individually, a "Fund")
which are as follows: The U. S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The Treasury
Money Market Fund, The Money Market Fund, and The Tax-
Free Money Market Fund. On October 1, 1992, the name
of the Trust was changed from "The SBK Select Series"
to "Signet Select Funds." On August 15, 1994, the name
of the Trust was changed from "Signet Select Funds" to
"The Medalist Funds." On February 15, 1995, the name
of the Trust was changed from "The Medalist Funds" to
"The Virtus Funds."
With the exception of The Tax-Free Money Market Fund,
which offers a single class of shares, the Funds are
offered in two classes, Investment Shares and Trust
Shares. This Combined Statement of Additional
Information relates only to the Investment Shares of
those Funds offering classes and to shares of The Tax-
Free Money Market Fund.
INVESTMENT OBJECTIVE AND POLICIES OF THE FUNDS
The prospectus discusses the objective of each Fund
and the policies it employs to achieve those
objectives. The following discussion supplements the
description of the Funds' investment policies in the
Combined prospectus.
The Funds' respective investment objectives cannot be
changed without approval of shareholders. The
investment policies described below may be changed by
the Trustees without shareholder approval.
Shareholders will be notified before any material
change in these policies becomes effective.
Additional information about investment limitations,
strategies that one or more Funds may employ, and
certain investment policies mentioned below appear in
the prospectus section "Portfolio Investments and
Strategies."
THE U.S. GOVERNMENT SECURITIES FUND
TYPES OF INVESTMENTS
The Fund invests primarily in securities which are
guaranteed as to payment of principal and interest by
the U.S. government or its instrumentalities.
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest generally include
direct obligations of the U.S. Treasury (such as
U.S. Treasury bills, notes, and bonds) and
obligations issued or guaranteed by U.S.
government agencies or instrumentalities. These
securities are backed by: the full faith and
credit of the U.S. Treasury; the issuer's right
to borrow from the U.S. Treasury; the
discretionary authority of the U.S. government
to purchase certain obligations of agencies or
instrumentalities; or the credit of the agency
or instrumentality issuing the obligations.
Examples of agencies and instrumentalities which
may not always receive financial support from
the U.S. government are: the Farm Credit System;
Federal Home Loan Banks; Farmers Home
Administration; and Federal National Mortgage
Association.
Collateralized Mortgage Obligations (CMOs)
Privately issued CMOs generally represent an
ownership interest in federal agency mortgage
pass-through securities such as those issued by
the Government National Mortgage Association.
The terms and characteristics of the mortgage
instruments may vary among pass-through mortgage
loan pools.
The market for such CMOs has expanded
considerably since its inception. The size of
the primary issuance market and the active
participation in the secondary market by
securities dealers and other investors make
government-related pools highly liquid.
THE STOCK FUND
The Fund invests primarily in the securities of high
quality companies, including common stocks, preferred
stocks, corporate bonds, notes, warrants and
convertible securities.
Convertible Securities
Convertible securities are fixed income
securities which may be exchanged or converted
into a predetermined number of the issuer's
underlying common stock at the option of the
holder during a specified time period.
Convertible securities may take the form of
convertible preferred stock, convertible bonds
or debentures, units consisting of "usable"
bonds and warrants or a combination of the
features of several of these securities. The
investment characteristics of each convertible
security vary widely, which allows convertible
securities to be employed for different
investment objectives.
The Fund will exchange or convert the
convertible securities held in its portfolio
into shares of the underlying common stock in
instances in which, in the investment adviser's
opinion, the investment characteristics of the
underlying common shares will assist the Fund in
achieving its investment objectives. Otherwise,
the Fund may hold or trade convertible
securities. In selecting convertible securities
for the Fund, the Fund's adviser evaluates the
investment characteristics of the convertible
security as a fixed income instrument, and the
investment potential of the underlying equity
security for capital appreciation. In evaluating
these matters with respect to a particular
convertible security, the Fund's adviser
considers numerous factors, including the
economic and political outlook, the value of the
security relative to other investment
alternatives, trends in the determinants of the
issuer's profits, and the issuer's management
capability and practices.
Warrants
Warrants are basically options to purchase
common stock at a specific price (usually at a
premium above the market value of the optioned
common stock at issuance) valid for a specific
period of time. Warrants may have a life ranging
from less than a year to twenty years or may be
perpetual. However, most warrants have
expiration dates after which they are worthless.
In addition, if the market price of the common
stock does not exceed the warrant's exercise
price during the life of the warrant, the
warrant will expire as worthless. Warrants have
no voting rights, pay no dividends, and have no
rights with respect to the assets of the
corporation issuing them. The percentage
increase or decrease in the market price of the
warrant may tend to be greater than the
percentage increase or decrease in the market
price of the optioned common stock.
Futures And Options Transactions
As a means of reducing fluctuations in the net
asset value of shares of the Fund, the Fund may
attempt to hedge all or a portion of its
portfolio by buying and selling financial
futures contracts, buying put options on
portfolio securities and listed put options on
futures contracts, and writing call options on
futures contracts. The Fund may also write
covered call options on portfolio securities to
attempt to increase its current income. The Fund
will maintain its positions in securities,
option rights, and segregated cash subject to
puts and calls until the options are exercised,
closed, or have expired. An option position on
financial futures contracts may be closed out
only on an exchange which provides a secondary
market from options of the same series.
Financial Futures Contracts
A futures contract is a firm commitment by two
parties: the seller, who agrees to make delivery
of the specific type of security called for in
the contract ("going short") and the buyer, who
agrees to take delivery of the security ("going
long") at a certain time in the future.
Financial futures contracts call for the
delivery of shares of common stocks represented
in a particular index.
Put Options on Financial Futures Contracts
The Fund may purchase listed put options on
financial futures contracts.Unlike entering
directly into a futures contract, which requires
the purchaser to buy a financial instrument on a
set date at a specified price, the purchase of a
put option on a futures contract entitles (but
does not obligate) its purchaser to decide on or
before a future date whether to assume a short
position at the specified price.
Generally, if the hedged portfolio securities
decrease in value during the term of an option,
the related futures contracts will also decrease
in value and the option will increase in value.
In such an event, the Fund will normally close
out its option by selling an identical option.
If the hedge is successful, the proceeds
received by the Fund upon the sale of the second
option will be large enough to offset both the
premium paid by the Fund for the original option
plus the decrease in value of the hedged
securities.
Alternatively, the Fund may exercise its put
option to close out the position. To do so, it
would simultaneously enter into a futures
contract of the type underlying the option (for
a price less than the strike price of the
option) and exercise the option. The Fund would
then deliver the futures contract in return for
payment of the strike price. If the Fund neither
closes out nor exercises an option, the option
will expire on the date provided in the option
contract, and only the premium paid for the
contract will be lost.
Call Options on Financial Futures Contracts
In addition to purchasing put options on
futures, the Fund may write listed call options
on futures contracts to hedge its portfolio.
When the Fund writes a call option on a futures
contract, it is undertaking the obligation of
assuming a short futures position (selling a
futures contract) at the fixed strike price at
any time during the life of the option if the
option is exercised. As stock prices fall,
causing the prices of futures to go down, the
Fund's obligation under a call option on a
future (to sell a futures contract) costs less
to fulfill, causing the value of the Fund's call
option position to increase.
In other words, as the underlying futures price
goes down below the strike price, the buyer of
the option has no reason to exercise the call,
so that the Fund keeps the premium received for
the option. This premium can substantially
offset the drop in value of the Fund's fixed
income or indexed portfolio which is occurring
as interest rates rise.
Prior to the expiration of a call written by the
Fund, or exercise of it by the buyer, the Fund
may close out the option by buying an identical
option. If the hedge is successful, the cost of
the second option will be less than the premium
received by the Fund for the initial option. The
net premium income of the Fund will then
substantially offset the decrease in value of
the hedged securities.
The Fund will not maintain open positions in
futures contracts it has sold or call options it
has written on futures contracts if, in the
aggregate, the value of the open positions
(marked to market) exceeds the current market
value of its securities portfolio plus or minus
the unrealized gain or loss on those open
positions, adjusted for the correlation of
volatility between the hedged securities and the
futures contracts. If this limitation is
exceeded at any time, the Fund will take prompt
action to close out a sufficient number of open
contracts to bring its open futures and options
positions within this limitation.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the
Fund does not pay or receive money upon the
purchase or sale of a futures contract. Rather,
the Fund is required to deposit an amount of
"initial margin" in cash or U.S. Treasury bills
with its custodian (or the broker, if legally
permitted). The nature of initial margin in
futures transactions is different from that of
margin in securities transactions in that
futures contract initial margin does not involve
the borrowing of funds by the Fund to finance
the transactions. 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.
A futures contract held by the Fund is valued
daily at the official settlement price of the
exchange on which it is traded. Each day the
Fund pays or receives cash, called "variation
margin," equal to the daily change in value of
the futures contract. This process is known as
"marking to market." Variation margin does not
represent a borrowing or loan by the Fund but is
instead settlement between the Fund and the
broker of the amount one would owe the other if
the futures contract expired. In computing its
daily net asset value, the Fund will mark to
market its open futures positions.
The Fund is also required to deposit and
maintain margin when it writes call options on
futures contracts.
Purchasing Put Options on Portfolio Securities
The Fund may purchase put options on portfolio
securities to protect against price movements in
particular securities in its portfolio. A put
option gives the Fund, in return for a premium,
the right to sell the underlying security to the
writer (seller) at a specified price during the
term of the option.
Writing Covered Call Options On Portfolio Securities
The Fund may also write covered call options to
generate income. As writer of a call option, the
Fund has the obligation upon exercise of the
option during the option period to deliver the
underlying security upon payment of the exercise
price. The Fund may only sell call options
either on securities held in its portfolio or on
securities which it has the right to obtain
without payment of further consideration (or has
segregated cash in the amount of any additional
consideration).
Over-the-Counter Options
The Fund may purchase and write over-the-counter
options on portfolio securities in negotiated
transactions with the buyers or writers of the
options for those options on portfolio
securities held by the Fund and not traded on an
exchange.
Over-the-counter options are two party contracts
with price and terms negotiated between buyer
and seller. In contrast, exchange-traded options
are third party contracts with standardized
strike prices and expiration dates and are
purchased from a clearing corporation. Exchange-
traded options have a continuous liquid market
while over-the-counter options may not.
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest are those set forth
under "The U.S. Government Securities Fund-U.S.
Government Obligations."
COMMERCIAL PAPER
The Fund may invest in commercial paper rated at least
A-1 by Standard & Poor's Ratings Group ("S&P"), Prime-
1 by Moody's Investors Service, Inc. ("Moody's"), or F-
1 by Fitch Investors Service ("Fitch") and money
market instruments (including commercial paper) which
are unrated but of comparable quality, including
Canadian Commercial Paper ("CCPs") and Europaper. In
the case where commercial paper, CCPs or Europaper
have received different ratings from different rating
services, such commercial paper, CCPs or Europaper is
an acceptable investment so long as at least one
rating is one of the preceding high quality ratings
and provided the investment adviser has determined
that such investment presents minimal credit risks.
BANK INSTRUMENTS
The Fund may invest in the instruments of banks and
savings and loans whose deposits are insured by the
Bank Insurance Fund ("BIF"), which is administered by
the Federal Deposit Insurance Corporation ("FDIC"), or
the Savings Association Insurance Fund ("SAIF"), which
is administered by the FDIC, such as certificates of
deposit, demand and time deposits, savings shares, and
bankers' acceptances. These instruments are not
necessarily guaranteed by those organizations.
In addition to domestic bank obligations such as
certificates of deposit, demand and time deposits,
savings shares, and bankers' acceptances, the Fund may
invest in:
o Eurodollar Certificates of Deposit ("ECDs")
issued by foreign branches of U.S. or foreign
banks;
o Eurodollar Time Deposits ("ETDs"), which are
U.S. dollar-denominated deposits in foreign
branches of U.S. or foreign banks;
o Canadian Time Deposits, which are U.S. dollar-
denominated deposits issued by branches of major
Canadian banks located in the United States; and
o Yankee Certificates of Deposit ("Yankee CDs"),
which are U.S. dollar-denominated certificates
of deposit issued by U.S. branches of foreign
banks and held in the United States.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND
MUNICIPAL BOND FUND
ACCEPTABLE INVESTMENTS
The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund pursue their investment objectives by
investing in professionally managed portfolios of
securities at least 65% of which are comprised of
Virginia (in the case of The Virginia Municipal Bond
Fund) or Maryland (in the case of The Maryland Municipal
Bond Fund) municipal securities. The Funds will invest
their assets so that, under normal circumstances, at
least 80% of their annual interest income is exempt from
federal regular and Virginia (in the case of The Virginia
Municipal Bond Fund) or Maryland (in the case of The
Maryland Municipal Bond Fund) state income taxes or that
at least 80% of their total assets are invested in
obligations, the interest income from which is exempt
from federal regular and Virginia (in the case of The
Virginia Municipal Bond Fund) or Maryland (in the case of
The Maryland Municipal Bond Fund) state income taxes.
Characteristics
The municipal securities in which the Funds
invest have the characteristics set forth in the
prospectus. An unrated municipal security will
be determined by a Fund's adviser to meet the
quality standards established by the Fund's
Board of Trustees if it is of comparable quality
to the rated municipal securities which the Fund
purchases. The Trustees consider the
creditworthiness of the issuer of a municipal
security, the issuer of a participation interest
if the Fund has the right to demand payment from
the issuer of the interest or the guarantor of
payment by either of those issuers.
If Moody's or S&P's ratings change because of
changes in those organizations or in their
rating systems, a Fund will try to use
comparable ratings as standards in accordance
with the investment policies described in the
Fund's prospectus.
TYPES OF ACCEPTABLE INVESTMENTS
Examples of Virginia and Maryland municipal securities
are:
o municipal notes and tax-exempt commercial paper;
o serial bonds sold with a series of maturity
dates;
o tax anticipation notes sold to finance working
capital needs of municipalities in anticipation
of receiving taxes at a later date;
o bond anticipation notes sold in anticipation of
the issuance of longer-term bonds in the future;
o revenue anticipation notes sold in expectation
of receipt of federal income available under the
Federal Revenue Sharing Program;
o prerefunded municipal bonds refundable at a
later date (payment of principal and interest on
prerefunded bonds is assured through the first
call date by the deposit in escrow of U.S.
government securities); or
o general obligation bonds secured by a
municipality's pledge of taxation.
THE TREASURY MONEY MARKET FUND
TYPES OF INVESTMENTS
The Fund invests only in short-term U.S. Treasury
obligations. Short-term U.S. Treasury obligations as
used herein refers to evidences of indebtedness issued
by the United States, or issued by an agency or
instrumentality thereof, and fully guaranteed as to
principal and interest by the United States, maturing
in 397 days or less from the date of acquisition
unless they are purchased under a repurchase agreement
that provides for repurchase by the seller within one
year from the date of acquisition. The Fund may also
retain Fund assets in cash.
THE MONEY MARKET FUND
TYPES OF INVESTMENTS
The Fund invests primarily in money market instruments
maturing in 397 days or less and which include, but are
not limited to, commercial paper and demand master notes,
domestic and foreign bank instruments, U.S. government
obligations, and corporate debt obligations.
Bank Instruments
The types of bank instruments in which the Fund
invests are those set forth under "The Stock
Fund-Bank Instruments."
U.S. Government Obligations
The types of U.S. government obligations in
which the Fund may invest are those set forth
under "The U.S. Government Securities Fund-U.S.
Government Obligations."
THE TAX-FREE MONEY MARKET FUND
The Fund invests in a portfolio of municipal
securities maturing in 13 months or less. As a matter
of investment policy, which cannot be changed without
shareholder approval, at least 80% of the Fund's
annual interest income will be exempt from federal
income tax (including alternative minimum tax). The
average maturity of the securities in the Fund's
portfolio, computed on a dollar-weighted basis, will
be 90 days or less.
PORTFOLIO INVESTMENTS AND STRATEGIES
REPURCHASE AGREEMENTS
The Funds or their custodian will take possession of
the securities subject to repurchase agreements and
these securities will be marked to market daily. In
the event that a defaulting seller filed for
bankruptcy or became insolvent, disposition of such
securities by a Fund might be delayed pending court
action. The Funds believe that under the regular
procedures normally in effect for custody of a Fund's
portfolio securities subject to repurchase agreements,
a court of competent jurisdiction would rule in favor
of a Fund and allow retention or disposition of such
securities. The Funds will only enter into repurchase
agreements with banks and other recognized financial
institutions such as broker/dealers which are deemed
by the adviser to be creditworthy pursuant to
guidelines established by the Trustees.
REVERSE REPURCHASE AGREEMENTS
The Funds may also enter into reverse repurchase
agreements. These transactions are similar to
borrowing cash. In a reverse repurchase agreement a
Fund transfers possession of a portfolio instrument to
another person, such as a financial institution,
broker, or dealer, in return for a percentage of the
instrument's market value in cash, and agrees that on
a stipulated date in the future the Fund will
repurchase the portfolio instrument by remitting the
original consideration plus interest at an agreed upon
rate. The use of reverse repurchase agreements may
enable a Fund to avoid selling portfolio instruments
at a time when a sale may be deemed to be
disadvantageous, but the ability to enter into reverse
repurchase agreements does not ensure that a Fund will
be able to avoid selling portfolio instruments at a
disadvantageous time.
When effecting reverse repurchase agreements, liquid
assets of a Fund, in a dollar amount sufficient to
make payment for the obligations to be purchased, are
segregated at the trade date. These securities are
marked to market daily and are maintained until the
transaction is settled.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
These transactions are made to secure what is
considered to be an advantageous price or yield for a
Fund. No fees or other expenses, other than normal
transaction costs, are incurred. However, liquid
assets of a Fund sufficient to make payment for the
securities to be purchased are segregated on a Fund's
records at the trade date. These assets are marked to
market daily and are maintained until the transaction
has been settled. The Funds may engage in these
transactions to an extent that would cause the
segregation of an amount up to 20% of the total value
of their assets. The Funds do not intend to engage in
when-issued and delayed delivery transactions to an
extent that would cause the segregation of more than
20% of the total value of their respective assets.
LENDING OF PORTFOLIO SECURITIES
The collateral received when The U.S. Government
Securities Fund, The Stock Fund and The Money Market
Fund lend portfolio securities must be valued daily
and, should the market value of the loaned securities
increase, the borrower must furnish additional
collateral to the particular Fund. During the time
portfolio securities are on loan, the borrower pays a
Fund any dividends or interest paid on such
securities. Loans are subject to termination at the
option of a Fund or the borrower. A Fund may pay
reasonable administrative and custodial fees in
connection with a loan and may pay a negotiated
portion of the interest earned on the cash or
equivalent collateral to the borrower or placing
broker. The U.S. Government Securities Fund and The
Stock Fund do not have the right to vote securities on
loan, but would terminate the loan and regain the
right to vote if that were considered important with
respect to the investment.
RESTRICTED AND ILLIQUID SECURITIES
The Funds may invest in restricted securities.
Restricted securities are any securities in which a
Fund may otherwise invest pursuant to its investment
objective and policies but which are subject to
restriction on resale under federal securities law.
However, The U.S. Government Securities Fund, The
Stock Fund, The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will limit investments in
illiquid securities, including certain restricted
securities determined by the Trustees not to be
liquid, and repurchase agreements providing for
settlement in more than seven days after notice, to
15% of its net assets. In the case of The Virginia
Municpal Bond Fund and The Maryland Municipal Bond
Fund, illiquid securities will include participation
interests and variable rate municipal securities
without a demand feature or with a demand feature of
longer than seven days and which the adviser believes
cannot be sold within seven days. The Treasury Money
Market Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will limit investments in illiquid
securities, including certain securities determined by
the Trustees not to be liquid, and repurchase
agreements providing for settlement in more than seven
days after notice, and in the case of The Money Market
Fund, specifically including non-negotiable fixed
income time deposits with maturities over seven days,
to 10% of their net assets.
The U.S. Government Securities Fund, The Stock Fund
and The Money Market Fund may invest in commercial
paper issued in reliance on the exemption from
registration afforded by Section 4(2) of the
Securities Act of 1933. Section 4(2) commercial paper
is restricted as to disposition under federal
securities law and is generally sold to institutional
investors, such as the Fund, who agree that they are
purchasing the paper for investment purposes and not
with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section
4(2) commercial paper is normally resold to other
institutional investors like the Fund through or with
the assistance of the issuer or investment dealers who
make a market in Section 4(2) commercial paper, thus
providing liquidity. The Funds believe that Section
4(2) commercial paper and possibly certain other
restricted securities which meet the criteria for
liquidity established by the Board of Trustees are
quite liquid. The Funds intend, therefore, to treat
the restricted securities which meet the criteria for
liquidity established by the Trustees, including
Section 4(2) commercial paper, as determined by a
Fund's investment adviser, as liquid and not subject
to the investment limitation applicable to illiquid
securities. In addition, because Section 4(2)
commercial paper is liquid, the Funds intend to not
subject such paper to the limitation applicable to
restricted securities.
PARTICIPATION INTERESTS
The financial institutions from which The Virginia
Municipal Bond Fund, The Maryland Municipal Bond Fund,
and The Tax-Free Money Market Fund purchase
participation interests frequently provide or secure
from other financial institutions irrevocable letters
of credit or guarantees and give a Fund the right to
demand payment on specified notice (normally within
thirty days for The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund and seven days for
The Tax-Free Money Market Fund) from the issuer of the
letter of credit or guarantee. These financial
institutions may charge certain fees in connection
with their repurchase commitments, including a fee
equal to the excess of the interest paid on the
municipal securities over the negotiated yield at
which the participation interests were purchased by a
Fund. By purchasing participation interests, a Fund is
buying a security meeting the maturity and quality
requirements of a Fund and is also receiving the tax-
free benefits of the underlying securities.
In the acquisition of participation interests, a Fund's
investment adviser will consider the following quality
factors:
o the quality of the underlying municipal security
(of which a Fund takes possession);
o the quality of the issuer of the participation
interest; and
o a guarantee or letter of credit from a high-
quality financial institution supporting the
participation interest.
VARIABLE RATE MUNICIPAL SECURITIES
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money Market
Fund invest in variable municipal securities. Variable
interest rates generally reduce changes in the market
value of municipal securities from their original
purchase prices. Accordingly, as interest rates
decrease or increase, the potential for capital
appreciation or depreciation is less for variable rate
municipal securities than for fixed income
obligations.
Many municipal securities with variable interest rates
purchased by the The Tax-Free Money Market Fund are
subject to repayment of principal (usually within
seven days) on the The Tax-Free Money Market Fund's
demand. For purposes of determining the Fund's average
maturity, the maturities of these variable rate demand
municipal securities (including participation
interests) are the longer of the periods remaining
until the next readjustment of their interest rates or
the periods remaining until their principal amounts
can be recovered buy exercising the right to demand
payment. The terms of these variable rate demand
instruments require payment of principal and accrued
interest from the issuer of the municipal obligations,
the issuer of the participation interests or a
guarantor of either issuer.
MUNICIPAL LEASES
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money Market
Fund may purchase municipal securities in the form of
participation interests which represent undivided
proportional interests in lease payments by a
governmental or nonprofit entity. The lease payments
and other rights under the lease provide for and
secure the payments on the certificates. Lease
obligations may be limited by municipal charter or the
nature of the appropriation for the lease. In
particular, lease obligations may be subject to
periodic appropriation. If the entity does not
appropriate funds for future lease payments, the
entity cannot be compelled to make such payments.
Furthermore, a lease may provide that the certificate
trustee cannot accelerate lease obligations upon
default. The trustee would only be able to enforce
lease payments as they became due. In the event of a
default or failure of appropriation, it is unlikely
that the trustee would be able to obtain an acceptable
substitute source of payment.
In determining the liquidity of municipal lease
securities, the adviser, under the authority delegated
by the Board of Trustees, will base its determination
on the following factors: (a) whether the lease can be
terminated by the lessee; (b) the potential recovery,
if any, from a sale of the leased property upon
termination of the lease; (c) the lessee's general
credit strength (e.g., its debts, administrative,
economic and financial characteristics, and
prospects); (d) the likelihood that the lessee will
discontinue appropriating funding for the leased
property because the property is no longer deemed
essential to its operations (e.g., the potential for
an "event of nonappropriation"); and (e) any credit
enhancement of legal recourse provided upon an event
of nonappropriation or other termination of the lease.
TEMPORARY INVESTMENTS
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund and The Tax-Free Money Market Fund
may also invest in temporary investments during times
of unusual market conditions for defensive purposes
and to maintain liquidity.
From time to time, such as when suitable securities
are not available to the respective Fund, a Fund may
invest a portion of its assets in cash. Any portion of
a Fund's assets maintained in cash will reduce the
amount of assets in securities held in the respective
Fund, and could thereby reduce a Fund's yield.
ADJUSTABLE RATE MORTGAGE SECURITIES
The U.S. Government Securities Fund invests in
adjustable rate mortgage securities ("ARMS"). Not
unlike other U.S. government securities, the market
value of ARMS will generally vary inversely with
changes in market interest rates. Thus, the market
value of ARMS generally declines when interest rates
rise and generally rises when interest rates decline.
While ARMS generally entail less risk of a decline
during periods of rapidly rising rates, ARMS may also
have less potential for capital appreciation than
other similar investments (e.g. investments with
comparable maturities) because as interest rates
decline, the likelihood increases that mortgages will
be prepaid. Furthermore, if ARMS are purchased at a
premium, mortgage foreclosures and unscheduled
principal payment may result in some loss of a
holder's principal investment to the extent of the
premium paid. Conversely, if ARMS are purchased at a
discount, both a scheduled payment of principal and an
unscheduled prepayment of principal would increase
current and total returns and would accelerate the
recognition of income, which would be taxed as
ordinary income when distributed to shareholders.
PORTFOLIO TURNOVER
The Funds will not attempt to set or meet a portfolio
turnover rate since any turnover would be incidental
to transactions undertaken in an attempt to achieve a
Fund's investment objective. The Stock Fund may
experience greater portfolio turnover than would be
expected with a portfolio of higher-rated securities.
A high portfolio turnover will result in increased
transaction costs to the Fund. For the fiscal years
ended September 30, 1994, 1993, and 1992, the
portfolio turnover rates were 227%, 154%, and 201%,
respectively, for The U.S. Government Securities Fund;
205%, 67%, and 38%, respectively, for The Stock Fund;
29%, 17%, and 51%, respectively, for The Virginia
Municipal Bond Fund; and 27%, 23%, and 34%,
respectively, for The Maryland Municipal Bond Fund.
INVESTMENT LIMITATIONS
Issuing Senior Securities and Borrowing Money
The Funds will not issue senior securities
except that a Fund may borrow money directly or
through reverse repurchase agreements in amounts
up to one-third of the value of its net assets,
including the amount borrowed. The Funds will
not borrow money or engage in reverse repurchase
agreements for investment leverage, but rather
as a temporary, extraordinary, or emergency
measure or to facilitate management of the
portfolio by enabling a Fund to meet redemption
requests when the liquidation of portfolio
securities is deemed to be inconvenient or
disadvantageous. A Fund will not purchase any
securities while any borrowings in excess of 5%
of its total assets are outstanding. With
respect to The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The
Treasury Money Market Fund, and The Money Market
Fund, during the period any reverse repurchase
agreements are outstanding, the Funds will
restrict the purchase of portfolio securities to
money market instruments maturing on or before
the expiration date of the reverse repurchase
agreements, but only to the extent necessary to
assure completion of the reverse repurchase
agreements.
Selling Short and Buying on Margin
The Funds will not purchase any securities on
margin but they may obtain such short-term
credits as may be necessary for clearance of
transactions. With respect to The U.S.
Government Securities Fund and The Stock Fund,
the deposit or payment by the Fund of initial or
variation margin in connection with financial
futures contracts or related options
transactions is not considered the purchase of a
security on margin. The Virginia Municipal Bond
Fund, The Maryland Municipal Bond Fund, The
Treasury Money Market Fund, The Money Market
Fund, and The Tax-Free Money Market Fund may not
sell any securities short.
Pledging Assets
The Funds will not mortgage, pledge, or
hypothecate any assets except to secure
permitted borrowings. In these cases the Funds,
except The Tax-Free Money Market Fund, may
pledge assets having a market value not
exceeding the lesser of the dollar amounts
borrowed or 15% of the value of total assets of
a Fund at the time of the pledge. Margin
deposits for the purchase and sale of financial
futures contracts and related options are not
deemed to be a pledge.
Lending Cash or Securities
The U.S. Government Securities Fund, The Stock
Fund, The Treasury Money Market Fund and The
Money Market Fund, will not lend any of their
assets, except portfolio securities up to one-
third of the value of their total assets. This
shall not prevent a Fund from purchasing or
holding bonds, debentures, notes, certificates
of indebtedness, or other debt securities,
entering into repurchase agreements, or engaging
in other transactions where permitted by a
Fund's investment objective, policies, and
limitations or the Trust's Declaration of Trust.
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will not lend any
of their assets, except that they may acquire
publicly or nonpublicly issued municipal
securities or temporary investments or enter
into repurchase agreements as permitted by a
Fund's investment objective, policies,
limitations and Declaration of Trust.
The Tax-Free Money Market Fund will not lend any
of its assets except that it may purchase or
hold portfolio securities permitted by its
investment objective, policies and limitations,
or Declaration of Trust.
Investing in Restricted Securities
Except for The Tax-Free Money Market Fund, the
Funds will not invest more than 10% of their net
assets in securities subject to restrictions on
resale under the Securities Act of 1933 (except
certain restricted securities which meet the
criteria for liquidity as established by the
Board of Trustees. With respect to The U.S.
Government Securities Fund, The Stock Fund and
The Money Market Fund, this exception
specifically extends to commercial paper issued
under Section 4(2) of the Securities Act of 1933
and certain other restricted securities which
meet the criteria for liquidity as established
by the Board of Trustees).
The Tax-Free Money Market Fund will not invest
more than 10% of its total assets in securities
subject to restrictions on resale under federal
securities law, except for restricted securities
determined to be liquid under criteria
established by the Trustees.
Investing in Commodities
The Funds will not purchase or sell commodities,
commodity contracts or commodity futures
contracts except for financial futures contracts
in the case of The Stock Fund.
Investing in Real Estate
The Funds will not purchase or sell real estate,
although The U.S. Government Securities Fund and
The Stock Fund may invest in securities secured
by real estate or interests in real estate or
issued by companies, including real estate
investment trusts, which invest in real estate
or interests therein. The Virginia Municipal
Bond Fund, The Maryland Municipal Bond Fund, The
Money Market Fund, and The Tax-Free Money Market
Fund may invest in securities of issuers whose
business involves the purchase or sale of real
estate or in securities which are secured by
real estate or interests in real estate.
Diversification of Investments
With respect to 75% of the value of its total
assets, The U.S. Government Securities Fund, The
Stock Fund and The Money Market Fund will not
purchase securities issued by any one issuer
(other than cash, cash items or securities
issued or guaranteed by the government of the
United States or its agencies or
instrumentalities and repurchase agreements
collateralized by such securities), if as a
result more than 5% of the value of its total
assets would be invested in the securities of
that issuer. The U.S. Government Fund and The
Stock Fund will not acquire more than 10% of the
outstanding voting securities of any one issuer.
Concentration of Investments
The U.S. Government Securities Fund, The Stock
Fund and The Money Market Fund will not invest
25% or more of the value of their total assets
in any one industry. With respect to The Money
Market Fund, investing in bank instruments (such
as time and demand deposits and certificates of
deposit), U.S. government obligations, or
instruments secured by these money market
instruments, such as repurchase agreements for
U.S. government obligations, shall not be
considered investments in any one industry.
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund will not purchase
securities if, as a result of such purchase, 25%
or more of the value of its total assets would
be invested in any one industry or in industrial
development bonds or other securities, the
interest on which is paid from revenues of
similar types of projects. However, these Funds
may invest as temporary investments more than
25% of the value of its assets in cash or cash
items, securities issued or guaranteed by the
U.S. government, its agencies, or
instrumentalities, or instruments secured by
these money market instruments, such as
repurchase agreements.
The Tax-Free Money Market Fund will not invest
25% or more of the value of its total assets in
any one industry, except that it may invest more
than 25% of its total assets in securities
issued or guaranteed by the U.S. government, its
agencies or instrumentalities and industrial
development bonds as long as they are not from
the same facility or similar types of
facilities. The Tax-Free Money Market Fund does
not intend to purchase securities that would
increase the percentage of its assets invested
in the securities of governmental subdivisions
located in any one state, territory, or U.S.
possession to 25% or more.
Underwriting
The Funds will not underwrite any issue of
securities, except as a Fund may be deemed to be
an underwriter under the Securities Act of 1933
in connection with the sale of securities in
accordance with its investment objective,
policies, and limitations.
The above limitations cannot be changed with respect
to a Fund without approval of a majority of that
Fund's Shares. The following limitations may be
changed by the Trustees without shareholder approval.
Shareholders will be notified before any material
change in these limitations becomes effective.
Investing in Illiquid Securities
The U.S. Government Securities Fund, The Stock
Fund, The Virginia Municipal Bond Fund, and The
Maryland Municipal Bond Fund will not invest
more than 15% of the value of their net assets
in illiquid securities, including repurchase
agreements providing for settlement in more than
seven days after notice, and certain restricted
securities determined by the Trustees not to be
liquid; and, in the case of The Virginia
Municipal Bond Fund and The Maryland Municipal
Bond Fund, specifically including participation
interests and variable rate municipal securities
without a demand feature or with a demand
feature of longer than seven days and which the
adviser believes cannot be sold within seven
days. The Treasury Money Market Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
will not invest more than 10% of the value of
their net assets in illiquid securities,
including repurchase agreements providing for
settlement more than seven days after notice and
certain securities determined by the Trustees
not to be liquid; and, in the case of The Money
Market Fund, specifically including non-
negotiable fixed income time deposits with
maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their respective investment
in other investment companies to no more than 3%
of the total outstanding voting stock of any
investment company, invest no more than 5% of
total assets in any one investment company, or
invest more than 10% of total assets in
investment companies in general. The U.S.
Government Securities Fund, The Stock Fund, The
Treasury Money Market Fund and The Money Market
Fund will purchase securities of closed-end
investment companies only in open market
transactions involving only customary broker's
commissions. However, these limitations are not
applicable if the securities are acquired in a
merger, consolidation, reorganization, or
acquisition of assets. With respect to The
Treasury Money Market Fund and The Money Market
Fund, the Funds will limit their investments and
the securities of other investment companies to
those of The Money Market Funds having
investment objectives and policies similar to
their own. The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund will invest in
other investment companies primarily for the
purposes of investing short-term cash which has
not yet been invested in other portfolio
instruments. The adviser will waive its
investment advisory fee on assets invested in
securities of open-end investment companies.
Investing in New Issuers
The U.S. Government Securities Fund, The Stock
Fund, The Money Market Fund, and The Tax-Free
Money Market Fund will not invest more than 5%
of the value of their total assets in securities
of issuers which have records of less than three
years of continuous operations, including the
operation of any predecessor. The Virginia
Municipal Bond Fund and The Maryland Municipal
Bond Fund will not invest more than 5% of the
value of its total assets in industrial
development bonds where the payment of principal
and interest is the responsibility of companies
(or in the alternative guarantors, where
applicable) which have records of less than
three years of continuous operations, including
the operation of any predecessor.
Investing in Issuers Whose Securities are Owned by
Officers and Trustees of the Trust
A Fund will not purchase or retain the
securities of any issuer if the officers and
Trustees of the Trust or its investment adviser
owning individually more than 1/2 of 1% of the
issuer's securities together own more than 5% of
the issuer's securities.
Investing in Minerals
A Fund will not purchase interests in oil, gas,
or other mineral exploration or development
programs or leases, although it may purchase the
securities of issuers which invest in or sponsor
such programs.
Arbitrage Transactions
A Fund will not enter into transactions for the
purpose of engaging in arbitrage.
Purchasing Securities to Exercise Control
A Fund will not purchase securities of a company
for the purpose of exercising control or
management.
Investing in Warrants
The Funds will not invest in warrants, except
that The Stock Fund may invest not more than 5%
of its net assets in warrants, including those
acquired in units or attached to other
securities. To comply with certain state
restrictions, the Fund will limit its investment
in such warrants not listed on the New York or
American Stock Exchanges to 2% of its net
assets. (If state restrictions change, this
latter restriction may be revised without notice
to shareholders.) For purposes of this
investment restriction, warrants will be valued
at the lower of cost or market, except that
warrants acquired by the Fund in units with or
attached to securities may be deemed to be
without value.
Investing in Put Options
Neither The U.S. Government Securities Fund nor
The Stock Fund will purchase put options on
securities unless the securities are held in a
Fund's portfolio and not more than 5% of the
value of either Fund's total assets would be
invested in premiums on open and put option
positions.
Writing Covered Call Options
Neither The U.S. Government Securities Fund nor
The Stock Fund will write call options on
securities unless the securities are held in
their portfolio or unless either Fund is
entitled to them in deliverable form without
further payment or after segregating cash in the
amount of any further payment.
Selling Short
Neither The U.S. Government Securities Fund nor
The Stock Fund will sell securities short unless
(1) it owns, or has a right to acquire, an equal
amount of such securities, or (2) it has
segregated an amount of its other assets equal
to the lesser of the market value of the
securities sold short or the amount required to
acquire such securities. The segregated amount
will not exceed 10% of either Fund's net assets.
While in a short position, the Fund will retain
the securities, rights, or segregated assets.
Dealing in Puts and Calls
The Virginia Municipal Bond Fund, The Maryland
Municipal Bond Fund, and The Tax-Free Money
Market Fund will not invest in puts, calls,
straddles, spreads, or any combination of them
except that The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund may purchase
put options on municipal securities in an amount
up to 5% of its total assets or may purchase
municipal securities accompanied by agreements
of sellers to repurchase them at a Fund's
option.
Except with respect to the Funds' policy of
borrowing money, if a percentage limitation is
adhered to at the time of investment, a later
increase or decrease in percentage resulting
from any change in value or net assets will not
result in a violation of such restriction.
The U.S. Government Securities Fund and The
Stock Fund have no present intent to borrow
money, pledge securities or invest in restricted
or illiquid securities in excess of 5% of the
value of their respective net assets in the
coming fiscal year. These Funds (1) will limit
the aggregate value of the assets underlying
covered call options or put options written by a
Fund to not more than 25% of its net assets, (2)
will limit the premiums paid for options
purchased by a Fund to 20% of its net assets,
and (3) will limit the margin deposits on
futures contracts entered into by a Fund to 5%
of its net assets. (If state requirements
change, these restrictions may be revised
without shareholder notification.)
The Virginia Municipal Bond Fund and The
Maryland Municipal Bond Fund have no present
intent to issue senior securities or borrow
money, pledge securities, invest in restricted
or illiquid securities or engage in when-issued
and delayed delivery transactions in excess of
5% of the value of its net assets during the
fiscal period.
The Treasury Money Market Fund and The Money
Market Fund do not expect to issue senior
securities or borrow money, pledge securities,
engage in whenissued and delayed delivery
transactions or reverse repurchase agreements,
for The Money Market Fund only, in excess of 5%
of the value of their net assets during the
coming fiscal year.
The Tax-Free Money Market Fund does not intend
to borrow money or pledge securities in excess
of 5% of the value of its net assets during the
coming fiscal year.
To comply with registration requirements in a
certain state, The Virginia Municipal Bond Fund,
The Maryland Municipal Bond Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
will not invest in real estate limited
partnerships.
THE VIRTUS FUNDS MANAGEMENT
OFFICERS AND TRUSTEES
Officers and Trustees are listed with their addresses,
principal occupations, and present positions,
including any affiliation with Virtus Capital
Management, Inc., Signet Trust Company, Federated
Investors, Federated Securities Corp., Federated
Services Company, and Federated Administrative
Services or the Funds (as defined below).
John F. Donahue@*
Federated Investors Tower
Pittsburgh, PA
Chairman and Trustee
Chairman and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; Chairman and Director, Federated Research
Corp.; Chairman, Passport Research, Ltd.; Director,
AEtna Life and Casualty Company; Chief Executive
Officer and Director, Trustee, or Managing General
Partner of the Funds. Mr. Donahue is the father of J.
Christopher Donahue, Vice President of the Trust.
Thomas G. Bigley
28th Floor
One Oxford Centre
Pittsburgh, PA
Trustee
Director, Oberg Manufacturing Co.; Chairman of the
Board, Children's Hospital of Pittsburgh; Director,
Trustee or Managing General Partner of the Funds;
formerly, Senior Partner, Ernst & Young LLP.
John T. Conroy, Jr.
Wood/IPC Commercial Department
John R. Wood and Associates, Inc., Realtors
3255 Tamiami Trail North
Naples, FL
Trustee
President, Investment Properties Corporation; Senior
Vice-President, John R. Wood and Associates, Inc.,
Realtors; President, Northgate Village Development
Corporation; Partner or Trustee in private real estate
ventures in Southwest Florida; Director, Trustee, or
Managing General Partner of the Funds; formerly,
President, Naples Property Management, Inc.
William J. Copeland
One PNC Plaza - 23rd Floor
Pittsburgh, PA
Trustee
Director and Member of the Executive Committee,
Michael Baker, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice Chairman
and Director, PNC Bank, N.A., and PNC Bank Corp. and
Director, Ryan Homes, Inc.
James E. Dowd
571 Hayward Mill Road
Concord, MA
Trustee
Attorney-at-law; Director, The Emerging Germany Fund,
Inc.; Director, Trustee, or Managing General Partner
of the Funds; formerly, Director, Blue Cross of
Massachusetts, Inc.
Lawrence D. Ellis, M.D.
3471 Fifth Avenue, Suite 1111
Pittsburgh, PA
Trustee
Hematologist, Oncologist, and Internist, Presbyterian
and Montefiore Hospitals; Professor of Medicine and
Trustee, University of Pittsburgh; Director of
Corporate Health, University of Pittsburgh Medical
Center; Director, Trustee, or Managing General Partner
of the Funds.
Edward L. Flaherty, Jr.@
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer &
Flaherty; Director, Eat'N Park Restaurants, Inc., and
Statewide Settlement Agency, Inc.; Director, Trustee,
or Managing General Partner of the Funds; formerly,
Counsel, Horizon Financial, F.A., Western Region.
Edward C. Gonzales
Federated Investors Tower
Pittsburgh, PA
President and Treasurer
Vice President, Treasurer, and Trustee, Federated
Investors; Vice President and Treasurer, Federated
Advisers, Federated Management, Federated Research,
Federated Research Corp., and Passport Research, Ltd.;
Executive Vice President, Treasurer, and Director,
Federated Securities Corp.; Trustee, Federated
Services Company and Federated Shareholder Services;
Chairman, Treasurer, and Trustee, Federated
Administrative Services; Trustee or Director of some
of the Funds; Vice President and Treasurer of the
Funds.
Peter E. Madden
225 Franklin Street
Boston, MA
Trustee
Consultant; State Representative, Commonwealth of
Massachusetts; Director, Trustee, or Managing General
Partner of the Funds; formerly, President, State
Street Bank and Trust Company and State Street Boston
Corporation and Trustee, Lahey Clinic Foundation, Inc.
Gregor F. Meyer
Two Gateway Center - Suite 674
Pittsburgh, PA
Trustee
Attorney-at-law; Partner, Henny, Koehuba, Meyer &
Flaherty; Chairman, Meritcare, Inc.; Director, Eat'N
Park Restaurants, Inc.; Director, Trustee, or Managing
General Partner of the Funds; formerly, Vice Chairman,
Horizon Financial, F.A.
Wesley W. Posvar
1202 Cathedral of Learning
University of Pittsburgh
Pittsburgh, PA
Trustee
Professor, Foreign Policy and Management Consultant;
Trustee, Carnegie Endowment for International Peace,
RAND Corporation, Online Computer Library Center,
Inc., and U.S. Space Foundation; Chairman, Czecho
Slovak Management Center; Director, Trustee, or
Managing General Partner of the Funds; President
Emeritus, University of Pittsburgh; formerly,
Chairman, National Advisory Council for Environmental
Policy and Technology.
Marjorie P. Smuts
4905 Bayard Street
Pittsburgh, PA
Trustee
Public relations/marketing consultant; Director,
Trustee, or Managing General Partner of the Funds.
Craig P. Churman
Federated Investors Tower
Pittsburgh, PA
Vice President and Assistant Treasurer
Vice President, Federated Administrative Services;
Vice President and Assistant Treasurer of some of the
Funds.
J. Christopher Donahue
Federated Investors Tower
Pittsburgh, PA
Vice President of the Trust
President and Trustee, Federated Investors, Federated
Advisers, Federated Management, and Federated
Research; President and Director, Federated Research
Corp.; President, Passport Research, Ltd.; Trustee,
Federated Administrative Services, Federated Services
Company, and Federated Shareholder Services; President
or Vice President of the Funds; Director, Trustee, or
Managing General Partner of some of the Funds. Mr.
Donahue is the son of John F. Donahue, Chairman and
Trustee of the Trust.
Richard B. Fisher
Federated Investors Tower
Pittsburgh, PA
Vice President
Executive Vice President and Trustee, Federated
Investors; Director, Federated Research Corp.;
Chairman and Director, Federated Securities Corp.;
President or Vice President of some of the Funds;
Director or Trustee of some of the Funds.
John W. McGonigle
Federated Investors Tower
Pittsburgh, PA
Vice President and Secretary
Vice President, Secretary, General Counsel, and
Trustee, Federated Investors; Vice President,
Secretary, and Trustee, Federated Advisers, Federated
Management, and Federated Research; Vice President and
Secretary, Federated Research Corp. and Passport
Research, Ltd.; Trustee, Federated Services Company;
Executive Vice President, Secretary, and Trustee,
Federated Administrative Services; Secretary and
Trustee, Federated Shareholder Services; Executive
Vice President and Director, Federated Securities
Corp.; Vice President and Secretary of the Funds.
* This Trustee is deemed to be an "interested person"
of the Trust as defined in the Investment Company
Act of 1940, as amended.
@ Member of the Trust Executive Committee. The
Executive Committee of the Board of Trustees
handles the responsibilities of the Board of
Trustees between meetings of the Board.
THE FUNDS
As referred to in the list of Trustees and Officers,
"Funds" includes the following investment companies:
American Leaders Fund, Inc.; Annuity Management
Series; Arrow Funds; Automated Cash Management Trust;
Automated Government Money Trust; California Municipal
Cash Trust; Cash Trust Series II; Cash Trust Series,
Inc.; DG Investor Series; Edward D. Jones & Co. Daily
Passport Cash Trust; Federated ARMs Fund; Federated
Exchange Fund, Ltd.; Federated GNMA Trust; Federated
Government Trust; Federated Growth Trust; Federated
High Yield Trust; Federated Income Securities Trust;
Federated Income Trust; Federated Index Trust;
Federated Institutional Trust; Federated Intermediate
Government Trust; Federated Master Trust; Federated
Municipal Trust; Federated Short-Intermediate
Government Trust; Federated Short-Term U.S. Government
Trust; Federated Stock Trust; Federated Tax-Free
Trust; Federated U.S. Government Bond Fund; First
Priority Funds; Fixed Income Securities, Inc.;
Fortress Adjustable Rate U.S. Government Fund, Inc.;
Fortress Municipal Income Fund, Inc.; Fortress Utility
Fund, Inc.; Fund for U.S. Government Securities, Inc.;
Government Income Securities, Inc.; High Yield Cash
Trust; Insight Institutional Series, Inc.; Insurance
Management Series; Intermediate Municipal Trust;
International Series, Inc.; Investment Series Funds,
Inc.; Investment Series Trust; Liberty Equity Income
Fund, Inc.; Liberty High Income Bond Fund, Inc.;
Liberty Municipal Securities Fund, Inc.; Liberty U.S.
Government Money Market Trust; Liberty Term Trust,
Inc. - 1999; Liberty Utility Fund, Inc.; Liquid Cash
Trust; Managed Series Trust; Money Market Management,
Inc.; Money Market Obligations Trust; Money Market
Trust; Municipal Securities Income Trust; Newpoint
Funds; New York Municipal Cash Trust; 111 Corcoran
Funds; Peachtree Funds; The Planters Funds; RIMCO
Monument Funds; The Shawmut Funds; Short-Term
Municipal Trust; Star Funds; The Starburst Funds; The
Starburst Funds II; Stock and Bond Fund, Inc.;
Sunburst Funds; Targeted Duration Trust; Tax-Free
Instruments Trust; Trademark Funds; Trust for
Financial Institutions; Trust For Government Cash
Reserves; Trust for Short-Term U.S. Government
Securities; Trust for U.S. Treasury Obligations; The
Virtus Funds; and World Investment Series, Inc.
FUND OWNERSHIP
Officers and Trustees own less than 1% of the outstanding
shares of each Fund.
As of January 11, 1995, the following shareholders of
record owned 5% or more of the outstanding shares of
the Funds: Stephens Inc., Little Rock, Arkansas, owned
approximately 434,383 Investment Shares of The Stock
Fund (18.6%); approximately 727,728 Investment Shares
of The Maryland Municipal Bond Fund (23.3%); and
approximately 6,058,078 shares of The Tax-Free Money
Market Fund (22.2%).
OFFICERS AND TRUSTEES COMPENSATION
NAME , AGGREGATE
TOTAL COMPENSATION
POSITION WITH COMPENSATION FROM
PAID TO TRUSTEES FROM
TRUST TRUST+
TRUST AND FUND COMPLEX
John F. Donahue,
Chairman and Trustee $ -0- $ -0-
for the Trust and
69
investment companies
Thomas G. Bigley,
Trustee $498
$24,991 for the Trust and
50
investment companies
John T. Conroy, Jr.,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
William J. Copeland,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
James E. Dowd,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
Lawrence D. Ellis, M.D.,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Edward L. Flaherty, Jr.,
Trustee $2,001.50
$136,100 for the Trust and
65
investment companies
Edward C. Gonzales,
President and Trustee $ -0- $ -0-
for the Trust and
18
investment companies
Peter E. Madden,
Trustee $1,517.50
$104,880 for the Trust and
65
investment companies
Gregor F. Meyer,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Wesley W. Posvar,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
Marjorie P. Smuts,
Trustee $1,816
$123,600 for the Trust and
65
investment companies
+The aggregate compensation is provided for the Trust
which is comprised of eight portfolios.
TRUSTEE LIABILITY
The Trust's Declaration of Trust provides that the
Trustees will not be liable for errors of judgment or
mistakes of fact or law. However, they are not
protected against any liability to which they would
otherwise be subject by reason of willful misfeasance,
bad faith, gross negligence, or reckless disregard of
the duties involved in the conduct of their office.
INVESTMENT ADVISORY SERVICES
ADVISER TO THE TRUST
The Trust's investment adviser is Virtus Capital
Management, Inc., which is a division of Signet Trust
Company, a wholly-owned subsidiary of Signet Banking
Corporation. Because of the internal controls
maintained by Signet Bank to restrict the flow of non-
public information, Fund investments are typically
made without any knowlidge of Signet Bank's or its
affiliates' lending relationships with an issuer.
The adviser shall not be liable to the Trust, a Fund,
or any shareholder of any of the Funds for any losses
that may be sustained in the purchase, holding, or
sale of any security or for anything done or omitted
by it, except acts or omissions involving willful
misfeasance, bad faith, gross negligence, or reckless
disregard of the duties imposed upon it by its
contract with the Trust.
ADVISORY FEES
For its advisory services, Virtus Capital Management,
Inc. receives an annual investment advisory fee as
described in the prospectus. During the fiscal years
ended September 30, 1994, 1993, and 1992 , the adviser
earned fees from: The U.S. Government Securities Fund,
of $1,734,083, $1,375,434, and $662,158, of which
$734,744, $784,857, and $571,943 were voluntarily
waived; The Stock Fund $703,937, $512,930, and
$348,390, of which $214,366, $372,554, and $157,500
were voluntarily waived; The Virginia Municipal Bond
Fund $861,187, $519,326, and $203,123, of which
$314,920, $345,108, and $203,123 were voluntarily
waived; The Maryland Municipal Bond Fund $355,431,
$233,787, and $91,829, of which $241,790, $231,723,
and $91,829 were voluntarily waived; The Treasury
Money Market Fund $1,388,302, $922,509, and $809,409,
of which $508,090, $369,003, and $176,525 were
voluntarily waived; and The Money Market Fund
$709,679, $729,525, and $387,183 of which $354,839,
$431,083, and $222,685 were voluntarily waived. For
the period from July 27, 1994 to September 30, 1994
the adviser earned $21,033 from The Tax-Free Money
Market Fund, of which $19,388 was voluntarily waived.
State Expense Limitations
The adviser has undertaken to comply with the
expense limitation established by certain states
for investment companies whose shares are
registered for sale in those states. If a Fund's
normal operating expenses (including the
investment advisory fee, but not including
brokerage commissions, interest, taxes, and
extraordinary expenses) exceed 2 1/2% per year
of the first $30 million of average net assets,
2% per year of the next $70 million of average
net assets, and 1 1/2% per year of the remaining
average net assets, the adviser will reimburse
the Fund for its expenses over the limitation.
If a Fund's monthly projected operating expenses
exceed this limitation, the investment advisory
fee paid will be reduced by the amount of the
excess, subject to an annual adjustment. If the
expense limitation is exceeded, the amount to be
reimbursed by the adviser will be limited, in
any single fiscal year, by the amount of the
investment advisory fee. This arrangement is not
part of the advisory contract and may be amended
or rescinded in the future.
ADMINISTRATIVE SERVICES
Federated Administrative Services, which is a
subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for
the fees set forth in the prospectus. For the fiscal
years ended September 30, 1994, 1993, and 1992, the
Funds incurred costs for administrative services as
follows: The U.S. Government Securities Fund incurred
$269,932, $233,156, and $122,622; The Stock Fund
incurred $109,075, $86,960, and $65,066; The Virginia
Municipal Bond Fund incurred $133,956, $87,752 and
$50,000; The Maryland Municipal Bond Fund incurred
$55,254, $49,614, and $50,000; The Treasury Money
Market Fund incurred $319,857, $235,278, and $226,433;
and The Money Market Fund incurred $165,549, $186,110,
and $107,640; of which $0, $0, and $0 were voluntarily
waived for The U.S. Government Securities Fund; $0,
$0, and $0 were voluntarily waived for The Stock Fund;
$0, $0, and $33,416 were voluntarily waived for The
Virginia Municipal Bond Fund; $0, $0, and $50,000 were
voluntarily waived for The Maryland Municipal Bond
Fund; $0, $0, and $0 were voluntarily waived for The
Treasury Money Market Fund; and $0, $0, and $0 were
voluntarily waived for The Money Market Fund. For the
period from July 27, 1994, to September 30, 1994, The
Tax-Free Money Market Fund paid $8,904 for
administrative services, of which $0 was voluntarily
waived.
CUSTODIAN
Signet Trust Company is custodian for the securities
and cash of the Funds. Under the Custodian Agreement,
Signet Trust Company holds the Funds' portfolio
securities in safekeeping and keeps all necessary
records and documents relating to its duties. The
custodian receives a fee at an annual rate of .05 of
1% on the first $10 million of average net assets of
each of the six respective portfolios and .025 of 1%
on average net assets in excess of $10 million. There
is a $20 fee imposed on each transaction. The
custodian fee received during any fiscal year shall be
at least $1,000 per Fund.
BROKERAGE TRANSACTIONS
When selecting brokers and dealers to handle the
purchase and sale of portfolio instruments, the
adviser looks for prompt execution of the order at a
favorable price. In working with dealers, the adviser
will generally use those who are recognized dealers in
specific portfolio instruments, except when a better
price and execution of the order can be obtained
elsewhere. The adviser makes decisions on portfolio
transactions and selects brokers and dealers subject
to guidelines established by the Board of Trustees.
The adviser may select brokers and dealers who offer
brokerage and research services. These services may be
furnished directly to the Funds or to the adviser and
may include:
o advice as to the advisability of investing in
securities;
o security analysis and reports;
o economic studies;
o industry studies;
o receipt of quotations for portfolio evaluations;
and
o similar services.
The adviser and its affiliates exercise reasonable
business judgment in selecting brokers who offer
brokerage and research services to execute securities
transactions. They determine in good faith that
commissions charged by such persons are reasonable in
relationship to the value of the brokerage and
research services provided.
Research services provided by brokers may be used by
the adviser in advising the Funds and other accounts.
To the extent that receipt of these services may
supplant services for which the adviser or its
affiliates might otherwise have paid, it would tend to
reduce their expenses.
For the fiscal year ended September 30, 1994, The
Stock Fund paid $552,066 in commissions on brokerage
transactions.
PURCHASING SHARES
Shares of the Funds are sold at their net asset value
without a sales charge on days the New York Stock
Exchange is open for business. The procedure for
purchasing Shares of the Funds is explained in the
prospectus under "Investing in Shares."
DISTRIBUTION PLAN
The Trust has adopted a Plan for Shares of the Funds
pursuant to Rule 12b-1 which was promulgated by the
Securities and Exchange Commission pursuant to the
Investment Company Act of 1940. The Plan provides that
the Funds' distributor, Federated Securities Corp.,
shall act as the distributor of Shares, and it permits
the payment of fees to brokers and dealers for
distribution and administrative services and to
administrators for administrative services. The Plan
is designed to (i) stimulate brokers and dealers to
provide distribution and administrative support
services to the Funds and their holders of Shares and
(ii) stimulate administrators to render administrative
support services to the Funds and their holders of
Shares. These services are to be provided by a
representative who has knowledge of the holder of
Shares' particular circumstances and goals, and
include, but are not limited to: providing office
space, equipment, telephone facilities, and various
personnel including clerical, supervisory, and
computer, as necessary or beneficial to establish and
maintain shareholder accounts and records; processing
purchase and redemption transactions and automatic
investments of client account cash balances; answering
routine client inquiries regarding the Funds;
assisting clients in changing dividend options,
account designations, and addresses; and providing
such other services as the Trust reasonably requests.
Other benefits which the Funds hope to achieve through
the Plan include, but are not limited to the
following: (1) an efficient and effective
administrative system; (2) a more efficient use of
assets of holders of Shares by having them rapidly
invested in the Funds with a minimum of delay and
administrative detail; and (3) an efficient and
reliable records system for holders of Shares and
prompt responses to shareholder requests and inquiries
concerning their accounts.
By adopting the Plan, the Board of Trustees expects
that the Funds will be able to achieve a more
predictable flow of cash for investment purposes and
to meet redemptions. This will facilitate more
efficient portfolio management and assist the Funds in
seeking to achieve their respective investment
objectives. By identifying potential investors in
Shares whose needs are served by a particular Fund's
objective, and properly servicing these accounts, the
Funds may be able to curb sharp fluctuations in rates
of redemptions and sales.
For the fiscal years ended September 30, 1994, 1993,
and 1992, the Funds paid fees to brokers and
administrators (financial institutions) pursuant to
the Plan as follows: The U.S. Government Securities
Fund , of $299,048, $111,353, and $0; The Stock Fund
$59,836, $14,672, and $0; The Virginia Municipal Bond
Fund, of $190,877, $55,569, and $0; The Maryland
Municipal Bond Fund, of $89,447, $31,414, and $0; The
Treasury Money Market Fund, of $52,221, $20,462, and
$0; The Money Market Fund, of $26,424, $11,499, and
$0. For the period from July 27, 1994 to September 30,
1994 the Tax-Free Money Market Fund paid no fees
pursuant to the Plan.
CONVERSION TO FEDERAL FUNDS
It is the policy of The Treasury Money Market Fund,
The Money Market Fund, and The Tax-Free Money Market
Fund to be as fully invested as possible so that
maximum interest may be earned. To this end, all
payments from shareholders must be in federal funds or
be converted into federal funds. Federated Services
Company acts as the shareholder's agent in depositing
checks and converting them to federal funds.
ADMINISTRATIVE ARRANGEMENTS
For the fiscal years ended September 30, 1994, 1993
and 1992, the distributor paid no administrative fees
to brokers and administrators (financial
institutions).
DETERMINING NET ASSET VALUE
Net asset values of The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund generally change
each day. The Treasury Money Market Fund, The Money
Market Fund, and The Tax-Free Money Market Fund
attempt to stabilize the value of their Shares at
$1.00. The days on which the net asset value is
calculated by these Funds are described in the
prospectus.
DETERMINING MARKET VALUE OF SECURITIES
The market value of The U.S. Government Securities
Fund's portfolio securities is determined as follows:
o according to the mean between the over-the-
counter bid and asked prices provided by an
independent pricing service, if available, or at
fair value as determined in good faith by the
Fund's Board of Trustees; or
o for short-term obligations with remaining
maturities of 60 days or less at the time of
purchase at amortized cost unless the Board of
Trustees determines that particular
circumstances of the security indicate
otherwise.
Prices provided by independent pricing services may be
determined without relying exclusively on quoted
prices and may reflect: institutional trading in
similar groups of securities, yield, quality, coupon
rate, maturity, type of issue, trading
characteristics, and other market data.
The market value of The Stock Fund's portfolio
securities is determined as follows:
o for equity securities, according to the last
sale price on a national securities exchange, if
available;
o in the absence of recorded sales for listed
equity securities, according to the mean between
the last closing bid and asked prices;
o for unlisted equity securities, the latest bid
prices;
o for bonds and other fixed income securities, as
determined by an independent pricing service;
o for short-term obligations, according to the
mean between bid and asked prices as furnished
by an independent pricing service or for short-
term obligations with remaining maturities of 60
days or less at the time of purchase at
amortized cost; or
o for all other securities, at fair value as
determined in good faith by the Board of
Trustees.
The U.S. Government Securities Fund and The Stock Fund
will value futures contracts, options, and put options
on futures and at their market values established by
the exchanges at the close of option trading on such
exchanges unless the Board of Trustees determine in
good faith that another method of valuing option
positions is necessary to appraise their fair value.
Over-the-counter put options will be valued at the
mean between the bid and the asked prices.
USE OF THE AMORTIZED COST METHOD
With respect to The Treasury Money Market Fund, The
Money Market Fund, and The Tax-Free Money Market Fund,
the Trustees have decided that the best method for
determining the value of portfolio instruments is
amortized cost. Under this method, portfolio
instruments are valued at the acquisition cost as
adjusted for amortization of premium or accumulation
of discount rather than at current market value.
A Fund's use of the amortized cost method of valuing
portfolio instruments depends on its compliance with
certain conditions in Rule 2a-7 (the "Rule")
promulgated by the Securities and Exchange Commission
under the Investment Company Act of 1940. Under the
Rule, the Trustees must establish procedures
reasonably designed to stabilize the net asset value
per share, as computed for purposes of distribution
and redemption, at $1.00 per Share, taking into
account current market conditions and a Fund's
investment objective.
Under the Rule, a Fund is permitted to purchase
instruments which are subject to demand features or
standby commitments. As defined by the Rule, a demand
feature entitles a Fund to receive the principal
amount of the instrument from the issuer or a third
party on (1) no more than 30 days' notice or (2) at
specified intervals not exceeding one year on no more
than 30 days' notice. A standby commitment entitles a
Fund to achieve same day settlement and to receive an
exercise price equal to the amortized cost of the
underlying instrument plus accrued interest at the
time of exercise.
The Funds acquire instruments subject to demand
features and standby commitments to enhance the
instrument's liquidity. The Funds treat demand
features and standby commitments as a part of the
underlying instruments, because the Funds do not
acquire them for speculative purposes and cannot
transfer them separately from the underlying
instruments. Therefore, although the Rule defines
demand features and standby commitments as "puts", the
Fund does not consider them to be separate investments
for purposes of its investment policies.
Monitoring Procedures
The Trustees' procedures include monitoring the
relationship between the amortized cost value
per share and the net asset value per share
based upon available indications of market
value. The Trustees will decide what, if any,
steps should be taken if there is a difference
of more than .5 of 1% between the two. The
Trustees will take any steps they consider
appropriate (such as redemption in kind or
shortening the average portfolio maturity) to
minimize any material dilution or other unfair
results arising from differences between the two
methods of determining net asset value.
Investment Restrictions
The Rule requires that a Fund limit its
investments to instruments that, in the opinion
of the Trustees, present minimal credit risks
and have received the requisite rating from one
or more nationally recognized statistical rating
organizations. If the instruments are not rated,
the Trustees must determine that they are of
comparable quality. The Rule also requires a
Fund to maintain a dollar-weighted average
portfolio maturity (not more than 90 days)
appropriate to the objective of maintaining a
stable net asset value of $1.00 per Share. In
addition, no instrument with a remaining
maturity of more than 397 days can be purchased
by a Fund.
Should the disposition of a portfolio security
result in a dollar-weighted average portfolio
maturity of more than 90 days, a Fund will
invest its available cash to reduce the average
maturity to 90 days or less as soon as possible.
A Fund may attempt to increase yield by trading
portfolio securities to take advantage of short-term
market variations. Under the amortized cost method of
valuation, neither the amount of daily income nor the
net asset value is affected by any unrealized
appreciation or depreciation of the portfolio.
In periods of declining interest rates, the indicated
daily yield on Shares, computed by dividing the
annualized daily income on a Fund's portfolio by the
net asset value computed as above, may tend to be
higher than a similar computation made by using a
method of valuation based upon market prices and
estimates.
In periods of rising interest rates, the indicated
daily yield on Shares computed the same way may tend
to be lower than a similar computation made by using a
method of calculation based upon market prices and
estimates.
VALUING MUNICIPAL SECURITIES
With respect to The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money
Market Fund, the Board of Trustees uses an independent
pricing service to value municipal securities. The
independent pricing service takes into consideration:
yield; stability; risk; quality; coupon rate;
maturity; type of issue; trading characteristics;
special circumstances of a security or trading market;
and any other factors or market data it considers
relevant in determining valuations for normal
institutional size trading units of debt securities
and does not rely exclusively on quoted prices.
USE OF AMORTIZED COST
With respect to The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund, the Board of
Trustees has decided that the fair value of debt
securities purchased by a Fund with remaining
maturities of 60 days or less at the time of purchase
shall be their amortized cost value, unless the
particular circumstances of the security indicate
otherwise. Under this method, portfolio instruments
and assets are valued at the acquisition cost as
adjusted for amortization of premium or accumulation
of discount rather than at current market value. The
Executive Committee continually assesses this method
of valuation and recommends changes where necessary to
assure that the Fund's portfolio instruments are
valued at their fair value as determined in good faith
by the Trustees.
REDEEMING SHARES
Each Fund redeems Shares at the next computed net
asset value after a Fund receives the redemption
request. Redemption procedures are explained in the
prospectus under "Redeeming Investment Shares."
REDEMPTION IN KIND
Although the Trust intends to redeem Shares in cash,
it reserves the right under certain circumstances to
pay the redemption price in whole or in part by a
distribution of securities from a Fund's portfolio.
Redemption in kind will be made in conformity with
applicable Securities and Exchange Commission rules,
taking such securities at the same value employed in
determining net asset value and selecting the
securities in a manner the Board of Trustees determine
to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 of
the Investment Company Act of 1940 under which a Fund
is obligated to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of any
class' net asset value during any 90-day period.
Although a Fund reserves the right to redeem Shares in
kind, it will activate this right only after providing
60 days' notice to shareholders.
TAX STATUS
THE FUNDS' TAX STATUS
The Funds will pay no federal income tax because they
expect to meet the requirements of Subchapter M of the
Internal Revenue Code applicable to regulated
investment companies and to receive the special tax
treatment afforded to such companies. To qualify for
this treatment, each Fund must, among other
requirements:
o derive at least 90% of its gross income from
dividends, interest, and gains from the sale of
securities;
o derive less than 30% of its gross income from
the sale of securities held less than three
months;
o invest in securities within certain statutory
limits; and
o distribute to its shareholders at least 90% of
its net income earned during the year.
SHAREHOLDERS' TAX STATUS
With respect to The U.S. Government Securities Fund,
The Stock Fund, The Treasury Money Market Fund and The
Money Market Fund, shareholders are subject to federal
income tax on dividends received as cash or additional
shares. No portion of any income dividend paid by a
Fund is eligible for the dividends received deduction
available to corporations. These dividends, and any
short-term capital gains, are taxable as ordinary
income.
With respect to The Virginia Municipal Bond Fund, The
Maryland Municipal Bond Fund, and The Tax-Free Money
Market Fund, no portion of any income dividend paid by
a Fund is eligible for the dividends received
deduction available to corporations.
Capital Gains
Capital gains experienced by The Treasury Money
Market Fund and The Money Market Fund could
result in an increase in dividends. Capital
losses could result in a decrease in dividends.
If, for some extraordinary reason, these Funds
realize net long-term capital gains, such net
long-term capital gains will be distributed at
least once every 12 months.
With respect to The U.S. Government Securities Fund
and The Stock Fund, long-term capital gains
distributed to shareholders will be treated as long-
term capital gains regardless of how long shareholders
have held Shares.
With respect to The Maryland Municipal Bond Fund, The
Virginia Municipal Bond Fund, and The Tax-Free Money
Market Fund, capital gains or losses may be realized
by a Fund on the sale of portfolio securities and as a
result of discounts from par value on securities held
to maturity. Sales would generally be made because of:
o the availability of higher relative yields;
o differentials in market values;
o new investment opportunities;
o changes in creditworthiness of an issuer; or
o an attempt to preserve gains or limit losses.
Distribution of long-term capital gains are taxed as
such, whether they are taken in cash or reinvested,
and regardless of the length of time the shareholder
has owned the Shares.
TOTAL RETURN
The average annual total return for The U.S.
Government Securities Fund, The Stock Fund, The
Virginia Municipal Bond Fund, and The Maryland
Municipal Bond Fund, for the fiscal year ended
September 30, 1994 and for the period from October 12,
1990 (effective date of each Fund's registration
statement) to September 30, 1994 was (5.32%) and
6.77%; (3.71%) and 7.66%; (6.21%) and 5.71%; (6.60%)
and 5.24% for Investment Shares and (3.12%) and 7.43%;
(1.50%) and 8.23%; (4.01%) and 6.34%; (4.50%) and
5.87% for Trust Shares.
The average annual total return for Shares of each
Fund is the average compounded rate of return for a
given period that would equate a $1,000 initial
investment to the ending redeemable value of that
investment. The ending redeemable value is computed by
multiplying the number of shares owned at the end of
the period by the net asset value per share at the end
of the period. The number of shares owned at the end
of the period is based on the number of shares
purchased at the beginning of the period with $1,000,
adjusted over the period by any additional shares,
assuming the monthly/quarterly reinvestment of all
dividends and distributions.
YIELD
The yield for the seven-day period ended September 30,
1994 for the The Treasury Money Market Fund and The
Money Market Fund were 3.85% and 4.09%, for Investment
Shares and 4.10% and 4.34%, for Trust Shares,
respectively. The yield for the seven-day period ended
September 30, 1994 for the The Tax-Free Money Market
Fund was 2.98%.
The U.S. Government Securities Fund, The Stock Fund,
The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund's yield for the thirty-day period
ended September 30, 1994 were 5.06%, 0.53%, 4.47% and
4.82% for Investment Shares and 5.31%, 0.78%, 4.73%
and 5.08% for Trust Shares.
The Treasury Money Market Fund, The Money Market Fund,
and The Tax-Free Money Market Fund calculate yield
daily, based upon the seven days ending on the day of
the calculation, called the "base period." This yield
is computed by:
o determining the net change in the value of a
hypothetical account with a balance of one share
at the beginning of the base period, with the
net change excluding capital changes but
including the value of any additional Shares
purchased with dividends earned from the
original one share and all dividends declared on
the original and any purchased Shares;
o dividing the net change in the account's value
by the value of the account at the beginning of
the base period to determine the base period
return; and
o multiplying the base period return by 365/7.
The yield for Shares of The U.S. Government Securities
Fund, The Stock Fund, The Virginia Municipal Bond Fund
and The Maryland Municipal Bond Fund is determined by
dividing the net investment income per share (as
defined by the Securities and Exchange Commission)
earned by the class of shares over a thirty-day period
by the maximum offering price per share of the class
of shares on the last day of the period. The yield of
the Investment Shares of the Fund is determined each
day by dividing the net investment income per share
(as defined by the Securities and Exchange Commission)
earned by the class of shares over a thirty-day period
by the maximum offering price per share of the class
of shares on the last day of the period. This value is
then annualized using semiannual compounding. This
means that the amount of income generated during the
thirty-day period is assumed to be generated each
month over a 12-month period and is reinvested every
six months. The yield does not necessarily reflect
income actually earned by the Fund because of certain
adjustments required by the Securities and Exchange
Commission and, therefore, may not correlate to the
dividends or other distributions paid to shareholders.
With respect to The U.S. Government Securities Fund
and The Stock Fund, the yield will be calculated
separately for Investment Shares and Trust Shares.
Because Investment Shares are subject to a 12b-1 fee,
the net yield for Trust Shares for the same period
will exceed that of Investment Shares.
To the extent that financial institutions and
broker/dealers charge fees in connection with services
provided in conjunction with an investment in a Fund,
the performance will be reduced for those shareholders
paying those fees.
EFFECTIVE YIELD
The effective yield for the seven-day period ended
September 30, 1994 for the The Treasury Money Market
Fund and The Money Market Fund was 3.92% and 4.18% for
Investment Shares and 4.18% and 4.44% for Trust
Shares, respectively. The effective yield for the
period ended September 30, 1994 for The Tax-Free Money
Market Fund was 3.03%.
The effective yield of The Treasury Money Market Fund,
The Money Market Fund, and The Tax-Free Money Market
Fund is computed by compounding the unannualized base
period return by:
o adding 1 to the base period return;
o raising the sum to the 365/7th power; and
o subtracting 1 from the result.
TAX-EQUIVALENT YIELD
The tax-equivalent yield for both classes of shares
for The Virginia Municipal Bond Fund and The Maryland
Municipal Bond Fund, and for The Tax-Free Money Market
Fund is calculated similarly to the yield, but is
adjusted to reflect the taxable yield that either
class would have had to earn to equal its actual
yield, assuming a 28% tax rate and also assuming that
income earned by the Fund is 100% tax-exempt.
The tax-equivalent yield for the Investment Shares for
the thirty-day period ended September 30, 1994, was
6.75% for The Virginia Municipal Bond Fund and 7.47%
for The Maryland Municipal Bond Fund. The tax-
equivalent yield for the Trust Shares was 7.14% for
The Virginia Municipal Bond Fund and 7.88% for The
Maryland Municipal Bond Fund for the same period. The
tax-equivalent yield for The Tax-Free Money Market
Fund for the same period was 4.14%.
Tax-Equivalency Tables
Both classes of shares may also use a tax-
equivalency table in advertising and sales
literature. The interest earned by the municipal
bonds in the Fund's portfolio generally remains
free from federal regular income tax, and is
often free from state and local taxes as well.
As the tables below indicate, a "tax-free"
investment is an attractive choice for
investors, particularly in times of narrow
spreads between tax-free and taxable yields.
TAXABLE YIELD EQUIVALENT FOR 1995
COMMONWEALTH OF VIRGINIA
COMBINED FEDERAL AND STATE INCOME TAX BRACKET:
20.75% 33.75% 36.75% 41.75% 45.35%
JOINT $1- $39,001 $94,251 $143,601 OVER
RETURN: 39,000 94,250 143,600 256,500 $256,500
SINGLE $1 $23,351 $56,551 $117,951 OVER
RETURN: 23,350 56,550 117.,950 256,500 $256,500
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
3.50% 4.42% 5.28% 5.53% 6.01% 6.40%
4.00% 5.05% 6.04% 6.32% 6.87% 7.32%
4.50% 5.68% 6.79% 7.11% 7.73% 8.23%
5.00% 6.31% 7.55% 7.91% 8.58% 9.15%
5.50% 6.94% 8.30% 8.70% 9.44% 10.06%
6.00% 7.57% 9.06% 9.49% 10.30% 10.98%
6.50% 8.20% 9.81% 10.28% 11.16% 11.89%
7.00% 8.83% 10.57% 11.07% 12.02% 12.81%
7.50% 9.46% 11.32% 11.86% 12.88% 13.72%
8.00% 10.09% 12.08% 12.65% 13.73% 14.64%
NOTE: THE MAXIMUM MARGINAL
TAX RATE FOR EACH BRACKET
WAS USED IN CALCULATING THE
TAXABLE YIELD EQUIVALENT.
FURTHERMORE, ADDITIONAL
STATE AND LOCAL TAXES PAID
ON COMPARABLE TAXABLE
INVESTMENTS WERE NOT USED
TO INCREASE FEDERAL
DEDUCTIONS.
TAXABLE YIELD EQUIVALENT FOR 1995
STATE OF MARYLAND
INCLUDING LOCAL INCOME TAX
COMBINED FEDERAL, STATE, AND COUNTY INCOME TAX
BRACKET:
22.50% 32.50% 38.50% 40.00% 45.00% 48.60%
JOINT $1- $39,001 $94,251 $100,001 $143,601 OVER
RETURN: 39,000 94,250 100,000 143,600 $256,500$256,500
SINGLE $1- $23,351 $56,551 $100,000 $117,951 OVER
RETURN: 23,350 56,550 100,000 117,950 256,500 $256,500
TAX-EXEMPT
YIELD TAXABLE YIELD EQUIVALENT
2.00% 2.58% 3.10% 3.25% 3.33% 3.64% 3.89%
2.50% 3.23% 3.88% 4.07% 4.17% 4.55% 4.86%
3.00% 3.87% 4.65% 4.88% 5.00% 5.45% 5.84%
3.50% 4.52% 5.43% 5.69% 5.83% 6.36% 6.81%
4.00% 5.16% 6.20% 6.50% 6.67% 7.27% 7.78%
4.50% 5.81% 6.98% 7.32% 7.50% 8.18% 8.75%
5.00% 6.45% 7.75% 8.13% 8.33% 9.09% 9.73%
5.50% 7.10% 8.53% 8.94% 9.17% 10.00% 10.70%
6.00% 7.74% 9.30% 9.76% 10.00% 10.91% 11.67%
6.50% 8.39% 10.08% 10.57% 10.83% 11.82% 12.65%
NOTE: THE MAXIMUM MARGINAL
TAX RATE FOR EACH BRACKET
WAS USED IN CALCULATING THE
TAXABLE YIELD EQUIVALENT.
FURTHERMORE, ADDITIONAL
STATE AND LOCAL TAXES PAID
ON COMPARABLE TAXABLE
INVESTMENT WERE NOT USED TO
INCREASE FEDERAL
DEDUCTIONS. THE LOCAL
INCOME TAX RATE IS ASSUMED
TO BE 50% OF THE STATE RATE
FOR ALL COUNTIES EXCLUDING
ALLEGHENY, BALTIMORE,
MONTGOMERY, PRINCE
GEORGE'S, TALBOT, AND
WORCHESTER.
The charts above are for
illustrative purposes only.
They are not an indicator
of past or future
performance of either class
of shares. Some portion of
the Fund's income may be
subject to the federal
alternative minimum tax and
state and local taxes.
PERFORMANCE COMPARISONS
Each Fund's performance of both classes of shares
depends upon such variables as:
o portfolio quality;
o average portfolio maturity;
o type of instruments in which the portfolio is
invested;
o changes in interest rates on money market
instruments, in the case of The Treasury Money
Market Fund and The Money Market Fund, or
changes in interest rates and market value of
portfolio securities in the case of U.S.
Government Income Fund, The Stock Fund, The
Virginia Municipal Bond Fund and Maryland
Municipal Bond Fund;
o changes in each Fund's or each class of Shares'
expenses;
o the relative amount of The Treasury Money Market
Fund's and The Money Market Fund's cash flow;
and
o various other factors.
In the case of The U.S. Government Securities Fund,
The Stock Fund, The Virginia Municipal Bond Fund and
The Maryland Municipal Bond Fund, either class of
shares' performance fluctuates on a daily basis
largely because net earnings and offering price per
Share fluctuate daily. Both net earnings and offering
price per Share are factors in the computation of
yield and total return.
From time to time, each Fund may advertise its
performance compared to similar funds or portfolios
using certain indices, reporting services, and
financial publications. These may include the
following:
THE U.S. GOVERNMENT SECURITIES FUND:
o MERRILL LYNCH COMPOSITE 1-5 YEAR TREASURY INDEX
is comprised of approximately 66 issues of U.S.
Treasury securities maturing between 1 and 4.99
years, with coupon rates of 4.25% or more. These
total return figures are calculated for one,
three, six, and twelve month periods and year-to-
date and include the value of the bond plus
income and any price appreciation or
depreciation.
o SALOMON BROTHERS 3-5 YEARS GOVERNMENT INDEX
quotes total returns for U.S. Treasury issues
(excluding flower bonds) which have maturities
of three to five years. These total returns are
year-to-date figures which are calculated each
month following January 1.
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
income into account any change in net asset
value over a specific period of time. From time
to time, the Trust will quote its Lipper ranking
in the U.S. Government funds category in
advertising and sales literature.
o MERRILL LYNCH 3-5 YEAR TREASURY INDEX is
comprised of approximately 24 issues of
intermediate-term U.S. government and U.S.
Treasury securities with maturities between 3
and 4.99 years and coupon rates above 4.25%.
Index returns are calculated as total returns
for periods of one, three, six and twelve months
as well as year-to-date.
o MERRILL LYNCH 3-YEAR TREASURY YIELD CURVE INDEX
is an unmanaged index comprised of the most
recently issued 3-year U.S. Treasury notes.
Index returns are calculated as total returns
for periods of one, three, six, and twelve
months as well as year-to-date.
o LEHMAN BROTHERS GOVERNMENT INTERMEDIATE INDEX is
an unmanaged index comprised of all publicly
issued, non-convertible domestic debt of the
U.S. government, or any agency thereof, or any
quasi-federal corporation and of corporate debt
guaranteed by the U.S. government. Only notes
and bonds with a minimum outstanding principal
of $1 million and maturities of 1-10 years.
o 3 YEAR TREASURY NOTES Source: Wall Street
Journal, Bloomberg Financial Markets, and
Telerate.. MORNINGSTAR, INC., an independent
rating service, is the publisher of the bi-
weekly MUTUAL FUND VALUES. MUTUAL FUND VALUES
rates more than 1,000 NASDAQ-listed mutual funds
of all types, according to their risk-adjusted
returns. The maximum rating is five stars, and
ratings are effective for two weeks.
THE STOCK FUND:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
into account any change in net asset value over
a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the
"growth and income funds" category in
advertising and sales literature.
o DOW JONES INDUSTRIAL AVERAGE ("DJIA") represents
share prices of selected blue-chip industrial
corporations as well as public utility and
transportation companies. The DJIA indicates
daily changes in the average price of stocks in
any of its categories. It also reports total
sales for each group of industries. Because it
represents the top corporations of America, the
DJIA index is a leading economic indicator for
the stock market as a whole.
o STANDARD & POOR'S DAILY STOCK PRICE INDEX OF 500
COMMON STOCKS, a composite index of common
stocks in industry, transportation, and
financial and publicutility companies, compares
total returns of funds whose portfolios
areinvested primarily in common stocks. In
addition, the Standard & Poor's index assumes
reinvestment of all dividends paid by stocks
listed on the index. Taxes due on any of these
distributions are not included, nor are
brokerage or other fees calculated in the
Standard & Poor's figures.
o MORNINGSTAR, INC., an independent rating
service, is the publisher of the bi-weekly
MUTUAL FUND VALUES. MUTUAL FUND VALUES rates
more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted
returns.The maximum rating is five stars, and
ratings are effective for two weeks.
THE VIRGINIA MUNICIPAL BOND FUND AND THE MARYLAND
MUNICIPAL BOND FUND:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all capital gains
distributions and income dividends and takes
into account any change in net asset value over
a specific period of time. From time to time,
the Fund will quote its Lipper ranking in the
"general municipal bond funds" category in
advertising and sales literature.
o MORNINGSTAR, INC., an independent rating
service, is the publisher of the bi-weekly
MUTUAL FUND VALUES. MUTUAL FUND VALUES rates
more than 1,000 NASDAQ-listed mutual funds of
all types, according to their risk-adjusted
returns.The maximum rating is five stars, and
ratings are effective for two weeks.
THE TREASURY MONEY MARKET FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "short-term U.S. government
funds" category in advertising and sales
literature.
o SALOMON 30-DAY TREASURY BILL INDEX is a weekly
quote of the most representative yields for
selected securities, issued by the U.S.
Treasury, maturing in 30 days.
THE MONEY MARKET FUND:
o LIPPER ANALYTICAL SERVICES, INC., ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "money market instruments fund"
category in advertising and sales literature.
o BANK RATE MONITOR NATIONAL INDEX, Miami,
Florida, is a financial reporting service which
publishes weekly average rates of 50 leading
bank and thrift institution money market deposit
accounts. The rates published in the index are
an average of the personal account rates offered
on the Wednesday prior to the date of
publication by ten of the largest banks and
thrifts in each of the five largest Standard
Metropolitan Statistical Areas. Account minimums
range upward from $2,500 in each institution and
compounding methods vary. If more than one rate
is offered, the lowest rate is used. Rates are
subject to change at any time specified by the
institution. Investors may use such indices or
reporting services in addition to either class
of shares' prospectus to obtain a more complete
view of the Share's performance before
investing. Of course, when comparing performance
of either class of shares to any index, factors
such as portfolio composition and prevailing
market conditions should be considered in
assessing the significance of such comparisons.
THE TAX-FREE MONEY MARKET FUND:
o LIPPER ANALYTICAL SERVICES, INC. ranks funds in
various fund categories by making comparative
calculations using total return. Total return
assumes the reinvestment of all income dividends
and capital gains distributions, if any. From
time to time, the Fund will quote its Lipper
ranking in the "Tax-Free Money Market Funds"
category in advertising and sales literature.
o IBC/DONOGHUE'S MONEY FUND REPORT publishes
annualized yields of hundreds of money market
funds on a weekly basis, and through its Money
Market Insight publication, reports monthly and
12-month-to-date investment results for the same
money funds.
o MONEY, A MONTHLY MAGAZINE, regularly ranks money
market funds in various categories based on the
latest available seven-day compound effective
yield. From time to time, the Fund will quote
its Money ranking in advertising and sales
literature.
o SALOMON BROTHERS SIX-MONTH PRIME MUNI NOTES is
an index of selected municipal notes, maturing
in six months, whose yields are chosen as
representative of this market. Calculations are
made weekly and monthly.
o SALOMON BROTHERS ONE-MONTH TAX-EXEMPT COMMERCIAL
PAPER is an index of selected tax-exempt
commercial paper issues, maturing in one month,
whose yields are chosen as representative of
this particular market. It is a weekly quote of
the most representative yields for selected
securities, issued by the U.S. Treasury,
maturing in 30 days. Calculations are made
weekly and monthly. Ehrlich-Bober & Co., Inc.
also tracks this Salomon Brothers Index.
Advertisements and other sales literature for both
classes of shares may quote total returns which are
calculated on non-standardized base periods. These total
returns also represent the historic change in the value
of an investment in either class of shares based on
monthly reinvestment of dividends over a specified period
of time.
FINANCIAL STATEMENTS
The financial statements for the fiscal period ended
September 30, 1994, are incorporated herein by
reference from the Funds' Annual Reports dated
September 30, 1994. A copy of the Annual Report for a
Fund may be obtained without charge by contacting
Signet Trust Company at the address located on the
back cover of the combined prospectus or by calling
804-771-7470.
APPENDIX
STANDARD AND POOR'S RATINGS GROUP MUNICIPAL BOND RATING
DEFINITIONS
AAA-Debt rated AAA has the highest rating assigned by
Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA-Debt rated AA has a very strong capacity to pay
interest and repay principal and differs from the higher
rated issues only in small degree.
A-Debt rated A has a strong capacity to pay interest and
repay principal although it is somewhat more susceptible
to the adverse effect of changes in circumstances and
economic conditions than debt in higher rated categories.
BBB-Debt rated BBB is regarded as having an adequate
capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher
rated categories.
BB, B, CCC, CC-Debt rated BB, B, CCC and CC is regarded,
on balance, as predominantly speculative with respect to
capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB indicates
the lowest degree of speculation and CC the highest
degree of speculation. While such debt will likely have
some quality and protective characteristics, these are
outweighed by large uncertainties of major risk exposures
to adverse conditions.
CI-The rating CI is reserved for income bonds on which no
interest is being paid.
D-Debt rated D is in default, and payment of interest
and/or repayment of principal is in arrears.
MOODY'S INVESTORS SERVICE, INC. MUNICIPAL BOND RATING
DEFINITIONS
AAA-Bonds which are rated Aaa are judged to be of the
best quality. They carry the smallest degree of
investment risk and are generally referred to as "gilt
edge." 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 which are rated Aa are judged to be of high
quality by all standards. Together with the Aaa group,
they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements
present which make the long term risks appear somewhat
larger than in Aaa securities.
A-Bonds which are rated A 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 some time in the future.
BAA-Bonds which are rated Baa are considered as medium
grade obligations, i.e., they are neither highly
protected nor poorly secured. Interest payments and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. Such bonds lack outstanding investment
characteristics and in fact have speculative
characteristics as well.
BA-Bonds which are Ba are judged to have speculative
elements; their future cannot be considered as well
assured. Often the protection of interest and principal
payments may be very moderate and thereby not well
safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in
this class.
B-Bonds which are rated B generally lack characteristics
of the desirable investment. Assurance of interest and
principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa-Bonds which are rated Caa are of poor standing. Such
issues may be in default or there may be present elements
of danger with respect to principal or interest.
CA-Bonds which are rated Ca represent obligations which
are speculative in a high degree. Such issues are often
in default or have other marked shortcomings.
C-Bonds which are rated C are the lowest rated class of
bonds and issues so rated can be regarded as having
extremely poor prospects of ever attaining any real
investment standing.
FITCH INVESTORS SERVICE, INC., LONG-TERM DEBT RATINGS
AAA-Bonds considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally
strong ability to pay interest and repay principal, which
is unlikely to be affected by reasonably foreseeable
events.
AA-Bonds considered to be investment grade and of very
high quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as
strong as bonds rated AAA. Because bonds rated in the AAA
and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these
issuers is generally rated F-1+.
NR-NR indicates that Fitch does not the specific issue.
Plus (+) or Minus (-): Plus and minus signs are used with
a rating symbol to indicate the relative position of a
credit within the rating category. Plus and minus signs,
however, are not used in AAA category.
STANDARD & POOR'S CORPORATION, MUNICIPAL NOTE RATINGS
SP-1-Very strong or strong capacity to pay principal and
interest. Those issues determined to possess overwhelming
safety characteristics will be given a plus (+)
designation.
SP-2-Satisfactory capacity to pay principal and interest.
MOODY'S INVESTORS SERVICE, SHORT-TERM LOAN RATINGS
MIG1/VMIG1-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.
MIG2/VMIG2-This designation denotes high quality. Margins
of protection are ample although not so large as in the
preceding group.
2102608B-R (2/95)
