BayFunds(R)
Money Market Funds
Investment Shares
Combined Prospectus
The shares offered in this prospectus represent interests in the Investment
Shares ("Shares") of the following money market portfolios ("Money Market
Funds") of BayFunds, an open-end, management investment company (a mutual fund):
Money Market Funds
. BayFunds Money Market Portfolio--Investment Shares and Trust Shares
. BayFunds U.S. Treasury Money Market Portfolio--Investment Shares and
Institutional Shares
In addition, BayFunds offers the following three other separate investment
portfolios, each having a distinct investment objective and policies:
. BayFunds Bond Portfolio--Investment Shares and Institutional Shares
. BayFunds Short Term Yield Portfolio--Investment Shares and Institutional
Shares
. BayFunds Equity Portfolio--Investment Shares and Institutional Shares
This prospectus relates only to the Investment Shares of the Money Market Funds
(individually referred to as a "Fund" or collectively as the "Funds").
Investment Shares of the Money Market Funds are designed primarily for
individuals who purchase Shares through BayBanks and its affiliates.
Shareholders can invest, reinvest or redeem shares at any time with no sales
loads or redemption fees imposed by the Money Market Funds. Shareholders have
access to other portfolios in BayFunds through an exchange program with no sales
loads or redemption fees.
The Shares offered by this prospectus are not deposits or obligations of
BayBanks, Inc., or its subsidiaries, are not endorsed or guaranteed by BayBanks,
Inc., or its subsidiaries, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in these Shares involves investment risks, including the possible
loss of principal.
An investment in the Funds is neither insured nor guaranteed by the U.S.
government. The Funds attempt to maintain a stable net asset value of $1.00 per
share; there can be no assurance that the Funds will be able to do so.
This prospectus contains the information you should read and know before you
invest in Investment Shares of the Money Market Funds. Keep this prospectus for
future reference.
The Funds have also filed a combined Statement of Additional Information dated
April 22, 1994, 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 the Funds by writing to the Funds or calling toll-free
1-800-BAY-FUND (1-800-229-3863).
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 April 22, 1994
- --------------------------------TABLE OF CONTENTS-------------------------------
Synopsis..................................................................... 1
Summary of Fund Expenses..................................................... 2
Financial Highlights--Investment Shares...................................... 3
General Information........................................................ 5
Investment Objective and Policies
of Each Fund............................................................... 5
Money Market Fund.......................................................... 5
Acceptable Investments.................................................. 6
Treasury Fund.............................................................. 6
Acceptable Investments.................................................. 6
Portfolio Investments and Strategies
of the Funds............................................................... 7
Government Securities...................................................... 7
Repurchase Agreements...................................................... 7
When-Issued and Delayed Delivery
Transactions............................................................ 7
Lending of Portfolio Securities............................................ 7
Restricted and Illiquid Securities......................................... 7
Reverse Repurchase Agreements.............................................. 8
Ratings.................................................................... 8
Bank Instruments........................................................... 9
Demand Master Notes........................................................ 9
Credit Enhancement......................................................... 9
Puts and Standby Commitments............................................... 9
Investing in Securities of Other
Investment Companies.................................................... 9
Investment Risks.......................................................... 10
Investment Limitations...................................................... 10
Regulatory Compliance....................................................... 11
BayFunds Information......................................................... 11
Management of BayFunds..................................................... 11
Board of Trustees....................................................... 11
Investment Advisers..................................................... 11
Advisory Fees......................................................... 11
Advisers' Background.................................................. 12
Distribution of the Funds' Shares.......................................... 12
Administration of the Funds................................................ 12
Administrative Services................................................. 13
Custodian............................................................... 13
Transfer Agent, Dividend Disbursing
Agent, and Portfolio Accounting
Services.............................................................. 13
Shareholder Servicing Arrangements...................................... 13
Legal Counsel........................................................... 13
Independent Auditors.................................................... 13
Expenses of the Funds and Shares............................................. 14
Net Asset Value.............................................................. 14
Pricing of Shares.......................................................... 14
Investing in Shares.......................................................... 15
Minimum Investment......................................................... 15
When You May Purchase Shares............................................... 15
When Your Purchase Is Effective............................................ 15
Purchases By Mail.......................................................... 16
Purchases By Phone......................................................... 16
Purchases By Wire.......................................................... 16
Purchases Through BayBanks Offices......................................... 17
Automatic Investment Program............................................... 17
Exchange Privileges.......................................................... 17
Exchanges By Telephone..................................................... 18
Written Exchanges.......................................................... 18
Exchanges Through BayBanks Offices......................................... 18
Redeeming Shares............................................................. 19
When You May Redeem Shares................................................. 19
When Redemptions Are Paid.................................................. 19
Signature Guarantees.................................................... 19
Redemptions By Mail........................................................ 19
Redemptions By Phone....................................................... 20
Redemption Proceeds By Wire................................................ 20
Backup Withholding...................................................... 20
Redemptions Through BayBanks Offices....................................... 20
Backup Withholding........................................................... 20
Redemptions Before Purchase
Instruments Clear....................................................... 20
Automatic Withdrawal Program............................................... 21
Shareholder Information...................................................... 21
Balances In Accounts....................................................... 21
Dividends and Distributions................................................ 21
Confirmations and Monthly Statements....................................... 22
Corporate Customers........................................................ 22
Retirement Plans........................................................... 22
Voting Rights.............................................................. 22
Authority To Act As Investment Advisers...................................... 23
Tax Information.............................................................. 24
Federal Income Tax......................................................... 24
Performance Information...................................................... 24
Other Classes of Shares...................................................... 25
Financial Highlights--Trust Shares
and Institutional Shares................................................ 26
Addresses......................................................Inside Back Cover
SYNOPSIS
Investment Objective and Policies
BayFunds offers you a convenient and affordable way to participate in five
separate, professionally managed, diversified investment portfolios with
distinct investment objectives and policies. This prospectus relates only to the
Investment Shares of the BayFunds Money Market Portfolio ("Money Market Fund")
and BayFunds U.S. Treasury Money Market Portfolio ("Treasury Fund")
(individually a "Fund" and collectively the "Funds").
BayFunds Money Market
Portfolio seeks to provide current income consistent with stability of
principal and liquidity by investing in a portfolio of money market
instruments with remaining maturities of 397 days or less; and
BayFunds U.S. Treasury Money
Market Portfolio seeks to provide current income consistent with stability
of principal and liquidity by investing in a portfolio consisting primarily
of short-term U.S. Treasury obligations with remaining maturities of 397
days or less.
As of the date of this prospectus, BayFunds offers shares in three other
portfolios:
. BayFunds Short Term Yield Portfolio seeks a high level of current income
consistent with preservation of capital by investing in a diversified
portfolio of high-grade debt obligations. The Fund will maintain a
dollar-weighted average portfolio maturity of three years or less;
. BayFunds Bond Portfolio seeks to achieve high current income and capital
appreciation by investing, under normal market and economic conditions, at
least 65% of the value of its total assets in bonds. The Fund will
maintain a dollar-weighted average porfolio maturity of twelve years or
less; and
. BayFunds Equity Portfolio seeks to provide long-term capital appreciation,
by investing, under normal market and economic conditions, at least 65% of
the value of its total assets in a broadly diversified portfolio of equity
securities, with current income as a secondary objective.
Shareholders may exchange Investment Shares in the Funds for Investment Shares
in the other portfolios of BayFunds without any redemption fee or other charge.
(See "Exchange Privileges" at pages 17-18.)
Valuing Fund Shares
Each Fund attempts to maintain a stable net asset value (or market value) of
$1.00 per share, although there is no assurance that it will be able to do so.
(See "Net Asset Value" at page 14.)
Buying and Redeeming Fund
Shares
You can conveniently buy and redeem Fund shares on any Business Day. (See
"Investing in Shares" at pages 15-17 and "Redeeming Shares" at pages 19-21.)
Shares of a Fund are bought and redeemed at net asset value without a sales load
or redemption fees. The minimum initial investment in a Fund is $2,500, or $500
if you participate in the Automatic Investment Program or invest through an
Individual Retirement Account ("IRA"). Subsequent investments must be in amounts
of at least $100, or $50 if you participate in the Automatic Investment Program
or invest through an IRA. (See "Automatic Investment Program" at page 17.)
Fund Management
The investment adviser for the Money Market Fund is BayBanks Investment
Management, Inc., and the investment adviser for the Treasury Fund is BayBank
Boston, N.A., each of which makes investment decisions for the respective Fund.
(See "BayFunds Information" at page 11.)
Shareholder Services
When you become a shareholder, you can easily obtain information about your
account, and about the Funds and other BayFunds' portfolios by calling toll-free
1-800-BAY-FUND (1-800-229-3863.)
Risk Factors
An investment in the Fund may involve certain risks that are explained more
fully in the sections of the prospectus discussing each Fund's investment
policies and its acceptable investments. (See "Investment Risks" at page 10.)
MONEY MARKET FUNDS
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Money
Investment Shares Market Treasury
Shareholder Transaction Expenses Fund Fund
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).................. None None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)....... None None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)..................................................... None None
Redemption Fees (as a percentage of amount redeemed, if applicable).......................... None None
Exchange Fees................................................................................ None None
<CAPTION>
Money
Annual Investment Shares Operating Expenses Market Treasury
(As a percentage of average net assets) Fund Fund
<S> <C> <C>
Management Fees (after waiver) (1)........................................................... 0.30% 0.20%
12b-1 Fees................................................................................... None None
Total Other Expenses......................................................................... 0.26% 0.44%
Shareholder Servicing Fees (after waiver)(2)..................................... 0.00% 0.25%
Total Investment Shares Operating Expenses (3)...................................... 0.56% 0.64%
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee for the Money Market Fund. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee for the Money Market Fund is 0.40%.
(2) The Funds can pay up to 0.25% of Investment Shares average daily net assets
for shareholder servicing agent fees. See "Shareholder Servicing
Arrangements."
(3) The Total Investment Shares Operating Expenses would be 0.91% for the Money
Market Fund, absent the voluntary waiver of expenses described in notes (1)
and (2) above.
The Annual Investment Shares Operating Expenses for the Money Market Fund and
Treasury Fund were 0.62% and 0.62%, respectively, for the fiscal year ended
December 31, 1993. The Operating Expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
The above table can help you understand the various costs and expenses that a
shareholder of Investment Shares will bear, either directly or indirectly. For
more complete descriptions of the various costs and expenses, see "BayFunds
Information" and "Investing in Shares." Wire-transferred redemptions may be
subject to additional fees.
<TABLE>
<CAPTION>
Example:
You would pay the following expenses on a $1,000 investment assuming (1) 5% annual return Money
and (2) redemption at the end of each time period. The Fund charges no redemption fees for Market Treasury
Investment Shares. Fund Fund
<S> <C> <C>
1 Year........................................................................................ $ 6 $ 7
3 Years....................................................................................... $18 $20
5 Years....................................................................................... $31 $36
10 Years...................................................................................... $70 $80
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to the
Money Market Fund and the Treasury Fund Investment Shares. The Funds also offer
another class of shares called Trust Shares and Institutional Shares,
respectively. Trust Shares of the Money Market Portfolio and Institutional
Shares of the Treasury Fund and Investment Shares of both Funds are generally
subject to the same expenses; however, Trust Shares and Institutional Shares are
not subject to a shareholder servicing fee. See "Other Classes of Shares."
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993, and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- ----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.03
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03)
- ---------------------------------------------------------------------------------------------------- ----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- ----------------
Total return** 2.58%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.62%(b)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.60%(b)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.11%(b)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $30,746
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 19, 1993 (date of initial
public offering) to December 31, 1993.
** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in its Annual
Report dated December 31, 1993, which can be obtained free of charge.
TREASURY FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993, and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.02
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.02)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 2.41%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.62%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.59%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.07%(a)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,694
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public offering) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
GENERAL INFORMATION
BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds 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. With respect to the Funds, as of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes of
shares, Trust Shares and Investment Shares of the Money Market Fund and
Institutional Shares and Investment Shares of the Treasury Fund. This prospectus
relates only to Investment Shares ("Shares") of the Funds.
The Shares are designed primarily for individuals who purchase Shares through
BayBanks and its affiliates and seek a convenient means of accumulating an
interest in a professionally managed, diversified portfolio of securities.
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.
For additional information about the investment strategies that one or both
Funds may employ, and certain investment policies mentioned below, please refer
to the "Portfolio Investments and Strategies of the Funds" section of this
prospectus and the combined Statement of Additional Information.
Money Market Fund
The Money Market Fund is designed for conservative investors who want
current income, liquidity, and stability of principal.
This Fund seeks to maintain a stable $1.00 share price, referred to as net
asset value per share, by investing primarily in a portfolio of money
market instruments. While the Fund cannot guarantee a stable share price,
the short-term nature of its investments helps to minimize price
fluctuations.
The investment objective of the Money Market Fund is to provide current income
consistent with stability of principal and liquidity. The Fund pursues its
investment objective by investing primarily in a diversified portfolio of
money market instruments with remaining maturities of 397 days or less. The
average maturity of these securities, computed on a dollar-weighted basis,
will be 90 days or less.
ACCEPTABLE INVESTMENTS
The Money Market Fund invests in high quality money market instruments that are
either rated in the highest short-term rating category by nationally recognized
statistical rating organizations ("NRSROs") or are of comparable quality to
securities having such ratings. Examples of these instruments include, but are
not limited to:
. domestic issues of corporate debt obligations;
commercial paper (including Canadian Commercial Paper and Europaper);
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions ("Bank
Instruments");
. demand master notes;
. 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 Money Market Fund invests only in instruments denominated and payable in
U.S. dollars.
Treasury Fund
The Treasury Fund is designed for conservative investors who want current
income, liquidity and stability of principal as well as the extra security
of a portfolio invested only in short-term U.S. Treasury obligations and
repurchase agreements collateralized by such obligations. This Fund seeks
to maintain a stable $1.00 share price, referred to as net asset value per
share, by investing primarily in a portfolio of short-term U.S. Treasury
obligations. While the Fund cannot guarantee a stable share price, the
short-term nature of its investments helps to minimize price
fluctuations.
The investment objective of the Treasury Fund is current income consistent with
stability of principal and liquidity. The Fund pursues its investment objective
by investing, under normal market conditions, at least 65% of the value of its
total assets in U.S. Treasury obligations with remaining maturities of 397 days
or less. The average maturity of these securities, computed on a dollar-weighted
basis, will be 90 days or less.
ACCEPTABLE INVESTMENTS
The Treasury Fund invests at least 65% of the value of its total assets in U.S.
Treasury obligations. These instruments are issued by the U.S. government, its
agencies, or instrumentalities 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, or have a variable rate of interest adjusted no less frequently
than every 397 days, or are purchased pursuant to a repurchase agreement which
provides for repurchase by the seller within 397 days from the date of
acquisition.
PORTFOLIO INVESTMENTS AND
STRATEGIES OF THE FUNDS
Government Securities
The types of Government Securities in which the Funds may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and, with respect to the Money Market Fund, 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:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. The Student Loan Marketing Association; and
. Federal National Mortgage Association.
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 securities to
the Funds and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Funds, the Funds could receive more or less than the
repurchase price on any sale of such securities.
When-Issued and Delayed Delivery Transactions
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Funds purchase
securities with payment and delivery scheduled for a future time. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Funds' investment objective
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Funds rely on the seller to complete the transaction. The
seller's failure to deliver the securities may cause the Funds to miss a price
or yield considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will limit the amount of
portfolio securities they may lend to not more than one-third of their
respective total assets. The Funds will only enter into loan arrangements with
broker/dealers, banks, or other institutions that their investment advisers have
determined are creditworthy under guidelines established by the Trustees and
will receive collateral equal to at least 100% of the value of the securities
loaned.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which the Funds may otherwise invest pursuant to their investment
objective and policies, but which are subject to restriction on resale under
federal securities law. However, the Funds will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 10% of its
net assets.
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 Money Market 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 Money Market 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 Money
Market Fund believes that Section 4(2) commercial paper and possibly certain
other restricted securities which meet the criteria for liquidity established by
the Trustees are quite liquid. The Money Market Fund intends, 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 the Money Market 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 Money Market Fund
intends to not subject such paper to the limitation applicable to restricted
securities.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements. This transaction is
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
Funds will repurchase the portfolio instrument by remitting the original
consideration plus interest at an agreed upon rate.
When effecting reverse repurchase agreements, assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments 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.
The use of reverse repurchase agreements may enable the Funds 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
the Funds will be able to avoid selling portfolio instruments at a
disadvantageous time.
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
Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1+ or F-1 by Fitch Investors Service, Inc. ("Fitch") are
all considered rated in the highest short-term rating category. The Funds 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. See "Regulatory Compliance."
Bank Instruments
The Money Market Fund may invest in Bank Instruments which are either issued by
an institution having capital, surplus and undivided profits over $100 million
as of the date of its most recently published financial statements or which are
insured by the Bank Insurance Fund ("BIF") or the Savings Association Insurance
Fund ("SAIF"), both of which are administered by the Federal Deposit Insurance
Corporation ("FDIC"). Bank Instruments may include Eurodollar Certificates of
Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"), and Eurodollar
Time Deposits ("ETDs"). The Money Market Fund will treat securities that are
credit enhanced with a bank's letter of credit as Bank Instruments.
Demand Master Notes
The Money Market Fund may purchase demand master notes, which are short-term
borrowing arrangements between a corporation or government agency and an
institutional lender (such as the Money Market 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. Many master notes give
the Money Market Fund the option of increasing or decreasing the principal
amount of the master note on a daily or weekly basis within certain limits.
Demand master notes and other short-term credit arrangements usually provide for
floating or variable rates of interest.
Credit Enhancement
The Money Market Fund may acquire securities that have been credit enhanced by a
guaranty, letter of credit or insurance. The Money Market Fund will evaluate 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, credit enhanced
securities will not be treated as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances, as required by
applicable regulations, the securities will be treated as having been issued
both by the issuer and the credit enhancer.
Puts and Standby Commitments
The Money Market Fund may acquire securities that are subject to puts and
standby commitments to repurchase the securities at their principal amount
(usually with accrued interest) within a fixed period (usually seven days)
following a demand by the Money Market Fund. The puts and standby commitments
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. These arrangements are used to provide the Money Market
Fund with liquidity and not to protect against changes in the market value of
the underlying securities. Puts that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
Investing in Securities of
Other Investment Companies
The Money Market Fund may invest in the securities of other investment companies
that are money market funds having investment objectives and policies similar to
its own, but it will not own more than 3% of the total outstanding voting stock
of any such investment company, invest more than 5% of its total assets in any
one such investment company, or invest more than 10% of its total assets in such
other investment companies in general. The Money Market Fund 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. The Money
Market Fund's adviser will waive its investment advisory fee on assets invested
in securities of open-end investment companies.
Investment Risks
The ECDs, ETDs, Yankee CDs, and Europaper which the Money Market Fund may
purchase 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
Money Market Fund's adviser in selecting investments for the Money Market Fund.
INVESTMENT LIMITATIONS
The Funds will not:
. borrow money directly or through reverse repurchase agreements (arrangements
in which the Funds sell a portfolio instrument for a percentage of their
cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Funds may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of
the value of their respective total assets and pledge up to 15% of the value
of those assets to secure such borrowings; nor
. with respect to 75% of the value of their respective total assets, invest
more than 5% in securities of 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.
The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Funds will not:
. invest more than 10% of their respective net assets in illiquid securities,
including repurchase agreements providing for settlement in more than seven
days after notice.
REGULATORY COMPLIANCE
The Funds may follow non-fundamental operating policies that are more
restrictive than their fundamental investment limitations, as set forth in this
prospectus and 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 (the "ICA"). In
particular, the Funds will comply with the various requirements of Rule 2a-7
under the ICA, which regulates money market mutual funds. For example, Rule 2a-7
generally prohibits the investment of more than 5% of each Fund's total assets
in the securities of any one issuer, although each Fund's investment limitation
only requires such 5% diversification with respect to 75% of its assets.
However, U.S. government securities may be purchased without regard to this 5%
limitation. The Funds will also determine the effective maturity of their
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.
BAYFUNDS INFORMATION
Management of BayFunds
BOARD OF TRUSTEES
A Board of Trustees supervises BayFunds.
BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.
INVESTMENT ADVISERS
Acting under the direction of the Trustees, the Advisers make investment
decisions for the Funds.
Pursuant to investment advisory contracts with BayFunds, investment decisions
for the Money Market Fund are made by BayBanks Investment Management, Inc., and
investment decisions for the Treasury Fund are made by BayBank Boston, N.A., the
Funds' investment advisers (individually referred to as the "Adviser," and
collectively as the "Advisers"), subject to direction by the Trustees. The
Advisers conduct investment research and supervision for the respective Funds
and are responsible for the purchase and sale of portfolio instruments, for
which they receive an annual fee from the respective Fund.
Advisory Fees
BayBanks Investment Management, Inc. receives an annual investment advisory fee
equal to .40 of 1% of the Money Market Fund's average daily net assets. BayBank
Boston, N.A. receives an annual investment advisory fee equal to .20 of 1% of
the Treasury Fund's average daily net assets. The Advisers have undertaken to
reimburse the respective Funds, up to the amount of the advisory fees, for
operating expenses in excess of limitations established by certain states. The
Advisers also may voluntarily choose to waive a portion of their fees or
reimburse the Funds for certain other expenses, but reserve the right to
terminate such waiver or reimbursement at any time at their sole discretion.
Advisers' Background
The Advisers have extensive investment experience and are subsidiaries of a
leading New England financial services organization.
The Advisers are wholly-owned subsidiaries of BayBanks, Inc., a bank holding
company organized under the laws of the Commonwealth of Massachusetts. BayBanks,
Inc., through its banking subsidiaries (hereinafter "BayBanks") and affiliates,
offers a full range of financial services to the public, including depository
services, commercial lending, cash management, brokerage, retail banking,
mortgage banking, and investment advisory and trust services. As part of their
regular banking operations, BayBanks 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 BayBanks. The lending
relationship will not be a factor in the selection of securities.
BayBanks Investment Management, Inc., Adviser for the Money Market Fund, is a
registered investment adviser and provides investment advisory services for
trust and other managed assets. BayBanks Investment Management, Inc. was
established as a separate subsidiary of BayBanks, Inc. in 1985, but its
predecessor division and personnel have been providing investment advisory
services to BayBanks' customers for more than 65 years. As of December 31, 1993,
the Trust Division of BayBank, a state-chartered affiliate of BayBanks
Investment Management, Inc. acted as custodian for assets totaling $4.7 billion.
Of this amount, BayBanks Investment Management, Inc. managed $2.7 billion of
discretionary assets. BayBanks Investment Management, Inc. and BayBanks have
been managing commingled funds for over twenty years. At the present time
BayBanks Investment Management, Inc. serves as adviser to five such commingled
funds with total assets of approximately $290 million. BayBanks Investment
Management, Inc. has managed mutual funds since August 1991 and manages
approximately $562 million (as of December 31, 1993) in various BayFunds
portfolios.
BayBank Boston, N.A., Adviser to the Treasury Fund, through its Capital Markets
Division, manages more than $2 billion of assets in the investment portfolios of
BayBanks, Inc. and BayBanks, and approximately $537 million (as of December 31,
1993) in the Treasury Fund. BayBank Boston, N.A., is a national banking
association.
Distribution of the Funds' Shares
Federated Securities Corp. is the principal distributor for Shares of the
Funds.
Federated Securities Corp. is the principal distributor (the "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.
Administration of the Funds
Various organizations provide services to the Funds.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
the Funds with certain administrative personnel and services necessary to
operate the Funds, such as legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
Average Aggregate
Maximum Daily Net Assets
Administrative Fee of BayFunds
<C> <S>
.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
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and cash
of the Funds.
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND
PORTFOLIO ACCOUNTING SERVICES
Supervised Service Company, Inc. (the "Transfer Agent"), Kansas City, Missouri,
is transfer agent for the Shares of the Funds, and dividend disbursing agent for
the Funds. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, provides portfolio accounting services for the Funds.
SHAREHOLDER SERVICING ARRANGEMENTS
BayBank Systems, Inc., Waltham, Massachusetts, is the shareholder servicing
agent for the Funds ("Shareholder Servicing Agent"). Each Fund may pay the
Shareholder Servicing Agent a fee based on the average daily net asset value of
Shares for which it provides shareholder services. These shareholder services
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance and communicating or facilitating
purchases and redemptions of Shares of each Fund. This fee will be equal to .25
of 1% of each Fund's average daily net assets for which the Shareholder
Servicing Agent provides services; however, the Shareholder Servicing Agent may
choose voluntarily to waive all or a portion of its fee at any time.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the Independent
Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young, Pittsburgh,
Pennsylvania.
Expenses of the Funds
and Shares
The Funds pay all of their own expenses and their allocable share of BayFunds'
expenses. The expenses borne by the Funds include the following types of
expenses: organization fees; Trustees fees; fees for those management and
administration services described above (including legal, audit and custodian
fees); and printing, registration and mailing costs for legally required
documents and reports to shareholders and government agencies. The Advisers may
voluntarily waive some expenses and has, in addition, undertaken to reimburse
the Funds, up to the amount of the respective advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
At present, the only expenses allocated to shares as a class are expenses under
the Funds' Shareholder Servicing Plan which relate to the Shares. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Shares as it deems appropriate ("Class Expenses").
NET ASSET VALUE
The term "net asset value" per share refers to the value of one Fund
share.
Each Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. Net asset
value per Share for purposes of pricing purchases and redemptions is calculated
by dividing the value of all securities and other assets belonging to a Fund,
less the liabilities charged to the Fund, by the number of outstanding shares of
the Fund.
The Funds cannot guarantee that their net asset value will always remain at
$1.00 per Share.
Pricing of Shares
The net asset value of each Fund is determined at 2:00 p.m. (Eastern time) and
the close of regular trading hours on the New York Stock Exchange, currently
4:00 p.m. (Eastern time), Monday through Friday, except on: (i) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day; (ii) 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; and (iii) days
during which no Shares are tendered for redemption and no orders to purchase
Shares are received.
INVESTING IN
SHARES
Shares of the Funds are sold "no-load"-- without a sales charge. Your
minimum initial investment is only $2,500, or $500 if you participate in
the Automatic Investment Program or invest through an IRA.
Minimum Investment
You can become a Fund shareholder with an initial investment of $2,500, or $500
if you participate in the Automatic Investment Program or invest through an IRA.
Subsequent investments must be in amounts of at least $100, or if you
participate in the Automatic Investment Program or invest through an IRA, the
minimum for additional Share purchases is $50. The Funds may waive any
investment minimums from time to time. In addition, the Funds may reduce or
waive investment minimums for investors purchasing through qualified BayBanks
accounts.
When You May Purchase Shares
The Funds offer Shares only on days on which the New York Stock Exchange and the
Federal Reserve Bank of Boston are open for business ("Business Days"). In
addition to the holidays listed above under "Pricing of Shares," other non-
Business Days include Martin Luther King's Day, Columbus Day and Veteran's Day.
If the Shareholder Servicing Agent receives your purchase order on a
non-Business Day, the order will not be executed until the next Business Day in
accordance with the Distributor's procedures. The Funds and the Distributor
reserve the right to reject any purchase request.
When Your Purchase Is Effective
Purchase orders for Shares of a Fund must be placed with the Shareholder
Servicing Agent by 11:30 a.m. (Eastern time) on a Business Day in order to be
eligible to receive dividends declared that day. Purchase orders received in
good order and accepted by the Funds from the Transfer Agent by 2:00 p.m.
(Eastern time) on a Business Day will be executed at the net asset value next
determined and will begin earning dividends that day. The Transfer Agent will
not communicate your purchase order to the Fund until the Shareholder Servicing
Agent has received the purchase price in Federal funds or other immediately
available funds. If your purchase order is received in good order and accepted
by the Funds from the Transfer Agent after 2:00 p.m. (Eastern time) and prior to
4:00 p.m. (Eastern time), it will be executed at the net asset value next
determined and Shares will begin earning dividends the next Business Day. When
you purchase Shares by check, the order is considered received when the check is
converted into Federal funds, normally within two Business Days.
To allow the Advisers to manage the Funds effectively and to enhance your
chances of being eligible to receive that day's dividend, you are strongly
encouraged to initiate all trades (purchases, redemptions, or exchanges) as
early in the day as possible. On those days when either the Federal Reserve Bank
of Boston or the U.S. Government Bond Market closes early, or, in an Adviser's
judgment, closing early is deemed to be in the best interest of a Fund's
shareholders, the right is reserved to advance the time on that day by which all
transactions (purchases, redemptions, or exchanges) must be received.
You must submit a completed and signed application at the time of your initial
purchase.
The Shareholder Servicing Agent is responsible for the prompt transmission of
purchase orders received in good order to the Transfer Agent.
Subsequent purchases may be made by telephone, mail, wire, or in person
through BayBanks offices.
Purchases By Mail
If you make your initial Share purchase by mail, you must send a completed and
signed application and a check payable to the specific Fund and class, to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
You may obtain an application by calling
1-800-BAY-FUND.
You may make subsequent investments in the Funds at any time by sending a check
for a minimum of $100 ($50 if for an IRA) payable to the specific Fund and class
at the following address:
BayFunds
P.O. Box 5-0900
Woburn, MA 01815-0900
or for IRAs:
BayFunds
P.O. Box 889
Burlington, MA 01803-5889
You must include either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
obtained by calling 1-800-BAY-FUND, or (c) a letter stating the amount of the
investment, the name of the Fund and class of shares, the exact name and address
of the account, and your account number.
If the check does not clear, your purchase order will be cancelled and you could
be held liable for associated transaction costs.
Purchases By Phone
Once you are a Fund shareholder, you may purchase additional Shares by calling
1-800-BAY-FUND.
You must have previously authorized the specific Fund in writing to accept
telephone requests. If you have not done so, call 1-800-BAY-FUND to receive the
Options Change Form and information on this Fund feature. Each Fund uses
reasonable procedures (including a shareholder identity test and sending a
written confirmation of each telephone transaction) to confirm that instructions
given by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for the losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
The establishment of certain types of deposit account relationships with
BayBanks may permit the direct deduction of your purchase price from your
BayBanks deposit account. Please call 1-800-BAY-FUND to determine whether your
BayBanks deposit account qualifies.
For the protection of investors, all phone communications may be recorded where
not otherwise prohibited by law.
Texas residents must purchase Shares through the Distributor at 1-800-358-2805.
Purchases By Wire
If you are a Fund shareholder, you may purchase additional Shares by wire by
first notifying BayBank, as agent for the Transfer Agent, by phone at
1-800-BAY-FUND and then wiring the funds as follows:
. BayBank
. ABA Number: 0110-0174-2
. Attention: Mutual Funds Services
. For Credit to: (shareholder name and account number)
. Further Credit to: (identify the appropriate Fund--Investment Shares)
Purchases Through BayBanks Offices
You may place an order to purchase Shares of a Fund in person through designated
BayBanks offices.
Purchase orders placed through BayBanks offices typically would be received by
the Transfer Agent within two Business Days. If you want more prompt processing,
you should consider another method, such as "Purchases By Phone."
Automatic Investment Program
You can buy Shares conveniently through the Automatic Investment Program.
When you participate in the Automatic Investment Program, you can purchase
additional Fund Shares in minimum amounts of $50. You must previously have
authorized in writing the amount of funds to be deducted automatically from
eligible BayBanks deposit accounts or your deposit account maintained at a
domestic financial institution which is an automated clearing house member, and
the frequency of the deductions. The funds will be invested in Shares of the
Funds at the net asset value next determined. The Funds may reduce or waive the
investment minimums for investors purchasing through qualified BayBanks
accounts.
EXCHANGE PRIVILEGES
If your investment needs change, you can easily exchange a Fund's
Investment Shares for Investment Shares of any other BayFunds Portfolio at
no charge.
BayFunds consists of the Funds, the BayFunds Short Term Yield Portfolio, the
BayFunds Equity Portfolio, and the BayFunds Bond Portfolio. As a shareholder,
you have access to the Investment Shares of all the portfolios ("Participating
Funds") of BayFunds through an exchange program. You may also purchase BayFunds
Shares of Massachusetts Municipal Cash Trust with redemption proceeds of a
BayFunds portfolio by calling 1-800-BAY-FUND.
You may exchange Shares having a net asset value of at least $100 for Investment
Shares of any other Participating Fund in which you have an account. The minimum
initial investment to establish an account in any other Participating Fund by
exchange is $2,500, or $500 if you participate in the Automatic Investment
Program or invest through an IRA. BayFunds does not charge any exchange fees.
Each exchange is considered a sale of shares of one fund and a purchase of
shares of another fund. Shares submitted for exchange will be redeemed at the
net asset value next determined after receipt of the exchange request by the
Transfer Agent on a Business Day. Investment Shares of the Participating Fund to
be acquired will be purchased at the net asset value per share next determined
on a Business Day. Transfers of money between a BayFunds portfolio and BayFunds
Shares of Massachusetts Municipal Cash Trust will be reflected as a redemption
and purchase on a shareholder's account statement. In a transfer involving the
BayFunds Shares of Massachusetts Municipal Cash Trust, the purchase order will
be placed on the Business Day following the Business Day after which the
redemption order has been executed.
If you do not have an account in the Participating Fund whose Investment Shares
you want to acquire, you must establish an account. Prior to any such exchange,
you must receive a copy of the current prospectus of the Investment Shares of
the Participating Fund into which an exchange is to be effected. This account
will be registered in the same name and, unless you specify otherwise, will have
the same dividend and distribution payment option you selected with your
existing account. If the new account registration (name, address, and taxpayer
identification number) is not identical to your existing account, please call
1-800-BAY-FUND for the necessary new account or transfer procedures.
The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.
You may find the exchange privilege useful if your investment objectives or
market outlook should change after you invest in any of the Investment Shares of
the Participating Funds. You may obtain further information on the exchange
privilege and obtain a prospectus by calling 1-800-BAY-FUND.
BayFunds reserves the right to terminate the exchange privilege at any time on
60 days' notice. Shareholders will be notified if this privilege is terminated.
Depending on the circumstances, an exchange may generate a short-or long-term
capital gain or loss for federal income tax purposes.
Exchanges By Telephone
You may provide instructions for exchanges by telephone between Participating
Funds by calling 1-800-BAY-FUND.
You must have previously authorized the Funds in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the Options
Change Form and information on this feature. Each Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for the losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Written Exchanges
You may send a written request for exchange to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
Your written request must include your name and tax identification number; the
name of the specific Fund, the name of the class of shares; the dollar amount or
number of Shares to be redeemed; the name of the fund and class of shares in
which shares are to be purchased; and your account number. Your request must be
signed by the registered owners(s) exactly as required by the account
application.
Exchanges Through BayBanks Offices
You may place an order to exchange Shares in person through designated BayBanks
offices.
Exchange orders received through designated BayBanks offices typically would be
received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Exchanges By
Telephone."
REDEEMING SHARES
When you sell your Shares--"redeem" them--you receive the net asset value
per share next determined after the request is received by a Fund in proper
form. There are no fees or other redemption charges (except for redemptions
by wire). You may redeem some or all of your investment.
When You May Redeem Shares
Each Fund redeems its Shares at the net asset value next determined after the
Fund has received your redemption request from the Transfer Agent in proper
form. Redemption requests can be executed only on Business Days. If your
redemption request is received by the Shareholder Servicing Agent on a
non-Business Day, the Transfer Agent will not communicate your redemption
request to the Fund until the next Business Day.
The Funds will not process any redemptions until a completed and signed
application has been received.
When Redemptions Are Paid
Redemption proceeds may be credited to an eligible BayBanks deposit account,
paid by check, or paid by wire, as you previously designated in your
application. Shareholders of a Fund must place redemption orders with the
Shareholder Servicing Agent by 11:30 a.m. (Eastern time) on a Business Day in
order to be eligible to receive redemption proceeds by wire on the day of
redemption. The Funds ordinarily will make payment for Shares redeemed after
proper receipt from the Transfer Agent of the redemption request and of all
documents in proper form within one Business Day to an eligible BayBanks deposit
account, within five Business Days if you requested redemption proceeds by
check, or the same day by wire if the Funds receive your redemption request from
the Transfer Agent by 2:00 p.m. (Eastern time) on the day of redemption. Shares
of the Funds redeemed and wired the same day will not receive the dividend
declared on the day of redemption.
Signature Guarantees. If you request a redemption for an amount in excess of
$10,000 (no limitation if the proceeds are being credited to your BayBanks
deposit account), a redemption of any amount to be sent to an address other than
your address of record with the Fund, the transfer of the registration of
Shares, or a redemption of any amount payable to someone other than yourself as
the shareholder of record, your signature must be guaranteed on a written
redemption request by a trust company or insured commercial bank; an insured
savings and loan association or savings bank; a member firm of a national or
regional stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Transfer Agent has adopted
standards for accepting signature guarantees from the above institutions.
BayFunds may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds do not
accept signatures guaranteed by a notary public. BayFunds and its Transfer Agent
reserve the right to amend these standards at any time without notice. If you
have a question about the proper form for redemption requests, call
1-800-BAY-FUND.
You may redeem Shares by phone, mail, or through BayBanks offices. You may
receive redemption proceeds by wire.
Redemptions By Mail
You may redeem Fund Shares by submitting a written request for redemption to:
BayFunds
P.O. Box 665
Waltham, MA 02554-9614
Your written redemption request must include your name and tax identification
number, the specific Fund's name, the class of shares name, the dollar amount or
number of Shares to be redeemed, and your account number. Your request must be
signed by the registered owner(s) exactly as required by the account
application.
Redemptions By Phone
You may redeem Fund Shares by calling
1-800-BAY-FUND.
You must have previously authorized the Fund in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the Options
Change Form.
In the event of drastic economic or market changes, you may experience
difficulty in redeeming by telephone. If this occurs, you should consider
another method of redemption, such as "Redemptions By Mail." Each Fund uses
reasonable procedures (including a shareholder identity test and sending a
written confirmation of each telephone transaction) to confirm that instructions
given by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Redemption Proceeds By Wire
You may receive redemption proceeds of Fund Shares by wire by calling
1-800-BAY-FUND. Redemption proceeds of at least $1,000 will be wired directly to
the domestic commercial bank and account you previously designated in writing.
You are charged a fee for each wire redemption and the fee is deducted from your
redemption proceeds.
Each Fund reserves the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect the Fund. However, the redemption order will be
effected at the net asset value next determined after the redemption request is
received by a Fund from the Transfer Agent in proper form. The Funds also
reserve the right to terminate or modify the "Redemption
Proceeds By Wire" or "Redemptions By Phone" procedures at any time. In that
event, shareholders would be promptly notified.
Redemptions Through BayBanks
Offices
You may place an order to redeem Fund Shares in person through designated
BayBanks offices.
Redemption orders received through designated BayBanks offices typically would
be received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Redemptions By Phone."
BACKUP WITHHOLDING
The Internal Revenue Service requires that backup withholding of 31% apply to
any redemption or exchange request on an account that has not certified its
taxpayer identification number ("TIN"). Shareholders who either have not
certified their number or applied for a number should be aware that backup
withholding will apply to any redemption request processed prior to receipt of a
TIN number and certification.
Redemptions Before Purchase
Instruments Clear
If any portion of a Fund's Shares to be redeemed represents an investment made
with uncollected funds, the Fund reserves the right to delay payment of proceeds
until the Shareholder Servicing Agent is reasonably certain that the funds have
been collected, which could take up to five Business Days.
Automatic Withdrawal Program
An Automatic Withdrawal Program may be established for IRA accounts only whereby
automatic redemptions are made from the account and transferred electronically
to an eligible BayBanks deposit account or your deposit account maintained at a
domestic financial institution that is an automated clearing house member. The
minimum withdrawal amount is $100 per month. Depending upon the amount of the
withdrawal payments and the amount of dividends paid with respect to Shares,
redemptions may reduce, and eventually deplete, the shareholder's investment in
the Fund. For this reason, payments under this program should not be considered
as yield or income on the shareholder's investment in the Fund. A shareholder
may apply for participation in this program by calling 1-800-BAY-FUND for
further information. If a shareholder withdraws any funds from the IRA account
before reaching age 59-1/2 (except certain withdrawals of excess contributions
and regular payments made over the shareholder's life expectancy), the
shareholder will be subject to an IRS penalty tax of 10% of the taxable amount
withdrawn in addition to regular income taxes on the taxable amount.
SHAREHOLDER INFORMATION
Balances in Accounts
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem your Shares (other than in retirement plan accounts or IRAs) and send you
the proceeds if, due to shareholder redemptions your account balance falls below
a minimum value of $1,000. However, before Shares are redeemed to close an
account, the shareholder will be notified in writing and given 60 days to
purchase additional Shares to meet the minimum balance requirement. The Funds
reserve the right to amend this standard upon 60 days' prior written notice to
shareholders. The Funds also reserve the right to redeem their Shares
involuntarily or make payment for redemptions in the form of securities if it
appears appropriate to do so in light of their responsibilities under the ICA.
Dividends and Distributions
You earn dividends daily and receive them monthly. You select the payment
option: automatic reinvestment in additional Shares, automatic credit to
eligible BayBanks deposit accounts, or by check.
Dividends from a Fund's net investment income are declared daily to shareholders
of record immediately following the 2:00 p.m. (Eastern time) pricing of Shares.
Dividends are paid monthly within five Business Days after the end of such
calendar month. The Funds do not expect to realize any net long-term capital
gains. However, if any such gains are realized, they will be distributed to
shareholders at least annually.
You elect in writing how you want to receive your dividends and your
distributions. You may choose automatic reinvestment in additional Fund Shares
at the net asset value next determined on the payment dates, automatic credit to
an eligible BayBanks deposit account, or by check. If you fail to select an
option, all distributions will be reinvested in additional Shares.
Confirmations and Monthly
Statements
Confirmations of each purchase, exchange or redemption are sent to each
shareholder of record. Monthly statements are sent to report transactions as
well as dividends paid during the month. However, BayBank IRA customers will
receive quarterly statements for their accounts. The Funds may suspend or
terminate their practice of confirming each transaction at any time without
notice.
The Funds' Transfer Agent maintains a Share account for each shareholder of
record. Share certificates are not issued.
Corporate Customers
Corporate customers of BayBanks interested in purchasing Fund Shares should
consult their account relationship managers for procedures applicable to their
accounts or call 1-800-554-3311. This prospectus should be read in conjunction
with any materials provided by BayBanks regarding such procedures.
Retirement Plans
BayBanks makes available for purchase Fund Shares for investment by IRAs, and
rollover IRAs. For details, including minimum investments, application forms and
other investment procedures, call 1-800-BAY-FUND. For information about
Simplified Employee Pension Plans and retirement plan vehicles established by
employers for their employees which are qualified under Section 401(k) and
403(b) of the Internal Revenue Code, call BayBank at 1-800-462-9999, extension
4589, or write to BayBank, Corporate Trust--New Business Department, 7 New
England Executive Park, Burlington, MA 01803.
Voting Rights
As a shareholder, you are entitled to vote on certain matters.
Each Share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in BayFunds have equal voting rights, except that, in matters affecting only a
particular fund or class, only shares of that particular Fund or class are
entitled to vote.
As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by a two-thirds vote of the
number of Trustees prior to such removal or by a two-thirds vote of the
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of BayFunds' outstanding shares of all portfolios entitled to vote.
AUTHORITY TO ACT AS
INVESTMENT ADVISERS
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing or
controlling a registered, open-end investment company continuously engaged in
the issuance of its shares, and from issuing, underwriting, selling or
distributing securities in general. Such laws and regulations do not prohibit
such a holding company or affiliate 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 their customer. Each Fund's
investment adviser, BayBanks Investment Management, Inc., and BayBank Boston,
N.A., is subject to such banking laws and regulations.
The Advisers believe that they may perform the investment advisory services for
the Funds contemplated by their advisory agreements with BayFunds without
violating 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 present or future statutes and regulations, could prevent the
Advisers from continuing to perform all or a part of the above services for
their customers and/or the Funds. In such event, changes in the operation of the
Funds may occur, including the possible alteration or termination of any
automatic or other Fund share investment and redemption services then being
provided, and the Trustees would consider alternative investment advisers and
other means of continuing available investment services. It is not expected that
Fund shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to BayBanks Investment Management, Inc. and/or
BayBank Boston, N.A. are 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 laws.
TAX INFORMATION
The following discussion on taxes is for general information only. Please
consult your own tax adviser for specific tax information about your
particular situation.
Federal Income Tax
Each Fund intends to meet requirements of the Internal Revenue Code applicable
to regulated investment companies in order not to be liable for any Federal
income taxes on income and gains distributed to the Fund's shareholders. Each
Fund will distribute substantially all of its net investment income and net
realized gains at least annually.
Each Fund will be treated as a single, separate entity for Federal income tax
purposes.
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. Distributions
from a Fund's net investment income and short-term capital gains will be taxed
as ordinary income and will not be eligible for the dividends received deduction
available to corporations.
Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
You can follow each Fund's performance.
From time to time, in advertisements or in reports to shareholders, the
performance and yield of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to relevant money market
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of the Funds may be compared to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds.
National financial publications in which performance and yield data are reported
may include The Wall Street Journal, The New York Times, Forbes, or Money
magazine. Publications of a local or regional nature, such as The Boston Globe
or The Boston Herald, may also be used in comparing the performance and yield of
the Funds.
The yield of the Shares represents the annualized rate of income earned on an
investment in the 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 by an investment in the 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.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in the Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed
as a percentage.
Yield, effective yield and total return will be calculated separately for the
Investment Shares of the Funds, and Institutional Shares of the Treasury Fund
and Trust Shares of the Money Market Fund. Because the Investment Shares are
subject to shareholder servicing fees, the yield, effective yield and total
return of Institutional Shares of the Treasury Fund and Trust Shares of the
Money Market Fund for the same period will exceed that of the Investment Shares
of the corresponding Fund.
Shares of the Funds are sold without any sales load or other similar
non-recurring charges.
OTHER CLASSES OF SHARES
Institutional Shares of the Treasury Fund are sold to banks and other
institutions investing for their own accounts and on behalf of persons
maintaining accounts at such banks and institutions and are subject to a minimum
initial investment of $500,000 or such minimums such banks or institutions may
set for their customers. Trust Shares of the Money Market Fund are sold
primarily to trusts, fiduciaries and institutions. Investments in Trust Shares
are subject to a minimum initial investment of $10,000. Institutional Shares and
Trust Shares are sold at net asset value and are distributed without shareholder
servicing fees.
The amount of dividends payable to Institutional Shares of the Treasury Fund and
Trust Shares of the Money Market Fund will exceed that of Investment Shares of
the corresponding Fund by the difference between Class Expenses and shareholder
servicing fees borne by shares of each respective class of shares of a Fund.
(Currently, there are no differences in Class Expenses other than shareholder
servicing fees.)
The stated advisory fee is the same for both classes of shares of a Fund.
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993, and on the following table for
each of the periods presented, is included in the Annual Report to Shareholders
dated December 31, 1993, which is incorporated by reference. This table should
be read in conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, April 30,
<S> <C> <C> <C>
1993 1992** 1992*
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
- --------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------
Net investment income 0.03 0.02 0.03
- --------------------------------------------------------------------------
Less distributions
- --------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02) (0.03)
- -------------------------------------------------------------------------- --------- ----------- ---------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
- -------------------------------------------------------------------------- --------- ----------- ---------------
Total return*** 2.72% 2.13% 3.55%
- --------------------------------------------------------------------------
Ratios to average net assets
- --------------------------------------------------------------------------
Expenses 0.59% 0.59%(b) 0.48%(b)
- --------------------------------------------------------------------------
Net investment income 2.68% 3.13%(b) 4.61%(b)
- --------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.11% 0.05%(b) 0.15%(b)
- --------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------
Net assets, end of period (000 omitted) $168,909 $242,935 $280,931
- --------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 1, 1991 (date of initial
public investment) to April 30, 1992. During the period from May 16, 1991
(start of business) to August 1, 1991, net investment income aggregating
$0.01 per share ($1,101) was distributed to Federated Administrative
Services.
** The Fund changed its fiscal year from April 30 to December 31.
*** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in its Annual
Report dated December 31, 1993, which can be obtained free of charge.
TREASURY FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993, and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.03
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 2.62%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.35%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.85%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.07%(a)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $502,724
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
ADDRESSES
BayFunds Money Market Portfolio and BayFunds U.S. Treasury Money Market
Portfolio
Investment Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
TO BAYFUNDS MONEY
MARKET PORTFOLIO
BayBanks Investment Management, Inc.
1414 Massachusetts Avenue
Cambridge, Massachusetts 02138
INVESTMENT ADVISER TO
BAYFUNDS U.S. TREASURY
MONEY MARKET PORTFOLIO
BayBank Boston, N.A.
175 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, Missouri 64105
SHAREHOLDER SERVICING AGENT
BayBank Systems, Inc.
One BayBank Technology Place
Waltham, Massachusetts 02154
PORTFOLIO ACCOUNTING SERVICES
Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
COUNSEL TO BAYFUNDS
Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
COUNSEL TO THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Ernst & Young
One Oxford Centre
Pittsburgh, Pennsylvania 15219
MONEY MARKET
PORTFOLIOS
Money Market Portfolio
U.S. Treasury
Money Market Portfolio
PROSPECTUS
Investment
Shares
BayBanks Investment Management, Inc.
- -----------------------------------------------------------
Investment Adviser for Money Market Portfolio
BayBank Boston, N.A.
- -----------------------------------------------------------
Investment Adviser for U.S. Treasury Money Market Portfolio
Federated Securities Corp.
- -----------------------------------------------------------
Distributor
Mutual
April 22, 1994 YTM620 Funds At
Printed on Recycled Paper 4011081-A-R(4/94) Bay Bank
BayFunds
Money Market Funds
Institutional Shares and Trust Shares
Combined Prospectus
The shares offered in this prospectus represent interests in the Institutional
Shares and Trust Shares ("Shares") of the following money market portfolios
("Money Market Funds") of BayFunds, an open-end, management investment company
(a mutual fund):
Money Market Funds
. BayFunds Money Market Portfolio--Trust Shares and Investment Shares
. BayFunds U.S. Treasury Money Market Portfolio--Institutional Shares and
Investment Shares
In addition, BayFunds offers the following three other separate investment
portfolios, each having a distinct investment objective and policies:
. BayFunds Bond Portfolio--Institutional Shares and Investment Shares
. BayFunds Short Term Yield Portfolio--Institutional Shares and Investment
Shares
. BayFunds Equity Portfolio--Institutional Shares and Investment Shares
This prospectus relates only to the Institutional Shares and Trust Shares of the
Money Market Funds (individually referred to as the "Fund" or collectively as
the "Funds"). Trust Shares of the Money Market Fund are sold to trusts,
fiduciaries and institutions. Institutional Shares of the Treasury Fund are sold
to BayBank Boston, N.A., its affiliated and correspondent banks and other
institutions investing for their own account and on behalf of customers
maintaining accounts at such banks and institutions.
Shareholders can invest, reinvest or redeem the Trust Shares and Institutional
Shares at any time with no sales loads or redemption fees imposed by the Funds,
although BayBank Boston, N.A., its affiliated and correspondent banks and other
institutions may charge their customers accounts for services provided in
connection with the purchase or redemption of Institutional Shares of the
Treasury Fund. Shareholders have access to other portfolios in BayFunds through
an exchange program with no sales loads or redemption fees.
The Shares offered by this prospectus are not deposits or obligations of
BayBanks, Inc., or its subsidiaries, are not endorsed or guaranteed by BayBanks,
Inc., or its subsidiaries, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in these Shares involves investment risks, including the possible
loss of principal.
An investment in the Funds is neither insured nor guaranteed by the U.S.
government. The Funds attempt to maintain a stable net asset value of $1.00 per
share; there can be no assurance that the Funds will be able to do so.
This prospectus contains the information you should read and know before you
invest in the Money Market Funds. Keep this prospectus for future reference.
The Funds have also filed a combined Statement of Additional Information dated
April 22, 1994, 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 the Funds by writing to the Funds or calling BayBanks Trust
Department in Massachusetts at (617) 273-1700 or toll-free 1-800-462-9999.
BayBanks Capital Markets customers should call 1-800-554-3311.
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 April 22, 1994
TABLE OF CONTENTS
Synopsis.......................................................................1
Summary of Fund Expenses.......................................................2
Financial Highlights--Trust
Shares and Institutional Shares..............................................3
General Information............................................................5
Investment Objective and Policies of
Each Fund....................................................................5
Money Market Fund............................................................5
Acceptable Investments....................................................5
Treasury Fund................................................................6
Acceptable Investments....................................................6
Portfolio Investments and Strategies
of the Funds.................................................................7
Government Securities.....................................................7
Repurchase Agreements.....................................................7
When-Issued and Delayed
Delivery Transactions...................................................7
Lending of Portfolio Securities...........................................7
Restricted and Illiquid Securities........................................7
Reverse Repurchase Agreements.............................................8
Ratings...................................................................8
Bank Instruments..........................................................8
Demand Master Notes.......................................................9
Credit Enhancement........................................................9
Puts and Standby Commitments..............................................9
Investing in Securities of Other
Investment Companies....................................................9
Investment Risks..........................................................9
Investment Limitations........................................................10
Regulatory Compliance.........................................................11
BayFunds Information..........................................................11
Management of BayFunds......................................................11
Board of Trustees........................................................11
Investment Advisers......................................................11
Advisory Fees..........................................................11
Advisers' Background...................................................12
Distribution of the Funds' Shares...........................................12
Administration of the Funds.................................................12
Administrative Services..................................................12
Custodian................................................................13
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services...............................................................13
Legal Counsel............................................................13
Independent Auditors.....................................................13
Expenses of the Funds and Shares..............................................13
Net Asset Value...............................................................14
Pricing of Shares...........................................................14
Investing in Shares...........................................................14
Minimum Investment..........................................................14
Share Purchases of the
Money Market Fund........................................................15
Through BayBanks.........................................................15
Share Purchases of the Treasury Fund........................................16
When Shares of the Treasury Fund
May be Purchased.......................................................16
When Purchases of the Treasury
Fund Shares Are Effective..............................................16
Exchanging Securities for Shares of
the Funds................................................................17
Exchange Privileges...........................................................17
Redeeming Shares..............................................................18
When Shares of the Money Market Fund
May Be Redeemed..........................................................18
By Telephone.............................................................18
By Mail..................................................................18
When Shares of the Treasury Fund
May Be Redeemed..........................................................19
When Redemptions of the Treasury Fund
Shares Are Effective...................................................19
Redemptions Before Purchase
Instruments Clear........................................................19
Shareholder Information.......................................................20
Balances in Accounts........................................................20
Confirmations and Statements................................................20
Dividends and Distributions.................................................20
Voting Rights...............................................................21
Authority to Act as Investment Advisers.......................................21
Tax Information...............................................................22
Federal Income Tax..........................................................22
Performance Information.......................................................23
Other Classes of Shares.......................................................24
Financial Highlights--Investment Shares.....................................25
Addresses......................................................Inside Back Cover
SYNOPSIS
This prospectus relates only to the Institutional Shares of the BayFunds U.S.
Treasury Money Market Portfolio ("Treasury Fund") and Trust Shares of the
BayFunds Money Market Portfolio ("Money Market Fund"). Each Fund is designed as
a convenient means of accumulating an interest in a professionally managed,
diversified portfolio investing primarily in money market instruments as
follows:
BayFunds Money Market
Portfolio seeks to provide current income consistent with stability of
principal and liquidity by investing primarily in a diversified portfolio
of money market instruments with remaining maturities of 397 days or less;
and
BayFunds U.S. Treasury Money Market Portfolio seeks to provide current
income consistent with stability of principal and liquidity by investing,
under normal market conditions, at least 65% of the value of its total
assets in U.S. Treasury obligations with remaining maturities of 397 days
or less.
For information on how to purchase Shares of either of these Funds, please refer
to "Investing in Shares." Each of the Funds attempts to stabilize the value of
its Shares at $1.00. A minimum initial investment of $10,000 is required for
Trust Shares of the Money Market Fund and $500,000 for Institutional Shares of
the Treasury Fund. Subsequent investment must be in amounts of at least $100 for
Trust Shares of the Money Market Fund and $100,000 for Institutional Shares of
the Treasury Fund. See "Minimum Investment." A bank or institution purchasing
Institutional Shares of the Treasury Fund will set minimums for its customers.
Shares are sold and redeemed at net asset value without a sales charge.
Information on redeeming Shares may be found under "Redeeming Shares."
Additionally, information regarding the exchange privilege offered with respect
to the other portfolios of BayFunds may be found under "Exchange Privileges."
BayBanks Investment Management, Inc. is the adviser to the Money Market Fund.
BayBank Boston, N.A. is the adviser to the Treasury Fund.
Risk Factors. The Funds may make certain investments and employ certain
investment techniques that involve risks, each of which are explained more fully
in the sections of this prospectus discussing the Funds' investment policies and
their acceptable investments. (See "Investment Objective and Policies of Each
Fund" and "Portfolio Investments and Strategies of the Funds.")
MONEY MARKET FUNDS
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Money Market Fund Treasury Fund
Shareholder Transaction Expenses Trust Shares Institutional Shares
<S> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................................... None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................. None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................ None None
Redemption Fees (as a percentage of amount redeemed, if applicable)... None None
Exchange Fees......................................................... None None
<CAPTION>
Annual Operating Expenses
(As a percentage of average net assets)
<S> <C> <C>
Management Fees (after waiver) (1).................................... % 0.30 % 0.20
12b-1 Fees............................................................ None None
Total Other Expenses.................................................. % 0.26 % 0.19
Total Operating Expenses (2).......................................... % 0.56 % 0.39
</TABLE>
(1) The management fee has been reduced to reflect the voluntary waiver of the
management fee for the Money Market Fund. The adviser can terminate this
voluntary waiver at any time at its sole discretion. The maximum management
fee for the Money Market Fund is 0.40%.
(2) Total Operating Expenses for the Money Market Fund would be 0.66%, absent
the voluntary waiver described in note (1) above.
The Annual Operating Expenses were 0.59% for the Money Market Fund Trust Shares,
and 0.35% for the Treasury Fund Institutional Shares, for the fiscal year ended
December 31, 1993. The Operating Expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
The above table can help you understand the various costs and expenses that a
shareholder of Money Market Fund Trust Shares and Treasury Fund Institutional
Shares will bear, either directly or indirectly. For more complete descriptions
of the various costs and expenses, see "BayFunds Information" and "Investing in
Shares." Wire-transferred redemptions may be subject to additional fees.
<TABLE>
<CAPTION>
Example:
You would pay the following expenses on a $1,000 investment Money Market Fund Treasury Fund
assuming (1) 5% annual return and (2) redemption at the end of Trust Shares Institutional Shares
each time period. The Fund charges no redemption fees.
<S> <C> <C>
1 Year............................................................ $ 6 $ 4
3 Years........................................................... $18 $13
5 Years........................................................... $31 $22
10 Years.......................................................... $70 $49
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to the
Money Market Fund Trust Shares and the Treasury Fund Institutional Shares. The
Funds also offer another class of shares called Investment Shares. Money Market
Fund Trust Shares and Investment Shares and Treasury Fund Institutional Shares
and Investment Shares are subject to the same expenses; however, Investment
Shares of both Funds are subject to a shareholder servicing fee. See "Other
Classes of Shares."
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--TRUST SHARES
(For a share outstanding throughout each period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
each of the periods presented, is included in the Annual Report to Shareholders
dated December 31, 1993, which is incorporated by reference. This table should
be read in conjunction with the Fund's financial statements and notes thereto,
which may be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended Year Ended
December 31, April 30,
<S> <C> <C> <C>
1993 1992** 1992*
Net asset value, beginning of period $ 1.00 $ 1.00 $ 1.00
- -----------------------------------------------------------------------
Income from investment operations
- -----------------------------------------------------------------------
Net investment income 0.03 0.02 0.03
- -----------------------------------------------------------------------
Less distributions
- -----------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03) (0.02) (0.03)
- ----------------------------------------------------------------------- --------- ----------- ---------------
Net asset value, end of period $ 1.00 $ 1.00 $ 1.00
- ----------------------------------------------------------------------- --------- ----------- ---------------
Total return*** 2.72% 2.13% 3.55%
- -----------------------------------------------------------------------
Ratios to average net assets
- -----------------------------------------------------------------------
Expenses 0.59% 0.59%(b) 0.48%(b)
- -----------------------------------------------------------------------
Net investment income 2.68% 3.13%(b) 4.61%(b)
- -----------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.11% 0.05%(b) 0.15%(b)
- -----------------------------------------------------------------------
Supplemental Data
- -----------------------------------------------------------------------
Net assets, end of period (000 omitted) $168,909 $242,935 $280,931
- -----------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from August 1, 1991 (date of initial
public investment) to April 30, 1992. During the period from May 16, 1991
(start of business) to August 1, 1991, net investment income aggregating
$0.01 per share ($1,101) was distributed to Federated Administrative
Services.
** The Fund changed its fiscal year from April 30 to December 31.
*** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in its Annual
Report dated December 31, 1993, which can be obtained free of charge.
TREASURY FUND
FINANCIAL HIGHLIGHTS--INSTITUTIONAL SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993, and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.03
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 2.62%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.35%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.85%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.07%(a)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $502,724
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
GENERAL INFORMATION
BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds 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. With respect to each Fund, as of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes of
shares, Trust Shares and Investment Shares of the Money Market Fund and
Institutional Shares and Investment Shares of the Treasury Fund. This prospectus
relates only to Trust Shares and Institutional Shares (collectively, "Shares")
of these Funds.
Trust Shares of the Money Market Fund are sold to trusts, fiduciaries and
institutions. Institutional Shares of the Treasury Fund are sold to BayBank
Boston, N.A., its affiliated and correspondent banks and other institutions
investing for their own account and on behalf of customers maintaining accounts
at such banks and institutions.
The other portfolios in BayFunds are: BayFunds Short Term Yield Portfolio;
BayFunds Bond Portfolio; and BayFunds Equity Portfolio.
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.
For additional information about the investment strategies that one or both
Funds may employ, and certain investment policies mentioned below, please refer
to the "Portfolio Investments and Strategies of the Funds" section of this
prospectus and the combined Statement of Additional Information.
Money Market Fund
The investment objective of the Money Market Fund is to provide current income
consistent with stability of principal and liquidity. The Fund pursues this
investment objective by investing primarily in a diversified portfolio of money
market instruments with remaining maturities of 397 days or less. The average
maturity of these securities, computed on a dollar-weighted basis, will be 90
days or less.
ACCEPTABLE INVESTMENTS
The Money Market Fund invests in high quality money market instruments that are
either rated in the highest short-term rating category by nationally recognized
statistical rating organizations ("NRSROs") or are of comparable quality to
securities having such ratings. Examples of these instruments include, but
are not limited to:
. domestic issues of corporate debt obligations;
. commercial paper (including Canadian Commercial Paper and Europaper);
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions ("Bank
Instruments");
. demand master notes;
. 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 Money Market Fund invests only in instruments denominated and payable in
U.S. dollars.
Treasury Fund
The investment objective of the Treasury Fund is current income consistent with
stability of principal and liquidity. The Fund pursues its investment objective
by investing, under normal market conditions, at least 65% of the value of its
total assets in U.S. Treasury obligations with remaining maturities of 397 days
or less. The average maturity of these securities, computed on a dollar-weighted
basis, will be 90 days or less.
ACCEPTABLE INVESTMENTS
The Treasury Fund invests at least 65% of the value of its total assets in U.S.
Treasury obligations. These instruments are issued by the U.S. government, its
agencies, or instrumentalities 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, or have a variable rate of interest adjusted no less frequently
than every 397 days, or are purchased pursuant to a repurchase agreement which
provides for repurchase by the seller within 397 days from the date of
acquisition.
PORTFOLIO INVESTMENTS AND
STRATEGIES OF THE FUNDS
Government Securities
The types of Government Securities in which the Funds may invest generally
include direct obligations of the U.S. Treasury (such as U.S. Treasury bills,
notes, and bonds) and, with respect to the Money Market Fund, 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:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. The Student Loan Marketing Association; and
. Federal National Mortgage Association.
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 securities to
the Funds and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Funds, the Funds could receive more or less than the
repurchase price on any sale of such securities.
When-Issued and Delayed Delivery Transactions
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Funds purchase
securities with payment and delivery scheduled for a future time. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Funds' investment objectives
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Funds rely on the seller to complete the transaction. The
seller's failure to deliver the securities may cause the Funds to miss a price
or yield considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term basis to broker/dealers, banks, or other
institutional borrowers of securities. The Funds will limit the amount of
portfolio securities they may lend to not more than one-third of their
respective total assets. The Funds will only enter into loan arrangements with
broker/dealers, banks, or other institutions that their investment advisers have
determined are creditworthy under guidelines established by the Trustees and
will receive collateral equal to at least 100% of the value of the securities
loaned.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which the Funds may otherwise invest pursuant to their investment
objective and policies, but which are subject to restriction on resale under
federal securities law. However, the Funds will limit investments in illiquid
securities, including certain restricted securities not determined by the
Trustees to be liquid, non-negotiable time deposits, and repurchase agreements
providing for settlement in more than seven days after notice, to 10% of their
respective net assets.
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 Money Market Fund who agrees 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 Money Market 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 Money
Market Fund believes that Section 4(2) commercial paper and possibly certain
other restricted securities which meet the criteria for liquidity established by
the Trustees are quite liquid. The Money Market Fund intends, 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 the Money Market 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 Money Market Fund
intends to not subject such paper to the limitation applicable to restricted
securities.
Reverse Repurchase Agreements
The Funds may enter into reverse repurchase agreements. This transaction is
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.
When effecting reverse repurchase agreements, assets of the Fund, in a dollar
amount sufficient to make payment for the obligations to be purchased, are
segregated at the trade date and maintained until the transaction is settled.
During the period any reverse repurchase agreements are outstanding, the Fund
will restrict the purchase of portfolio instruments 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.
The use of reverse repurchase agreements may enable the Funds 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
the Funds will be able to avoid selling portfolio instruments at a
disadvantageous time.
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
Standard & Poor's Corporation ("S&P"), Prime-1 by Moody's Investors Service,
Inc. ("Moody's"), or F-1+ or F-1 by Fitch Investors Service, Inc. ("Fitch") are
all considered rated in the highest short-term rating category. The Funds 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. See "Regulatory Compliance."
Bank Instruments
The Money Market Fund may invest in Bank Instruments which are either issued by
an institution having capital, surplus and undivided profits over $100 million
as of the date of its most recently published financial statements or which
are insured by the Bank Insurance Fund ("BIF") or the Savings Association
Insurance Fund ("SAIF"), both of which are administered by the Federal Deposit
Insurance Corporation ("FDIC"). Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee
CDs"), and Eurodollar Time Deposits ("ETDs"). The Money Market Fund will
treat securities that are credit enhanced with a bank's letter of credit as
Bank Instruments.
Demand Master Notes
The Money Market Fund may purchase demand master notes, which are short-term
borrowing arrangements between a corporation or government agency and an
institutional lender (such as the Money Market 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. Many master notes give
the Money Market Fund the option of increasing or decreasing the principal
amount of the master note on a daily or weekly basis within certain limits.
Demand master notes and other short-term credit arrangements usually provide for
floating or variable rates of interest.
Credit Enhancement
The Money Market Fund may acquire securities that have been credit enhanced by a
guaranty, letter of credit or insurance. The Money Market Fund will evaluate 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, credit enhanced
securities will not be treated as having been issued by the credit enhancer for
diversification purposes. However, under certain circumstances, as required by
applicable regulations, the securities will be treated as having been issued
both by the issuer and the credit enhancer.
Puts and Standby Commitments
The Money Market Fund may acquire securities that are subject to puts and
standby commitments to repurchase the securities at their principal amount
(usually with accrued interest) within a fixed period (usually seven days)
following a demand by the Money Market Fund. The puts and standby commitments
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. These arrangements are used to provide the Money Market
Fund with liquidity and not to protect against changes in the market value of
the underlying securities. Puts that are exercisable even after a payment
default on the underlying security may be treated as a form of credit
enhancement.
Investing in Securities of Other Investment Companies
The Money Market Fund may invest in the securities of other investment companies
that are money market funds having investment objectives and policies similar to
its own, but it will not own more than 3% of the total outstanding voting stock
of any such investment company, invest more than 5% of its total assets in any
one such investment company, or invest more than 10% of its total assets in such
other investment companies in general. The Money Market Fund 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. The Money
Market Fund's adviser will waive its investment advisory fee on assets invested
in securities of open-end investment companies.
Investment Risks
The ECDs, ETDs, Yankee CDs, and Europaper which the Money Market Fund may
purchase 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 Money Market Fund's adviser in selecting
investments for the Money Market Fund.
INVESTMENT LIMITATIONS
The Funds will not:
. borrow money directly or through reverse repurchase agreements (arrangements
in which the Funds sell a portfolio instrument for a percentage of their
cash value with an agreement to buy it back on a set date) or pledge
securities except, under certain circumstances, the Funds may borrow money
and engage in reverse repurchase agreements in amounts up to one-third of
the value of their respective total assets and pledge up to 15% of the value
of those assets to secure such borrowings; nor
. with respect to 75% of the value of their respective total assets, invest
more than 5% in securities of 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.
The above limitations cannot be changed without shareholder approval. The
following limitation, however, may be changed by the Trustees without
shareholder approval. Shareholders will be notified before any material change
in this limitation becomes effective.
The Funds will not:
. invest more than 10% of their respective net assets in illiquid securities,
including repurchase agreements providing for settlement in more than seven
days after notice.
REGULATORY COMPLIANCE
The Funds may follow non-fundamental operating policies that are more
restrictive than their fundamental investment limitations, as set forth in this
prospectus and 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 (the "ICA"). In
particular, the Funds will comply with the various requirements of Rule 2a-7
under the ICA, which regulates money market mutual funds. For example, Rule 2a-7
generally prohibits the investment of more than 5% of each Fund's total assets
in the securities of any one issuer, although each Fund's investment limitation
only requires such 5% diversification with respect to 75% of its assets.
However, U.S. government securities may be purchased without regard to this 5%
limitation. The Funds will also determine the effective maturity of their
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.
BAYFUNDS INFORMATION
Management of BayFunds
BOARD OF TRUSTEES
BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.
INVESTMENT ADVISERS
Pursuant to investment advisory contracts with BayFunds, investment decisions
for the Money Market Fund are made by BayBanks Investment Management, Inc., and
investment decisions for the Treasury Fund are made by BayBank Boston, N.A., the
Funds' investment advisers (individually referred to as the "Adviser," and
collectively as the "Advisers"), subject to direction by the Trustees. The
Advisers continually conduct investment research and supervision for the
respective Funds and are responsible for the purchase and sale of portfolio
instruments, for which they receive an annual fee from the respective Fund.
Advisory Fees
BayBanks Investment Management, Inc. receives an annual investment advisory fee
equal to .40 of 1% of the Money Market Fund's average daily net assets. BayBank
Boston, N.A., receives an annual investment advisory fee equal to .20 of 1% of
the Treasury Fund's average daily net assets. The Advisers have undertaken to
reimburse the respective Funds, up to the amount of the advisory fees, for
operating expenses in excess of limitations established by certain states. The
Advisers also may voluntarily choose to waive a portion of their fees or
reimburse the Funds for certain other expenses, but reserve the right to
terminate such waiver or reimbursement at any time at their sole discretion.
Advisers' Background
The Advisers are wholly-owned subsidiaries of BayBanks, Inc., a bank holding
company organized under the laws of the Commonwealth of Massachusetts. BayBanks,
Inc. through its banking subsidiaries (hereinafter "BayBanks") and affiliates,
offers a full range of financial services to the public, including depository
services, commercial lending, cash management, brokerage, retail banking,
mortgage banking, and investment advisory and trust services. As part of their
regular banking operations, BayBanks 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 BayBanks. The lending
relationship will not be a factor in the selection of securities.
BayBanks Investment Management, Inc., the Adviser for the Money Market Fund, is
a registered investment adviser and provides investment advisory services for
trust and other managed assets. BayBanks Investment Management, Inc. was
established as a separate subsidiary of BayBanks, Inc. in 1985, but its
predecessor division and personnel have been providing investment advisory
services to BayBanks' customers for more than 65 years. As of December 31, 1993,
the Trust Division of BayBank, a state-chartered affiliate of BayBanks
Investment Management, Inc., acted as custodian for assets totaling $4.7
billion. Of this amount, BayBanks Investment Management, Inc. managed $2.7
billion of discretionary assets. BayBanks Investment Management, Inc., and
BayBanks have been managing commingled funds for over twenty years. At the
present time BayBanks Investment Management, Inc. serves as adviser to five such
commingled funds with total assets of approximately $290 million. BayBanks
Investment Management, Inc. has managed mutual funds since August 1991 and
manages approximately $562 million (as of December 31, 1993) in various BayFunds
portfolios.
BayBank Boston, N.A., Adviser to the Treasury Fund, through its Capital Markets
Division, manages more than $2 billion of assets in the investment portfolios of
BayBanks, Inc. and BayBanks, and approximately $537 million (as of December 31,
1993) in the Treasury Fund. BayBank Boston, N.A., is a national banking
association.
Distribution of the Funds' Shares
Federated Securities Corp. is the principal distributor (the "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.
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 the Funds, such as legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
Average Aggregate
Maximum Daily Net Assets
Administrative Fee of BayFunds
<C> <S>
.150% on the first $250 million
.125% on the next $250 million
.100% on the next $250 million
.075% on assets in excess of
$750 million
</TABLE>
The administrative fee received during any fiscal year shall be at least $50,000
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and cash
of the Funds.
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND
PORTFOLIO ACCOUNTING SERVICES
Supervised Service Company, Inc. (the "Transfer Agent"), Kansas City, Missouri,
is transfer agent for the Shares of the Funds, and dividend disbursing agent for
the Funds. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, provides portfolio accounting services for the Funds.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the Independent
Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young, Pittsburgh,
Pennsylvania.
Expenses of the Funds and Shares
The Funds pay all of their own expenses and their allocable share of BayFunds'
expenses. The expenses borne by the Funds include the following types of
expenses: organization fees; Trustees fees; fees for those management and
administration services described above (including legal, audit and custodian
fees); and printing, registration and mailing costs for legally required
documents and reports to shareholders and government agencies. The Advisers may
voluntarily waive some expenses and has, in addition, undertaken to reimburse
the Funds, up to the amount of the respective advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
At present, the only expenses allocated to shares as a class are expenses under
the Funds' Shareholder Servicing Plan which only relates to the Investment
Shares. However, the Trustees reserve the right to allocate certain other
expenses to holders of shares as it deems appropriate ("Class Expenses").
NET ASSET VALUE
Each Fund attempts to stabilize the net asset value of its Shares at $1.00 by
valuing the portfolio securities using the amortized cost method. Net asset
value per Share for purposes of pricing purchases and redemptions is calculated
by dividing the value of all securities and other assets belonging to a Fund,
less the liabilities charged to the Fund, by the number of outstanding shares of
the Fund.
The Funds cannot guarantee that their net asset value will always remain at
$1.00 per Share.
Pricing of Shares
The net asset value of each Fund is determined at 2:00 p.m. (Eastern time) and
the close of regular trading hours on the New York Stock Exchange, currently
4:00 p.m. (Eastern time), Monday through Friday, except on: (i) the following
holidays: New Year's Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day; (ii) 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; and (iii) days
during which no Shares are tendered for redemption and no orders to purchase
Shares are received.
INVESTING IN
SHARES
Minimum Investment
The minimum initial investment in Shares of the Money Market Fund is $10,000.
Subsequent investments must be in amounts of at least $100. The Money Market
Fund may waive any investment minimums from time to time.
Shares of the Treasury Fund are sold to BayBank Boston, N.A., its affiliated and
correspondent banks and other institutions investing for their own account and
on behalf of customers maintaining accounts at such banks and institutions.
(BayBank Boston, N.A. and such banks and institutions may be collectively
referred to as the "Institution.") The minimum initial investment by an
Institution is $500,000, and subsequent investments must be in amounts of at
least $100,000. An Institution will set minimums for its customers.
Depending upon the terms of each customer account, an Institution may charge the
customer account fees for services it provides, such as automatic investment,
cash management, dividend payment processing, information regarding customer
positions, and sub-accounting with respect to customer accounts. Such fees may
include compensating balance requirements or account maintenance fees, or may be
based on account assets or transactions. Customers should obtain information
about account services and fees directly from their Institution before
authorizing the purchase of Shares of the Treasury Fund, and this prospectus
should be read in conjunction with any such information.
Shares are purchased and redeemed with no sales loads or redemption fees imposed
by the Funds. Depending upon the terms of each customer account, an Institution
may charge the customer account fees for services it provides, such as
automatic investment, cash management, dividend payment processing, information
regarding customer position, and sub-accounting with respect to customer
accounts. Such fees may include compensating balance requirements or account
maintenance fees, or may be based on account assets or transactions. Customers
should obtain information about account services and fees directly from their
Institution before authorizing the purchase of Shares, and this prospectus
should be read in conjunction with any such information.
Share Purchases of the Money Market Fund
The Money Market Fund offers Shares only on days on which the New York Stock
Exchange and the Federal Reserve Bank of Boston are open for business ("Business
Days"). In addition to the holidays listed above under "Pricing of Shares,"
other non-Business Days include Martin Luther King's Day, Columbus Day and
Veteran's Day. A customer of BayBanks may purchase Shares of the Money Market
Fund through BayBanks. If a purchase order is received through BayBanks on a
non-Business Day, the order will not be executed until the next Business Day in
accordance with the Distributor's procedures. All other investors should
purchase Shares directly from the Distributor. The Money Market Fund and the
Distributor reserve the right to reject any purchase request.
THROUGH BAYBANKS
A customer of BayBanks may telephone the BayBanks Trust Department toll-free at
1-800-462-9999. Participants in Employee Benefits programs should contact their
Plan Administrator. For the protection of investors, all phone communications
may be recorded where not otherwise prohibited by law.
Payment may be made to BayBanks either by check or Federal funds. If a purchase
order is received in good order and accepted by the Money Market Fund from the
Transfer Agent by 2:00 p.m. (Eastern time) on a Business Day, it will be
executed at the net asset value next determined and Shares will begin earning
dividends that day. The Transfer Agent will not communicate a purchase order to
the Money Market Fund until BayBanks has received the purchase price in Federal
funds or other immediately available funds. If a purchase order is received in
good order and accepted by the Money Market Fund from the Transfer Agent after
2:00 p.m. (Eastern time) and prior to 4:00 p.m. (Eastern time), it will be
executed at the net asset value next determined and Shares will begin earning
dividends the next Business Day. When Shares are purchased by check, the order
is considered received when the check is converted into Federal funds, normally
within two Business Days. When payment is made with Federal funds, they should
be wired to BayBanks as agent for the Transfer Agent as follows: ABA No.
0113-0235-7; Wire Order Number 0110-0174-2; Fiduciary Account Number 03000-002-
298-5. Investors not purchasing through BayBanks should consult their financial
institution for wiring instructions.
To allow the Adviser to manage the Money Market Fund effectively, investors are
strongly encouraged to initiate all trades (purchases, redemptions, or
exchanges) as early in the day as possible. On those days when either the
Federal Reserve Bank of Boston or the U.S. Government Bond Market closes early,
or, in the Adviser's judgment, closing early is deemed to be in the best
interest of the Money Market Fund's shareholders, the right is reserved to
advance the time on that day by which all transactions (purchases, redemptions,
or exchanges) must be received.
Texas residents must purchase Shares through Federated Securities Corp. at
1-800-356-2805.
BayBanks is responsible for the prompt transmission of purchase orders received
in good order to the Transfer Agent.
Share Purchases of the Treasury Fund
A customer of BayBanks may telephone the BayBanks Trust Department toll-free at
1-800-462-9999. BayBanks Capital Markets customers should call 1-800-554-3311.
Participants in Employee Benefits programs should contact their Plan
Administrator. Shares of the Treasury Fund may be purchased in accordance with
procedures established by an Institution in connection with the requirements of
its customer accounts. Procedures applicable to each Institution and each
customer account governing the purchase of Shares of the Treasury Fund will
differ. For example, such procedures may include instructions under which a
customer's account is "swept" automatically on a daily basis of collected
balances in excess of a minimum agreed to by an Institution and the customer.
The Treasury Fund expects that the Institution will transmit orders on behalf of
their customers for the purchase of Shares of the Treasury Fund arising from
automatic investment programs within one business day of the time the amounts in
excess of the minimum balances are swept.
Customers should consult their account relationship manager at their Institution
for further information and procedures on purchasing Shares of the Treasury
Fund. This prospectus should be read in conjunction with any materials provided
by the Institution regarding such procedures.
WHEN SHARES OF THE TREASURY FUND
MAY BE PURCHASED
The Treasury Fund sells Shares only on days on which the New York Stock Exchange
and the Federal Reserve Bank of Boston are open for business ("Business Days").
In addition to the holidays listed above under "Pricing of Shares," other non-
Business Days include Martin Luther King's Day, Columbus Day and Veteran's Day.
Orders received by the Transfer Agent on a non-Business Day will not be executed
until the next Business Day in accordance with the Distributor's procedures.
WHEN PURCHASES OF
THE TREASURY FUND SHARES
ARE EFFECTIVE
Orders by an Institution to purchase Shares received in good order and accepted
by the Treasury Fund from the Transfer Agent before 2:00 p.m. (Eastern time) on
a Business Day will be executed at the net asset value next determined and will
begin earning dividends that day. The Transfer Agent will not communicate
purchase orders to the Treasury Fund until the Transfer Agent receives Federal
funds or other available funds. Orders by an Institution to purchase Shares
received in good order and accepted by the Treasury Fund from the Transfer Agent
after 2:00 p.m. (Eastern time) and prior to 4:00 p.m. (Eastern time) will be
executed at the net asset value next determined and Shares will begin earning
dividends the next Business Day. Each Institution is responsible for
transmitting purchase orders promptly to the Treasury Fund in accordance with
the terms of its customer agreements. The Treasury Fund and the Distributor
reserve the right to reject any purchase order.
To allow the Adviser to manage the Treasury Fund effectively, investors are
strongly encouraged to initiate all trades (purchases, redemptions, or
exchanges) as early in the day as possible and to notify the Treasury Fund at
least one day in advance of transactions (purchases, exchanges or redemptions)
in excess of $5 million. On those days when either the Federal Reserve Bank of
Boston or the U.S. Government Bond Market closes early, or, in the Adviser's
judgment, closing early is deemed to be in the best interest of the Treasury
Fund's shareholders, the right is reserved to advance the time on that day by
which all transactions (purchases, exchanges and redemptions) must be received.
Exchanging Securities for Shares of the Funds
The Funds may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value, must be liquid and must
not be subject to restrictions on resale. The market value of any securities
exchanged in an initial investment, plus any cash, must be at least $100,000.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares of the Fund on the day the securities are valued. One Share of
the Fund will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
EXCHANGE PRIVILEGES
BayFunds consists of the Funds, the BayFunds Short Term Yield Portfolio, the
BayFunds Equity Portfolio, and the BayFunds Bond Portfolio. Customers may access
the Institutional Shares of the other portfolios of BayFunds ("Participating
Funds") through an exchange program. In addition, institutions may purchase
BayFunds Shares of Massachusetts Municipal Cash Trust with redemption proceeds
of a BayFunds portfolio. A customer of BayBanks may telephone the BayBanks Trust
Department toll-free at 1-800-462-9999. BayBanks Capital Markets customers
should call 1-800-554-3311. Participants in Employee Benefits programs should
contact their Plan Administrator. Procedures will be established by each
Institution in connection with the requirements of its customer accounts and the
Participating Funds. Customers should contact their Institution to obtain
further information on exchange privileges. Prior to any such exchange, a
customer must receive a copy of the current prospectus of the Participating Fund
into which an exchange is to be effected.
The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.
REDEEMING SHARES
When Shares of the Money
Market May Be Redeemed
The Money Market Fund redeems Shares at their net asset value next determined
after the Money Market Fund has received the redemption request from the
Transfer Agent in proper form. Redemption requests can be executed only on
Business Days. If a redemption request is received through BayBanks on a
non-Business Day, the Transfer Agent will not communicate the redemption request
to the Money Market Fund until the next Business Day.
BY TELEPHONE
A customer of BayBanks may telephone the BayBanks Trust Department toll-free at
1-800-462-9999. BayBanks Capital Markets customers should call 1-800-554-3311.
Participants in Employee Benefits programs should contact their Plan
Administrator. Redemption proceeds may be paid by check or paid by wire. The
Money Market Fund ordinarily will make payment for Shares redeemed after proper
receipt from the Transfer Agent of the redemption request the same day by wire
if the Money Market Fund receives the redemption request from the Transfer Agent
by 2:00 p.m. (Eastern time) on the day of redemption. Shares redeemed and wired
on the same day will not receive the dividend declared on the day of redemption.
Payment for Shares of the Money Market Fund redeemed by check will be within
five Business Days. The Money Market Fund reserves the right to wire redemption
proceeds within five Business Days after receiving the order if, in its
judgment, an earlier payment could adversely affect the Money Market Fund. If at
any time the Money Market Fund shall determine it necessary to terminate or
modify this method of redemption, shareholders would be promptly notified.
An authorization form permitting the Money Market Fund to accept telephone
requests must first be completed. Authorization forms and information on this
service are available from BayBanks or the Distributor.
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. The Money Market
Fund uses reasonable procedures (including a shareholder identity test and
sending a written confirmation of each telephone transaction) to confirm that
instructions given by telephone are genuine. However, the Money Market Fund is
not responsible for the authenticity of telephone instructions or for any losses
caused by fraudulent or unauthorized telephone instructions if the Money Market
Fund reasonably believed that the instructions were genuine.
BY MAIL
A shareholder who is a customer of BayBanks may redeem Shares of the Money
Market Fund by sending a written request to BayBanks. The written request should
include the shareholder's name, the Fund name, the class of shares name, the
account number, and the share or dollar amount requested, and should be signed
by each registered owner exactly as the Shares are registered. For assistance in
redeeming by mail, a customer of BayBanks may telephone the BayBanks Trust
Department toll-free at 1-800-462-9999. BayBanks Capital Markets customers
should call 1-800-554-3311. Participants in Employee Benefits programs should
contact their Plan Administrator.
Except for 401(k) plan participants and administrators, shareholders requesting
a redemption of $10,000 or more (no limitation if the proceeds are being
credited to a BayBanks deposit account), a redemption of any amount to be sent
to an address other than that on record with the Money Market Fund, a transfer
of the registration of Shares, or a redemption payable other than to the
shareholder of record, must have signatures on written redemption requests
guaranteed by:
. a trust company or insured commercial bank;
. an insured savings and loan association or a savings bank;
. a member firm of a national or regional stock exchange; or
. any other "eligible guarantor institution," as defined in the Securities
Exchange Act of 1934.
The Transfer Agent has adopted standards for accepting signature guarantees from
the above institutions. The Money Market Fund may elect in the future to limit
eligible signature guarantees to institutions that are members of a signature
guarantee program. The Money Market Fund does not accept signatures guaranteed
by a notary public. The Money Market Fund and the Transfer Agent reserve the
right to amend these standards at any time without notice.
When Shares of the Treasury Fund May Be Redeemed
Shares of the Treasury Fund may be redeemed in accordance with procedures
established by an Institution in connection with the requirements of its
customer accounts. Procedures applicable to each Institution and each customer
account governing the redemption of Shares of the Treasury Fund will differ.
Customers should contact their Institution for further information. Each
Institution is responsible for transmitting redemption orders promptly to the
Treasury Fund and crediting customers' accounts with redemption proceeds on a
timely basis.
WHEN REDEMPTIONS OF THE TREASURY FUND SHARES ARE EFFECTIVE
Redemption orders are effected at the net asset value per Share next determined
after proper receipt of the redemption request by the Treasury Fund from the
Transfer Agent in proper form. Institutions may transmit redemption orders by
telephoning the Transfer Agent. Payment for redemption orders received by the
Transfer Agent by 2:00 p.m. (Eastern time) on a Business Day will be wired the
same day to the Institution for credit to customer accounts that day. Shares so
redeemed will not be eligible to receive the dividend declared on the redemption
date. Payment for redemption orders received after 2:00 p.m. (Eastern time) or
on a non-Business Day will normally be wired in Federal funds to the Institution
for credit to customer accounts on the next Business Day.
The Treasury Fund assesses no charges for wiring redemption proceeds. However,
Institutions may charge customer accounts for redemption services. Information
relating to such redemption services and charges, if any, are available from the
Institutions.
The Treasury Fund reserves the right to wire redemption proceeds within five
Business Days after receiving the redemption order if, in its judgment, an
earlier payment could adversely affect the Treasury Fund.
Redemptions Before Purchase Instruments Clear
If any portion of a Fund's Shares to be redeemed represents an investment made
with uncollected funds, the Fund reserves the right to delay payment of proceeds
until BayBanks is reasonably certain that the funds have been collected, which
could take up to five Business Days.
SHAREHOLDER INFORMATION
Balances in Accounts
Due to the high cost of maintaining accounts with low balances, the Money Market
Fund may redeem Trust Shares in any account and pay the proceeds to the
shareholder if, due to shareholder redemptions, the account balance falls below
the required minimum value of $10,000. In addition, the Treasury Fund may redeem
Institutional Shares if an Institution account falls below $100,000.
Before Shares of either Fund are redeemed to close an account, the shareholder
or the Institution, as applicable, will be notified in writing and allowed 60
days to purchase additional Shares to meet the minimum balance requirement of
such Fund. Each Fund reserves the right to amend this standard upon 60 days'
prior written notice. Each Fund also reserves the right to redeem its Shares
involuntarily or make payment for redemptions in the form of securities if it
appears appropriate to do so in light of its responsibilities under the ICA.
Customers of Institutions should consult their relevant account agreements for
any applicable balance requirements.
Confirmations and Statements
Monthly confirmations are sent to the Institutions or shareholder of record to
report transactions such as purchases and redemptions as well as dividends paid
during the month. With respect to the Treasury Fund, it is the responsibility of
the Institutions to provide their customers with confirmations and statements of
account with respect to Share transactions made for their accounts at the
Institutions in accordance with procedures established by the Institutions.
Share certificates are not issued. The Transfer Agent for the Money Market Fund
maintains a Share account for each shareholder of record. Shares of the Treasury
Fund will be held of record by the Institutions or in the name of a nominee of
the Institutions. Beneficial ownership of Shares of the Treasury Fund will be
recorded by the Institutions and reflected in statements of account provided by
the Institutions to their customers.
Dividends and Distributions
Dividends from a Fund's net investment income are declared daily to shareholders
of record (normally the Institutions in the case of the Treasury Fund)
immediately following the 2:00 p.m. (Eastern time) pricing of shares. With
respect to the Money Market Fund, dividends are paid monthly and will be
reinvested on payment dates in additional Shares of the Money Market Fund unless
cash payments are requested by writing to the Money Market Fund or BayBanks as
appropriate. With respect to the Treasury Fund, dividends are paid monthly
within five Business Days after the end of such calendar month.
Neither Fund expects to realize any net long-term capital gains. If for some
extraordinary reason a Fund realizes net long-term capital gains, it will
distribute them at least annually.
Institutions may elect to (a) have their dividends and distributions
automatically reinvested in additional Shares of the Treasury Fund at the net
asset value next determined on the payment dates, (b) receive their dividends
and distributions in cash, or (c) receive a combination of additional Shares of
the Treasury Fund and cash. It is expected that customers of an Institution's
automatic investment program will receive all dividends and distributions of the
Treasury Fund in cash credited to their account pursuant to the terms of their
agreement with an Institution; all other customers should contact their
Institution for further information about dividend elections.
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 each portfolio
in BayFunds have equal voting rights, except that, in matters affecting only a
particular fund or class, only shares of that particular fund or class are
entitled to vote.
As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Fund's operation and for the election of Trustees
under certain circumstances. As of March 30, 1994, Slatt & Co., Burlington,
Massachusetts, acting in various capacities for numerous accounts, was the owner
of record of 144,009,069 Shares (99.36%) of the Money Market Fund and
188,750,949 Shares (30.80%) of the Treasury Fund 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. As of March 30, 1994,
Express & Co., Boston, Massachusetts, acting in various capacities for numerous
accounts, was the owner of record of 424,138,995 Shares (69.20%) of the Treasury
Fund, and therefore, may for certain purposes, be deemed to control the Treasury
Fund and be able to affect the outcome of certain matters presented for a vote
of shareholders. Trustees may be removed by a two-thirds vote of the number of
Trustees prior to such removal or by a two-thirds vote of the shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of
BayFunds' outstanding shares of all portfolios entitled to vote.
AUTHORITY TO ACT AS
INVESTMENT ADVISERS
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling or distributing securities
in general. Such laws and regulations do not prohibit such a holding company or
affiliate 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 their customer. Each Fund's investment adviser, BayBanks
Investment Management, Inc. and BayBank Boston, N.A., is subject to such banking
laws and regulations.
The Advisers believe that they may perform the investment advisory services for
the Funds contemplated by their advisory agreements with BayFunds without
violating 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 present or future statutes and regulations, could prevent the
Advisers from continuing to perform all or a part of the above services for
their customers and/or the Funds. In such event, changes in the operation of the
Funds may occur, including the possible alteration or termination of any
automatic or other Fund share investment and redemption services then being
provided, and the Trustees would consider alternative investment advisers and
other means of continuing available investment services. It is not expected that
Fund shareholders would suffer any adverse financial consequences (if another
adviser with equivalent abilities to BayBanks Investment Management, Inc.
and/or BayBank Boston, N.A., 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 laws.
TAX INFORMATION
Federal Income Tax
Each Fund intends to meet requirements of the Internal Revenue Code applicable
to regulated investment companies in order not to be liable for any Federal
income taxes on income and gains distributed to the Fund's shareholders. Each
Fund will distribute substantially all of its net investment income and net
realized gains at least annually.
Each Fund will be treated as a single, separate entity for Federal income tax
purposes.
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. Distributions
from a Fund's net investment income and short-term capital gains will be taxed
as ordinary income and will not be eligible for the dividends received deduction
available to corporations.
Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local tax laws.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the
performance and yield of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to relevant money market
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of the Funds may be compared to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds.
National financial publications in which performance and yield data are reported
include The Wall Street Journal, The New York Times, Forbes, or Money magazine.
Publications of a local or regional nature, such as The Boston Globe or The
Boston Herald, may also be used in comparing the performance and yield of the
Funds.
The yield of the Shares represents the annualized rate of income earned on an
investment in the 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 by an investment in the 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.
Advertisements and other sales literature may also refer to total return. Total
return represents the change, over a specified period of time, in the value of
an investment in the Shares after reinvesting all income distributions. It is
calculated by dividing that change by the initial investment and is expressed as
a percentage.
Yield, effective yield and total return will be calculated separately for Trust
Shares of the Money Market Fund, Institutional Shares of the Treasury Fund and
Investment Shares of each of the Funds. Because Investment Shares of the Funds
are subject to shareholder servicing fees, the yield, effective yield and total
return of the Trust Shares of the Money Market Fund and Institutional Shares of
the Treasury Fund for the same period will exceed that of Investment Shares of
the corresponding Fund.
OTHER CLASSES OF SHARES
Investment Shares of the Funds are sold primarily to individuals who purchase
shares through BayBanks and its affiliates. Investment Shares of the Funds are
sold at net asset value. Investments in Investment Shares of the Funds may be
subject to a minimum initial investment of $2,500, or $500 if in connection with
participation in the Automatic Investment Program or through an IRA. Investment
Shares are sold at net asset value and are subject to a shareholder servicing
fee.
The amount of dividends payable to Trust Shares of the Money Market Fund and
Institutional Shares of the Treasury Fund will exceed that of Investment Shares
of the corresponding Fund by the difference between Class Expenses and
shareholder servicing fees borne by shares of each respective class of shares of
the Fund. (Currently, there are no differences in Class Expenses other than
shareholder servicing fees.)
The stated advisory fee is the same for both classes of shares of the Fund.
MONEY MARKET FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.03
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.03)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 2.58%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.62%(b)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.60%(b)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (a) 0.11%(b)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $30,746
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 19, 1993 (date of initial
public offering) to December 31, 1993.
** Based on net asset value which does not reflect the sales load or
contingent deferred sales charge, if applicable.
(a) This voluntary expense decrease is reflected in both the expense and net
investment income ratios shown above.
(b) Computed on an annualized basis.
Further information about the Fund's performance is contained in its Annual
Report dated December 31, 1993, which can be obtained free of charge.
TREASURY FUND
FINANCIAL HIGHLIGHTS--INVESTMENT SHARES
(For a share outstanding throughout the period)
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 1.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.02
- ----------------------------------------------------------------------------------------------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.02)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 1.00
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 2.41%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.62%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 2.59%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.07%(a)
- ----------------------------------------------------------------------------------------------------
Supplemental Data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $34,694
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public offering) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
ADDRESSES
BayFunds Money Market Portfolio--Trust Shares
and BayFunds U.S. Treasury Money Market Portfolio--Institutional Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
TO BAYFUNDS MONEY
MARKET PORTFOLIO
BayBanks Investment Management, Inc.
1414 Massachusetts Avenue
Cambridge, Massachusetts 02138
INVESTMENT ADVISER TO
BAYFUNDS U.S. TREASURY
MONEY MARKET PORTFOLIO
BayBank Boston, N.A.
175 Federal Street
Boston, Massachusetts 02110
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, Missouri 64105
PORTFOLIO ACCOUNTING SERVICES
Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
COUNSEL TO BAYFUNDS
Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
COUNSEL TO THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Ernst & Young
One Oxford Centre
Pittsburgh, Pennsylvania 15219
MONEY MARKET
PORTFOLIOS
Money Market Portfolio
Trust Shares
U.S. Treasury
Money Market Portfolio
Institutional Shares
PROSPECTUS
BayBanks Investment Management, Inc.
- -----------------------------------------------------------
Investment Adviser for Money Market Portfolio
BayBank Boston, N.A.
- -----------------------------------------------------------
Investment Adviser for U.S. Treasury Money Market Portfolio
Federated Securities Corp.
- -----------------------------------------------------------
Distributor
Mutual
April 22, 1994 YTM620 Funds At
Printed on Recycled Paper 4011081-IS(4/94) Bay Bank
BayFunds Money Market Portfolio
(Trust and Investment Shares)
BayFunds U.S. Treasury Money Market Portfolio
(Institutional and Investment Shares)
(Portfolios of BayFunds)
Combined Statement of Additional Information
This combined Statement of Additional Information should be read with
the prospectuses for the classes of shares of BayFunds Money Market
Portfolio ("Money Market Fund") and BayFunds U.S. Treasury Money
Market Portfolio ("Treasury Fund") (individually referred to as a
"Fund" or collectively as the "Funds"), each dated April 22, 1994.
This combined Statement is not a prospectus itself. To receive a copy
of a prospectus for the Investment Shares of the Funds, write to the
Fund or call toll free at 1-800-BAY-FUND (1-800-229-3863).
Prospectuses of Money Market Fund--Trust Shares and Treasury
Fund--Institutional Shares may be obtained by calling BayBanks Trust
Department in Massachusetts at (617) 273-1700 or toll free
1-800-462-9999. BayBanks Capital Markets customers should call
1-800-554-3311.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 22, 1994
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
General Information About the Funds 1
- ---------------------------------------------------------------
Investment Objective and Policies of the Funds 1
- ---------------------------------------------------------------
Types of Investments 1
Restricted and Illiquid Securities 1
When-Issued and Delayed
Delivery Transactions 2
Repurchase Agreements 2
Reverse Repurchase Agreements 2
Lending of Portfolio Securities 2
Investment Limitations 2
BayFunds Management 5
- ---------------------------------------------------------------
Trustees and Officers 5
Fund Ownership 6
Trustee Liability 6
Investment Advisory Services 6
- ---------------------------------------------------------------
Advisers to the Funds 6
Advisory Fees 6
Brokerage Transactions 7
- ---------------------------------------------------------------
Shareholder Servicing Arrangements 7
- ---------------------------------------------------------------
Administrative Services 7
- ---------------------------------------------------------------
Purchasing Shares 8
- ---------------------------------------------------------------
Conversion to Federal Funds 8
Exchanging Securities for Fund Shares 8
Determining Net Asset Value 8
- ---------------------------------------------------------------
Use of the Amortized Cost Method 8
Exchange Privileges 9
- ---------------------------------------------------------------
Requirements for Exchange 9
Making an Exchange 9
Redeeming Shares 9
- ---------------------------------------------------------------
Redemption in Kind 9
Massachusetts Law 10
- ---------------------------------------------------------------
Tax Status 10
- ---------------------------------------------------------------
The Funds' Tax Status 10
Shareholders' Tax Status 10
Yield 10
- ---------------------------------------------------------------
Effective Yield 11
- ---------------------------------------------------------------
Performance Comparisons 11
- ---------------------------------------------------------------
Financial Statements 11
- ---------------------------------------------------------------
Appendix 12
- ---------------------------------------------------------------
General Information About the Funds
- --------------------------------------------------------------------------------
The Funds are portfolios in BayFunds, which was established as a Massachusetts
business trust under a Declaration of Trust dated April 1, 1991.
The portfolios in BayFunds are: BayFunds Money Market Portfolio; BayFunds U.S.
Treasury Money Market Portfolio; BayFunds Bond Portfolio; BayFunds Equity
Portfolio; and BayFunds Short Term Yield Portfolio. This combined Statement of
Additional Information relates only to the Money Market Fund and Treasury Fund.
The Money Market Fund and Treasury Fund are offered in two classes of shares.
The Money Market Fund is offered in Trust and Investment Shares. The Treasury
Fund is offered in Institutional and Investment Shares. Collectively the classes
will be referred to as "Shares."
Investment Objective and Policies of the Funds
- --------------------------------------------------------------------------------
The prospectus for each Fund discusses the Fund's investment objective and the
policies each Fund employs to achieve that objective. The following discussion
supplements the description of each Fund's investment policies in the Fund's
prospectus. The Funds' investment objectives cannot be changed without approval
of shareholders. Unless indicated otherwise, the investment policies described
in the prospectus of each Fund may be changed by the Board of Trustees
("Trustees") without the approval of each Fund's shareholders. Shareholders will
be notified before any material changes in these policies become effective.
Types of Investments
The Treasury Fund invests primarily in short-term U.S. Treasury obligations with
remaining maturities of 397 days or less. These may include direct obligations
of the U.S. Treasury (such as U.S. Treasury bills, notes and bonds) and
obligations issued or guaranteed as to principal and interest by the U.S.
government. Examples of such obligations are:
. Export-Import Bank;
. General Services Administration;
. Government National Mortgage Association; and
. Small Business Administration.
The following policies apply to the Money Market Fund only.
The Money Market Fund invests primarily in money market instruments with
remaining maturities of 397 days or less and which include, but are not limited
to, commercial paper, demand master notes, domestic and foreign bank
instruments, U.S. government obligations, corporate debt obligations and
repurchase agreements.
Bank Instruments
The instruments of domestic banks and savings and loans whose deposits
are insured by the Bank Insurance Fund or the Savings Association
Insurance Fund, both of which are administered by the Federal Deposit
Insurance Corporation, such as certificates of deposit, demand and time
deposits, savings shares, and bankers' acceptances, are not necessarily
guaranteed by those organizations.
In addition, the Fund may invest in the following U.S. dollar-denominated
instruments:
. Eurodollar Certificates of Deposit which are issued by foreign
branche of U.S. or foreign banks;
. Eurodollar Time Deposits, which are deposits in foreign branches of
U.S. or foreign banks;
. Canadian Time Deposits, which are deposits issued by branches of major
Canadian banks located in the United States; and
. Yankee Certificates of Deposit, which are certificates of deposit
issued by U.S. branches of foreign banks and held in the United
States.
Restricted and Illiquid Securities
The ability of the Trustees to determine the liquidity of certain restricted
securities is permitted under the Securities and Exchange Commission ("SEC")
Staff position set forth in the adopting release for Rule 144A under the
Securities Act of 1933. Rule 144A is a non-exclusive safe harbor for certain
secondary market transactions involving securities subject to restrictions on
resale under federal securities laws. Rule 144A provides an exemption from
registration for resales of otherwise restricted securities to qualified
institutional buyers. Rule 144A was expected to further enhance the liquidity of
the secondary market for securities eligible for resale under Rule 144A. The
Money Market Fund believes that the Staff of the SEC has left the question of
determining the liquidity of all restricted securities (eligible for resale
under Rule 144A) to the Trustees. The Trustees consider the following criteria
in determining the liquidity of certain restricted securities:
. the frequency of trades and quotes for the security;
. the number of dealers willing to purchase or sell the security and the
number of other potential buyers;
. dealer undertakings to make a market in the security; and
. the nature of the security and the nature of the marketplace trades.
The following policies apply to both Funds.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a later time.
These transactions are made to secure what is considered to be an advantageous
price and yield for a Fund. 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.
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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
As a matter of policy, each Fund does 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 its assets.
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. To
the extent that the original seller does not repurchase the securities from a
Fund, the Fund could receive less than the repurchase price on any sale of such
securities. In the event that such a defaulting seller filed for bankruptcy or
became insolvent, disposition of such securities by the Fund might be delayed
pending court action. The Funds believe that under the regular procedures
normally in effect for custody of the Funds' portfolio securities subject to
repurchase agreements, a court of competent jurisdiction would rule in favor of
the Funds 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 Funds' advisers 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.
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 maintained until the transaction is settled.
Lending of Portfolio Securities
The collateral received when each Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the 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.
Investment Limitations
Selling Short and Buying on Margin
The Funds will not sell any securities short or purchase any securities
on margin but may obtain such short-term credits as may be necessary for
clearance of transactions.
Issuing Senior Securities and Borrowing Money
(Applicable to the Money Market Fund Only)
The Money Market Fund will not issue senior securities except that the
Money Market Fund may borrow money directly or through reverse repurchase
agreements in amounts up to one-third of the value of its total assets
including the amounts borrowed. The Money Market Fund 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 the Money
Market Fund to meet redemption requests when the liquidation of
portfolio securities is deemed to be inconvenient or disadvantageous.
The Money Market Fund will not purchase any securities while borrowings
in excess of 5% of the value of its total assets are outstanding. The
Money Market Fund has no present intention to borrow money or engage in
reverse repurchase agreements except as a temporary measure for
extraordinary or emergency purposes and not in an amount in excess of
5% of the Money Market Fund's net assets.
Issuing Senior Securities and Borrowing Money
(Applicable to the Treasury Fund Only)
The Treasury Fund will not issue senior securities except that the
Treasury Fund may borrow money directly or through reverse repurchase
agreements as a temporary measure for extraordinary or emergency purposes
and then only in amounts not in excess of one-third of the value of the
Treasury Fund's total assets; provided that, while borrowings exceed 5%
of the Treasury Fund's total assets, any such borrowings will be repaid
before additional investments are made. The Treasury Fund will not borrow
money or engage in reverse repurchase agreements for investment leverage
purposes. The Treasury Fund has no present intention to borrow money or
engage in reverse repurchase agreements in an amount in excess of 5% of
the Treasury Fund's net assets.
Pledging Assets
The Funds will not mortgage, pledge or hypothecate any assets except to
secure permitted borrowings. In those cases, a 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.
Lending Cash or Securities
The Funds 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 the Funds 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 the Funds' investment objective, policies, and limitations or its
Declaration of Trust.
Investing in Commodities and Real Estate
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts. The Funds will not purchase or sell real
estate, including real estate limited partnerships, although they 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.
Concentration of Investments
The Money Market Fund will not invest more than 25% of the value of its
total assets in any one industry, except it may invest more than 25% of
the value of its total assets in time and demand deposits, certificates
of deposit, and other instruments of domestic banks, and U.S. branches of
foreign banks, or U.S. government obligations, or instruments secured by
these money market instruments, such as repurchase agreements for U.S.
government obligations.
Diversification of Investments
With respect to 75% of the value of their total assets, the Funds 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 their total assets at the time of purchase would be invested in
the securities of that issuer.
Underwriting
The Funds will not underwrite any issue of securities, except as they may
be deemed to be an underwriter under the Securities Act of 1933 in
connection with the sale of securities in accordance with their
investment objective, policies and limitations.
Investing in Restricted Securities
The Funds will not purchase restricted securities if immediately
thereafter more than 10% (for the Money Fund) or 5% (for the Treasury
Fund) of the net assets of the Fund, as applicable, taken at market
value, would be invested in such securities (except for 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 Trustees).
The above investment limitations cannot be changed without shareholder approval.
The Funds do not consider the issuance of separate classes of shares to involve
the issuance of "senior securities" within the meaning of the investment
limitation set forth above. The following limitations, however, 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 Funds 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, certain restricted
securities determined by the Trustees not to be liquid, and
non-negotiable time deposits with maturities over seven days.
Investing in Securities of Other Investment Companies
The Funds will limit their investment in other investment companies that
are money market funds having investment objectives and policies similar
to their own, to no more than 3% of the total outstanding voting stock of
any such investment company, invest not more than 5% of their total
assets in any one investment company, or invest no more than 10% of their
total assets in investment companies in general. The Funds will purchase
securities of closed-end investment companies only in open market
transactions involving only customary brokers' commissions. However,
these limitations are not applicable if the securities are acquired in a
merger, consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses such as management fees, and,
therefore, any investment by a Fund in shares of another investment
company would be subject to such duplicate expenses. The Funds will
invest in other investment companies primarily for the purpose of
investing their short-term cash on a temporary basis. The advisers will
waive their investment advisory fee on assets invested in securities of
open-end investment companies.
Investing in New Issuers
The Money Market Fund will not invest more than 5% of the value of its
total assets in securities of issuers which have records of less than
three years of continuous operations, including the operations of any
predecessor.
Investing in Issuers Whose Securities Are Owned by Officers and Trustees of
BayFunds
The Money Market Fund will not purchase or retain the securities of any
issuer if the officers and Trustees of BayFunds the Funds' investment
advisers owning individually more than 1/2 of 1% of the issuer's
securities together own more than 5% of the issuer's securities.
Arbitrage Transactions
The Funds will not enter into transactions for the purpose of engaging in
arbitrage.
Dealing in Puts And Calls
The Funds will not invest in puts, calls, straddles, spreads or any
combination of them.
Investing in Minerals
The Money Market Fund will not purchase interests in oil, gas, or other
mineral exploration or development programs or leases, except it may
purchase the securities of issuers which invest in or sponsor such
programs.
Except with respect to 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 Funds do not expect to borrow money or pledge securities in excess of 5% of
the value of their net assets during the coming fiscal year.
The Funds consider instruments issued by a U.S. branch of a domestic bank having
capital, surplus, and undivided profits in excess of $100,000,000 at the time of
investment to be "cash items."
BayFunds Management
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Trustees and Officers
Trustees and Officers are listed with their addresses, principal occupations,
and present positions, including any affiliation with BayBanks Investment
Management, Inc., BayBank Boston, N.A., BayBanks, Inc., Federated Investors,
Federated Securities Corp., and Federated Administrative Services.
<TABLE>
<CAPTION>
Position with
Name and Address BayFunds Principal Occupation During Past Five Years
<S> <C> <C>
Kenneth G. Condon Trustee Treasurer (since June 1992) and Vice President for Financial Affairs
11 Dudley Road (1984 through present), Boston University; Member, BayBank Trust
Sudbury, MA Advisory Board; Member, Regional Strategic Planning Committee, BayBanks,
Inc.; Director, Seragen, Inc.; Trustee and Chairman of the Finance/Audit
Committee, Newbury College; formerly, Director and Member of Audit Com-
mittee, BayBank Harvard Trust Co.; Director of the Boston Chapter of the
Financial Executives Institute.
Robert W. Eisenmenger Trustee Consultant; formerly, First Vice President of the Federal Reserve Bank
92 Woodland Street of Boston, and Executive Director for Priced Services for the Federal
Natick, MA Reserve System; Trustee, Massachusetts Congregational Fund; Trustee and
Consultant, Cape Cod Five Cents Savings Bank.
Sara L. Johnson Trustee Principal and Director of Regional Forecasting (since 1992), Managing
30 Eaton Court Economist for Regional Information Group's Eastern Regions (1988-1991)
Wellesley Hills, MA and Senior Economist, U.S. Economic Service (1983-1988), DRI/McGraw
Hill.
Ernest R. May Trustee Charles Warren Professor of History, Harvard University; Chair, Board of
John F. Kennedy School of Visitors, Joint Military Intelligence College; Chair, Board of Control,
Government John Anson Kittredge Educational Fund; Director, Charles Warren Center
Cambridge, MA for Studies in American History, Harvard University.
Alvin J. Silk Trustee Lincoln Filene Professor of Business Administration, Graduate School of
Soldiers Field Road Business Administration, Harvard University (1988-present); formerly,
Boston, MA Erwin H. Schell Professor of Management, Sloan School of Management,
Massachusetts Institute of Technology; formerly, Director, BayBank
Systems, Inc.; Trustee, Marketing Science Institute.
Glen R. Johnson President and Trustee, Federated Investors; President and/or Trustee of certain
Federated Investors Tower Treasurer investment companies distributed by Federated Securities Corp.; Staff
Pittsburgh, PA member, Federated Securities Corp. and Federated Administrative
Services.
Craig P. Churman Vice President Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower and Assistant Assistant Treasurer of certain investment companies distributed by
Pittsburgh, PA Treasurer Federated Securities Corp.
Peter J. Germain Secretary Corporate Counsel, Federated Investors.
Federated Investors Tower
Pittsburgh, PA
</TABLE>
Fund Ownership
Officers and Trustees own less than 1% of each of the Funds' outstanding shares.
As of March 30, 1994, the following shareholder of record owned 5% or more of
the outstanding Trust Shares of the Money Market Fund: Slatt & Co., Burlington,
Massachusetts, owned approximately 144,009,069 shares (99.36%).
As of March 30, 1994, no shareholders of record owned 5% or more of the
outstanding Investment Shares of the Money Market Fund.
As of March 30, 1994, the following shareholder of record owned 5% or more of
the outstanding Institutional Shares of Treasury Fund: Slatt & Co., Burlington,
Massachusetts, owned approximately 188,750,949 shares (30.80%); Express & Co,
Boston, Massachussetts, owned approximately 424,138,995 shares (69.20%).
As of March 30, 1994, the following shareholder of record owned 5% or more of
the outstanding Investment Shares of Treasury Fund: Medical Group Financial
Services, Inc., Boston, Massachussetts, owned approximately 4,366,363 shares
(6.22%).
Trustee Liability
BayFunds' Declaration of Trust provides that the Trustees are not 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
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Advisers to the Funds
The Money Market Fund's investment adviser is BayBanks Investment Management,
Inc. ("BBIM"). The Treasury Fund's investment adviser is BayBank Boston, N.A.
("BBNA"). BBIM and BBNA will collectively be referred to as the "advisers." The
advisers are wholly-owned subsidiaries of BayBanks, Inc., a bank holding company
organized under the laws of the Commonwealth of Massachusetts with a number of
commercial bank subsidiaries. Collectively, these bank subsidiaries are referred
to in this Statement of Additional Information as "BayBanks."
The advisers shall not be liable to BayFunds, the Funds or any shareholder 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 them, except acts or
omissions involving willful misfeasance, bad faith, gross negligence, or
reckless disregard of the duties imposed upon them by their contracts with
BayFunds.
Because of the internal controls maintained by BayBanks to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of BayBanks or its affiliates' lending relationships with an issuer.
Advisory Fees
For their advisory services, the advisers receive an annual investment advisory
fee as described in the prospectuses.
For the period from May 16, 1991 (start of business) to April 30, 1992, and the
years ended December 31, 1992 and 1993, the adviser earned fees from Money
Market Fund of $745,003, $781,926, and $893,521, respectively, of which
$223,422, $48,529, and $192,825, respectively, was voluntarily waived.
For the period from January 29, 1993 (date of initial public investment) to
December 31, 1993, the adviser earned fees from Treasury Fund in the amount of
$851,157.
State Expense Limitation
The advisers have 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, each of the advisers has agreed
to reimburse the Funds for its expenses over the limitation up to the
amount of the advisory fee.
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 an 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 contracts and may be amended
or rescinded in the future.
Expenses of a Fund and Shares
Each Fund pays all of its own expenses and its allocable share of
BayFunds' expenses. The expenses borne by a Fund include, but are not
limited to, the cost of: organizing BayFunds and continuing its
existence; Trustee fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering BayFunds, the Fund, and the shares with federal and state
securities authorities; taxes and commissions; issuing, purchasing,
repurchasing, and redeeming shares; fees for custodians, transfer agents,
dividend disbursing agents, portfolio accounting services, and
registrars; printing, mailing, auditing, accounting, and legal expenses;
reports to shareholders and governmental agencies; meetings of Trustees
and shareholders and proxy solicitations therefor; insurance premiums;
association membership dues; and such non-recurring and extraordinary
items as may arise.
At present, the only expenses allocated to shares as a class are expenses
under the Fund's Shareholder Servicing Plan which relate to the
Investment Shares. However, the Trustees reserve 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:
transfer agent fees as identified by the Transfer Agent as attributable
to holders of a class 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 service as
required to support holders of a class of shares; legal fees relating
solely to a class of shares; and Trustees' fees incurred as a result of
issues relating solely to a class of shares.
Brokerage Transactions
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When selecting brokers and dealers to handle the purchase and sale of portfolio
instruments, the advisers look for prompt execution of the order at a favorable
price. In working with dealers, the advisers 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 advisers make
decisions on portfolio transactions and select brokers and dealers subject to
review by the Trustees.
The advisers may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to the Funds or to the
advisers and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. similar services.
The advisers 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 and dealers may be used by the advisers in
advising the Funds and other accounts. To the extent that receipt of these
services may supplant services for which the advisers or their affiliates might
otherwise have paid, it would tend to reduce expenses.
As of December 31, 1993, Money Market Fund owned approximately $9,493,000 of the
securities of Dean Witter Discover & Co.; and $9,447,000 of the securities of
Merrill Lynch & Co., both of whom are its regular brokers that derive more than
15% of gross revenues from securities-related activities.
Shareholder Servicing Arrangements
For the period ended December 31, 1993, Money Market Fund did not pay any fees
under the Shareholder Services Plan. Treasury Fund paid BayBanks Systems, Inc.
$38,154 in shareholder services fees.
Administrative Services
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Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for fees as described in the
prospectuses. For the period from May 16, 1991 (start of business) to
April 30, 1992 and the years ended December 31, 1992 and 1993, the Money Market
Fund incurred costs for administrative service fees of $277,092, $286,304, and
$263,548, respectively, of which $53,154, $49,869, and $15,149 were voluntarily
waived.
For the period from January 29, 1993 (date of initial public investment) to
December 31, 1993, the Treasury Fund incurred costs for administrative fees of
$478,865, of which $238,788 was voluntarily waived.
In addition, Federated Administrative Services reimbursed $48,336 to Money
Market Fund for the year ended December 31, 1993, and $59,801 to Treasury Fund
for the period from January 29, 1993 (date of initial public investment) to
December 31, 1993.
Purchasing Shares
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The procedures for purchasing Shares are explained in the prospectus of each
Fund.
Conversion to Federal Funds
It is the Funds' policy 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. BayBanks acts as the
shareholder's agent in depositing checks and converting them to Federal funds.
Exchanging Securities for Fund Shares
Each Fund may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least $100,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share of the Fund will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
Determining Net Asset Value
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The Funds attempt to stabilize the value of a share at $1.00. The days on which
net asset value is calculated by the Funds are described in the prospectuses.
Use of the Amortized Cost Method
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.
The Funds' use of the amortized cost method of valuing portfolio instruments
depends on their compliance with Rule 2a-7 (the "Rule") promulgated by the SEC
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 the Funds' investment
objectives.
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 values. 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 the Funds limit their 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. In
purchasing shares of other investment companies, the Trustees will review
each company's stated investment policies for consistency with Rule 2a-7.
The Rule also requires the Funds 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 instruments with a remaining maturity of more than 397 days can be
purchased by the Funds.
Should the disposition of a portfolio security result in a dollar-weighted
average portfolio maturity of more than 90 days, the Funds will invest their
available cash to reduce the average maturity to 90 days or less as soon as
possible.
The Funds may attempt to increase yield by trading portfolio securities to take
advantage of short-term market variations. This policy may, from time to time,
result in high portfolio turnover. 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 of
the Funds computed by dividing the annualized daily income on the Funds'
portfolios 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 of the
Funds 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.
Exchange Privileges
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Requirements for Exchange
Upon receipt of proper instructions and required supporting documents, shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other Participating Fund.
Please review the Fund prospectus for further information on the exchange
privileges.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
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The Funds redeem Shares at the next computed net asset value after the Funds
receive the redemption request from the Funds' transfer agent in proper form.
Redemption procedures are explained in each Fund's prospectus.
Redemption in Kind
Although the Funds intend to redeem Shares in cash, they reserve the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective Fund's portfolio.
Redemption in kind will be made in conformity with applicable SEC rules, taking
such securities at the same value employed in determining net asset value and
selecting the securities in a manner the Trustees determine to be fair and
equitable.
BayFunds has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Funds to redeem Shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of the net asset value of the
respective class during any 90-day period.
Redemption in kind is not as liquid as cash redemption. If redemption is made in
kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
Monthly Statements
Shareholders of the Funds who have eligible BayBanks deposit accounts
will receive combined monthly statements containing all information
relating to their deposit account(s) and BayFunds transactions.
Companion Account Availability
Certain BayBanks deposit account customers may elect to open a companion
BayFunds account to facilitate BayFunds transactions.
Massachusetts Law
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Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of BayFunds. To protect shareholders,
BayFunds has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of BayFunds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument BayFunds or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for BayFunds'
obligations, BayFunds is required, by its Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, BayFunds will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of BayFunds. Therefore, financial loss resulting from liability as a
shareholder will occur only if BayFunds cannot meet its obligations to indemnify
shareholders and pay judgments against them from its assets.
Tax Status
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The Funds' Tax Status
The Funds intend to meet the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for Federal income taxes on income and gains distributed to Fund
shareholders. To qualify for this treatment, a Fund must, among other
requirements:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
. derive less than 30% of its gross income from the sale of securities held,
or deemed held, less than three months;
. diversify its holdings according to certain statutory requirements; and
. distribute to its shareholders at least 90% of its taxable and tax-exempt
income earned during the year.
The Funds will distribute substantially all of their net investment income and
net realized gains at least annually.
Shareholders' Tax Status
Shareholders are subject to Federal income tax on dividends and any short-term
capital gains 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.
Capital Gains
Capital gains experienced by a Fund 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.
Yield
- --------------------------------------------------------------------------------
The Funds calculate their yield for both classes of shares daily, based upon the
seven days ending on the day of the calculation, called the "base period." This
yield is computed by:
. 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;
. 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
multiplying the base period return by (365/7).
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in either
class of shares, the performance will be reduced for those shareholders paying
those fees.
The yields for the seven day period ended December 31, 1993 for Trust Shares of
Money Market Fund and Institutional Shares of Treasury Fund were 2.69% and
2.89%, respectively, and 2.69% and 2.64% for the Investment Shares of Money
Market Fund and Treasury Fund, respectively.
Effective Yield
- --------------------------------------------------------------------------------
The effective yield for both classes of shares of each Fund is computed by
compounding the unannualized base period return by:
. adding 1 to the base period return;
. raising the sum to the 365/7th power; and
. subtracting 1 from the result.
The effective yields for the seven day period ended December 31, 1993 for Trust
Shares of the Money Market Fund and Institutional Shares of Treasury Fund were
2.73% and 2.93%, respectively, and 2.73% and 2.67% for the Investment Shares of
Money Market Fund and Treasury Fund, respectively.
Performance Comparisons
- --------------------------------------------------------------------------------
The performance of both classes of shares of each Fund depends upon such
variables as:
. portfolio quality;
. average portfolio maturity;
. type of instruments in which the portfolio is invested;
. changes in interest rates on money market instruments;
. changes in a Fund's or of either class of its shares expenses; and
. the relative amount of a Fund's cash flow.
From time to time the Funds may advertise their performance of both classes of
shares compared to similar funds or portfolios.
Investors may use financial publications and/or indices to obtain a more
complete view of the Fund's performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Fund uses in advertising may include:
. 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, a Fund will quote its Lipper ranking in the "general
money market funds" category in advertising and sales literature.
. Bank Rate Monitor National Index, Miami Beach, Florida, is a financial
reporting service which publishes weekly average rates of 50 leading banks
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.
. 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 year-to-date investment results for the
same money funds.
Advertisements and other sales literature for both classes of shares of either
Fund may refer to total return. Total return is the historic change in the value
of an investment in either Funds' classes of shares based on the monthly
reinvestment of dividends over a specified period of time.
Financial Statements
- --------------------------------------------------------------------------------
The financial statements for the fiscal year ended December 31, 1993, are
incorporated herein by reference to the Annual Report of each Fund dated
December 31, 1993 (File No. 811-6296). You may request a copy of the Annual
Reports free of charge by writing the Funds or by calling 1-800-BAY-FUND.
Appendix
- --------------------------------------------------------------------------------
Standard and Poor's Corporation Corporate Bond Rating Definitions
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. 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.
Moody's Investors Service, Inc., Corporate 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
edged." Interest payments are protected by a large or by an exceptionally stable
margin and principal is secure. While the various protective elements are likely
to change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa--Bonds 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.
Fitch Investors Service, Inc., Bond Rating Definitions
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 credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated "AAA."
Standard and Poor's Corporation Commercial Paper Rating Definitions
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
Moody's Investors Service, Inc., Commercial Paper Rating Definitions
P-1--Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
--Leading market positions in well established industries.
--High rates of return on funds employed.
--Conservative capitalization structure with moderate reliance on debt and
ample asset protection.
--Broad margins in earning coverage of fixed financial charges and high
internal cash generation.
--Well-established access to a range of financial markets and assured
sources of alternate liquidity.
P-2--Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above, but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc., Short-Term Debt Rating Definitions
F-1+--Exceptionally Strong Credit Quality. Issues assigned this rating are
regarded as having the strongest degree of assurance for timely payment.
F-1--Very Strong Credit Quality. Issues assigned this rating reflect an
assurance for timely payment only slightly less in degree than issues rated
F-1+.
F-2--Good Credit Quality. Issues carrying this rating have a satisfactory degree
of assurance for timely payment, but the margin of safety is not as great as the
F-1+ and F-1 ratings.
1042301B (4/94)
BayFunds
Income Funds
Investment Shares
Combined Prospectus
The shares offered in this prospectus represent interests in the Investment
Shares ("Shares") of the following income portfolios ("Income Funds") of
BayFunds, an open-end, management investment company (a mutual fund):
Income Funds
. BayFunds Short Term Yield Portfolio--Investment Shares and Institutional
Shares
. BayFunds Bond Portfolio--Investment Shares and Institutional Shares
In addition, BayFunds offers the following three other separate investment
portfolios, each having a distinct investment objective and policies:
. BayFunds Equity Portfolio--Investment Shares and Institutional Shares
. BayFunds Money Market Portfolio--Investment Shares and Trust Shares
. BayFunds U.S. Treasury Money Market Portfolio--Investment Shares and
Institutional Shares.
This prospectus relates only to the Investment Shares of the Income Funds
(individually referred to as a "Fund" or collectively as the "Funds").
Investment Shares of the Funds are designed primarily for individuals who
purchase Shares through BayBanks and its affiliates. Shareholders can invest,
reinvest or redeem Investment Shares with no sales loads or redemption fees
imposed by these Funds. Shareholders have access to other portfolios in BayFunds
through an exchange program with no sales loads or redemption fees.
The Shares offered by this prospectus are not deposits or obligations of
BayBanks, Inc., or its subsidiaries, are not endorsed or guaranteed by BayBanks,
Inc., or its subsidiaries, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in these Shares involves investment risks, including the possible
loss of principal.
This prospectus contains the information you should read and know before you
invest in either Fund. Keep this prospectus for future reference.
The Funds have also filed a combined Statement of Additional Information dated
April 22, 1994, 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 the Funds by writing to the Funds or calling toll-free
1-800-BAY-FUND (1-800-229-3863).
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 April 22, 1994
TABLE OF CONTENTS
Synopsis.......................................................................1
Summary of Fund Expenses.......................................................2
Financial Highlights...........................................................3
General Information............................................................5
Investment Objective and Policies
of Each Fund.................................................................5
Short Term Yield Fund........................................................5
Acceptable Investments....................................................6
Bond Fund....................................................................6
Acceptable Investments....................................................7
Portfolio Investments and Strategies
of the Funds.................................................................8
Government Securities.....................................................8
Variable Rate Demand Notes................................................8
Asset-Backed Securities...................................................8
Non-Mortgage Related Asset-Backed
Securities..............................................................9
Mortgage-Related Asset-Backed
Securities..............................................................9
Adjustable Rate Mortgage
Securities ("ARMS").................................................10
Collateralized Mortgage
Obligations ("CMOs")................................................10
Obligations of Foreign Issuers..............................................10
Restricted and Illiquid Securities..........................................10
Repurchase Agreements.......................................................11
When-Issued and Delayed Delivery
Transactions.............................................................11
Lending of Portfolio Securities.............................................11
Temporary Investments.......................................................11
Average Portfolio Maturity..................................................12
Portfolio Turnover..........................................................12
Ratings.....................................................................12
Investment Limitations........................................................13
BayFunds Information..........................................................13
Management of BayFunds......................................................13
Board of Trustees........................................................13
Investment Adviser.......................................................13
Advisory Fees..........................................................13
Adviser's Background...................................................14
Distribution of the Funds' Shares...........................................15
Administration of the Funds.................................................15
Administrative Services..................................................15
Custodian................................................................15
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services...............................................................15
Shareholder Servicing Arrangements.......................................15
Legal Counsel............................................................16
Independent Auditors.....................................................16
Expenses of the Funds and Shares............................................16
Net Asset Value...............................................................16
Pricing of Shares...........................................................16
Investing in Shares...........................................................17
Minimum Investment..........................................................17
When You May Purchase Shares................................................17
When Your Purchase Is Effective.............................................17
Purchases By Mail...........................................................17
Purchases By Phone..........................................................18
Purchases By Wire...........................................................18
Purchases Through BayBanks Offices..........................................18
Automatic Investment Program................................................19
Exchange Privileges...........................................................19
Exchanges By Telephone......................................................20
Written Exchanges...........................................................20
Exchanges Through BayBanks Offices..........................................20
Redeeming Shares..............................................................21
When You May Redeem Shares..................................................21
When Redemptions Are Paid...................................................21
Signature Guarantees.....................................................21
Redemptions By Mail.........................................................21
Redemptions By Phone........................................................22
Redemption Proceeds By Wire.................................................22
Redemptions Through BayBanks Offices........................................22
Backup Withholding.......................................................22
Redemptions Before Purchase
Instruments Clear........................................................22
Automatic Withdrawal Program................................................22
Shareholder Information.......................................................23
Balances in Accounts........................................................23
Dividends and Distributions.................................................23
Confirmations and Monthly Statements........................................24
Corporate Customers.........................................................24
Retirement Plans............................................................24
Voting Rights...............................................................24
Authority To Act As Investment Adviser........................................25
Tax Information...............................................................26
Federal Income Tax..........................................................26
Performance Information.......................................................26
Distribution Rate..........................................................27]
Other Classes of Shares.......................................................28
Addresses......................................................Inside Back Cover
SYNOPSIS
Investment Objective and Policies
BayFunds offers you a convenient and affordable way to participate in five
separate, professionally managed, diversified investment portfolios with
distinct investment objectives and policies. This prospectus relates only to the
Investment Shares of the BayFunds Bond Portfolio ("Bond Fund") and BayFunds
Short Term Yield Portfolio ("Short Term Yield Fund") (individually, a "Fund" and
collectively, the "Funds").
BayFunds Short Term Yield
Portfolio seeks a high level of current income consistent with preservation
of capital by investing in a diversified portfolio of high-grade debt
obligations. This Fund will maintain a dollar-weighted average portfolio
maturity of three years or less.
BayFunds Bond Portfolio seeks to achieve high current income and capital
appreciation by investing, under normal market and economic conditions, at
least 65% of the value of its total assets in bonds. The Fund will maintain
a dollar-weighted average maturity of twelve years or less.
As of the date of this prospectus, BayFunds offers shares in three other
portfolios:
. BayFunds Money Market Portfolio seeks to provide current income consistent
with stability of principal and liquidity by investing in a portfolio of
money market instruments with remaining maturities of 397 days or less;
. BayFunds U.S. Treasury Money Market Portfolio seeks to provide current
income consistent with stability of principal and liquidity by investing
in a
portfolio consisting primarily of short-term U.S. Treasury obligations with
remaining maturities of 397 days or less; and
. BayFunds Equity Portfolio seeks to provide long-term capital appreciation by
investing, under normal market and economic conditions, at least 65% of its
assets in a broadly diversified portfolio of equity securities, with current
income as a secondary investment consideration.
Shareholders may exchange Investment Shares in the Funds for Investment Shares
in the other portfolios of BayFunds without any redemption fee or other charge.
(See "Exchange Privileges" at pages 19-20.)
Valuing Fund Shares
Each Fund's net asset value per share fluctuates. (See "Net Asset Value" at page
16.)
Buying and Redeeming Fund
Shares
You can conveniently buy and redeem Fund shares on any Business Day. (See
"Investing in Shares" at pages 17-19 and Redeeming Shares" at pages 21-23.)
Shares of a Fund are bought and redeemed at net asset value without a sales load
or redemption fees. The minimum initial investment in a Fund is $2,500, or $500
if you participate in the Automatic Investment Program or invest through an
Individual Retirement Account ("IRA"). (See "Automatic Investment Program" at
page 19.) Subsequent investments must be in amounts of at least $100, or $50 if
you participate in the Automatic Investment Program or invest through an IRA.
Fund Management
The investment adviser for the Funds is BayBanks Investment Management, Inc.,
which makes investment decisions for each Fund. (See "BayFunds Information" at
page 13.)
Shareholder Services
When you become a shareholder in a Fund, you can easily obtain information about
your account, and about the Fund and other BayFunds' portfolios by calling
toll-free 1-800-BAY-FUND
(1-800-229-3863.)
Risk Factors
Investments in the Funds may involve certain risks that are explained more fully
in the sections of this prospectus discussing each Fund's investment policies
and its acceptable investments. (See "Portfolio Investments and Strategies of
the Funds" at page 8.)
INCOME FUNDS
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Investment Shares Short Term Bond
Shareholder Transaction Expenses Yield Fund Fund
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage of offering price).......... None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................ None None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable)............................................. None None
Redemption Fees (as a percentage of amount redeemed, if applicable).................. None None
Exchange Fees........................................................................ None None
<CAPTION>
Annual Investment Shares Operating Expenses Short Term Bond
(As a percentage of average net assets) Yield Fund Fund
<S> <C> <C> <C>
Management Fees...................................................................... 0.50% 0.60%
12b-1 Fees........................................................................... None None
Total Other Expenses................................................................. 0.52% 0.62%
Shareholder Servicing Fees................................................ 0.25% 0.25%
Total Investment Shares Operating Expenses.................................. 1.02% 1.22%
</TABLE>
The Annual Investment Shares Operating Expenses for the Short Term Yield Fund
and Bond Fund were 0.60% and 0.70% respectively, for the fiscal year ended
December 31, 1993. The Operating Expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
The above table can help you understand the various costs and expenses that a
shareholder of Investment Shares will bear, either directly or indirectly. For
more complete descriptions of the various costs and expenses, see "BayFunds
Information" and "Investing in Shares." Wire-transferred redemptions may be
subject to additional fees.
<TABLE>
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. Short Term Bond
The Fund charges no redemption fees. Yield Fund Fund
<S> <C> <C>
1 Year....................................................................................... $ 10 $ 12
3 Years...................................................................................... $ 32 $ 39
5 Years...................................................................................... $ 56 $ 67
10 Years..................................................................................... $ 125 $ 148
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to
Investment Shares. The Funds also offer another class of shares called
Institutional Shares. Institutional Shares and Investment Shares are generally
subject to the same expenses, except that Institutional Shares are not subject
to a shareholder servicing fee. See "Other Classes of Shares."
SHORT TERM YIELD FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31, 1993*
<S> <C>
- ------------------------------------------------------------------------------------------- ---------------------
Net asset value, beginning of period $ 10.00
- -------------------------------------------------------------------------------------------
Income from investment operations
- -------------------------------------------------------------------------------------------
Net investment income 0.48
- -------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.09)
- ------------------------------------------------------------------------------------------- ---------------------
Total from investment operations 0.39
- ------------------------------------------------------------------------------------------- ---------------------
Less distributions
- -------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48)
- ------------------------------------------------------------------------------------------- ---------------------
Net asset value, end of period $ 9.91
- ------------------------------------------------------------------------------------------- ---------------------
Total return** % 3.96
- -------------------------------------------------------------------------------------------
Ratios to average net assets
- -------------------------------------------------------------------------------------------
Expenses 0.60%(a)
- -------------------------------------------------------------------------------------------
Net investment income 5.19%(a)
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.16%(a)
- -------------------------------------------------------------------------------------------
Supplemental Data
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $173,301
- -------------------------------------------------------------------------------------------
Portfolio turnover rate 98%
- -------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
BOND FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31, 1993*
<S> <C>
- ------------------------------------------------------------------------------------------- ---------------------
Net asset value, beginning of period $ 10.00
- -------------------------------------------------------------------------------------------
Income from investment operations
- -------------------------------------------------------------------------------------------
Net investment income 0.55
- -------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.24
- ------------------------------------------------------------------------------------------- ---------------------
Total from investment operations 0.79
- ------------------------------------------------------------------------------------------- ---------------------
Less distributions
- -------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.55)
- -------------------------------------------------------------------------------------------
Distribution to shareholders from net realized gain on investment transactions (0.10)
- ------------------------------------------------------------------------------------------- ---------------------
Total distributions (0.65)
- ------------------------------------------------------------------------------------------- ---------------------
Net asset value, end of period $10.14
- ------------------------------------------------------------------------------------------- ---------------------
Total return** 7.97%
- -------------------------------------------------------------------------------------------
Ratios to average net assets
- -------------------------------------------------------------------------------------------
Expenses 0.70%(a)
- -------------------------------------------------------------------------------------------
Net investment income 5.84%(a)
- -------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23%(a)
- -------------------------------------------------------------------------------------------
Supplemental Data
- -------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $78,080
- -------------------------------------------------------------------------------------------
Portfolio turnover rate 74%
- -------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 voluntarily 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
GENERAL INFORMATION
BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds 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. With respect to the Funds, as of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes of
shares, Investment Shares and Institutional Shares. This prospectus relates only
to Investment Shares ("Shares") of the Funds.
The Shares are designed primarily for individuals who purchase Shares through
BayBanks and its affiliates and seek a convenient means of accumulating an
interest in a professionally managed, diversified portfolio.
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.
For additional information about the investment strategies that one or both
Funds may employ, and certain investment policies mentioned below, please refer
to the "Portfolio Investments and Strategies of the Funds" section of this
prospectus and the combined Statement of Additional Information.
Short Term Yield Fund
If you are seeking high current income and greater price stability than a
long-term bond fund provides, then the Short Term Yield Fund may be a
suitable investment. The average maturity of the Fund's holdings will be
kept to three years or less in order to limit fluctuations in Share
price.
The investment objective of the Short Term Yield Fund is a high level of current
income consistent with preservation of capital. Under normal market and economic
conditions, the Fund pursues its investment objective by investing in a
diversified portfolio of high-grade debt obligations, which may include bonds,
notes, debentures, asset-backed and mortgage-backed securities, commercial
paper, bank instruments, and money market instruments. The Fund will maintain
a dollar-weighted average portfolio maturity of three years or less.
ACCEPTABLE INVESTMENTS
The Short Term Yield Fund buys only high-grade U.S. dollar-denominated debt
obligations.
The high-grade debt obligations in which the Fund invests are rated by one or
more nationally recognized statistical rating organizations ("NRSROs") in one of
the three highest rating categories at the time of purchase (e.g., AAA, AA or A
by Standard & Poor's Corporation ("S&P") or Fitch Investors Service, Inc.
("Fitch"), or Aaa, Aa or A by Moody's Investors Service, Inc. ("Moody's")). The
Short Term Yield Fund may purchase commercial paper rated by one or more NRSROs
in one of their two highest categories at the time of purchase (e.g., A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch). The Short Term
Yield Fund may also invest in unrated debt securities that are determined by its
adviser to be of comparable quality to securities having such ratings. The Short
Term Yield Fund will limit its investment in commercial paper rated in the
second highest rating category by one or more NRSROs to not more than 10% of net
assets. Downgrades will be evaluated on a case by case basis by the adviser. The
adviser will determine whether or not a downgraded security continues to be an
acceptable investment. If not, the security will be sold.
Acceptable investments include the following:
. Government Securities (as defined below);
. corporate debt obligations, including medium-term notes and variable rate
demand notes;
. asset-backed securities rated in one of the two highest ratings categories
by a NRSRO, or if unrated, of comparable quality in the judgment of the
adviser;
. commercial paper (including Canadian Commercial Paper and Europaper);
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
. medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
. U.S. dollar-denominated debt obligations of foreign issuers;
. repurchase agreements;
. money market instruments; and
. money market mutual funds.
The Short Term Yield Fund invests only in instruments denominated and payable in
U.S. dollars.
Bond Fund
If you are seeking high current income and capital appreciation, then the
Bond Fund may be a suitable investment.
The investment objective of the Bond Fund is high current income and capital
appreciation. Under normal market and economic conditions, the Fund pursues its
investment objective by investing at least 65% of the value of its total assets
in bonds. The Fund intends to maintain a dollar-weighted average portfolio
maturity of 12 years or less.
ACCEPTABLE INVESTMENTS
The Bond Fund buys only investment grade U.S. dollar-denominated debt
obligations.
The investment grade debt securities in which the Bond Fund invests are rated by
one or more NRSROs in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). The Bond Fund may purchase commercial paper rated by one or more
NRSROs in their highest category at the time of purchase (e.g., A-1 by S&P,
Prime-1 by Moody's, or F-1 by Fitch). The Bond Fund may also invest in unrated
debt securities that are determined by its adviser to be of comparable quality
to securities having such ratings.
Acceptable investments include the following:
. Government Securities (as defined below);
. domestic issues of corporate debt obligations;
. asset-backed securities in one of the two highest ratings categories by an
NRSRO, or if unrated, of comparable quality in the judgment of the adviser;
. U.S. dollar-denominated debt obligations of foreign issuers;
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
. commercial paper;
. repurchase agreements;
. money market instruments; and
. money market mutual funds.
The adviser attempts to manage the Bond Fund's total performance, which includes
both changes in principal value of the Bond Fund's portfolio and income earned,
by anticipating opportunities in the capital markets and risks of changes in
market interest rates. When the adviser expects that market interest rates may
decline, which would cause prices of outstanding bonds to rise, it generally
extends the average maturity of the Bond Fund's portfolio. When the adviser
expects that market interest rates may rise, which would cause prices of
outstanding bonds to decline, it generally shortens the average maturity of the
Bond Fund's portfolio. Further, the adviser attempts to improve the Bond Fund's
total return by weighing the relative value of alternative bond issues having
similar maturities in selecting portfolio securities. By actively managing the
Bond Fund's portfolio in this manner, the adviser seeks to provide capital
appreciation during periods of falling interest rates and protection against
capital depreciation during periods of rising rates.
PORTFOLIO INVESTMENTS AND
STRATEGIES OF THE FUNDS
Government Securities
The Funds may purchase 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"). The types of Government Securities
in which the Funds 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:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. The Student Loan Marketing Association; and
. Federal National Mortgage Association.
Variable Rate Demand Notes
The Short Term Yield Fund may purchase variable rate demand notes, which are
long-term corporate debt instruments that have variable or floating interest
rates and provide the Short Term Yield Fund 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. Many variable rate demand notes
allow the Short Term Yield Fund to demand the repurchase of the security on not
more than seven days prior notice. Other notes only permit the Short Term Yield
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals.
Asset-Backed Securities
The Funds may purchase asset-backed securities. Asset-backed securities are
created by the grouping of certain governmental, government related and private
loans, receivables and other lender assets into pools. Interests in these pools
are sold as individual securities. Payments from the asset pools may be divided
into several different tranches of debt securities, with some tranches entitled
to receive regular installments of principal and interest, other tranches
entitled to receive regular installments of interest, with principal payable at
maturity or upon specified call dates, and other tranches only entitled to
receive payments of principal and accrued interest at maturity or upon specified
call dates. Different tranches of securities will bear different interest rates,
which may be fixed or floating. Because the loans held in the asset pool often
may be prepaid without penalty or premium, asset-backed securities are generally
subject to higher prepayment risks than most other types of debt instruments.
Prepayment risks on mortgage securities tend to increase during periods of
declining mortgage interest rates, because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Depending upon market
conditions, the yield that the Funds receive from the reinvestment of such
prepayments, or any scheduled principal payments, may be lower than the yield on
the original mortgage security. As a consequence, mortgage securities may be a
less effective means of "locking in" interest rates than other types of debt
securities having the same stated maturity and may also have less potential
for capital appreciation. For certain types of asset pools, such as
collateralized mortgage obligations, prepayments may be allocated to one
tranche of securities ahead of other tranches, in order to reduce the risk of
prepayment for the other tranches.
Prepayments may result in a capital loss to the Funds to the extent that the
prepaid mortgage securities were purchased at a market premium over their stated
principal amount. Conversely, the prepayment of mortgage securities purchased at
a market discount from their stated principal amount will accelerate the
recognition of interest income by the Funds, which would be taxed as ordinary
income when distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Non-Mortgage Related
Asset-Backed Securities
The Funds may invest in non-mortgage related asset-backed securities, including
interests in pools of receivables, such as credit card and accounts receivable
and motor vehicle and other installment purchase obligations and leases. These
securities may be in the form of pass-through instruments or asset-backed
obligations. The securities are issued by non-governmental entities and carry no
direct or indirect U.S. government guarantee.
Non-mortgage related asset-backed securities present certain risks that are not
presented by mortgage-related asset-backed securities described below.
Primarily, these securities do not have the benefit of the same security
interest in the related collateral. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
reregistered because the owner and obligor moves to another state, such
registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
Mortgage-Related Asset-Backed Securities
The Funds may also invest in various mortgage-related asset-backed securities.
These types of investments may include adjustable rate mortgage securities,
collateralized mortgage obligations, real estate mortgage investment conduits,
or other securities collateralized by or representing an interest in real estate
mortgages (collectively, "mortgage securities"). Many mortgage securities
are issued or guaranteed by U.S. government agencies.
ADJUSTABLE RATE MORTGAGE SECURITIES ("ARMS")
ARMS are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMS in which the Funds invest
are issued by the Government National Mortgage Association ("GNMA"), the Federal
National Mortgage Association ("FNMA"), and the 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.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC certificates, but may be collateralized by whole loans or private
pass-through securities.
The Funds will only invest in CMOs which are rated AAA by a NRSRO, and which may
be: (a) 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; (b) collateralized by pools of mortgages
in which payment of principal and interest is guaranteed by the issuer and such
guarantee is collateralized by U.S. government securities; or (c) securities in
which the proceeds of the issuance are invested in mortgage securities and
payment of the principal and interest is supported by the credit of an agency or
instrumentality of the U.S. government.
Obligations of Foreign Issuers
The Funds may invest in debt obligations of foreign issuers which are U.S.
dollar-denominated and traded on domestic exchanges or in the over-the-counter
market (American Depositary Receipts or "ADRs"). Obligations of foreign issuers
may include debt obligations of supranational entities, which include
international organizations designed or supported by governmental entities to
promote economic reconstruction or development, and international banking
institutions and related government agencies. Examples of these include, but are
not limited to, the International Bank for Reconstruction and Development (World
Bank), European Investment Bank, Asian Development Bank and InterAmerican
Development Bank. Each of the Funds will limit its investments in non-ADR
foreign obligations to less than 5% of its net assets. Different risks may also
exist with respect to investments of foreign banks 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 requirements, loan limitations, examinations,
accounting, auditing, and recordkeeping, and the public availability of
information. These factors will be carefully considered by the Funds' adviser in
selecting investments for the Funds.
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which the Funds may otherwise invest pursuant to their
investment objectives and policies, but which are subject to restriction on
resale under federal securities law. Such restrictions often impact the
marketability of the investment. However, the Funds will limit investments in
illiquid securities, including certain restricted securities not determined by
the Trustees to be liquid, non-negotiable time deposits, and repurchase
agreements providing for settlement in more than seven days after notice, to
15% of their respective net assets.
The Funds 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
Funds, 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 Funds 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 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 the 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.
Repurchase Agreements
Certain 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 securities to
the Funds and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Funds, the Funds could receive more or less than the
repurchase price on any sale of such securities.
When-Issued and Delayed
Delivery Transactions
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Funds purchase
securities with payment and delivery scheduled for a future time. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Funds' investment objectives
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Funds rely on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Funds to miss a price
or yield considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term or long-term basis, or both, to broker/dealers,
banks, or other institutional borrowers of securities. The Funds will limit the
amount of portfolio securities they may lend to not more than one-third of their
respective total assets. The Funds will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the adviser has determined
are creditworthy under guidelines established by the Trustees and will receive
collateral equal to at least 100% of the value of the securities loaned.
Temporary Investments
For defensive purposes only, the Funds may also invest in cash and cash items
during times of unusual market conditions and to maintain liquidity. Cash items
may include short-term obligations such as:
. with respect to the Short Term Yield Fund, commercial paper rated A-1 or A-2
by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch;
. with respect to the Bond Fund, commercial paper rated A-1 by S&P, Prime-1 by
Moody's, or F-1 by Fitch;
. obligations of the U.S. government or its agencies or instrumentalities; and
repurchase agreements.
Average Portfolio Maturity
The Short Term Yield Fund's dollar-weighted average portfolio maturity will
not exceed three years. The Bond Fund's dollar-weighted average portfolio
maturity will not exceed 12 years.
Neither Fund will maintain a stable net asset value. However, the adviser will
seek to limit, to the extent consistent with the Short Term Yield Fund's
investment objective of current income, the magnitude of fluctuations in the
Short Term Yield Fund's net asset value by limiting the dollar-weighted average
maturity of the Short Term Yield Fund's portfolio to three years or less.
Similarly, to the extent consistent with the Bond Fund's investment objective of
high current income and capital appreciation, the adviser will seek to limit the
magnitude of fluctuations in the Bond Fund's net asset value by limiting the
dollar-weighted average maturity of the Bond Fund's portfolio to 12 years or
less. Securities with shorter maturities generally have less price movement than
securities of comparable quality with longer maturities. In periods of
anticipated rising interest rates, a greater portion of the Funds' assets may be
invested in securities the value of which are believed to be less sensitive to
interest rate changes.
Portfolio Turnover
Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in a Fund's portfolio will be sold whenever the 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 adviser does not anticipate that the annual portfolio turnover rate will
generally exceed 100% for the Short Term Yield Fund or 200% for the Bond Fund
under normal market conditions. The Bond Fund's higher portfolio turnover rate
may lead to increased costs and may also result in higher taxes paid by the Bond
Fund's shareholders.
Ratings
The Bond Fund may invest in debt securities that are investment grade; that is,
rated Baa or higher by Moody's, or BBB or higher by S&P or Fitch, or, if
unrated, judged by the adviser to be of comparable quality. Moody's, S&P, and
Fitch believe that securities rated Baa or BBB, while of investment grade, have
speculative characteristics with respect to the issuer's capacity to pay
interest and repay principal. If an investment grade security loses its rating
or has its rating reduced after the Bond Fund has purchased it, the Bond Fund is
not required to sell the security from its portfolio; however, the adviser will
endeavor to dispose of the security as soon as practicable thereafter, taking
into account existing market conditions.
INVESTMENT LIMITATIONS
The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which the Funds sell 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, the Funds may borrow up
to one-third of the value of their respective total assets and pledge up to 15%
of the value of those assets to secure such borrowings. With respect to 75% of
the value of total assets, each Fund will invest no more than 5% in securities
of any one issuer or acquire more than 10% of the outstanding voting securities
of 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 U.S. government
securities.
The above limitations cannot be changed without shareholder approval.
BAYFUNDS INFORMATION
Management of BayFunds
BOARD OF TRUSTEES
A Board of Trustees supervises BayFunds.
BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.
INVESTMENT ADVISER
Acting under the direction of the Trustees, the Adviser makes investment
decisions for the Funds.
Pursuant to an investment advisory contract with BayFunds, investment decisions
for the Funds are made by BayBanks Investment Management, Inc., the Funds'
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Funds
and is responsible for the purchase and sale of portfolio instruments, for which
it receives an annual fee from the Funds.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to .50 of 1% of the
Short Term Yield Fund's average daily net assets and .60 of 1% of the Bond
Fund's average daily net assets. The Adviser has undertaken to reimburse the
Funds, up to the amount of the advisory fee, for operating expenses in excess of
limitations established by certain states. The Adviser may also voluntarily
choose to waive a portion of its fee or reimburse the Funds for certain other
expenses, but reserves the right to terminate such waiver or reimbursement at
any time at its sole discretion.
Adviser's Background
The Adviser has extensive investment experience and is a subsidiary of a
leading New England financial services organization.
The Adviser is a wholly-owned subsidiary of BayBanks, Inc., a bank holding
company organized under the laws of the Commonwealth of Massachusetts. BayBanks,
Inc., through its banking subsidiaries (hereinafter "BayBanks") and affiliates,
offers a full range of financial services to the public, including depository
services, commercial lending, cash management, brokerage, retail banking,
mortgage banking, and investment advisory and trust services. As part of their
regular banking operations, BayBanks 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 BayBanks. The lending
relationship will not be a factor in the selection of securities.
The Adviser is a registered investment adviser and provides investment advisory
services for trust and other managed assets. The Adviser was established as a
separate subsidiary of BayBanks, Inc. in 1985, but its predecessor division and
personnel have been providing investment advisory services to BayBanks'
customers for more than 65 years. As of December 31, 1993, the Trust Division of
BayBank, a state-chartered affiliate of the Adviser, acted as custodian for
assets totaling $4.7 billion. Of this amount, the Adviser managed $2.7 billion
of discretionary assets. The Adviser and BayBanks have been managing commingled
funds for over twenty years. At the present time, the Adviser serves as adviser
to five such commingled funds with total assets of approximately $290 million.
The Adviser has managed mutual funds since August 1991 and manages approximately
$562 million (as of December 31, 1993) in various BayFunds portfolios.
BayBank Boston, N.A., an affiliate of the Adviser, through its Capital Markets
Division, manages more than $2 billion of assets in the investment portfolios of
BayBanks, Inc. and BayBanks and approximately $537 million (as of December 31,
1993) in the BayFunds U.S. Treasury Money Market Portfolio. BayBank Boston,
N.A., is a national banking association.
Eric J. Letendre, C.F.A., has served as the Short Term Yield Fund's portfolio
manager since January 1993 and, as such, has primary responsibility for the day
to day management of the Short Term Yield Fund's portfolio. Mr. Letendre had
also served as Manager of the Short Term Yield Fund's predecessor Collective
Investment Fund since April 1992. Mr. Letendre is currently a Vice President and
Portfolio Manager of the Adviser. Mr. Letendre is responsible for managing
approximately $372 million of fixed income assets. Mr. Letendre's business
experience over the past five years has included his position as portfolio
manager for BayBanks Investment Management, Inc. beginning in May 1991. Over
this period, he has also been responsible for the portfolio management of the
BayFunds Money Market Portfolio. Prior to joining the Adviser, he was a money
manager for the Corporate Treasury Division at Bain & Co.
Richard B. G. Vincent, C.F.A., has served as the Bond Fund's portfolio manager
since January 1993 and, as such, has primary responsibility for the day to day
management of the Bond Fund's portfolio. Mr. Vincent also served as the Manager
of the Bond Fund's predecessor Collective Investment Fund from April 1990. Mr.
Vincent has been with the Adviser for the past three years and is currently a
Vice President and Portfolio Manager. As institutional portfolio manager for the
Adviser, Mr. Vincent is responsible for managing approximately $439 million of
fixed-income assets. His other responsibilities within the past five years
include the sale of taxable and tax-exempt securities on behalf of BayBank
Boston, N.A., and serving as the assistant portfolio manager to the BayBanks,
Inc. investment portfolio.
Distribution of the Funds' Shares
Federated Securities Corp. is the principal distributor for Shares of the
Funds.
Federated Securities Corp. is the principal distributor (the "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.
Administration of the Funds
Various organizations provide services to the Funds.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
the Funds with certain administrative personnel and services necessary to
operate the Funds, such as legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified in the
following table:
<TABLE>
<CAPTION>
Average Aggregate
Maximum Daily Net Assets
Administrative Fee of BayFunds
<C> <S>
.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
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and cash
of the Funds.
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND
PORTFOLIO ACCOUNTING SERVICES
Supervised Service Company, Inc. (the "Transfer Agent"), Kansas City, Missouri,
is transfer agent for the Shares of the Funds and dividend disbursing agent for
the Funds. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, provides portfolio accounting services for the Funds.
SHAREHOLDER SERVICING ARRANGEMENTS
BayBank Systems, Inc., Waltham, Massachusetts, is the shareholder servicing
agent for the Funds (the "Shareholder Servicing Agent"). Each Fund may pay the
Shareholder Servicing Agent a fee based on the average daily net asset value of
Shares for which it provides shareholder services. These shareholder services
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance and communicating or facilitating
purchases and redemptions of Shares. This fee will be equal to .25 of 1% of each
Fund's average daily net assets for which the Shareholder Servicing Agent
provides services; however, the Shareholder Servicing Agent may choose
voluntarily to waive all or a portion of its fee at any time.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the Independent
Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young, Pittsburgh,
Pennsylvania.
Expenses of the Funds and Shares
The Funds pay all of their own expenses and their allocable share of BayFunds'
expenses. The expenses borne by the Funds include the following types of
expenses: organization fees; Trustees fees; fees for those management and
administration services described above (including legal, audit and custodian
fees); and printing, registration and mailing costs for legally required
documents and reports to shareholders and government agencies. The Adviser may
voluntarily waive some expenses and has, in addition, undertaken to reimburse
the Funds, up to the amount of the advisory fee, the amount by which operating
expenses exceed limitations imposed by certain states.
At present, the only expenses allocated to shares as a class are expenses under
the Funds' Shareholder Servicing Plan which relate to the Shares. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Shares as it deems appropriate ("Class Expenses").
NET ASSET VALUE
The term "net asset value" per share refers to the value of one Share of a
Fund.
Each Fund's net asset value per share fluctuates. Net asset value per share for
purposes of pricing purchases and redemptions is calculated by dividing the
market value of all securities and other assets belonging to a Fund, less the
liabilities charged to the Fund, by the number of outstanding shares of the
Fund. The net asset value for Institutional Shares of a Fund may be greater than
that of Investment Shares of a Fund due to the variance in daily net income
realized by each class as a result of shareholder servicing fees incurred by the
Investment Shares. Such variance will reflect only accrued net income to which
the shareholders of a particular class are entitled.
Pricing of Shares
The net asset value of each Fund is determined at the close of regular trading
hours on the New York Stock Exchange, currently 4:00 p.m. (Eastern time), Monday
through Friday, except on: (i) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day; (ii) 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; and (iii) days during which no Shares are tendered
for redemption and no orders to purchase Shares are received.
INVESTING IN SHARES
Shares are sold "no-load"--without a sales charge. Your minimum initial
investment is only $2,500, or $500 if you participate in the Automatic
Investment Program or invest through an IRA.
Minimum Investment
You can become a Fund shareholder with an initial investment of $2,500, or $500
if you participate in the Automatic Investment Program or invest through an IRA.
Subsequent investments must be in amounts of at least $100, or if you
participate in the Automatic Investment Program or invest through an IRA, the
minimum for additional Share purchases is $50. The Funds may waive any
investment minimums from time to time. In addition, the Funds may reduce or
waive investment minimums for investors purchasing through qualified BayBanks
accounts.
When You May Purchase Shares
The Funds offer Shares only on days on which the New York Stock Exchange and the
Federal Reserve Bank of Boston are open for business ("Business Days"). In
addition to the holidays listed above under "Pricing of Shares," other non-
Business Days include Martin Luther King's Day, Columbus Day and Veteran's Day.
If the Shareholder Servicing Agent receives your purchase order on a
non-Business Day, the order will not be executed until the next Business Day in
accordance with the Distributor's procedures. The Funds and the Distributor
reserve the right to reject any purchase request.
When Your Purchase Is Effective
If your purchase order is received in good order and accepted by the Fund from
the Transfer Agent by 4:00 p.m. (Eastern time) on a Business Day, it will be
executed at the net asset value next determined. The Transfer Agent will not
communicate your purchase order to the Fund until the Shareholder Servicing
Agent has received the purchase price in Federal funds or other immediately
available funds. When you purchase Shares by check, the order is considered
received when the check is converted into Federal funds, normally within two
Business Days. BayBanks acts as the shareholder's agent in depositing checks and
converting them to Federal funds.
You must submit a completed and signed application at the time of your initial
purchase.
The Shareholder Servicing Agent is responsible for prompt transmission of
purchase orders to the Transfer Agent.
Subsequent purchases may be made by telephone, mail, wire, or in person
through BayBanks offices.
Purchases By Mail
If you make your initial Share purchase by mail, you must send a completed and
signed application and a check payable to the specific Fund and class, to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
You may obtain an application by calling 1-800-BAY-FUND.
You may make subsequent investments in a Fund at any time by sending a check for
a minimum of $100 ($50 if for an IRA) payable to the specific Fund and class at
the following address:
BayFunds
P.O. Box 5-0900
Woburn, MA 01815-0900
or for IRAs:
BayFunds
P.O. Box 889
Burlington, MA 01803-5889
You must include either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
obtained by calling 1-800-BAY-FUND, or (c) a letter stating the amount of the
investment, the name of the Fund and class of shares, the exact name and address
of the account, and your account number.
If the check does not clear, your purchase order will be cancelled and you could
be held liable for associated transaction costs.
Purchases By Phone
Once you are a Fund shareholder, you may purchase Shares by phone by calling
1-800-BAY-FUND.
You must have previously authorized the specific Fund in writing to accept
telephone requests. If you have not done so, call 1-800-BAY-FUND to receive the
Options Change Form and information on this Fund feature. Each Fund uses
reasonable procedures (including a shareholder identity test and sending a
written confirmation of each telephone transaction) to confirm that instructions
given by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for the losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
The establishment of certain types of deposit account relationships with
BayBanks may permit the direct deduction of your purchase price from your
BayBanks deposit account. Please call 1-800-BAY-FUND to determine whether your
BayBanks deposit account qualifies.
For the protection of investors, all phone communications may be recorded where
not otherwise prohibited by law.
Texas residents must purchase Shares through the Distributor at 1-800-356-2805.
Purchases By Wire
If you are a Fund shareholder, you may purchase additional Shares by wire by
first notifying BayBank, as agent for the Transfer Agent, by phone at
1-800-BAY-FUND and then wiring the funds as follows:
. BayBank
. ABA Number: 0110-0174-2
. Attention: Mutual Funds Services
. For Credit to: (shareholder name and account number)
. Further Credit to: (identify the appropriate Fund--Investment Shares)
Purchases Through BayBanks Offices
You may place an order to purchase Shares of a Fund in person through designated
BayBanks offices.
Purchase orders placed through BayBanks offices typically would be received by
the Transfer Agent within two Business Days. If you want more prompt processing,
you should consider another method, such as "Purchases by Phone."
Automatic Investment Program
You can buy Shares conveniently through the Automatic Investment Program.
When you participate in the Automatic Investment Program, you can purchase
additional Fund Shares in minimum amounts of $50. You must previously have
authorized in writing the amount of funds to be deducted automatically from
eligible BayBanks deposit accounts or your deposit account maintained at a
domestic financial institution which is an automated clearing house member, and
the frequency of the deductions. The funds will be invested in Shares of the
specified Fund at the net asset value next determined. The Funds may reduce or
waive the investment minimums for investors purchasing through qualified
BayBanks accounts.
EXCHANGE PRIVILEGES
If your investment needs change, you can easily exchange a Fund's
Investment Shares for Investment Shares of any other BayFund Portfolio at
no charge.
BayFunds consists of the Funds, the BayFunds Equity Portfolio, the BayFunds U.S.
Treasury Money Market Portfolio and the BayFunds Money Market Portfolio. As a
shareholder, you have access to the Investment Shares of all the portfolios
("Participating Funds") of BayFunds through an exchange program. You may also
purchase BayFunds Shares of Massachusetts Municipal Cash Trust with redemption
proceeds of a BayFunds portfolio by calling 1-800-BAY-FUND.
You may exchange Shares having a net asset value of at least $100 for Investment
Shares of any other Participating Fund in which you have an account. The minimum
initial investment to establish an account in any other Participating Fund by
exchange is $2,500, or $500 if you participate in the Automatic Investment
Program or invest through an IRA. BayFunds does not charge any exchange fees.
Each exchange is considered a sale of shares of one fund and a purchase of
shares of another fund. Shares submitted for exchange will be redeemed at the
net asset value next determined after receipt of the exchange request by the
Transfer Agent on a Business Day. Investment Shares of the Participating Fund to
be acquired will be purchased at the net asset value per share next determined
on a Business Day. Transfers of money between a BayFunds portfolio and BayFunds
Shares of Massachusetts Municipal Cash Trust will be reflected as a redemption
and purchase on a shareholder's account statement. In a transfer involving the
BayFunds Shares of Massachusetts Municipal Cash Trust, the purchase order will
be placed on the Business Day following the Business Day after which the
redemption order has been executed.
If you do not have an account in the Participating Fund whose Investment Shares
you want to acquire, you must establish an account. Prior to any such exchange,
you must receive a copy of the current prospectus of the Investment Shares of
the Participating Fund into which an exchange is to be effected. This account
will be registered in the same name and, unless you specify otherwise, will have
the same dividend and distribution payment option as you selected with your
existing account. If the new account registration (name, address, and taxpayer
identification number) is not identical to your existing account, please call
1-800-BAY-FUND for the necessary new account or transfer procedures.
The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.
You may find the exchange privilege useful if your investment objectives or
market outlook should change after you invest in any of the Investment Shares of
Participating Funds. You may obtain further information on the exchange
privilege and obtain a prospectus by calling 1-800-BAY-FUND.
BayFunds reserves the right to terminate the exchange privilege at any time on
60 days' notice. Shareholders will be notified if this privilege is terminated.
Depending on the circumstances, an exchange may generate a short-or long-term
capital gain or loss for federal income tax purposes.
Exchanges By Telephone
You may provide instructions for exchanges by telephone between Participating
Funds by calling 1-800-BAY-FUND.
You must have previously authorized the Funds in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the Options
Change Form and information on this feature. Each Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Written Exchanges
You may send a written request for an exchange to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
Your written request must include your name and tax identification number; the
name of the specific Fund, the name of the class of shares; the dollar amount or
number of Shares to be redeemed; the name of the fund and class of shares in
which shares are to be purchased; and your account number. Your request must be
signed by the registered owner(s) exactly as required by the account
application.
Exchanges Through BayBanks Offices
You may place an order to exchange Shares in person through designated BayBanks
offices.
Exchange orders received through designated BayBanks offices typically would be
received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Exchanges by
Telephone."
REDEEMING SHARES
When you sell your Shares--"redeem" them--you receive the net asset value
per share next determined after the request is received by a Fund in proper
form. There are no fees or other redemption charges (except for redemptions
by wire). You may redeem some or all of your investment.
When You May Redeem Shares
Each Fund redeems its Shares at the net asset value next determined after the
Fund has received your redemption request from the Transfer Agent in proper
form. Redemption requests can be executed only on Business Days. If your
redemption request is received by the Shareholder Servicing Agent on a
non-Business Day, the Transfer Agent will not communicate your redemption
request to the Fund until the next Business Day.
The Funds will not process any redemptions until a completed and signed
application has been received.
When Redemptions Are Paid
The Funds ordinarily will make payment for Shares redeemed after proper receipt
from the Transfer Agent of the redemption request and of all documents in proper
form within five Business Days. Redemption proceeds may be credited to an
eligible BayBanks deposit account, paid by check, or paid by wire, as you
previously designated in your application.
Signature Guarantees. If you request a redemption for an amount in excess of
$10,000 (no limitation if the proceeds are being credited to your BayBanks
deposit account), a redemption of any amount to be sent to an address other than
your address of record with the Fund, the transfer of the registration of
Shares, or a redemption of any amount payable to someone other than yourself as
the shareholder of record, your signature must be guaranteed on a written
redemption request by a trust company or insured commercial bank; an insured
savings and loan association or savings bank; a member firm of a national or
regional stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Transfer Agent has adopted
standards for accepting signature guarantees from the above institutions.
BayFunds may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Funds do not
accept signatures guaranteed by a notary public. BayFunds and its Transfer Agent
reserve the right to amend these standards at any time without notice. If you
have a question about the proper form for redemption requests, call
1-800-BAY-FUND.
You may redeem Shares by phone, mail, or through BayBanks offices.You may
receive redemption proceeds by wire.
Redemptions By Mail
You may redeem Fund Shares by submitting a written request for redemption to:
BayFunds
P.O. Box 665
Waltham, MA 02554-9614
Your written request must include your name and tax identification number, the
specific Fund's name, the class of shares name, the dollar amount or number of
Shares to be redeemed, and your account number. Your request must be signed by
the registered owner(s) exactly as required by the account application.
Redemptions By Phone
You may redeem Fund Shares by calling
1-800-BAY-FUND.
You must have previously authorized the Fund in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the Options
Change Form.
In the event of drastic economic or market changes, you may experience
difficulty in redeeming by telephone. If this occurs, you should consider
another method of redemption, such as "Redemptions by Mail." The Fund uses
reasonable procedures (including a shareholder identity test and sending a
written confirmation of each telephone transaction) to confirm that instructions
given by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Redemption Proceeds By Wire
You may receive redemption proceeds of Fund Shares by wire by calling
1-800-BAY-FUND. Redemption proceeds of at least $1,000 will be wired directly to
the domestic commercial bank and account you previously designated in writing.
You are charged a fee for each wire redemption and the fee is deducted from your
redemption proceeds.
Each Fund reserves the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect the Fund. However, the redemption order will be
effected at the net asset value next determined after redemption request is
received by a Fund from the Transfer Agent in proper form. The Funds also
reserve the right to terminate or modify the "Redemption Proceeds By Wire" or
"Redemptions By Phone" procedures at any time. In that event, shareholders would
be promptly notified.
Redemptions Through BayBanks
Offices
You may place an order to redeem Fund Shares in person through designated
BayBanks offices.
Redemption orders received through designated BayBanks offices typically would
be received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Redemptions By Phone."
BACKUP WITHHOLDING
The Internal Revenue Service requires that backup withholding of 31% apply to
any redemption or exchange request on an account that has not certified its
taxpayer identification number ("TIN"). Shareholders who either have not
certified their number or applied for a number should be aware that backup
withholding will apply to any redemption request processed prior to receipt of a
TIN number and certification.
Redemptions Before Purchase
Instruments Clear
If any portion of a Fund's Shares to be redeemed represents an investment made
with uncollected funds, the Fund reserves the right to delay payment of proceeds
until the Shareholder Servicing Agent is reasonably certain that the funds have
been collected, which could take up to five Business Days.
Automatic Withdrawal Program
An Automatic Withdrawal Program may be established for IRA accounts only
whereby automatic redemptions are made from the account and transferred
electronically to an eligible BayBanks deposit account or your deposit account
maintained at a domestic financial institution that is an automated clearing
house member. The minimum redemption amount is $100 per month. Depending upon
the amount of the withdrawal payments and the amount of dividends paid with
respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling 1-800-BAY-FUND for further information. If a shareholder
withdraws any funds from the IRA account before reaching age 59-1/2 (except
certain withdrawals of excess contributions and regular payments made over the
shareholder's life expectancy), the shareholder will be subject to an IRS
penalty tax of 10% of the taxable amount withdrawn in addition to regular
income taxes on the taxable amount.
SHAREHOLDER INFORMATION
Balances in Accounts
Due to the high cost of maintaining accounts with low balances, a Fund may
redeem your Shares (other than in retirement plan accounts or IRAs) and send you
the proceeds if, due to shareholder redemptions, your account balance falls
below a minimum value of $1,000. However, before Shares are redeemed to close an
account, the shareholder will be notified in writing and given 60 days to
purchase additional Shares to meet the minimum balance requirement. The Funds
reserve the right to amend this standard upon 60 days' prior written notice to
shareholders. The Funds also reserve the right to redeem their Shares
involuntarily or to make payment for redemptions in the form of securities if it
appears appropriate to do so in light of their responsibilities under the
Investment Company Act of 1940.
Dividends and Distributions
You earn dividends daily and receive them monthly, and capital gains are
paid out in "distributions" at least annually. You select the payment
option: automatic reinvestment in additional Shares, automatic credit to
eligible BayBanks deposit accounts, or by check.
Dividends from a Fund's net investment income are declared daily, immediately
prior to the 4:00 p.m. (Eastern time) pricing of the Shares. Dividends are paid
monthly within five Business Days after the end of such calendar month to all
shareholders invested in the Fund on the record date. Net realized capital gains
are distributed at least annually.
You elect in writing how you want to receive your dividends and your
distributions. You may choose automatic reinvestment in additional Shares at
the net asset value next determined on the payment dates, automatic credit to
an eligible BayBanks deposit account, or by check. If you fail to select an
option, all distributions will be reinvested in additional Shares.
Confirmations and Monthly Statements
You will receive confirmations of each purchase, exchange or redemption. Monthly
statements are sent to report transactions such as purchases and redemptions, as
well as dividends paid during the month. However, BayBank IRA customers will
receive quarterly statements for their accounts.
The Funds' Transfer Agent maintains a Share account for each shareholder of
record. Share certificates are not issued.
Corporate Customers
Corporate customers of BayBanks interested in purchasing Fund Shares should
consult their account relationship managers for procedures applicable to their
accounts or call 1-800-554-3311. This prospectus should be read in conjunction
with any materials provided by BayBanks regarding such procedures.
Retirement Plans
BayBanks makes available for purchase Fund Shares for investment by IRAs and
rollover IRAs. For details, including minimum investments, application forms and
other investment procedures, call 1-800-BAY-FUND. For information about
Simplified Employee Pension Plans and retirement plan vehicles established by
employers for their employees which are qualified under Section 401(k) and
403(b) of the Internal Revenue Code, call BayBank at 1-800-462-9999, extension
4589 or write to BayBank, Corporate Trust--New Business Department, 7 New
England Executive Park, Burlington, MA 01803.
Voting Rights
As a shareholder, you are entitled to vote on certain matters.
Each share of a Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in BayFunds have equal voting rights except that, in matters affecting only a
particular fund or class, only shares of that particular fund or class are
entitled to vote.
As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by a two-thirds vote of the
number of Trustees prior to such removal or by a two-thirds vote of the
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of BayFunds' outstanding shares of all portfolios entitled to vote.
AUTHORITY TO ACT AS
INVESTMENT ADVISER
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof, from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling or distributing securities
in general. Such laws and regulations do not prohibit such a holding company or
affiliate 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 their customer. The Funds' investment adviser, BayBanks
Investment Management, Inc., is subject to such banking laws and regulations.
The Adviser believes that it may perform the investment advisory services for
the Funds contemplated by its advisory agreement with BayFunds without violating
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 present or future
statutes and regulations, could prevent the Adviser from continuing to perform
all or a part of the above services for its customers and/or the Funds. In such
event, changes in the operation of the Funds may occur, including the possible
alteration or termination of any automatic or other Fund share investment and
redemption services then being provided, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
BayBanks Investment 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 laws.
TAX INFORMATION
This discussion of taxes is for general information only. Please consult
your own tax adviser about your particular situation.
Federal Income Tax
Each Fund intends to meet requirements of the Internal Revenue Code applicable
to regulated investment companies in order not to be liable for any Federal
income taxes or income and gains distributed to the Fund's shareholders. Each
Fund will distribute substantially all of its net investment income and net
realized gains at least annually.
Each Fund will be treated as a single, separate entity for Federal income tax
purposes.
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. Distributions
from a Fund's net investment income and short-term capital gains will be taxed
as ordinary income and will not be eligible for the dividends received deduction
available to corporations. Distributions of net long-term capital gains will be
taxed as such regardless of how long the Shares have been held.
Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
You can follow each Fund's performance.
From time to time, in advertisements or in reports to shareholders, the
performance and yield of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to relevant bond indices or
to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Funds may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performance of mutual funds.
National financial publications in which performance and yield data are reported
may include The Wall Street Journal, The New York Times, Forbes, or Money
magazine. Publications of a local or regional nature, such as The Boston Globe
or The Boston Herald, may also be used in comparing the performance and yield of
the Funds.
Total return represents the change, over a specified period of time, in the
value of an investment in Investment Shares 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 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 net asset value per share of Shares 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.
Yield and total return will be calculated separately for both classes of shares
of the Funds. Because Investment Shares are subject to shareholder servicing
fees, the yield and total return of Institutional Shares of a Fund for the same
period will exceed that of its Investment Shares.
Shares of the Funds are sold without any sales load or other similar
non-recurring charges.
Distribution Rate
The Funds may quote non-standardized yield in the form of a distribution rate.
In such case, the Short Term Yield Fund calculates its yield daily, as of the
date preceding the calculation, based upon the thirty days ending on the day of
the calculation. This yield is computed by:
. adding the average daily interest accrued to the average daily original
issue discount earned per share on the Fund's portfolio for that thirty-day
period, exclusive of gains or losses on portfolio instruments, including
short-term capital gains;
. subtracting the average daily provision for expenses per share for the
thirty-day period;
. multiplying by the number of days in the current month times twelve; and
. dividing by the thirty-day average net asset value per share.
The Bond Fund calculates its yield daily, as of the date preceding the
calculation, based upon the thirty days ending on the day of the calculation.
This yield is computed by:
. adding the average daily interest accrued to the average daily discount
earned (including original issue discount) per share on the Fund's portfolio
for that thirty-day period, exclusive of gains or losses on portfolio
instruments;
. subtracting the average daily provision for expenses per share for the
thirty-day period;
. multiplying by 365 days; and
. dividing by the thirty-day average net asset value per share.
OTHER CLASSES OF SHARES
Institutional Shares are offered primarily to trusts, fiduciaries and other
institutions. Institutional Shares are subject to a minimum initial investment
of $10,000. Institutional Shares are sold at net asset value and are distributed
without shareholder servicing fees. Institutional Shares were effective as of
January 1, 1994.
The amount of dividends payable to Institutional Shares of a Fund will be
greater than those payable to its Investment Shares by the difference between
Class Expenses and shareholder servicing fees borne by shares of each respective
class of shares of the Fund. (Currently, there are no differences in Class
Expenses other than shareholder servicing fees.)
The stated advisory fee is the same for both classes of shares of a Fund.
ADDRESSES
BayFunds Short Term Yield Portfolio and BayFunds Bond Portfolio
Investment Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
BayBanks Investment Management, Inc.
1414 Massachusetts Avenue
Cambridge, Massachusetts 02138
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, Missouri 64105
SHAREHOLDER SERVICING AGENT
BayBanks Systems, Inc.
One BayBank Technology Place
Waltham, Massachusetts 02154
PORTFOLIO ACCOUNTING SERVICES
Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
COUNSEL TO BAYFUNDS
Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
COUNSEL TO THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Ernst & Young
One Oxford Centre
Pittsburgh, Pennsylvania 15219
INCOME
PORTFOLIOS
Short Term Yield Portfolio
Bond Portfolio
PROSPECTUS
Investment
Shares
BayBanks Investment Management, Inc.
- -----------------------------------------------------------
Investment Adviser
Federated Securities Corp.
- -----------------------------------------------------------
Distributor
Mutual
April 22, 1994 YTM615 Funds At
Printed on Recycled Paper 401107A-R(4/94) Bay Bank
BayFunds
Income Funds and Equity Fund
Institutional Shares
Combined Prospectus
The shares offered in this prospectus represent interests in the Institutional
Shares ("Shares") of the following income and equity portfolios of BayFunds, an
open-end, management investment company (a mutual fund):
Income Funds
. BayFunds Bond Portfolio--Institutional Shares and Investment Shares
. BayFunds Short Term Yield Portfolio--Institutional Shares and Investment
Shares
Equity Fund
. BayFunds Equity Portfolio--Institutional Shares and Investment Shares
In addition, BayFunds offers the following two other separate investment
portfolios, each having a distinct investment objective and policies:
. BayFunds Money Market Portfolio--Trust Shares and Investment Shares
. BayFunds U.S. Treasury Money Market Portfolio--Institutional Shares and
Investment Shares
This prospectus relates only to the Institutional Shares of the Income Funds and
Equity Fund (individually referred to as a "Fund" or collectively as the
"Funds"). Institutional Shares of the Funds are offered primarily to trusts,
fiduciaries and other institutions as a convenient means of accumulating an
interest in a professionally managed, diversified portfolio of securities.
Shareholders can invest, reinvest, or redeem Institutional Shares with no sales
loads or redemption fees imposed by the Funds. Shareholders have access to other
portfolios in BayFunds through an exchange program with no sales loads or
redemption fees.
The Shares offered by this prospectus are not deposits or obligations of
BayBanks, Inc., or its subsidiaries, are not endorsed or guaranteed by BayBanks,
Inc., or its subsidiaries, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in these Shares involves investment risks, including the possible
loss of principal.
This prospectus contains the information you should read and know before you
invest in the Funds. Keep this prospectus for future reference.
The Funds have also filed a combined Statement of Additional Information dated
April 22, 1994, 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 the Funds by writing to the Funds or calling toll-free
1-800-462-9999 ext. 4589 during normal business hours.
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 April 22, 1994
TABLE OF CONTENTS
Synopsis.......................................................................1
Summary of Fund Expenses.......................................................2
General Information............................................................3
Investment Objective and Policies
of Each Fund.................................................................3
Short Term Yield Fund
Acceptable Investments....................................................3
Bond Fund
Acceptable Investments....................................................4
Equity Fund
Acceptable Investments....................................................5
Portfolio Investments and Strategies
of the Funds.................................................................6
Government Securities........................................................6
Variable Rate Demand Notes...................................................6
Asset-Backed Securities......................................................6
Non-Mortgage Related Asset-Backed
Securities................................................................7
Mortgage-Related Asset-Backed
Securities................................................................7
Adjustable Rate Mortgage Securities
("ARMS")................................................................8
Collateralized Mortgage Obligations
("CMOs")................................................................8
Obligations of Foreign Issuers...............................................8
Restricted and Illiquid Securities...........................................9
Repurchase Agreements........................................................9
When-Issued and Delayed Delivery
Transactions..............................................................9
Lending of Portfolio Securities..............................................9
Temporary Investments.......................................................10
Average Portfolio Maturity..................................................10
Portfolio Turnover..........................................................10
Ratings.....................................................................10
Futures and Options Transactons.............................................11
Writing Covered Options..................................................11
Futures Contracts........................................................11
Futures and Options Trading Markets......................................11
Risks..................................................................11
Investment Limitations........................................................12
BayFunds Information..........................................................13
Management of BayFunds......................................................13
Board of Trustees........................................................13
Investment Adviser.......................................................13
Advisory Fees..........................................................13
Adviser's Background...................................................13
Distribution of the Funds' Shares...........................................14
Administration of the Funds.................................................14
Administrative Services..................................................14
Custodian................................................................14
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services...............................................................15
Legal Counsel............................................................15
Independent Auditors.....................................................15
Expenses of the Funds and Shares............................................15
Net Asset Value...............................................................16
Pricing of Shares...........................................................16
Investing in Shares...........................................................16
Minimum Investment..........................................................16
How Shares Are Purchased....................................................16
When Shares May Be Purchased................................................17
When Purchases Are Effective................................................17
Exchanging Securities for Shares
of the Funds.............................................................17
Exchange Privileges...........................................................18
Redeeming Shares..............................................................18
When Shares May Be Redeemed.................................................18
When Redemptions Are Effective..............................................18
Redemptions Before Purchase
Instruments Clear........................................................19
Shareholder Information.......................................................19
Balances in Accounts........................................................19
Dividends and Distributions.................................................19
Confirmations and Statements................................................20
Voting Rights...............................................................20
Authority To Act As Investment Adviser........................................21
Tax Information...............................................................22
Federal Income Tax..........................................................22
Performance Information.......................................................22
Distribution Rate...........................................................23
Other Classes of Shares.......................................................24
Financial Highlights........................................................25
Addresses......................................................Inside Back Cover
SYNOPSIS
This prospectus relates only to the Institutional Shares of the BayFunds Bond
Portfolio ("Bond Fund"), BayFunds Short Term Yield Portfolio ("Short Term Yield
Fund") (collectively, the "Income Funds"), and BayFunds Equity Portfolio
("Equity Fund"). Institutional Shares are designed to offer trusts, fiduciaries
and other institutions a convenient means of accumulating an interest in a
professionally managed, diversified portfolio consisting primarily of debt
securities in the case of the Income Funds, and equity securities in the case of
the Equity Fund.
For information on how to purchase Shares of the Funds, please refer to
"Investing in Shares." Shares are subject to a minimum initial investment of
$10,000 by a purchasing institution, which may be waived or lowered from time to
time. Subsequent investments must be in amounts of at least $100. See "Minimum
Investment." Customers of a purchasing institution should consult their account
agreement for any separate minimum investments. Shares are sold and redeemed at
net asset value without a sales charge. Information on redeeming Shares may be
found under "Redeeming Shares." Additionally, information regarding the exchange
privilege offered with respect to the other portfolios of BayFunds may be found
under "Exchange Privileges." BayBanks Investment Management, Inc. is the adviser
to the Funds.
Risk Factors. _The Funds may make certain investments and employ certain
investment techniques that involve risks that are explained more fully in the
sections of this prospectus discussing the Funds' investment policies and their
acceptable investments. (See "Investment Objective and Policies of Each Fund"
and "Portfolio Investments and Strategies of the Funds.")
INCOME FUNDS AND EQUITY FUND
SUMMARY OF FUND EXPENSES
<TABLE>
<CAPTION>
Institutional Shares Short Term Bond Equity
Shareholder Transaction Expenses Yield Fund Fund Fund
<S> <C> <C> <C>
Maximum Sales Load Imposed on Purchases (as a percentage
of offering price).................................................................. None None None
Maximum Sales Load Imposed on Reinvested Dividends
(as a percentage of offering price)................................................. None None None
Contingent Deferred Sales Charge (as a percentage of original purchase
price or redemption proceeds, as applicable)........................................ None None None
Redemption Fees (as a percentage of amount redeemed,
if applicable)...................................................................... None None None
Exchange Fees......................................................................... None None None
<CAPTION>
Annual Institutional Shares Operating Expenses Short Term Bond Equity
(As a percentage of projected average net assets) Yield Fund Fund Fund
<S> <C> <C> <C>
Management Fees....................................................................... 0.50% 0.60% 0.70%
12b-1 Fees............................................................................ None None None
Total Other Expenses.................................................................. 0.27% 0.37% 0.31%
Total Institutional Shares Operating Expenses....................................... 0.77% 0.97% 1.01%
</TABLE>
Expenses in this table are estimated based on average expenses expected to be
incurred during the fiscal year ending December 31, 1994. During the course of
this period, expenses may be more or less than the average amount shown.
The above table can help you understand the various costs and expenses that a
shareholder of Institutional Shares will bear, either directly or indirectly.
For more complete descriptions of the various costs and expenses, see "BayFunds
Information" and "Investing in Shares." Wire-transferred redemptions may be
subject to additional fees.
<TABLE>
<CAPTION>
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 Fund charges no Short Term Bond Equity
redemption fees. Yield Fund Fund Fund
<S> <C> <C> <C>
1 Year.................................................................................. $ 8 $10 $10
3 Years................................................................................. $25 $31 $32
</TABLE>
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 fiscal year ending December 31, 1994.
The information set forth in the foregoing table and example relates only to
Institutional Shares. The Funds also offer another class of shares called
Investment Shares. Investment Shares and Institutional Shares are generally
subject to the same expenses, except that Investment Shares are subject to a
shareholder servicing fee. See "Other Classes of Shares."
GENERAL INFORMATION
BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds 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. With respect to the Income Funds and Equity Fund,
as of the date of this prospectus, the Board of Trustees ("Trustees") has
established two classes of shares, Institutional Shares and Investment Shares.
This prospectus relates only to Institutional Shares ("Shares") of such Funds.
Shares are offered primarily to trusts, fiduciaries and other institutions as a
convenient means of accumulating an interest in a professionally managed,
diversified portfolio of securities.
The other portfolios in BayFunds are: BayFunds Money Market Portfolio and
BayFunds U.S. Treasury Money Market Portfolio.
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.
For additional information about the investment strategies that the Funds may
employ, and certain investment policies mentioned below, please refer to the
"Portfolio Investments and Strategies of the Funds" section of this prospectus
and the combined Statement of Additional Information.
Short Term Yield Fund
The investment objective of the Short Term Yield Fund is a high level of current
income consistent with preservation of capital. Under normal market and economic
conditions, the Fund pursues its investment objective by investing in a
diversified portfolio of high-grade debt obligations, which may include bonds,
notes, debentures, asset-backed and mortgage-backed securities, commercial
paper, bank instruments, and money market instruments. The Fund will maintain a
dollar-weighted average portfolio maturity of three years or less.
ACCEPTABLE INVESTMENTS
The high-grade debt obligations in which the Short Term Yield Fund invests are
rated by one or more nationally recognized statistical rating organizations
("NRSROs") in one of the three highest rating categories at the time of purchase
(e.g., AAA, AA or A by Standard & Poor's Corporation ("S&P") or Fitch Investors
Service, Inc. ("Fitch"), or Aaa, Aa or A by Moody's Investors Service, Inc.
("Moody's")). The Short Term Yield Fund may purchase commercial paper rated by
one or more NRSROs in one of their two highest categories at the time of
purchase (e.g., A-1 or A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2
by Fitch). The Short Term Yield Fund may also invest in unrated debt securities
that are determined by its adviser to be of comparable quality to securities
having such ratings. The Short Term Yield Fund will limit its investment in
commercial paper rated in the second highest rating category by one or more
NRSROs to not more than 10% of net assets. Downgrades will be evaluated on a
case by case basis by the adviser. The adviser will determine whether or not a
downgraded security continues to be an acceptable investment. If not, the
security will be sold.
Acceptable investments include the following:
. Government Securities (as defined below);
. corporate debt obligations, including medium-term notes and variable rate
demand notes;
. asset-backed securities rated in one of the two highest ratings categories
by a NRSRO, or if unrated, of comparable quality in the judgment of the
adviser;
. commercial paper (including Canadian Commercial Paper and Europaper);
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
. medium and short-term credit facilities, including demand notes and
participations in revolving credit facilities;
. U.S. dollar-denominated debt obligations of foreign issuers;
. repurchase agreements;
. money market instruments; and
. money market mutual funds.
The Short Term Yield Fund invests only in instruments denominated and payable in
U.S. dollars.
Bond Fund
The investment objective of the Bond Fund is high current income and capital
appreciation. Under normal market and economic conditions, the Fund pursues its
investment objective by investing at least 65% of the value of its total assets
in bonds. The Fund intends to maintain a dollar-weighted average portfolio
maturity of twelve years or less.
ACCEPTABLE INVESTMENTS
The investment grade debt securities in which the Bond Fund invests are rated by
one or more NRSROs in one of the four highest rating categories at the time of
purchase (e.g., AAA, AA, A or BBB by S&P or Fitch, or Aaa, Aa, A or Baa by
Moody's). The Bond Fund may purchase commecial paper rated by one or more NRSROs
in their highest category at the time of purchase (e.g., A-1 by S&P, Prime-1 by
Moody's, or F-1 by Fitch). The Bond Fund may also invest in unrated debt
securities that are determined by its adviser to be of comparable quality to
securities having such ratings.
Acceptable investments include the following:
. Government Securities (as defined below);
. domestic issues of corporate debt obligations;
. asset-backed securities in one of the two highest ratings categories by an
NRSRO, or if unrated, of comparable quality in the judgment of the adviser;
. U.S. dollar-denominated debt obligations of foreign issuers;
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
. commercial paper;
. repurchase agreements;
. money market instruments; and
. money market mutual funds.
The adviser attempts to manage the Bond Fund's total performance, which includes
both changes in principal value of the Bond Fund's portfolio and income earned,
by anticipating opportunities in the capital markets and risks of changes in
market interest rates. When the adviser expects that market interest rates may
decline, which would cause prices of outstanding bonds to rise, it generally
extends the average maturity of the Bond Fund's portfolio. When the adviser
expects that market interest rates may rise, which would cause prices of
outstanding bonds to decline, it generally shortens the average maturity of the
Bond Fund's portfolio. Further, the adviser attempts to improve the Bond Fund's
total return by weighing the relative value of alternative bond issues having
similar maturities in selecting portfolio securities. By actively managing the
Bond Fund's portfolio in this manner, the adviser seeks to provide capital
appreciation during periods of falling interest rates and protection against
capital depreciation during periods of rising rates.
Equity Fund
The investment objective of the Equity Fund is long-term capital appreciation.
Current income is a secondary consideration in the selection of investments.
Under normal market conditions, the Fund pursues its investment objective by
investing at least 65% of the value of its total assets in a broadly diversified
portfolio of equity securities. The stock selection process emphasizes the
securities of those companies which the Equity Fund's adviser believes offer the
potential for long-term, above-average capital appreciation. In making portfolio
investments, the adviser assesses characteristics such as financial condition,
earnings momentum, earnings variability, trading liquidity, market valuation,
potential for capital gains, and other investment criteria. Securities of other
companies may be attractive in the pursuit of investment value across all
sectors of the stock market, or by virtue of other economic or financial factors
the adviser deems important in the pursuit of the Equity Fund's investment
objective.
ACCEPTABLE INVESTMENTS
Acceptable investments include the following:
. common stocks of U.S. or foreign companies which are either listed on the
New York or American Stock Exchange or traded in over-the-counter markets,
preferred stock of such companies, warrants, and securities convertible
into or exchangeable for common stock of such companies;
. investments in American Depositary Receipts of foreign companies traded on
the New York Stock Exchange, American Stock Exchange or in the
over-the-counter market;
. stock index futures;
. fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire;
. zero coupon convertible securities;
. certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
. repurchase agreements;
. money market instruments; and
. money market mutual funds.
PORTFOLIO INVESTMENTS AND
STRATEGIES OF THE FUNDS
Government Securities
Except as noted under "Temporary Investments," only the Short Term Yield Fund
and Bond Fund may purchase 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"). The types of Government Securities
in which these Funds 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:
. Federal Home Loan Banks;
. Federal Home Loan Mortgage Corporation;
. Federal Farm Credit Banks;
. The Student Loan Marketing Association; and
. Federal National Mortgage Association.
Variable Rate Demand Notes
The Short Term Yield Fund may purchase variable rate demand notes, which are
long-term corporate debt instruments that have variable or floating interest
rates and provide the Short Term Yield Fund 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. Many variable rate demand notes
allow the Short Term Yield Fund to demand the repurchase of the security on not
more than seven days prior notice. Other notes only permit the Short Term Yield
Fund to tender the security at the time of each interest rate adjustment or at
other fixed intervals.
Asset-Backed Securities
The Short Term Yield Fund and Bond Fund may purchase asset-backed securities.
Asset-backed securities are created by the grouping of certain governmental,
government related and private loans, receivables and other lender assets into
pools. Interests in these pools are sold as individual securities. Payments from
the asset pools may be divided into several different tranches of debt
securities, with some tranches entitled to receive regular installments of
principal and interest, other tranches entitled to receive regular installments
of interest, with principal payable at maturity or upon specified call dates,
and other tranches only entitled to receive payments of principal and accrued
interest at maturity or upon specified call dates. Different tranches of
securities will bear different interest rates, which may be fixed or floating.
Because the loans held in the asset pool often may be prepaid without penalty or
premium, asset-backed securities are generally subject to higher prepayment
risks than most other types of debt instruments. Prepayment risks on mortgage
securities tend to increase during periods of declining mortgage interest rates,
because many borrowers refinance their mortgages to take advantage of the more
favorable rates. Depending upon market conditions, the yield that the Short Term
Yield Fund and the Bond Fund receive from the reinvestment of such prepayments,
or any scheduled principal payments, may be lower than the yield on the original
mortgage security. As a consequence, mortgage securities may be a less effective
means of "locking in" interest rates than other types of debt securities having
the same stated maturity and may also have less potential for capital
appreciation. For certain types of asset pools, such as collateralized mortgage
obligations, prepayments may be allocated to one tranche of securities ahead of
other tranches, in order to reduce the risk of prepayment for the other
tranches.
Prepayments may result in a capital loss to the Short Term Yield Fund and the
Bond Fund to the extent that the prepaid mortgage securities were purchased at a
market premium over their stated principal amount. Conversely, the prepayment of
mortgage securities purchased at a market discount from their stated principal
amount will accelerate the recognition of interest income by the Short Term
Yield Fund and the Bond Fund, which would be taxed as ordinary income when
distributed to the shareholders.
The credit characteristics of asset-backed securities also differ in a number of
respects from those of traditional debt securities. The credit quality of most
asset-backed securities depends primarily upon the credit quality of the assets
underlying such securities, how well the entity issuing the securities is
insulated from the credit risk of the originator or any other affiliated
entities, and the amount and quality of any credit enhancement to such
securities.
Non-Mortgage Related
Asset-Backed Securities
The Short Term Yield Fund and the Bond Fund may invest in non-mortgage related
asset-backed securities, including interests in pools of receivables, such as
credit card and accounts receivable and motor vehicle and other installment
purchase obligations and leases. These securities may be in the form of
pass-through instruments or asset-backed obligations. The securities are issued
by non-governmental entities and carry no direct or indirect U.S. government
guarantee.
Non-mortgage related asset-backed securities present certain risks that are not
presented by mortgage-related asset-backed securities described below.
Primarily, these securities do not have the benefit of the same security
interest in the related collateral. Credit card receivables are generally
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, many of which give such debtors the right to
set off certain amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of asset-backed securities backed by motor vehicle installment
purchase obligations permit the servicer of such receivables to retain the
possession of the underlying obligations. If the servicer sells these
obligations to another party, there is a risk that the purchaser would acquire
an interest superior to that of the holders of the related asset-backed
securities. Further, if a vehicle is registered in one state and is then
reregistered because the owner and obligor moves to another state, such
registration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
Mortgage-Related Asset-Backed
Securities
The Short Term Yield Fund and the Bond Fund may also invest in various
mortgage-related asset-backed securities. These types of investments may include
adjustable rate mortgage securities, collateralized mortgage obligations, real
estate mortgage investment conduits, or other securities collateralized by or
representing an interest in real estate mortgages (collectively, "mortgage
securities"). Many mortgage securities are issued or guaranteed by U.S.
government agencies.
ADJUSTABLE RATE MORTGAGE
SECURITIES ("ARMS")
ARMS are pass-through mortgage securities representing interests in adjustable
rather than fixed interest rate mortgages. The ARMS in which the Short Term
Yield Fund and the Bond Fund invest are issued by the Government National
Mortgage Association ("GNMA"), the Federal National Mortgage Association
("FNMA"), and the 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.
COLLATERALIZED MORTGAGE
OBLIGATIONS ("CMOs")
CMOs are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by GNMA, FNMA or
FHLMC certificates, but may be collateralized by whole loans or private
pass-through securities.
The Short Term Yield Fund and the Bond Fund may invest in CMOs which are rated
AAA by a NRSRO, and which may be: (a) 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; (b) collateralized by pools of
mortgages in which payment of principal and interest is guaranteed by the issuer
and such guarantee is collateralized by U.S. government securities; or (c)
securities in which the proceeds of the issuance are invested in mortgage
securities and payment of the principal and interest is supported by the credit
of an agency or instrumentality of the U.S. government.
Obligations of Foreign Issuers
The Short Term Yield Fund and the Bond Fund may invest in debt obligations of
foreign issuers which are U.S. dollar-denominated and traded on domestic
exchanges or in the over-the-counter market (American Depositary Receipts or
"ADRs"). In addition, the Equity Fund may invest in debt obligations and equity
securities of foreign issuers which are U.S. dollar-denominated and traded on
the New York or American Stock Exchange, in the over-the-counter market or in
the form of ADRs. Obligations of foreign issuers may include debt obligations of
supranational entities, which include international organizations designed or
supported by governmental entities to promote economic reconstruction or
development, and international banking institutions and related government
agencies. Examples of these include, but are not limited to, the International
Bank for Reconstruction and Development (World Bank), European Investment Bank,
Asian Development Bank and InterAmerican Development Bank. Each Fund will limit
its investments in non-ADR foreign obligations to less than 5% of its net
assets. Different risks may also exist with respect to investments of foreign
banks 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 requirements, loan
limitations, examinations, accounting, auditing, and recordkeeping, and the
public availability of information. These factors will be carefully considered
by the Funds' adviser in selecting investments for the Funds. As a matter of
practice, the Equity Fund will not invest in the securities of a foreign issuer
if the risks associated with such investment appear substantial. (See the
combined Statement of Additional Information for additional risk disclosure on
non-ADR foreign obligations.)
Restricted and Illiquid Securities
The Funds may invest in restricted securities. Restricted securities are any
securities in which the Funds may otherwise invest pursuant to their investment
objectives and policies, but which are subject to restriction on resale under
federal securities law. Such restrictions often impact the marketability of the
investment. However, the Funds will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, over-the-counter options (in the case of
the Equity Fund), and repurchase agreements providing for settlement in more
than seven days after notice, to 15% of their respective net assets.
The Funds 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
Funds, 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 Funds 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 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 the 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.
Repurchase Agreements
Certain 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 securities to
the Funds and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Funds, the Funds could receive more or less than the
repurchase price on any sale of such securities.
When-Issued and Delayed
Delivery Transactions
The Funds may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Funds purchase
securities with payment and delivery scheduled for a future time. The Funds
engage in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Funds' investment objectives
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Funds rely on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Funds to miss a price
or yield considered to be advantageous.
Lending of Portfolio Securities
In order to generate additional income, the Funds may lend their portfolio
securities on a short-term or long-term basis, or both, to broker/dealers,
banks, or other institutional borrowers of securities. The Funds will limit the
amount of portfolio securities they may lend to not more than one-third of their
respective total assets. The Funds will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the adviser has determined
are creditworthy under guidelines established by the Trustees and will receive
collateral equal to at least 100% of the value of the securities loaned.
Temporary Investments
For defensive purposes only, the Funds may also invest in cash and cash items
during times of unusual market conditions and to maintain liquidity. Cash items
may include short-term obligations such as:
. with respect to the Short Term Yield Fund, commercial paper rated A-1 or
A-2 by S&P, Prime-1 or Prime-2 by Moody's, or F-1 or F-2 by Fitch;
. with respect to the Bond Fund and the Equity Fund, commercial paper rated
A-1 by S&P, Prime-1 by Moody's or F-1 by Fitch;
. obligations of the U.S. government or its agencies or instrumentalities;
and
. repurchase agreements.
Average Portfolio Maturity
None of the Funds maintain a stable net asset value. However, the adviser will
seek to limit, to the extent consistent with the Short Term Yield Fund's
investment objective of current income, the magnitude of fluctuations in the
Short Term Yield Fund's net asset value by limiting the dollar-weighted average
maturity of the Short Term Yield Fund's portfolio to three years or less.
Similarly, to the extent consistent with the Bond Fund's investment objective of
high current income and capital appreciation, the adviser will seek to limit the
magnitude of fluctuations in the Bond Fund's net asset value by limiting the
dollar-weighted average maturity of the Bond Fund's portfolio to twelve years or
less. Securities with shorter maturities generally have less price movement than
securities of comparable quality with longer maturities. In periods of
anticipated rising interest rates, a greater portion of the assets of the Short
Term Yield Fund and the Bond Fund may be invested in securities the value of
which are believed to be less sensitive to interest rate changes.
Portfolio Turnover
Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in a Fund's portfolio will be sold whenever the adviser
believes it is appropriate to do so in light of a Fund's investment objective,
without regard to the length of time a particular security may have been held.
The adviser does not anticipate that the annual portfolio turnover rate will
generally exceed 200% for the Bond Fund, 100% for the Short Term Yield Fund or
150% for the Equity Fund under normal market conditions. The high portfolio
turnover rates for the Bond Fund and Equity Fund may lead to increased costs and
may also result in higher taxes paid by such Funds' shareholders.
Ratings
The Bond Fund only may invest in debt securities that are investment grade; that
is, rated Baa or higher by Moody's, or BBB or higher by S&P or Fitch, or, if
unrated, judged by the adviser to be of comparable quality. Moody's, S&P, and
Fitch believe that securities rated Baa or BBB, while of investment grade, have
speculative characteristics with respect to the issuer's capacity to pay
interest and repay principal. If an investment grade security loses its rating
or has its rating reduced after the Bond Fund has purchased it, the Bond Fund is
not required to sell the security from its portfolio; however, the adviser will
endeavor to dispose of the security as soon as practicable thereafter, taking
into account existing market conditions.
The Equity Fund will limit its investment in debt securities to those which are
rated by one or more NRSROs in one of the three highest rating categories at the
time of purchase (e.g., AAA, AA or A by S&P or Fitch, or Aaa, Aa or A by
Moody's). The Equity Fund may also invest in unrated debt securities that are
determined by the adviser to be of comparable quality to securities having such
ratings.
Downgrades will be evaluated on a case by case basis by the adviser. The adviser
will determine whether or not the downgraded security continues to be an
acceptable investment. If not, the security will be sold.
Futures and Options Transactions
The Equity Fund may engage in the following futures and options transactions.
WRITING COVERED OPTIONS
The Equity Fund may write (i.e., sell) covered call options. By writing a call
option, the Equity Fund becomes obligated during the term of the option to
deliver the securities underlying the option upon payment of the exercise price.
The Equity Fund May Only Write "Covered" Call Options. This means that so long
as the Equity Fund is obligated as the writer of a call option, it will own the
underlying securities subject to the option or, in the case of call options on
U.S. Treasury bills, the Equity Fund might own substantially similar U.S.
Treasury bills.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Equity Fund receives a premium from writing a call option
which it retains whether or not the option is exercised. By writing a call
option, the Equity Fund might lose the potential for gain on the underlying
security while the option is open. Prior to the exercise of an option, the
Equity Fund has the right to buy out the option position at the then prevailing
price.
FUTURES CONTRACTS
The Equity Fund may purchase and sell stock index futures contracts to hedge all
or a portion of its portfolio against changes in the price of its portfolio
securities, but will not engage in futures transactions for speculative
purposes.
FUTURES AND
OPTIONS TRADING MARKETS
Futures and options in which the Equity Fund will trade must be listed on
national securities exchanges. Exchanges on which such options currently are
traded are the Chicago Board Options Exchange and the New York, American,
Pacific and Philadelphia Stock Exchanges.
Risks. When the Equity Fund writes a covered call option, the Equity Fund risks
not participating in any rise in the value of the underlying security. When the
Equity Fund uses futures as a hedging device, there is a risk that the prices of
the securities subject to the futures contract may not correlate perfectly with
the prices of the securities in the Equity Fund's portfolio. This may cause the
futures contract to react differently than the portfolio securities to market
changes. In addition, the adviser could be incorrect in its expectations about
the direction or extent of market factors, such as interest rate and stock price
movements. In these events, the Equity Fund may lose money on the futures
contract.
It is not certain that a secondary market for positions in futures contracts
will exist at all times. Although the adviser will consider liquidity before
entering into transactions, there is no assurance that a liquid secondary market
will exist for any particular futures contract at any point in time. The Equity
Fund's ability to establish and close out futures positions depends on this
secondary market.
The Equity Fund may not purchase or sell futures contracts if immediately
thereafter the sum of the amount of margin deposits on the Equity Fund's
existing futures positions and premiums paid for related options would exceed 5%
of the market value of the Equity Fund's total assets.
INVESTMENT LIMITATIONS
The Funds will not borrow money directly or through reverse repurchase
agreements (arrangements in which the 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, the Funds may borrow up
to one-third of the value of their respective total assets and pledge up to 15%
of the value of those assets to secure such borrowings.
With respect to 75% of the value of total assets, each Fund will invest no more
than 5% in securities of any one issuer or acquire more than 10% of the
outstanding voting securities of 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 U.S.
government securities.
The above limitations cannot be changed without shareholder approval.
BAYFUNDS INFORMATION
Management of BayFunds
BOARD OF TRUSTEES
BayFunds is managed by a Board of Trustees. The Trustees are responsible for
managing BayFunds' business affairs and for exercising all BayFunds' powers
except those reserved for the shareholders.
INVESTMENT ADVISER
Pursuant to an investment advisory contract with BayFunds, investment decisions
for the Funds are made by BayBanks Investment Management, Inc., the Funds'
investment adviser (the "Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Funds
and is responsible for the purchase and sale of portfolio instruments, for which
it receives an annual fee from the Funds.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to .50 of 1% of the
average daily net assets of the Short Term Yield Fund, .60 of 1% of the average
daily net assets of the Bond Fund and .70 of 1% of the average daily net assets
of the Equity Fund. The Adviser has undertaken to reimburse the Funds, up to the
amount of the advisory fee, for operating expenses in excess of limitations
established by certain states. The Adviser may also voluntarily choose to waive
a portion of its fee or reimburse the Funds for certain other expenses, but
reserves the right to terminate such waiver or reimbursement at any time at its
sole discretion.
Adviser's Background
The Adviser is a wholly-owned subsidiary of BayBanks, Inc., a bank holding
company organized under the laws of the Commonwealth of Massachusetts. BayBanks,
Inc., through its banking subsidiaries (hereinafter "BayBanks") and affiliates,
offers a full range of financial services to the public, including depository
services, commercial lending, cash management, brokerage, retail banking,
mortgage banking, and investment advisory and trust services. As part of their
regular banking operations, BayBanks 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 BayBanks. The lending
relationship will not be a factor in the selection of securities.
The Adviser is a registered investment adviser and provides investment advisory
services for trust and other managed assets. The Adviser was established as a
separate subsidiary of BayBanks, Inc. in 1985, but its predecessor division and
personnel have been providing investment advisory services to BayBanks'
customers for more than 65 years. As of December 31, 1993, the Trust Division of
BayBank, a state-chartered affiliate of the Adviser, acted as custodian for
assets totaling $4.7 billion. Of this amount, the Adviser managed $2.7 billion
of discretionary assets. The Adviser and BayBanks have been managing commingled
funds for over twenty years. At the present time, the Adviser serves as adviser
to five such commingled funds with total assets of approximately $290 million.
The Adviser has managed mutual funds since August 1991 and manages approximately
$562 million (as of December 31, 1993) in various BayFunds portfolios.
BayBank Boston, N.A., an affiliate of the Adviser, through its Capital Markets
Division, manages more than $2 billion of assets in the investment portfolios of
BayBanks, Inc. and BayBanks and approximately $537 million (as of December 31,
1993) in the BayFunds U.S. Treasury Money Market Portfolio. BayBank Boston,
N.A., is a national banking association.
Eric J. Letendre, C.F.A., has served as the Short Term Yield Fund's portfolio
manager since January 1993 and, as such, has primary responsibility for the day
to day management of the Short Term Yield Fund's portfolio. Mr. Letendre has
also served as Manager to the Short Term Yield Fund's predecessor Collective
Investment Fund since April 1992. Mr. Letendre is currently a Vice President and
Portfolio Manager of the Adviser. Mr. Letendre is responsible for managing
approximately $372 million of fixed income assets. Mr. Letendre's business
experience over the past five years has included his position as portfolio
manager for BayBanks Investment Management, Inc. beginning in May 1991. Over
this period, he has also has been responsible for the portfolio management of
the BayFunds Money Market Portfolio. Prior to joining the Adviser, he was a
money manager for the Corporate Treasury Division at Bain & Co.
Richard B. G. Vincent, C.F.A., has served as the Bond Fund's portfolio manager
since January 1993 and, as such, has primary responsibility for the day to day
management of the Bond Fund's portfolio. Mr. Vincent also served as the Manager
of the Bond Fund's predecessor Collective Investment Fund from April 1990. Mr.
Vincent has been with the Adviser for the past three years and is currently a
Vice President and Portfolio Manager. As institutional portfolio manager for the
Adviser, Mr. Vincent is responsible for managing approximately $439 million of
fixed-income assets. His other responsibilities within the past five years
include the sale of taxable and tax-exempt securities on behalf of BayBank
Boston, N.A., and serving as the assistant portfolio manager to the BayBanks,
Inc. investment portfolio.
Geraldine D. Carroll, C.F.A., has served as the Equity Fund's portfolio manager
since January 1993 and, as such, has primary responsibility for the day to day
management of the Equity Fund's portfolio. Ms. Carroll has been associated with
the Adviser for the past six years and is currently a Vice President and
Institutional Portfolio Manager. During this time period, she has had
responsibility for over $350 million of equity and bond assets.
Distribution of the Funds' Shares
Federated Securities Corp. is the principal distributor (the "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.
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 the Funds, such as legal and accounting services. Federated
Administrative Services provides these at an annual rate as specified in the
following table:
<TABLE>
<CAPTION>
Average Aggregate
Maximum Daily Net Assets
Administrative Fee of BayFunds
<C> <S>
- --------------------- -------------------------
.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
for each Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and cash
of the Funds.
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND PORTFOLIO
ACCOUNTING SERVICES
Supervised Service Company, Inc. (the "Transfer Agent"), Kansas City, Missouri,
is transfer agent for the Shares of the Funds and dividend disbursing agent for
the Funds. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, provides portfolio accounting services for the Funds.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the Independent
Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Funds are Ernst & Young, Pittsburgh,
Pennsylvania.
Expenses of the Funds and Shares
The Funds pay all of their own expenses and their allocable share of BayFunds'
expenses. The expenses borne by the Funds include the following types of
expenses: organization fees; Trustees fees; fees for those management and
administration services described above (including legal, audit and custodian
fees); and printing, registration and mailing costs for legally required
documents and reports to shareholders and government agencies. The Adviser may
voluntarily waive some expenses and has, in addition, undertaken to reimburse
the Funds, up to the amount of the advisory fee, the amount by which operating
expenses exceed limitations imposed by certain states.
At present, the only expenses allocated to shares as a class are expenses under
the Funds' Shareholder Servicing Plan which only relates to the Investment
Shares. However, the Trustees reserve the right to allocate certain other
expenses to holders of shares as it deems appropriate ("Class Expenses").
NET ASSET VALUE
Each Fund's net asset value per share fluctuates. Net asset value per share for
purposes of pricing purchases and redemptions is calculated by dividing the
market value of all securities and other assets belonging to a Fund, less the
liabilities charged to the Fund, by the number of outstanding shares of the
Fund. The net asset value for Institutional Shares of a Fund may be greater than
that of Investment Shares of a Fund due to the variance in daily net income
realized by each class as a result of shareholder servicing fees incurred by the
Investment Shares. Such variance will reflect only accrued net income to which
the shareholders of a particular class are entitled.
Pricing of Shares
The net asset value of each Fund is determined at the close of regular trading
hours on the New York Stock Exchange, currently 4:00 p.m. (Eastern time), Monday
through Friday, except on: (i) the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day, and Christmas Day; (ii) 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; and (iii) days during which no Shares are tendered
for redemption and no orders to purchase Shares are received.
INVESTING IN SHARES
Minimum Investment
Shares are offered to trusts, fiduciaries and other institutions (collectively
referred to as the "Institution"). The minimum initial investment by an
Institution is $10,000, and subsequent investments must be in amounts of at
least $100. The Funds may waive any investment minimums from time to time. An
Institution will set minimums for its customers.
Shares are purchased and redeemed with no sales loads or redemption fees imposed
by the Funds. Depending upon the terms of each customer account, an Institution
may charge the customer account fees for services it provides, such as automatic
investment, cash management, dividend payment processing, information regarding
customer position, and sub-accounting with respect to customer accounts. Such
fees may include compensating balance requirements or account maintenance fees,
or may be based on account assets or transactions. Customers should obtain
information about account services and fees directly from their Institution
before authorizing the purchase of Shares, and this prospectus should be read in
conjunction with any such information.
How Shares Are Purchased
Shares may be purchased in accordance with procedures established by an
Institution in connection with the requirements of its customer accounts.
Procedures applicable to each Institution and each customer account governing
the purchase of Shares will differ.
Customers should consult their trust account relationship manager at this
Institution for further information and procedures on purchasing Shares. This
prospectus should be read in conjunction with any materials provided by the
Institution regarding such procedures.
When Shares May Be Purchased
The Funds offer Shares only on days on which the New York Stock Exchange and the
Federal Reserve Bank of Boston are open for business ("Business Days"). In
addition to the holidays listed above under "Pricing of Shares," other non-
Business Days include Martin Luther King's Day, Columbus Day and Veteran's Day.
Orders received by the Transfer Agent on a non-Business Day will not be executed
until the next Business Day in accordance with the Distributor's procedures. The
Funds and the Distributor reserve the right to reject any purchase request.
When Purchases Are Effective
Orders by an Institution to purchase Shares that are received in good order and
accepted by the Fund from the Transfer Agent by 4:00 p.m. (Eastern time) on a
Business Day will be executed at the net asset value next determined. The
Transfer Agent will not communicate purchase orders to the Fund until the
Transfer Agent has received the purchase price in Federal funds or other
immediately available funds. When you purchase Shares by check, the order is
considered received when the check is converted into Federal funds, normally
within two Business Days. BayBanks acts as the shareholder's agent in depositing
checks and converting them to Federal funds.
Each Institution is responsible for prompt transmission of purchase orders to
the Funds in accordance with terms of its customer agreements.
Texas residents must purchase Shares through the Distributor at 1-800-356-2805.
Exchanging Securities for Shares of the Funds
The Funds may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and the Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
particular Fund, must have a readily ascertainable market value, and must be
liquid. The market value of any securities exchanged in an initial investment,
plus any cash, must be at least $100,000.
Securities accepted by a Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of the Shares on the day the securities are valued. One Share of the Fund
will be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
EXCHANGE PRIVILEGES
BayFunds consists of the Funds, the BayFunds U.S. Treasury Money Market
Portfolio and the BayFunds Money Market Portfolio. Institutions may access other
portfolios ("Participating Funds") of BayFunds through an exchange program.
Institutions may also purchase BayFunds Shares of Massachusetts Municipal Cash
Trust with redemption proceeds of a BayFunds portfolio. A customer of BayBanks
may telephone the BayBanks Trust Department toll-free at 1-800-462-9999.
BayBanks Capital Markets customers should call 1-800-554-3311. Participants in
Employee Benefits programs should contact their Plan Administrator.
Procedures will be established by each Institution in connection with the
requirements of its customer accounts and the Participating Funds. Customers
should contact their Institution to obtain further information on exchange
privileges. Prior to any such exchange, the Institution must provide a copy of
the current prospectus of the Participating Fund into which an exchange is to be
effected. The exchange privilege is available to shareholders in any state in
which the Participating Fund's shares being acquired may be sold.
REDEEMING SHARES
When Shares May Be Redeemed
Shares may be redeemed in accordance with procedures established by an
Institution in connection with the requirements of its customer accounts.
Procedures applicable to each Institution and each customer account governing
the redemption of Shares will differ. Customers should contact their Institution
for further information. Each Institution is responsible for transmitting
redemption orders promptly to the Funds and crediting customers' accounts with
redemption proceeds on a timely basis.
When Redemptions Are Effective
Redemption orders are effective at the net asset value per Share next determined
after proper receipt of the redemption request by the Fund from the Transfer
Agent in proper form. Redemption orders can be executed only on Business Days.
If your redemption request is received by the Transfer Agent on a non-Business
Day, the Transfer Agent will not communicate your redemption request to the Fund
until the next Business Day. Payment for redemption orders received by the
Transfer Agent by 4:00 p.m. (Eastern time) on a Business Day will normally be
wired the next Business Day to the Institution for credit to customer accounts.
Shares so redeemed will not be eligible to receive the dividend declared on the
redemption date. Payment for redemption orders received after 4:00 p.m. (Eastern
time) or on a non-Business Day will normally be wired in Federal funds to the
Institution for credit to customer accounts of the Business Day following the
Business Day on which the redemption order is effected.
The Funds assess no charges for wiring redemption proceeds. However,
Institutions may charge customer accounts for redemption services. Information
relating to such redemption services and charges, if any, are available from the
Institutions.
The Funds reserve the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in their judgment, an earlier
payment could adversely affect the Funds.
Redemptions Before Purchase Instruments Clear
If any portion of a Fund's Shares to be redeemed represents an investment made
with uncollected funds, the Fund reserves the right to delay payment of proceeds
until BayBanks is reasonably certain that the funds have been collected, which
could take up to five Business Days.
SHAREHOLDER INFORMATION
Balances in Accounts
A Fund may redeem Shares if an Institution's account falls below $10,000.
However, before Shares are redeemed to close an account, the Institution will be
notified in writing and given 60 days to purchase additional Shares to meet the
minimum balance requirement. The Funds reserve the right to amend this standard
upon 60 days' prior written notice to shareholders. The Funds also reserve the
right to redeem their Shares involuntarily or to make payment for redemptions in
the form of securities if it appears appropriate to do so in light of their
responsibilities under the Investment Company Act of 1940. Customers should
consult their relevant account agreements for any applicable balance
requirements.
Dividends and Distributions
Dividends from the Funds' net investment income of the Short Term Yield Fund and
Bond Fund are declared daily, immediately prior to the 4:00 p.m. (Eastern time)
pricing of the Shares. Dividends of the Short Term Yield Fund and Bond Fund are
paid monthly within five Business Days after the end of such calendar month to
all shareholders invested in such Funds on the record date. Dividends from the
Equity Fund's net investment income are declared and paid quarterly within five
Business Days after the end of such calendar quarter to all shareholders
invested in the Equity Fund on the record date. Net realized capital gains are
distributed at least annually.
Institutions may elect to (a) have their dividends and distributions
automatically reinvested in additional Shares at the net asset value next
determined on the payment dates, (b) receive their dividends and distributions
in cash, or (c) receive a combination of additional Shares and cash. It is
expected that customers of an Institution's automatic investment program will
receive all dividends and distributions in cash credited to their account
pursuant to the terms of their agreement with an Institution; all other
customers should contact their Institution for further information about
dividend elections.
Confirmations and Statements
Confirmations are sent to the Institutions (at least monthly in the case of the
Income Funds and at least quarterly in the case of the Equity Fund) to report
transactions such as purchases and redemptions as well as dividends paid. It is
the responsibility of the Institutions to provide the customers with
confirmations and statements of account with respect to Share transactions made
for their accounts at the Institutions in accordance with procedures established
by the Institutions.
Fund Shares will be held of record by the Institutions or in the name of a
nominee of the Institutions. Beneficial ownership of Shares will be recorded by
the Institutions and reflected in statements of account provided by the
Institutions to their customers. Share certificates are not issued.
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 each portfolio
in BayFunds have equal voting rights except that, in matters affecting only a
particular fund or class, only shares of that particular fund or class are
entitled to vote.
As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or a Funds' operation and for the election of Trustees
under certain circumstances. As of March 30, 1994, Slatt & Co., Burlington,
Massachusetts, acting in various capacities for numerous accounts, was the owner
of record of 9,073,743 Shares (99.99%) of the Short Term Yield Fund, 6,556,153
Shares (99.99%) of the Bond Fund, and 8,028,421 Shares (99.99%) of the Equity
Fund, 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 a two-thirds vote of the number of
Trustees prior to such removal or by a two-thirds vote of the shareholders at a
special meeting. A special meeting of shareholders shall be called by the
Trustees upon the written request of shareholders owning at least 10% of
BayFunds' outstanding shares of all portfolios entitled to vote.
AUTHORITY TO ACT AS
INVESTMENT ADVISER
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof, from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling or distributing securities
in general. Such laws and regulations do not prohibit such a holding company or
affiliate 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 their customer. The Funds' investment adviser, BayBanks
Investment Management, Inc., is subject to such banking laws and regulations.
The Adviser believes that it may perform the investment advisory services for
the Funds contemplated by its advisory agreement with BayFunds without violating
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 present or future
statutes and regulations, could prevent the Adviser from continuing to perform
all or a part of the above services for its customers and/or the Funds. In such
event, changes in the operation of the Funds may occur, including the possible
alteration or, termination of any automatic or other Fund share investment and
redemption services then being provided, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
BayBanks Investment 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 laws.
TAX INFORMATION
Federal Income Tax
Each Fund intends to meet requirements of the Internal Revenue Code applicable
to regulated investment companies in order not to be liable for any Federal
income taxes or income and gains distributed to the Fund's shareholders. Each
Fund will distribute substantially all of its net investment income and net
realized gains at least annually.
Each Fund will be treated as a single, separate entity for Federal income tax
purposes.
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. Distributions
from the Funds' net investment income and short-term capital gains of the Short
Term Yield Fund and Bond Fund will be taxed as ordinary income and will not be
eligible for the dividends received deduction available to corporations.
However, the dividends received deduction for corporations will apply to
ordinary income distributions of the Equity Fund to the extent the distribution
represents amounts that would qualify for the dividends received deduction to
the Equity Fund if the Equity Fund were a regular corporation, and to the extent
designated by the Equity Fund as so qualifying. These dividends and any
short-term capital gains are taxable as ordinary income. Distributions of net
long-term capital gains will be taxed as such regardless of how long the Shares
have been held.
Early each year, each Fund will notify its shareholders of the amount and tax
status of distributions paid to the shareholder for the preceding year.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
From time to time, in advertisements or in reports to shareholders, the
performance and yield of the Funds may be quoted and compared to those of other
mutual funds with similar investment objectives and to relevant bond or equity
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds. For example,
the performance of the Funds may be compared to data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service which
monitors the performance of mutual funds.
National financial publications in which performance and yield data are reported
may include The Wall Street Journal, The New York Times, Forbes, or Money
magazine. Publications of a local or regional nature, such as The Boston Globe
or The Boston Herald, may also be used in comparing the performance and yield of
the Funds.
Total return represents the change, over a specified period of time, in the
value of an investment in Shares 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 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 net asset value per share of those Shares 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
the Shares and, therefore, may not correlate to the dividends or other
distributions paid to shareholders.
Yield and total return will be calculated separately for Institutional Shares
and Investment Shares. Because Institutional Shares are not subject to
shareholder servicing fees, the yield and total return of Institutional Shares
of a Fund for the same period will exceed that of its Investment Shares.
Shares of the Funds are sold without any sales load or other similar
non-recurring charges.
Distribution Rate
The Funds may quote non-standardized yield in the form of a distribution rate.
In such case, the Short Term Yield Fund calculates its yield daily, as of the
date preceding the calculation, based upon the thirty days ending on the day of
the calculation. This yield is computed by:
. adding the average daily interest accrued to the average daily original
issue discount earned per share on the Fund's portfolio for that thirty-day
period, exclusive of gains or losses on portfolio instruments, including
short-term capital gains;
. subtracting the average daily provision for expenses per share for the
thirty-day period;
. multiplying by the number of days in the current month times twelve; and
. dividing by the thirty-day average net asset value per share.
The Bond Fund calculates its yield daily, as of the date preceding the
calculation, based upon the thirty days ending on the day of the calculation.
This yield is computed by:
. adding the average daily interest accrued to the average daily discount
earned (including original issue discount) per share on the Fund's
portfolio for that thirty-day period, exclusive of gains or losses on
portfolio instruments;
. subtracting the average daily provision for expenses per share for the
thirty-day period;
. multiplying by 365 days; and
. dividing by the thirty-day average net asset value per share.
The Equity Fund calculates its annualized current net yield daily as of the date
preceding the calculation. The calculation is made by:
. dividing the most recent quarterly dividend (including any short-term
capital gains) times four by
. the offering price per share for that day.
OTHER CLASSES OF SHARES
Investment Shares are designed primarily for individuals who purchase shares
through BayBanks and its affiliates. Investment Shares are subject to a minimum
initial investment of $2,500, or $500 if in connection with participation in the
Automatic Investment Program or through an IRA. Investment Shares are sold at
net asset value and are subject to a shareholder servicing fee.
The amount of dividends payable to Institutional Shares of a Fund will exceed
that of its Investment Shares by the difference between Class Expenses and
shareholder servicing fees borne by shares of each respective class of shares of
the Fund. (Currently, there are no differences in Class Expenses ther than
shareholder servicing fees.)
The stated advisory fee is the same for both
classes of shares of a Fund.
SHORT TERM YIELD FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31, 1993*
<S> <C>
- --------------------------------------------------------------------------------------------- ------------------
Net asset value, beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------
Income from investment operations
- ---------------------------------------------------------------------------------------------
Net investment income 0.48
- ---------------------------------------------------------------------------------------------
Net realized and unrealized loss on investments (0.09)
- --------------------------------------------------------------------------------------------- ------------------
Total from investment operations 0.39
- --------------------------------------------------------------------------------------------- ------------------
Less distributions
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.48)
- --------------------------------------------------------------------------------------------- ------------------
Net asset value, end of period $ 9.91
- --------------------------------------------------------------------------------------------- ------------------
Total return** % 3.96
- ---------------------------------------------------------------------------------------------
Ratios to average net assets
- ---------------------------------------------------------------------------------------------
Expenses 0.60%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 5.19%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.16%(a)
- ---------------------------------------------------------------------------------------------
Supplemental Data
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $173,301
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 98%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31,1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
BOND FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31, 1993*
<S> <C>
- -------------------------------------------------------------------------------------------- -------------------
Net asset value, beginning of period $ 10.00
- --------------------------------------------------------------------------------------------
Income from investment operations
- --------------------------------------------------------------------------------------------
Net investment income 0.55
- --------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.24
- -------------------------------------------------------------------------------------------- -------------------
Total from investment operations 0.79
- -------------------------------------------------------------------------------------------- -------------------
Less distributions
- --------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.55)
- --------------------------------------------------------------------------------------------
Distribution to shareholders from net realized gain on investment transactions (0.10)
- -------------------------------------------------------------------------------------------- -------------------
Total distributions (0.65)
- -------------------------------------------------------------------------------------------- -------------------
Net asset value, end of period $10.14
- -------------------------------------------------------------------------------------------- -------------------
Total return** 7.97%
- --------------------------------------------------------------------------------------------
Ratios to average net assets
- --------------------------------------------------------------------------------------------
Expenses 0.70%(a)
- --------------------------------------------------------------------------------------------
Net investment income 5.84%(a)
- --------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.23%(a)
- --------------------------------------------------------------------------------------------
Supplemental Data
- --------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $78,080
- --------------------------------------------------------------------------------------------
Portfolio turnover rate 74%
- --------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 voluntarily 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
EQUITY FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994, on the Fund's financial
statements for the year ended December 31, 1993 and on the following table for
the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31, 1993*
<S> <C>
- --------------------------------------------------------------------------------------------- ------------------
Net asset value, beginning of period $ 10.00
- ---------------------------------------------------------------------------------------------
Income from investment operations
- ---------------------------------------------------------------------------------------------
Net investment income 0.14
- ---------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.98
- --------------------------------------------------------------------------------------------- ------------------
Total from investment operations 1.12
- --------------------------------------------------------------------------------------------- ------------------
Less distributions
- ---------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.14)
- --------------------------------------------------------------------------------------------- ------------------
Net asset value, end of period $10.98
- --------------------------------------------------------------------------------------------- ------------------
Total return** 11.28%
- ---------------------------------------------------------------------------------------------
Ratios to average net assets
- ---------------------------------------------------------------------------------------------
Expenses 0.75%(a)
- ---------------------------------------------------------------------------------------------
Net investment income 1.56%(a)
- ---------------------------------------------------------------------------------------------
Expense waiver/reimbursement (b) 0.24%(a)
- ---------------------------------------------------------------------------------------------
Supplemental Data
- ---------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $111,687
- ---------------------------------------------------------------------------------------------
Portfolio turnover rate 81%
- ---------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
ADDRESSES
BayFunds Short Term Yield Portfolio,
BayFunds Bond Portfolio and
BayFunds Equity Portfolio
Institutional Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
BayBanks Investment Management, Inc.
1414 Massachusetts Avenue
Cambridge, Massachusetts 02138
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, Missouri 64105
PORTFOLIO ACCOUNTING SERVICES
Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
COUNSEL TO BAYFUNDS
Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
COUNSEL TO THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Ernst & Young
One Oxford Centre
Pittsburgh, Pennsylvania 15219
INCOME AND EQUITY
PORTFOLIOS
Short Term Yield Portfolio
Bond Portfolio
Equity Portfolio
PROSPECTUS
Institutional
Shares
BayBanks Investment Management, Inc.
- -----------------------------------------------------------
Investment Adviser
Federated Securities Corp.
- -----------------------------------------------------------
Distributor Mutual
April 22, 1994 Funds At
Printed on Recycled Paper 4011107A-IS(4/94) Bay Bank
BayFunds Equity Portfolio
(A Portfolio of BayFunds)
Investment Shares
Prospectus
The shares offered in this prospectus represent interests in the Investment
Shares ("Shares") of the BayFunds Equity Portfolio (the "Fund"), a diversified
investment portfolio of BayFunds, an open-end, management investment company (a
mutual fund).
The Fund's investment objective is long-term capital appreciation. Under normal
market and economic conditions, the Fund will invest at least 65% of the value
of its total assets in equity securities of companies that the Fund's investment
adviser believes have above-average capital appreciation potential.
BayFunds offers the following four other separate investment portfolios, each
having a distinct investment objective and policies:
_ BayFunds Short Term Yield Portfolio--Investment Shares and Institutional
Shares
_ BayFunds Bond Portfolio--Investment Shares and Institutional Shares
_ BayFunds Money Market Portfolio--Investment Shares and Trust Shares
_ BayFunds U.S. Treasury Money Market Portfolio--Investment Shares and
Institutional Shares
This prospectus relates only to the Investment Shares of the Fund. Investment
Shares of the Fund are sold primarily to individuals who purchase Shares through
BayBanks and its affiliates. Shareholders can invest, reinvest, or redeem
Investment Shares with no sales loads or redemption fees imposed by the Fund.
Shareholders have access to other portfolios in BayFunds through an exchange
program with no sales loads or redemption fees.
The Shares offered by this prospectus are not deposits or obligations of
BayBanks, Inc., or its subsidiaries, are not endorsed or guaranteed by BayBanks,
Inc., or its subsidiaries, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other government agency.
Investment in these Shares involves investment risks, including the possible
loss of principal.
This prospectus contains the information you should read and know before you
invest in Shares of the Fund. Keep this prospectus for future reference.
The Fund has also filed a combined Statement of Additional Information dated
April 22, 1994, 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 the Fund by writing to the Fund or calling toll-free
1-800-BAY-FUND (1-800-229-3863).
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 April 22, 1994
TABLE OF CONTENTS
Synopsis..................................................................... 1
Summary of Fund Expenses..................................................... 2
Financial Highlights......................................................... 3
General Information.......................................................... 4
Investment Information....................................................... 4
Investment Objective....................................................... 4
Investment Policies........................................................ 4
Acceptable Investments..................................................... 5
Securities of Foreign Issuers........................................... 5
Futures and Options Transactions........................................ 5
Writing Covered Options............................................... 5
The Fund May Only Write
"Covered" Call Options........................................... 5
Futures Contracts..................................................... 5
Futures and Options Trading
Markets............................................................ 5
Risks.............................................................. 6
Restricted and Illiquid Securities...................................... 6
Repurchase Agreements................................................... 6
Lending of Portfolio Securities......................................... 7
When-Issued and Delayed Delivery
Transactions.......................................................... 7
Temporary Investments................................................... 7
Portfolio Turnover...................................................... 7
Ratings................................................................. 7
Investment Limitations..................................................... 8
BayFunds Information......................................................... 8
Management of BayFunds..................................................... 8
Board of Trustees....................................................... 8
Investment Adviser...................................................... 8
Advisory Fees......................................................... 8
Adviser's Background.................................................. 9
Distribution of Fund Shares................................................. 9
Administration of the Fund.................................................. 9
Administrative Services................................................. 10
Custodian............................................................... 10
Transfer Agent, Dividend Disbursing
Agent and Portfolio Accounting
Services.............................................................. 10
Shareholder Servicing Arrangements...................................... 10
Legal Counsel........................................................... 10
Independent Auditors.................................................... 10
Brokerage Transactions..................................................... 10
Expenses of the Fund and Shares............................................ 10
Net Asset Value.............................................................. 11
Pricing of Shares.......................................................... 11
Investing in Shares.......................................................... 12
Minimum Investment......................................................... 12
When You May Purchase Shares............................................... 12
When Your Purchase Is Effective............................................ 12
Purchases By Mail.......................................................... 12
Purchases By Phone......................................................... 13
Purchases By Wire.......................................................... 13
Purchases Through BayBanks Offices......................................... 13
Automatic Investment Program............................................... 13
Exchange Privileges.......................................................... 14
Exchanges By Telephone..................................................... 15
Written Exchanges.......................................................... 15
Exchanges Through BayBanks Offices......................................... 15
Redeeming Shares............................................................. 16
When You May Redeem Shares................................................. 16
When Redemptions Are Paid.................................................. 16
Signature Guarantees.................................................... 16
Redemptions By Mail........................................................ 16
Redemptions By Phone....................................................... 17
Redemption Proceeds By Wire................................................ 17
Redemptions Through BayBanks Offices....................................... 17
Backup Withholding...................................................... 17
Redemption Before Purchase Instruments
Clear................................................................... 17
Automatic Withdrawal Program............................................... 17
Shareholder Information...................................................... 18
Balances in Accounts....................................................... 18
Dividends and Distributions................................................ 18
Confirmations and Statements............................................... 19
Corporate Customers........................................................ 19
Retirement Plans........................................................... 19
Voting Rights.............................................................. 19
Authority To Act As Investment Adviser....................................... 20
Tax Information.............................................................. 21
Federal Income Tax......................................................... 21
Performance Information...................................................... 21
Distribution Rate.......................................................... 22
Other Classes of Shares...................................................... 22
Addresses......................................................Inside Back Cover
SYNOPSIS
Investment Objective and Policies
BayFunds offers you a convenient and affordable way to participate in five
separate, professionally managed, diversified investment portfolios (the
"Funds") with distinct investment objectives and policies. This prospectus
relates only to the Investment Shares of the BayFunds Equity Portfolio.
BayFunds Equity Portfolio seeks to provide long-term capital appreciation,
by investing under normal market and economic conditions, at least 65% of
the value of its total assets in a broadly diversified portfolio of equity
securities, with current income as a secondary investment consideration.
As of the date of this prospectus, BayFunds offers shares in four other Funds:
BayFunds Short Term Yield Portfolio seeks a high level of current income
consistent with preservation of capital, by investing in a diversified
portfolio of high-grade debt obligations. The Fund will maintain a dollar-
weighted average maturity of three years or less;
BayFunds Bond Portfolio seeks to achieve high current income and capital
appreciation, by investing, under normal market and economic conditions, at
least 65% of of the value of its total assets in bonds. The Fund will
maintain a dollar-weighted average maturity of twelve years or less;
BayFunds Money Market Portfolio seeks to provide current income consistent
with stability of principal and liquidity, by investing in a portfolio of
money market instruments with remaining maturities of 397 days or less; and
BayFunds U.S. Treasury Money Market Portfolio seeks to provide current income
consistent with stability of principal and liquidity, by investing, under
normal market conditions, at least 65% of the value of its total assets in
U.S. Treasury Obligations with remaining maturities of 397 days or less.
Shareholders may exchange Investment Shares in the Fund for Investment Shares in
the other Funds, without any redemption fee or other charge. (See "Exchange
Privileges" at pages 14-15).
Valuing Fund Shares
The Fund's net asset value per share fluctuates. (See "Net Asset Value" at page
11.)
Buying and Redeeming Fund
Shares
You can conveniently buy and redeem Fund shares on any Business Day. (See
"Investing in Shares" at pages 12-14 and "Redeeming Shares" at pages 16-18.)
Shares of the Fund are bought and redeemed at net asset value without a sales
load or redemption fees. The minimum initial investment in the Fund is $2,500,
or $500 if you participate in the Automatic Investment Program or invest through
an Individual Retirement Account ("IRA"). (See "Automatic Investment Program" at
pages 13-14.) Subsequent investments must be in amounts of at least $100, or $50
if you participate in the Automatic Investment Program or invest through an IRA.
Fund Management
The Fund's investment adviser is BayBanks Investment Management, Inc. (the
"Adviser"), which makes investment decisions for the Fund. (See "BayFunds
Information" at page 8.)
Shareholder Services
When you become a shareholder in the Fund, you can easily obtain information
about your account, and about the Fund and other BayFunds' portfolios by calling
toll-free 1-800-BAY-FUND (1-800-229-3863).
Risk Factors
An investment in the Fund may involve certain risks that are explained more
fully in the sections of this prospectus discussing the Fund's investment
policies and its acceptable investments. (See "Acceptable Investments" at page
5.)
SUMMARY OF FUND EXPENSES
<TABLE>
<S> <C> <C>
Investment Shares
Shareholder Transaction Expenses
Maximum Sales Load Imposed on Purchases (as a percentage of offering price)................................. None
Maximum Sales Load Imposed on Reinvested Dividends (as a percentage of offering price)...................... None
Contingent Deferred Sales Charge (as a percentage of original purchase price
or redemption proceeds, as applicable).................................................................... None
Redemption Fees (as a percentage of amount redeemed, if applicable)......................................... None
Exchange Fee................................................................................................ None
Annual Investment Shares Operating Expenses
(As a percentage of average net assets)
Management Fee.............................................................................................. 0.70%
12b-1 Fees.................................................................................................. None
Total Other Expenses........................................................................................ 0.56%
Shareholder Servicing Fee........................................................................ 0.25%
Total Investment Shares Operating Expenses......................................................... 1.26%
</TABLE>
The Annual Investment Shares Operating Expenses were 0.75% for the fiscal year
ended December 31, 1993. The Operating Expenses in the table above are based on
estimated expenses expected during the fiscal year ending December 31, 1994.
The above table can help you understand the various costs and expenses that a
shareholder of Investment Shares will bear, either directly or indirectly. For
more complete descriptions of the various costs and expenses, see "BayFunds
Information" and "Investing in Shares." Wire-transferred redemptions may be
subject to additional fees.
<TABLE>
<S> <C>
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 Fund charges no redemption fees.
1 Year......................................................................................................... $ 13
3 Years........................................................................................................ $ 40
5 Years........................................................................................................ $ 69
10 Years....................................................................................................... $ 152
</TABLE>
The above example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.
The information set forth in the foregoing table and example relates only to
Investment Shares. The Fund also offers another class of shares called
Institutional Shares. Institutional Shares and Investment Shares are generally
subject to the same expenses, except that Institutional Shares are not subject
to a shareholder servicing fee. See "Other Classes of Shares."
EQUITY FUND
FINANCIAL HIGHLIGHTS
(For a share outstanding throughout the period)
The Financial Highlights presented below are historical information for
Investment Shares. The outstanding shares of the Fund were redesignated
Investment Shares on January 1, 1994. Institutional Shares were offered
effective January 1, 1994.
The following table has been audited by Ernst & Young, the Trust's independent
auditors. Their report dated February 11, 1994 on the Fund's financial
statements for the period ended December 31, 1993, and on the following table
for the period presented, is included in the Annual Report to Shareholders dated
December 31, 1993, which is incorporated by reference. This table should be read
in conjunction with the Fund's financial statements and notes thereto, which may
be obtained free of charge from the Trust.
<TABLE>
<CAPTION>
Year Ended
December 31,
1993*
<S> <C>
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, beginning of period $ 10.00
- ----------------------------------------------------------------------------------------------------
Income from investment operations
- ----------------------------------------------------------------------------------------------------
Net investment income 0.14
- ----------------------------------------------------------------------------------------------------
Net realized and unrealized gain on investments 0.98
- ---------------------------------------------------------------------------------------------------- -----------------
Total from investment operations 1.12
- ---------------------------------------------------------------------------------------------------- -----------------
Less distributions
- ----------------------------------------------------------------------------------------------------
Dividends to shareholders from net investment income (0.14)
- ---------------------------------------------------------------------------------------------------- -----------------
Net asset value, end of period $ 10.98
- ---------------------------------------------------------------------------------------------------- -----------------
Total return** 11.28%
- ----------------------------------------------------------------------------------------------------
Ratios to average net assets
- ----------------------------------------------------------------------------------------------------
Expenses 0.75%(a)
- ----------------------------------------------------------------------------------------------------
Net investment income 1.56%(a)
- ----------------------------------------------------------------------------------------------------
Expense waiver/reimbursement(b) 0.24%(a)
- ----------------------------------------------------------------------------------------------------
Supplemental data
- ----------------------------------------------------------------------------------------------------
Net assets, end of period (000 omitted) $ 111,687
- ----------------------------------------------------------------------------------------------------
Portfolio turnover rate % 81
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Reflects operations for the period from January 29, 1993 (date of initial
public investment) to December 31, 1993.
** 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 its Annual
Report dated December 31, 1993, which can be obtained free of charge.
GENERAL INFORMATION
BayFunds was established as a Massachusetts business trust under a Declaration
of Trust dated April 1, 1991. The Declaration of Trust permits BayFunds 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. With respect to this Fund, as of the date of this
prospectus, the Board of Trustees ("Trustees") has established two classes of
shares, Investment Shares and Institutional Shares. This prospectus relates only
to Investment Shares ("Shares") of the Fund.
The Shares are designed primarily for individuals who purchase shares through
BayBanks and its affiliates and seek a convenient means of accumulating an
interest in a professionally managed, diversified portfolio consisting primarily
of equity securities.
Shares are currently sold and redeemed at net asset value without a sales charge
imposed by the Fund. For information on how to purchase Shares of the Fund,
please refer to "Investing in Shares." A minimum initial investment of $2,500 is
required. This minimum requirement may be reduced to $500 in connection with
participation in the Automatic Investment Program or investments through an IRA.
Information on redeeming Shares may be found under "Redeeming Shares."
The other portfolios in BayFunds are: BayFunds Money Market Portfolio; BayFunds
U.S. Treasury Money Market Portfolio; BayFunds Short Term Yield Portfolio; and
BayFunds Bond Portfolio.
INVESTMENT INFORMATION
If you are seeking long-term capital appreciation and current income is not
your primary consideration, then the Fund may be a suitable investment.
Investment Objective
The investment objective of the Fund is long-term capital appreciation. Current
income is a secondary consideration in the selection of investments. The
investment objective cannot be changed without the approval of the Fund's
shareholders. While there is no assurance that the Fund will achieve its
investment objective, it endeavors to do so by following the investment policies
described in this prospectus.
Investment Policies
Under normal market and economic conditions, the Fund pursues its investment
objective by investing at least 65% of the value of its total assets in a
broadly diversified portfolio of equity securities. The stock selection process
emphasizes the securities of those companies which the Adviser believes offer
the potential for long-term, above-average capital appreciation. In making
portfolio investments, the Adviser assesses characteristics such as financial
condition, earnings momentum, earnings variability, trading liquidity, market
valuation, potential for capital gains, and other investment criteria.
Securities of other companies may be attractive in the pursuit of investment
value across all sectors of the stock market, or by virtue of other economic or
financial factors the Adviser deems important in the pursuit of the Fund's
investment objective. Unless indicated otherwise, the investment policies may be
changed by the Trustees without the approval of shareholders. Shareholders will
be notified before any material change in these policies becomes effective.
Acceptable Investments
Acceptable investments include the following:
common stocks of U.S. or foreign companies which are either listed on the New
York or American Stock Exchange or traded in over-the-counter markets,
preferred stock of such companies, warrants, and securities convertible into
or exchangeable for common stock of such companies;
investments in American Depositary Receipts of foreign companies traded on
the New York Stock Exchange, American Stock Exchange or in the
over-the-counter market;
stock index futures;
fixed rate notes and bonds and adjustable and variable rate notes of
companies whose common stock the Fund may acquire;
zero coupon convertible securities;
certificates of deposit, demand and time deposits, savings shares, bankers'
acceptances, deposit notes and other instruments of domestic and foreign
banks, savings and loans and other deposit or thrift institutions;
repurchase agreements;
money market instruments; and
money market mutual funds.
SECURITIES OF FOREIGN ISSUERS
The Fund may invest in securities of foreign issuers which are U.S.
dollar-denominated and traded on the New York or American Stock Exchange or in
the over-the-counter market or in the form of American Depositary Receipts
("ADRs").
The Fund will limit its investments in non-ADR foreign obligations to less than
5% of its net assets. As a matter of practice, the Fund will not invest in the
securities of a foreign issuer if the risks associated with such investment
appear substantial. (See the Statement of Additional Information for additional
risk disclosure on non-ADR foreign obligations.)
FUTURES AND OPTIONS TRANSACTIONS
Writing Covered Options
The Fund may write (i.e., sell) covered call options. By writing a call option,
the Fund becomes obligated during the term of the option to deliver the
securities underlying the option upon payment of the exercise price.
The Fund May Only Write "Covered" Call Options. This means that so long as the
Fund is obligated as the writer of a call option, it will own the underlying
securities subject to the option or, in the case of call options on U.S.
Treasury bills, the Fund might own substantially similar U.S. Treasury bills.
The principal reason for writing call options is to obtain, through a receipt of
premiums, a greater current return than would be realized on the underlying
securities alone. The Fund receives a premium from writing a call option which
it retains whether or not the option is exercised. By writing a call option, the
Fund might lose the potential for gain on the underlying security while the
option is open. Prior to the exercise of an option, the Fund has the right to
buy out the option position at the then prevailing price.
Futures Contracts
The Fund may purchase and sell stock index futures contracts to hedge all or a
portion of its portfolio against changes in the price of its portfolio
securities, but will not engage in futures transactions for speculative
purposes.
Futures and Options Trading Markets
Futures and options which the Fund will trade must be listed on national
securities exchanges. Exchanges on which such options currently are
traded are the Chicago Board Options Exchange and the New York, American,
Pacific and Philadelphia Stock Exchanges.
Risks. When the Fund writes a covered call option, the Fund risks not
participating in any rise in the value of the underlying security. When the Fund
uses futures as a hedging device, there is a risk that the prices of the
securities subject to the futures contract may not correlate perfectly with the
prices of the securities in the Fund's portfolio. This may cause the futures
contract to react differently than the portfolio securities to market changes.
In addition, the Adviser could be incorrect in its expectations about the
direction or extent of market factors, such as interest rate and stock price
movements. In these events, the Fund may lose money on the futures contract.
It is not certain that a secondary market for positions in futures contracts
will exist at all times. Although the Adviser will consider liquidity before
entering into transactions, there is no assurance that a liquid secondary market
will exist for any particular futures contract at any point in time. The Fund's
ability to establish and close out futures positions depends on this secondary
market.
The Fund may not purchase or sell futures contracts 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.
RESTRICTED AND ILLIQUID SECURITIES
The Fund may invest in restricted securities. Restricted securities are any
securities in which the Fund may otherwise invest pursuant to its investment
objective and policies, but which are subject to restriction on resale under
federal securities law. Such restrictions often impact the marketability of the
investment. However, the Fund will limit investments in illiquid securities,
including certain restricted securities not determined by the Trustees to be
liquid, non-negotiable time deposits, over-the-counter options and repurchase
agreements providing for settlement in more than seven days after notice, to 15%
of its net assets.
The 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 Fund believes that Section 4(2) commercial paper
and possibly certain other restricted securities which meet the criteria for
liquidity established by the Trustees are quite liquid. The Fund intends,
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 the 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 Fund intends to not subject such paper to the
limitation applicable to restricted securities.
REPURCHASE AGREEMENTS
Certain securities in which the Fund invests may be purchased pursuant to
repurchase agreements. Repurchase agreements are arrangements in which banks,
broker/dealers, and other recognized financial institutions sell securities to
the Fund and agree at the time of sale to repurchase them at a mutually agreed
upon time and price. To the extent that the seller does not repurchase the
securities from the Fund, the 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 Fund may lend its portfolio
securities on a short-term or long-term basis, or both, to broker/dealers,
banks, or other institutional borrowers of securities. The Fund will limit the
amount of portfolio securities it may lend to not more than one-third of its
total assets. The Fund will only enter into loan arrangements with
broker/dealers, banks, or other institutions which the Adviser has determined
are creditworthy under guidelines established by the Trustees and will receive
collateral equal to at least 100% of the value of the securities loaned.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
The Fund may purchase portfolio securities on a when-issued or delayed delivery
basis. These transactions are arrangements in which the Fund purchases
securities with payment and delivery scheduled for a future time. The Fund
engages in when-issued and delayed delivery transactions only for the purpose of
acquiring portfolio securities consistent with the Fund's investment objective
and policies, not for investment leverage. In when-issued and delayed delivery
transactions, the Fund relies on the seller to complete the transaction. The
seller's failure to complete the transaction may cause the Fund to miss a price
or yield considered to be advantageous.
TEMPORARY INVESTMENTS
For defensive purposes only, the Fund may also invest in cash and cash items
during times of unusual market conditions and to maintain liquidity. Cash items
may include short-term obligations such as:
commercial paper rated A-1 by Standard & Poor's Corporation ("S&P"), Prime-1
by Moody's Investors Service, Inc. ("Moody's") or F-1 by Fitch Investors
Service, Inc. ("Fitch");
obligations of the U.S. government or its agencies or instrumentalities; and
repurchase agreements.
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
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 Adviser does not anticipate that the Fund's annual portfolio
turnover rate will generally exceed 150% under normal market conditions. A high
portfolio turnover rate may lead to increased costs and may also result in
higher taxes paid by the Fund's shareholders.
RATINGS
The Fund will limit its investment in debt securities to those which are rated
by one or more nationally recognized statistical rating organizations ("NRSROs")
in one of the three highest rating categories at the time of purchase (e.g.,
AAA, AA or A by S&P or Fitch, or Aaa, Aa or A by Moody's). The Fund may purchase
commercial paper rated by one or more NRSROs in their highest category at the
time of purchase (e.g., A-1 by S&P, Prime-1 by Moody's, or F-1 by Fitch).
Downgrades will be evaluated on a case by case basis by the Adviser. The Adviser
will determine whether or not the security continues to be an acceptable
investment. If not, the security will be sold. The Fund may also invest in
unrated debt securities that are determined by the Adviser to be of comparable
quality to securities having such ratings.
Investment Limitations
The Fund will not:
borrow money directly or through reverse repurchase agreements (arrangements
in which the 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, the Fund may borrow 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; and
with respect to 75% of the value of total assets, the Fund will not invest
more than 5% in securities of any one issuer or acquire more than 10% of the
outstanding voting securities of 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 U.S. government securities.
The above investment limitations cannot be changed without shareholder approval.
In addition, the Fund will not invest more than 15% of the value of its net
assets in illiquid securities, including repurchase agreements providing for
settlement in more than seven days after notice, over-the-counter options and
certain restricted securities not determined by the Trustees to be liquid. This
investment limitation may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material change in this
limitation becomes effective.
BAYFUNDS INFORMATION
Management of BayFunds
BOARD OF TRUSTEES
A Board of Trustees supervises BayFunds.
BayFunds is managed by a Board of Trustees.
The Trustees are responsible for managing BayFunds' business affairs and for
exercising all BayFunds' powers except those reserved for the shareholders.
INVESTMENT ADVISER
Acting under the direction of the Trustees, the Adviser makes investment
decisions for the Fund.
Pursuant to an investment advisory contract with BayFunds, investment decisions
for the Fund are made by BayBanks Investment Management, Inc., the Fund's
investment adviser ("the Adviser"), subject to direction by the Trustees. The
Adviser continually conducts investment research and supervision for the Fund
and is responsible for the purchase and sale of portfolio instruments, for which
it receives an annual fee from the Fund.
Advisory Fees
The Adviser receives an annual investment advisory fee equal to .70 of 1% of
the Fund's average daily net assets. The Adviser has undertaken to reimburse
the Fund, up to the amount of the advisory fee, for operating expenses in
excess of limitations established by certain states. The Adviser may also
voluntarily choose to waive a portion of its fee or reimburse the Fund for
certain other expenses, but reserves the right to terminate such waiver or
reimbursement at any time at its sole discretion.
Adviser's Background
The Adviser has extensive investment experience and is a subsidiary of a
leading New England financial services organization.
The Adviser is a wholly-owned subsidiary of BayBanks, Inc., a bank holding
company organized under the laws of the Commonwealth of Massachusetts. BayBanks,
Inc., through its banking subsidiaries (hereinafter "BayBanks") and affiliates,
offers a full range of financial services to the public, including depository
services, commercial lending, cash management, brokerage, retail banking,
mortgage banking, and investment advisory and trust services. As part of their
regular banking operations, BayBanks may make loans to public companies. Thus,
it may be possible, from time to time, for the Fund to hold or acquire the
securities of issuers which are also lending clients of BayBanks. The lending
relationship will not be a factor in the selection of securities.
The Adviser is a registered investment adviser and provides investment advisory
services for trust and other managed assets. The Adviser was established as a
separate subsidiary of BayBanks, Inc. in 1985, but its predecessor division and
personnel have been providing investment advisory services to BayBanks'
customers for more than 65 years. As of December 31, 1993, the Trust Division of
BayBank, a state-chartered affiliate of the Adviser, acted as custodian for
assets totaling $4.7 billion. Of this amount, the Adviser managed $2.7 billion
of discretionary assets. The Adviser and BayBanks have been managing commingled
funds for over twenty years. At the present time, the Adviser serves as adviser
to five such commingled funds with total assets of approximately $290 million.
The Adviser has managed mutual funds since August 1991 and manages approximately
$562 million (as of December 31, 1993) in various BayFunds portfolios.
BayBank Boston, N.A., an affiliate of the Adviser, through its Capital Markets
Division, manages more than $2 billion of assets in the investment portfolios of
BayBanks, Inc. and BayBanks and approximately $537 million (as of December 31,
1993) in the BayFunds U.S. Treasury Money Market Portfolio. BayBank Boston, N.A.
is a national banking association.
Geraldine D. Carroll, C.F.A., has served as the Fund's portfolio manager since
January 1993 and, as such, has primary responsibility for the day to day
management of the Fund's portfolio. Ms. Carroll has been associated with the
Adviser for the past six years and is currently a Vice President and
Institutional Portfolio Manager. During this time period, she has had
responsibility for over $350 million of equity and bond assets.
Distribution of Fund Shares
Federated Securities Corp. is the principal distributor for Shares of the
Fund.
Federated Securities Corp. is the principal distributor (the "Distributor") for
Shares of the Fund. 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.
Administration of the Fund
Various organizations provide services to the Fund.
ADMINISTRATIVE SERVICES
Federated Administrative Services, a subsidiary of Federated Investors, provides
the Fund with certain administrative personnel and services necessary to operate
the Fund, such as legal and accounting services. Federated Administrative
Services provides these at an annual rate as specified below:
<TABLE>
<CAPTION>
Average Aggregate
Maximum Daily Net Assets
Administrative Fee of BayFunds
<C> <S>
.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
for the Fund. Federated Administrative Services may choose voluntarily to
reimburse a portion of its fee at any time.
CUSTODIAN
The Fifth Third Bank, Cincinnati, Ohio, is custodian for the securities and cash
of the Fund.
TRANSFER AGENT, DIVIDEND
DISBURSING AGENT AND
PORTFOLIO ACCOUNTING SERVICES
Supervised Service Company, Inc. (the "Transfer Agent"), Kansas City, Missouri,
is transfer agent for the Shares of the Fund and dividend disbursing agent for
the Fund. Federated Services Company, Pittsburgh, Pennsylvania, a subsidiary of
Federated Investors, provides portfolio accounting services for the Fund.
SHAREHOLDER SERVICING ARRANGEMENTS
BayBank Systems, Inc., Waltham, Massachusetts, is the Fund's shareholder
servicing agent (the "Shareholder Servicing Agent"). The Fund may pay the
Shareholder Servicing Agent a fee based on the average daily net asset value of
Shares for which it provides shareholder services. These shareholder services
include, but are not limited to, distributing prospectuses and other
information, providing shareholder assistance and communicating or facilitating
purchases and redemptions of Shares. This fee will be equal to .25 of 1% of the
Fund's average daily net assets for which the Shareholder Servicing Agent
provides services; however, the Shareholder Servicing Agent may choose
voluntarily to waive all or a portion of its fee at any time.
LEGAL COUNSEL
Legal counsel is provided by Ropes & Gray, Washington, D.C., Counsel to
BayFunds, and Sullivan & Worcester, Washington, D.C., Counsel to the Independent
Trustees.
INDEPENDENT AUDITORS
The independent auditors for the Fund are Ernst & Young, Pittsburgh,
Pennsylvania.
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. The Adviser makes
decisions on portfolio transactions and selects brokers and dealers subject to
review by the Trustees.
Expenses of the Fund and Shares
The Fund pays all of its own expenses and its allocable share of BayFunds'
expenses. The expenses borne by the Fund include the following types of
expenses: organization fees; Trustees fees; fees for those management and
administration services described above (including legal,
audit and custodian fees); and printing, registration and mailing costs for
legally required documents and reports to shareholders and government agencies.
The Adviser may voluntarily waive some expenses and has, in addition, undertaken
to reimburse the Fund, up to the amount of the advisory fee, the amount by which
operating expenses exceed limitations imposed by certain states.
At present, the only expenses allocated to shares as a class are expenses under
the Fund's Shareholder Servicing Plan which relate to the Shares. However, the
Trustees reserve the right to allocate certain other expenses to holders of
Shares as it deems appropriate ("Class Expenses").
NET ASSET VALUE
The term "net asset value" per share refers to the value of one Fund
Share.
The Fund's net asset value per share fluctuates. Net asset value per share for
purposes of pricing purchases and redemptions is calculated by dividing the
market value of all securities and other assets belonging to the Fund, less
liabilities charged to the Fund, by the number of outstanding shares of the
Fund. The net asset value for Institutional Shares may be greater than that of
Investment Shares due to the variance in daily net income realized by each class
as a result of shareholder servicing fees incurred by the Investment Shares.
Such variance will reflect only accrued net income to which the shareholders of
a particular class are entitled.
Pricing of Shares
The net asset value is determined at the close of regular trading hours on the
New York Stock Exchange, currently 4:00 p.m. (Eastern time), Monday through
Friday, except on: (i) the following holidays: New Year's Day, Presidents' Day,
Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and
Christmas Day; (ii) days on which there are not sufficient changes in the value
of the Fund's portfolio securities that its net asset value might be materially
affected; and (iii) days during which no Shares are tendered for redemption and
no orders to purchase Shares are received.
INVESTING IN SHARES
Shares are sold "no-load"--without a sales charge. Your minimum initial
investment is only $2,500, or $500 if you participate in the Automatic
Investment Program or invest through an IRA.
Minimum Investment
You can become a shareholder with an initial investment of $2,500, or $500 if
you participate in the Automatic Investment Program or invest through an IRA.
Subsequent investments must be in amounts of at least $100, or if you
participate in the Automatic Investment Program or invest through an IRA, the
minimum for additional Share purchases is $50. The Fund may waive any investment
minimums from time to time. In addition, the Fund may reduce or waive investment
minimums for investors purchasing through qualified BayBanks accounts.
When You May Purchase Shares
The Fund offers Shares only on days on which the New York Stock Exchange and the
Federal Reserve Bank of Boston are open for business ("Business Days"). In
addition to the holidays listed above under "Pricing of Shares," other non-
Business Days include Martin Luther King's Day, Columbus Day and Veterans' Day.
If the Shareholder Servicing Agent receives your purchase order on a
non-Business Day, the order will not be executed until the next Business Day in
accordance with the Distributor's procedures. The Fund and the Distributor
reserve the right to reject any purchase request.
When Your Purchase Is Effective
If your purchase order is received in good order and accepted by the Fund from
the Transfer Agent by 4:00 p.m. (Eastern time) on a Business Day, it will be
executed at the net asset value next determined. The Transfer Agent will not
communicate your purchase order to the Fund until the Shareholder Servicing
Agent has received the purchase price in Federal funds or other immediately
available funds. When you purchase Shares by check, the order is considered
received when the check is converted into Federal funds, normally within two
Business Days. BayBanks acts as the shareholder's agent in depositing checks and
converting them to Federal funds.
You must submit a completed and signed application at the time of your initial
purchase. The Shareholder Servicing Agent is responsible for prompt transmission
of purchase orders to the Transfer Agent.
Subsequent purchases may be made by telephone, mail, wire, or in person
through BayBanks offices.
Purchases By Mail
If you make your initial Share purchase by mail, you must send a completed and
signed application, and a check payable to the Fund and class to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
You may obtain an application by calling
1-800-BAY-FUND.
You may make subsequent investments in the Fund at any time by sending a check
for a minimum of $100 ($50 if for an IRA) payable to the Fund and class at the
following address:
BayFunds
P.O. Box 5-0900
Woburn, MA 01815-0900
or for IRAs:
BayFunds
Burlington, MA 01803-5889
P.O. Box 889
You must include either (a) the detachable form that regularly accompanies
confirmation of a prior transaction, (b) a subsequent order form that may be
obtained by calling 1-800-BAY-FUND, or (c) a letter stating the amount of the
investment, the name of the Fund and class of shares, the exact name and address
of the account, and your account number.
If the check does not clear, your purchase order will be cancelled and you could
be held liable for associated transaction costs.
Purchases By Phone
Once you are a shareholder, you may purchase Shares by calling 1-800-BAY-FUND.
You must have previously authorized the Fund in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the Options
Change Form and information on this Fund feature. Each Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, a Fund is not responsible for the
authenticity of telephone instructions or for the losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
The establishment of certain types of deposit account relationships with
BayBanks may permit the direct deduction of your purchase price from your
BayBanks deposit account. Please call 1-800-BAY-FUND to determine whether your
BayBanks deposit account qualifies.
For the protection of investors, all phone communications may be recorded where
not otherwise prohibited by law.
Texas residents must purchase Shares through the Distributor at 1-800-356-2805.
Purchases By Wire
If you are a shareholder, you may purchase additional Shares by wire by first
notifying BayBanks, as agent for the Transfer Agent, by phone at 1-800-BAY-FUND,
then wiring the funds as follows:
BayBank
ABA Number: 0110-0174-2
Attention: Mutual Funds Services
For Credit to: (shareholder name and account number)
Further Credit to: BayFunds Equity Portfolio--Investment Shares
Purchases Through BayBanks Offices
You may place an order to purchase Shares in person through designated BayBanks
offices.
Purchase orders placed through BayBanks offices typically would be received by
the Transfer Agent within two Business Days. If you want more prompt processing,
you should consider another method, such as "Purchases by Phone."
Automatic Investment Program
You can buy Shares conveniently through the Automatic Investment Program.
When you participate in the Automatic Investment Program, you can purchase
additional Shares in minimum amounts of $50. You must previously have
authorized in writing the amount of funds to be deducted automatically from
eligible BayBanks deposit accounts or your deposit account maintained at a
domestic financial institution which is an automated clearing house member, and
the frequency of the deductions. The funds will be invested in Shares at the
net asset value next determined. The Fund may reduce or waive the investment
minimums for investors purchasing through qualified BayBanks accounts.
EXCHANGE PRIVILEGES
If your investment needs change, you can easily exchange Fund Shares for
Investment Shares of any other BayFunds' portfolio at no charge.
BayFunds consists of the Fund, the BayFunds Money Market Portfolio, the BayFunds
U.S. Treasury Money Market Portfolio, the BayFunds Short Term Yield Portfolio,
and the BayFunds Bond Portfolio. As a shareholder, you have access to the
Investment Shares of all other portfolios ("Participating Funds") of BayFunds
through an exchange program. You may also purchase BayFunds Shares of
Massachusetts Municipal Cash Trust with redemption proceeds of a BayFunds
portfolio by calling 1-800-BAY-FUND.
You may exchange Shares having a net asset value of at least $100 for Investment
Shares of any other Participating Fund in which you have an account. The minimum
initial investment to establish an account in any other Participating Fund by
exchange is $2,500, or $500 if you participate in the Automatic Investment
Program or invest through an IRA. BayFunds does not charge any exchange fees.
Each exchange is considered a sale of shares of one fund and a purchase of
shares of another fund. Shares submitted for exchange will be redeemed at the
net asset value next determined after receipt of the exchange request by the
Transfer Agent on a Business Day. Investment Shares of the Participating Fund
to be acquired will be purchased at the net asset value per share next
determined on a Business Day. Transfers of money between a BayFunds portfolio
and BayFunds Shares of Massachusetts Municipal Cash Trust will be reflected as
a redemption and purchase on a shareholder's account statement. In a transfer
involving the BayFunds Shares of Massachusetts Municipal Cash Trust, the
purchase order will be placed on the Business Day following the Business Day
after which the redemption order has been executed.
If you do not have an account in the Participating Fund whose Investment Shares
you want to acquire, you must establish an account. Prior to any such exchange,
you must receive a copy of the current prospectus of the Investment Shares of
the Participating Fund into which an exchange is to be effected. This account
will be registered in the same name and, unless you specify otherwise, will have
the same dividend and distribution payment option as you selected with your
existing account. If the new account registration (name, address, and taxpayer
identification number) is not identical to your existing account, please call
1-800-BAY-FUND for the necessary new account or transfer procedures.
The exchange privilege is available to shareholders in any state in which
Participating Funds' shares being acquired may be sold.
You may find the exchange privilege useful if your investment objectives or
market outlook should change after you invest in any of the Investment Shares of
the Participating Funds. You may obtain further information on the exchange
privilege and obtain a prospectus by calling
1-800-BAY-FUND.
BayFunds reserves the right to terminate the exchange privilege at any time on
60 days' notice. Shareholders will be notified if this privilege is terminated.
Depending on the circumstances, an exchange may generate a short-or long-term
capital gain or loss for Federal income tax purposes.
Exchanges By Telephone
You may provide instructions for exchanges by telephone between Participating
Funds by calling 1-800-BAY-FUND.
You must have previously authorized the Fund in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the necessary
Options Change Form and information on this feature. The Fund uses reasonable
procedures (including a shareholder identity test and sending a written
confirmation of each telephone transaction) to confirm that instructions given
by telephone are genuine. However, the Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Written Exchanges
You may send a written request for an exchange to:
BayFunds
P.O. Box 665
Waltham, MA 02254-9614
Your written request must include your name and tax identification number; the
name of the Fund; the name of the class of Shares; the dollar amount or number
of Shares to be redeemed; the name of the fund and class of shares in which
shares are to be purchased; and your account number. Your request must be signed
by the registered owner(s) exactly as required by the account application.
Exchanges Through BayBanks Offices
You may place an order to exchange Shares in person through designated BayBanks
offices.
Exchange orders received through designated BayBanks offices typically would be
received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Exchanges By
Telephone."
REDEEMING SHARES
When you sell your Shares--"redeem" them--you receive the net asset value
per share next determined after the request is received by the Fund in
proper form. There are no fees or other redemption charges (except for
redemptions by wire). You may redeem some or all of your investment.
When You May Redeem Shares
The Fund redeems Shares at the net asset value next determined after the Fund
has received your redemption request from the Transfer Agent in proper form.
Redemption requests can be executed only on Business Days. If your redemption
request is received by the Shareholder Servicing Agent on a non-Business Day,
the Transfer Agent will not communicate your redemption request to the Fund
until the next Business Day.
The Fund will not process any redemptions until a completed and signed
application has been received.
When Redemptions Are Paid
The Fund ordinarily will make payment for Shares redeemed after proper receipt
from the Transfer Agent of the redemption request and of all documents in proper
form within five Business Days. Redemption proceeds may be credited to an
eligible BayBanks deposit account, paid by check, or paid by wire, as you
previously designated in your application.
Signature Guarantees. If you request a redemption for an amount in excess of
$10,000 (no limitation if the proceeds are being credited to your BayBanks
deposit account), a redemption of any amount to be sent to an address other than
your address of record with the Fund, the transfer of the registration of
Shares, or a redemption of any amount payable to someone other than yourself as
the shareholder of record, your signature must be guaranteed on a written
redemption request by a trust company or insured commercial bank; an insured
savings and loan association or savings bank; a member firm of a national or
regional stock exchange; or any other "eligible guarantor institution," as
defined in the Securities Exchange Act of 1934. The Transfer Agent has adopted
standards for accepting signature guarantees from the above institutions. The
Fund may elect in the future to limit eligible signature guarantors to
institutions that are members of a signature guarantee program. The Fund does
not accept signatures guaranteed by a notary public. The Fund and the Transfer
Agent reserve the right to amend these standards at any time without notice. If
you have a question about the proper form for redemption requests, call
1-800-BAY-FUND.
You may redeem Shares by telephone, mail, or through BayBanks offices. You
may receive redemption proceeds by wire.
Redemptions By Mail
You may redeem Shares by submitting a written request for redemption to:
BayFunds
P.O. Box 665
Waltham, MA 02554-9614
Your written request must include your name and tax identification number, the
Fund's name, the name of the class of Shares, the dollar amount or number of
Shares to be redeemed, and your account number. Your request must be signed by
the registered owner(s) exactly as required by the account application.
Redemptions By Phone
You may redeem Shares by calling 1-800-BAY-FUND.
You must have previously authorized the Fund in writing to accept telephone
requests. If you have not done so, call 1-800-BAY-FUND to receive the necessary
Options Change Form.
In the event of drastic economic or market changes, you may experience
difficulty in redeeming by telephone. If this occurs, you should consider
another method of redemption, such as "Redemptions by Mail." The Fund uses
reasonable procedures (including a shareholder identity test and sending a
written confirmation of each telephone transaction) to confirm that instructions
given by telephone are genuine. However, the Fund is not responsible for the
authenticity of telephone instructions or for any losses caused by fraudulent or
unauthorized telephone instructions if the Fund reasonably believed that the
instructions were genuine.
Redemption Proceeds By Wire
You may receive redemption proceeds of Fund Shares by wire by calling
1-800-BAY-FUND. Redemption proceeds of at least $1,000 will be wired directly to
the domestic commercial bank and account you previously designated in writing.
You are charged a fee for each wire redemption and the fee is deducted from your
redemption proceeds.
The Fund reserves the right to wire redemption proceeds within five Business
Days after receiving the redemption order if, in its judgment, an earlier
payment could adversely affect the Fund. However, the redemption order will be
effected at the net asset value next determined after the redemption request is
received by the Fund from the Transfer Agent in proper form. The Fund also
reserves the right to terminate or modify the "Redemption Proceeds By Wire" or
"Redemptions By Phone" procedures at any time. In that event, shareholders would
be promptly notified.
Redemptions Through BayBanks
Offices
You may place an order to redeem Shares in person through designated BayBanks
offices.
Redemption orders received through designated BayBanks offices typically would
be received by the Transfer Agent within two Business Days. For more prompt
processing, you should consider another method, such as "Redemptions By Phone."
BACKUP WITHHOLDING
The Internal Revenue Service requires that backup withholding of 31% apply to
any redemption or exchange request on an account that has not certified its
taxpayer identification number ("TIN"). Shareholders who either have not
certified its number or applied for a number should be aware that backup
withholding will apply to any redemption request processed prior to receipt of a
TIN number and certification.
Redemption Before Purchase
Instruments Clear
If any portion of a Fund's Shares to be redeemed represents an investment made
with uncollected funds, the Fund reserves the right to delay payment of proceeds
until the Shareholder Servicing Agent is reasonably certain that the funds have
been collected, which could take up to five Business Days.
Automatic Withdrawal Program
An Automatic Withdrawal Program may be established for IRA accounts only
whereby automatic redemptions are made from the account and transferred
electronically to an eligible BayBanks deposit account or your deposit account
maintained at a domestic financial institution that is an automated clearing
house member. The minimum redemption amount is $100 per month. Depending upon
the amount of the withdrawal payments and the amount of dividends paid with
respect to Shares, redemptions may reduce, and eventually deplete, the
shareholder's investment in the Fund. For this reason, payments under this
program should not be considered as yield or income on the shareholder's
investment in the Fund. A shareholder may apply for participation in this
program by calling 1-800-BAY-FUND for further information. If a shareholder
withdraws any funds from the IRA account before reaching age 59-1/2 (except
certain withdrawals of excess contributions and regular payments made over the
shareholder's life expectancy), the shareholder will be subject to an IRS
penalty tax of 10% of the taxable amount withdrawn in addition to regular
income taxes on the taxable amount.
SHAREHOLDER INFORMATION
Balances in Accounts
Due to the high cost of maintaining accounts with low balances, the Fund may
redeem your Shares (other than in retirement plan accounts or IRAs) and send you
the proceeds if, due to shareholder redemptions, your account balance falls
below a minimum value of $1,000. However, before Shares are redeemed to close an
account, the shareholder will be notified in writing and given 60 days to
purchase additional Shares to meet the minimum balance requirement. The Fund
reserves the right to amend this standard upon 60 days' prior written notice to
shareholders. The Fund also reserves the right to redeem Shares involuntarily or
to make payment for redemptions in the form of securities if it appears
appropriate to do so in light of the Fund's responsibilities under the
Investment Company Act of 1940.
Dividends and Distributions
If you are a shareholder of record, you receive dividends quarterly, and
capital gains are paid out in "distributions" at least annually. You select
the payment option: automatic reinvestment in additional Shares, automatic
credit to eligible BayBanks deposit accounts, or by check.
Dividends from the Fund's net investment income are declared and paid quarterly
within five Business Days after the end of such calendar quarter to all
shareholders invested in the Fund on the record date. Net realized capital gains
are distributed at least annually.
You elect in writing how you want to receive your dividends and your
distributions. You may choose automatic reinvestment in additional Shares at
the net asset value next determined on the payment dates, automatic credit to
an eligible BayBanks deposit account, or by check. If you fail to select an
option, all distributions will be reinvested in additional Shares.
Confirmations and Statements
You will receive confirmations of each purchase, exchange or redemption.
Statements are periodically sent, but no less often than quarterly, to report
transactions such as purchases and redemptions, as well as dividends paid.
BayBank IRA customers will receive quarterly statements for their accounts.
The Fund's Transfer Agent maintains a Share account for each shareholder of
record. Share certificates are not issued.
Corporate Customers
Corporate customers of BayBanks interested in purchasing Shares should consult
their account relationship managers for procedures applicable to their accounts
or call 1-800-554-3311. This prospectus should be read in conjunction with any
materials provided by BayBanks regarding such procedures.
Retirement Plans
BayBanks makes available for purchase Shares for investment by IRAs and rollover
IRAs. For details, including minimum investments, application forms and other
investment procedures, call 1-800-BAY-FUND. For information about Simplified
Employee Pension Plans and retirement plan vehicles established by employers for
their employees which are qualified under Section 401(k) and 403(b) of the
Internal Revenue Code, call BayBank at 1-800-462-9999, extension 4589, or write
to BayBank, Corporate Trust--New Business Department, 7 New England Executive
Park, Burlington, MA 01803.
Voting Rights
As a shareholder, you are entitled to vote on certain matters.
Each share of the Fund gives the shareholder one vote in Trustee elections and
other matters submitted to shareholders for vote. All shares of each portfolio
in BayFunds have equal voting rights except that, in matters affecting only a
particular fund or class, only shares of that particular fund or class are
entitled to vote.
As a Massachusetts business trust, BayFunds is not required to hold annual
shareholder meetings. Shareholder approval will be sought only for certain
changes in BayFunds' or the Fund's operation and for the election of Trustees
under certain circumstances. Trustees may be removed by a two-thirds vote of the
number of Trustees prior to such removal or by a two-thirds vote of the
shareholders at a special meeting. A special meeting of shareholders shall be
called by the Trustees upon the written request of shareholders owning at least
10% of BayFunds' outstanding shares of all portfolios entitled to vote.
AUTHORITY TO ACT AS
INVESTMENT ADVISER
The Glass-Steagall Act and other banking laws and regulations presently prohibit
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof, from sponsoring, organizing or controlling a
registered, open-end investment company continuously engaged in the issuance of
its shares, and from issuing, underwriting, selling or distributing securities
in general. Such laws and regulations do not prohibit such a holding company or
affiliate 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 their customer. The Fund's investment adviser, BayBanks
Investment Management, Inc., is subject to such banking laws and regulations.
The Adviser believes that it may perform the investment advisory services for
the Fund contemplated by its advisory agreement with BayFunds without violating
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 present or future
statutes and regulations, could prevent the Adviser from continuing to perform
all or a part of the above services for its customers and/or the Fund. In such
event, changes in the operation of the Fund may occur, including the possible
alteration or termination of any automatic or other Fund share investment and
redemption services then being provided, and the Trustees would consider
alternative investment advisers and other means of continuing available
investment services. It is not expected that Fund shareholders would suffer any
adverse financial consequences (if another adviser with equivalent abilities to
BayBanks Investment 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 laws.
TAX INFORMATION
This discussion of taxes is for general information only. Please consult
your own tax adviser about your particular situation.
Federal Income Tax
The Fund intends to meet requirements of the Internal Revenue Code applicable to
regulated investment companies in order not to be liable for any Federal income
taxes on income and gains distributed to Fund shareholders. The Fund will
distribute substantially all of its net investment income and net realized gains
at least annually.
The Fund will be treated as a single, separate entity for Federal income tax
purposes.
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. The dividends
received deduction for corporations will apply to ordinary income distributions
to the extent the distribution represents amounts that would qualify for the
dividends received deduction to the Fund if the Fund were a regular corporation,
and to the extent designated by the Fund as so qualifying. These dividends and
any short-term capital gains are taxable as ordinary income. Distributions of
net long-term capital gains will be taxed as such regardless of how long the
Shares have been held.
Early each year, the Fund will notify each shareholder of the amount and tax
status of distributions paid to the shareholder for the preceding year.
Shareholders are urged to consult their own tax advisers regarding the status of
their accounts under state and local laws.
PERFORMANCE INFORMATION
You can follow the Fund's performance.
From time to time, in advertisements or in reports to shareholders, the
performance and yield of the Fund may be quoted and compared to those of other
mutual funds with similar investment objectives and to relevant equity indices
or to rankings prepared by independent services or other financial or industry
publications that monitor the performance of mutual funds. For example, the
performance of the Fund may be compared to data prepared by Lipper Analytical
Services, Inc., a widely recognized independent service which monitors the
performance of mutual funds.
National financial publications in which performance and yield data are reported
may include The Wall Street Journal, The New York Times, Forbes, or Money
magazine. Publications of a local or regional nature, such as The Boston Globe
or The Boston Herald, may also be used in comparing the performance and yield of
the Fund.
Total return represents the change, over a specified period of time, in the
value of an investment in Investment Shares 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 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 net asset value per share of Shares 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.
Yield and total return will be calculated separately for both classes of shares
of the Fund. Because Investment Shares are subject to shareholder servicing
fees, yield and total return of Institutional Shares for the same period will
exceed that of Investment Shares.
Shares of the Fund are sold without any sales load or other similar
non-recurring charges.
Distribution Rate
The Fund may quote non-standardized yield in the form of a distribution rate. In
such case, the Fund calculates its annualized current net yield daily as of the
date preceding the calculation. The calculation is made by:
_ dividing the most recent quarterly dividend times four (including any
short-term capital gains) by
_ the offering price per share for that day.
OTHER CLASSES OF SHARES
Institutional Shares are offered primarily to trusts, fiduciaries and other
institutions. Institutional Shares are subject to a minimum initial investment
of $10,000. Institutional Shares are sold at net asset value and are distributed
without shareholder servicing fees. Institutional Shares were effective as of
January 1, 1994.
The amount of dividends payable to Institutional Shares will be greater than
those payable to Investment Shares by the difference between Class Expenses and
shareholder servicing fees borne by shares of each respective class. (Currently,
there are no differences in Class Expenses other than shareholder servicing
fees.)
The stated advisory fee is the same for both
classes of shares of the Fund.
ADDRESSES
BayFunds Equity Portfolio
Investment Shares
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
DISTRIBUTOR
Federated Securities Corp.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
INVESTMENT ADVISER
BayBanks Investment Management, Inc.
1414 Massachusetts Avenue
Cambridge, Massachusetts 02138
CUSTODIAN
The Fifth Third Bank
38 Fountain Square Plaza
Cincinnati, Ohio 45202
TRANSFER AGENT AND DIVIDEND
DISBURSING AGENT
Supervised Service Company, Inc.
811 Main Street
Kansas City, Missouri 64105
SHAREHOLDER SERVICING AGENT
BayBank Systems, Inc.
One BayBank Technology Place
Waltham, Massachusetts 02154
PORTFOLIO ACCOUNTING SERVICES
Federated Services Company
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
COUNSEL TO BAYFUNDS
Ropes & Gray
1001 Pennsylvania Avenue, N.W.
Washington, D.C. 20004
COUNSEL TO THE INDEPENDENT TRUSTEES
Sullivan & Worcester
1025 Connecticut Avenue, N.W.
Washington, D.C. 20036
INDEPENDENT AUDITORS
Ernst & Young
One Oxford Centre
Pittsburgh, Pennsylvania 15219
EQUITY
PORTFOLIO
PROSPECTUS
Investment
Shares
BayBanks Investment Management, Inc.
- -----------------------------------------------------------
Investment Adviser
Federated Securities Corp.
- -----------------------------------------------------------
Distributor
Mutual
April 22, 1994 YTM625 Funds At
Printed on Recycled Paper 2092911A-R(4/94) Bay Bank
BayFunds Bond Portfolio
BayFunds Equity Portfolio
BayFunds Short Term Yield Portfolio
(Institutional and Investment Shares)
(Portfolios of BayFunds)
Combined Statement of Additional Information
This combined Statement of Additional Information should be read with
the prospectuses for the classes of shares of BayFunds Bond Portfolio
("Bond Fund"), BayFunds Equity Portfolio ("Equity Fund") and BayFunds
Short Term Yield Portfolio ("Short Term Yield Fund") (individually
referred to as a "Fund" or collectively as the "Funds"), each dated
April 22, 1994. This combined Statement is not a prospectus. To
receive a copy of a Fund's prospectus, write to the Fund or call
toll-free 1-800-BAY-FUND (1-800-229-3863) for Investment Shares or
1-800-462-9999 ext. 4589 during normal business hours for
Institutional Shares.
Federated Investors Tower
Pittsburgh, Pennsylvania 15222-3779
Statement dated April 22, 1994
FEDERATED SECURITIES CORP.
---------------------------------------------------------
Distributor
A subsidiary of FEDERATED INVESTORS
Table of Contents
- --------------------------------------------------------------------------------
General Information About the Funds 1
- ---------------------------------------------------------------
Investment Objective and Policies of the Funds 1
- ---------------------------------------------------------------
Types of Investments 1
- ---------------------------------------------------------------
Convertible Securities 1
Warrants 1
Stock Index Futures Contracts 2
Margin in Futures Transactions 2
Credit Facilities 2
Credit Enhancement 2
Demand Features 2
Weighted Average Portfolio Maturity 3
Duration 3
Collateralized Mortgage Obligations ("CMOs") 3
Real Estate Mortgage Investment Conduits
("REMICs") 3
Resets of Interest 4
Mortgage-Backed and Asset-Backed Securities
Risks 4
Bank Instruments 5
Obligations of Foreign Issuers 5
Repurchase Agreements 5
Reverse Repurchase Agreements 5
When-Issued and Delayed Delivery Transactions 5
Lending of Portfolio Securities 6
Portfolio Turnover 6
Investment Limitations 6
BayFunds Management 8
- ---------------------------------------------------------------
Trustees and Officers 8
Fund Ownership 9
Trustee Liability 9
Investment Advisory Services 9
- ---------------------------------------------------------------
Adviser to the Funds 9
Advisory Fees 10
Brokerage Transactions 10
- ---------------------------------------------------------------
Shareholder Servicing Arrangements 11
- ---------------------------------------------------------------
Administrative Services 11
- ---------------------------------------------------------------
Purchasing Shares 11
- ---------------------------------------------------------------
Exchanging Securities for Fund Shares 11
- ---------------------------------------------------------------
Determining Net Asset Value 12
- ---------------------------------------------------------------
Determining Market Value of Securities 12
Exchange Privileges 12
- ---------------------------------------------------------------
Requirements for Exchange 12
Making an Exchange 12
Redeeming Shares 12
- ---------------------------------------------------------------
Redemption in Kind 12
Monthly Statements 13
Companion Account Availability 13
Massachusetts Law 13
- ---------------------------------------------------------------
Tax Status 13
- ---------------------------------------------------------------
The Funds' Tax Status 13
Total Return 13
- ---------------------------------------------------------------
Yield 13
- ---------------------------------------------------------------
Performance Comparisons 14
- ---------------------------------------------------------------
Financial Statements 15
- ---------------------------------------------------------------
Appendix 16
- ---------------------------------------------------------------
General Information About the Funds
- --------------------------------------------------------------------------------
The Funds are portfolios in BayFunds, which was established as a Massachusetts
business trust under a Declaration of Trust dated April 1, 1991.
The portfolios in BayFunds are: BayFunds Bond Portfolio; BayFunds Equity
Portfolio; BayFunds Short Term Yield Portfolio; BayFunds Money Market Portfolio;
and BayFunds U.S. Treasury Money Market Portfolio. This combined Statement of
Additional Information relates only to the Bond Fund, Equity Fund and Short Term
Yield Fund.
The Funds are offered in two classes of shares, Institutional and Investment
Shares. Collectively, the classes will be referred to as "Shares."
Investment Objectives and Policies of the Funds
- --------------------------------------------------------------------------------
The prospectus for each Fund discusses the Fund's investment objective and the
policies each Fund employs to achieve that objective. The following discussion
supplements the description of each Fund's investment policies in the Fund's
prospectus. The Funds' investment objectives cannot be changed without approval
of shareholders. Unless indicated otherwise, the investment policies described
in the prospectus of each Fund may be changed by the Board of Trustees
("Trustees") without the approval of each Fund's shareholders. Shareholders will
be notified before any material changes in these policies become effective.
Types of Investments
- --------------------------------------------------------------------------------
The following policies apply to the Equity Fund only.
The Equity Fund's investments include, but are not limited to: common stocks,
preferred stocks, warrants, investments in American Depositary Receipts, stock
index futures, corporate bonds, notes, convertible securities, zero coupon
convertible securities, money market instruments and money market mutual funds.
Convertible Securities
The Equity Fund may invest in convertible securities.
The Fund will exchange or convert the convertible securities held in its
portfolio into shares of the underlying common stock when, in the Fund adviser's
opinion, the investment characteristics of the underlying common shares will
assist the Fund in achieving its investment objective. 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.
Zero Coupon Convertible Securities
Zero coupon convertible securities are debt securities which are issued
at a discount to their face amount and do not entitle the holder to any
periodic payments of interest prior to maturity. Rather, interest earned
on zero coupon convertible securities accretes at a stated yield until
the security reaches its face amount at maturity. Zero coupon convertible
securities are convertible into a specific number of shares of the
issuer's common stock. In addition, zero coupon convertible securities
usually have put features that provide the holder with the opportunity to
put the bonds back to the issuer at a stated price before maturity.
Generally, the prices of zero coupon convertible securities may be more
sensitive to market interest rate fluctuations than conventional
convertible securities.
Federal income tax law requires the holder of a zero coupon convertible
security to recognize income with respect to the security prior to the
receipt of cash payments. To maintain its qualification as a portfolio of
a regulated investment company and avoid liability for federal income
taxes, the Equity Fund will be required to distribute income accrued with
respect to zero coupon convertible securities which it owns, and may have
to sell portfolio securities (perhaps at disadvantageous times) in order
to generate cash to satisfy these distribution requirements.
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). 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.
Stock Index Futures Contracts
As a means of reducing fluctuations in the net asset value of shares of the
Equity Fund, the Fund may attempt to hedge all or a portion of its portfolio by
buying and selling stock index 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 calls until the options are exercised, closed, or
have expired.
Stock index futures contracts are based on indices that reflect the market value
of common stock of the firms included in the indices. An index futures contract
is an agreement pursuant to which two parties agree to take or make delivery of
an amount of cash equal to the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written.
"Margin" in Futures Transactions
Unlike the purchase or sale of a security, the Equity 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 initial margin in futures transactions 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 following policies apply to the Short Term Yield Fund only.
Credit Facilities
Demand notes are borrowing arrangements between a corporation and an
institutional lender (such as the Short Term Yield 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. Revolving credit
facilities are borrowing arrangements in which the lender agrees to make loans
up to a maximum amount upon demand by the borrower during a specified term. As
the borrower repays the loan, an amount equal to the repayment may be borrowed
again during the term of the facility. The Fund generally acquires a
participation interest in a revolving credit facility from a bank or other
financial institution. The terms of the participation requires the Fund to make
a pro rata share of all loans extended to the borrower and entitles the Fund to
a pro rata share of all payments made by the borrower. Demand notes and
revolving facilities usually provide for floating or variable rates of interest.
Credit Enhancement
Certain of the Short Term Yield Fund's acceptable investments may be credit
enhanced by a guaranty, letter of credit or insurance. The 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, the 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 the Fund to treat the securities as having
been issued by both the issuer and the 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 Short Term Yield 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 following
a demand by the 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. The Fund uses
these arrangements to provide the Fund 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 are treated as a form of credit enhancement.
The following policies apply to the Bond and Short Term Yield Funds only.
Weighted Average Portfolio Maturity
The Bond and Short Term Yield Funds will determine their dollar-weighted average
portfolio maturity by assigning a "weight" to each portfolio security based upon
the pro rata market value of such portfolio security in comparison to the market
value of the entire portfolio. The remaining maturity of each portfolio security
is then multiplied by its weight, and the results are added together to
determine the weighted average maturity of the portfolio. For purposes of
calculating their dollar-weighted average portfolio maturity, the Bond and Short
Term Yield Funds will (a) treat asset-backed securities as having a maturity
equal to their estimated weighted-average maturity and (b) treat variable and
floating rate instruments as having a remaining maturity commensurate with the
period remaining until the next scheduled adjustment to the instrument's
interest rate. The average maturity of asset-backed securities will be
calculated based upon assumptions established by the adviser as to the probable
amount of principal prepayments weighted by the period until such prepayments
are expected to be received.
Duration
Duration is a commonly used measure of the potential volatility of the price of
a debt security, or the aggregate market value of a portfolio of debt
securities, prior to maturity. Duration measures the magnitude of the change in
the price of a debt security relative to a given change in the market rate of
interest. The duration of a debt security depends on three primary variables:
the security's coupon rate, maturity date, and level of market interest rates
for similar debt securities. Generally, debt securities with lower coupons or
longer maturities will have a longer duration than securities with higher
coupons or shorter maturities.
Duration is calculated by dividing the sum of the time-weighted values of cash
flows of a security or portfolio of securities, including principal and interest
payments, by the sum of the present values of the cash flows. Certain debt
securities, such as asset-backed securities, may be subject to prepayment at
irregular intervals. The duration of these instruments will be calculated based
upon assumptions established by the investment adviser as to the probable amount
and sequence of principal prepayments.
Mathematically, duration is measured as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PVCF1(1) PVCF2(2) PVCF3(3) PVCFn(n)
Duration = -------- + -------- + -------- + ........ + --------
PVTCF PVTCF PVTCF PVTCF
</TABLE>
where
PVCFt = the present value of the cash flow in period t discounted at the
prevailing yield-to-maturity
t = the period when the cash flow is received
n = remaining number of periods until maturity
PVTCF = total present value of the cash flow from the bond where the present
value is determined using the prevailing yield-to-maturity
Collateralized Mortgage Obligations ("CMOs")
The Bond and Short Term Yield Funds may invest in CMOs. Privately issued CMOs
generally represent an ownership interest in a pool of 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 their 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.
Real Estate Mortgage Investment Conduits ("REMICs")
REMICs are offerings of multiple class real estate mortgage-backed securities
which qualify and elect treatment as such under provisions of the Internal
Revenue Code. Issuers of REMICs may take several forms, such as trusts,
partnerships, corporations, associations, or segregated pools of mortgages. Once
REMIC status is elected and obtained, the entity is not subject to federal
income taxation. Instead, income is passed through the entity and is taxed to
the person or persons who hold interests in the REMIC. A REMIC interest must
consist of one or more classes of "regular interests," some of which may offer
adjustable rates of interest, and a single class of "residual interests." To
qualify as a REMIC, substantially all the assets of the entity must be in assets
directly or indirectly secured principally by real property.
Resets of Interest
The interest rates paid on some of the Adjustable Rate Mortgage Securities
("ARMS"), CMOs, and REMICs in which the Bond and Short Term Yield Funds invest
will be readjusted at intervals of one year or less to an increment over some
predetermined interest rate index. There are two main categories of indices:
those based on U.S. Treasury securities and those derived from a calculated
measure, such as a cost of funds index or a moving average of mortgage rates.
Commonly utilized indices include the one-year, three-year and five-year
constant maturity Treasury Note rates, the three-month Treasury Bill rate, the
six-month Treasury Bill rate, the one-month or three-month London Interbank
Offered Rate ("LIBOR") and the National Median Cost of Funds. Some indices, such
as the three-month and six-month Treasury Bill rate, closely mirror changes in
market interest rate levels. Others tend to lag changes in market rate levels
and tend to have somewhat less volatile interest rates.
To the extent that the adjusted interest rate on the mortgage security reflects
current market rates, the market value of an ARMS will tend to be less sensitive
to interest rate changes than a fixed rate debt security of the same stated
maturity. Hence, ARMS which use indices that lag changes in market rates should
experience greater price volatility than ARMS that closely mirror the market.
Certain residual interest tranches of CMOs may have adjustable interest rates
that deviate significantly from prevailing market rates, even after the interest
rate is reset, and are subject to correspondingly increased price volatility. In
the event that the Fund purchases such residual interest mortgage securities, it
will factor in the increased interest and price volatility of such securities
when determining its dollar-weighted average portfolio maturity.
Caps and Floors
The underlying mortgages which collateralize the ARMS, CMOs and REMICs in
which the Bond and Short Term Yield Funds invest will frequently have
caps and floors which limit the maximum amount by which the loan rate to
the residential borrower may change up or down: (1) per reset or
adjustment interval and (2) over the life of the loan. Some residential
mortgage loans restrict periodic adjustments by limiting changes in the
borrower's monthly principal and interest payments rather than limiting
interest rate changes. These payment caps may result in negative
amortization.
The value of mortgage securities in which the Bond and Short Term Yield
Funds invest may be affected if market interest rates rise or fall faster
and farther than the allowable caps or floors on the underlying
residential mortgage loans. Additionally, even though the interest rates
on the underlying residential mortgages are adjustable, amortization and
prepayments may occur, thereby causing the effective maturities of the
mortgage securities in which the Funds invest to be shorter than the
maturities stated in the underlying mortgages.
Mortgage-Backed and Asset-Backed Securities Risks
Mortgage-backed and asset-backed securities generally pay back principal and
interest over the life of the security. At the time the Bond and Short Term
Yield Funds reinvest the payments and any unscheduled prepayments of principal
received, the Bond and Short Term Yield Funds may receive a rate of interest
which is actually lower than the rate of interest paid on these securities
("prepayment risks"). Mortgage-backed and asset-backed securities are subject to
higher prepayment risks than most other types of debt instruments with
prepayment risks because the underlying mortgage loans or the collateral
supporting asset-backed securities may be prepaid without penalty or premium.
Prepayment risks on mortgage-backed securities tend to increase during periods
of declining mortgage interest rates because many borrowers refinance their
mortgages to take advantage of the more favorable rates. Prepayments on
mortgage-backed securities are also affected by other factors, such as the
frequency with which people sell their homes or elect to make unscheduled
payments on their mortgages. Although asset-backed securities generally are less
likely to experience substantial prepayments than are mortgage-backed
securities, certain of the factors that affect the rate of prepayments on
mortgage-backed securities also affect the rate of prepayments on asset-backed
securities. In addition, at the time the Bond and Short Term Yield Funds
reinvest the payments and any unscheduled prepayments of principal received, the
Funds may receive a rate of interest which is actually lower than the rate of
interest paid on these securities.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities do not have the benefit
of the same security interest in the related collateral. Credit card receivables
are generally unsecured and the debtors are entitled to the protection of a
number of state and federal consumer credit laws, many of which give such
debtors the right to set off certain amounts owed on credit cards, thereby
reducing the balance due. Most issuers of asset-backed securities backed by
motor vehicle installment purchase obligations permit the servicer of such
receivables to retain possession of the underlying obligations. If the servicer
sells these obligations to another party, there is a risk that the purchaser
would acquire an interest superior to that of the holders of the related
asset-backed securities. Further, if a vehicle is registered in one state and is
then reregistered because the owner and obligor moves to another state, such
reregistration could defeat the original security interest in the vehicle in
certain cases. In addition, because of the large number of vehicles involved in
a typical issuance and technical requirements under state laws, the trustee for
the holders of asset-backed securities backed by automobile receivables may not
have a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries on repossessed
collateral may not, in some cases, be available to support payments on these
securities.
The following policies apply to all three Funds.
Bank Instruments
The Funds only invest in those bank instruments ("Bank Instruments") which are
either issued by an institution having capital, surplus and undivided profits
over $100 million or insured by the Bank Insurance Fund or the Savings
Association Insurance Fund, both of which are administered by the Federal
Deposit Insurance Corporation. Bank Instruments may include Eurodollar
Certificates of Deposit ("ECDs"), Yankee Certificates of Deposit ("Yankee CDs"),
Eurodollar Time Deposits ("ETDs") and Canadian Time Deposits.
Obligations of Foreign Issuers
Obligations of a foreign issuer may present greater risks than investments in
U.S. securities, including higher transaction costs as well as the imposition of
additional taxes by foreign governments. In addition, investments in foreign
issuers may include additional risks associated with less complete financial
information about the issuers, less market liquidity, and political instability.
Future political and economic developments, the possible imposition of
withholding taxes on interest income, the possible seizure or nationalization of
foreign holdings, the possible establishment of exchange controls, or the
adoption of other governmental restrictions, might adversely affect the payment
of principal and interest on obligations of foreign issuers. As a matter of
practice, the Funds will not invest in the obligations of a foreign issuer if
any such risk appears to the Funds' adviser to be substantial.
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. To
the extent that the original seller does not repurchase the securities from a
Fund, the Fund could receive more or less than the repurchase price on any sale
of such securities. In the event that such a defaulting seller filed for
bankruptcy or became insolvent, disposition of such securities by the Fund might
be delayed pending court action. The Funds believe that, under the regular
procedures normally in effect for custody of the Funds' portfolio securities
subject to repurchase agreements, a court of competent jurisdiction would rule
in favor of the Funds 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 Funds'
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.
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 maintained until the transaction is settled.
When-Issued and Delayed Delivery Transactions
These transactions are arrangements in which the Funds purchase securities with
payment and delivery scheduled for a future time. These transactions are made to
secure what is considered to be an advantageous price and yield for a Fund.
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.
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 at the trade date. These securities are marked to
market daily and maintained until the transaction is settled.
As a matter of policy, each Fund does 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 its assets.
Lending of Portfolio Securities
The collateral received when each Fund lends portfolio securities must be valued
daily and, should the market value of the loaned securities increase, the
borrower must furnish additional collateral to the 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.
Portfolio Turnover
Although the Funds do not intend to invest for the purpose of seeking short-term
profits, securities in a Fund's portfolio will be sold whenever the adviser
believes it is appropriate to do so in light of a Fund's investment objective,
without regard to the length of time a particular security may have been held.
The adviser does not anticipate that a Fund's annual portfolio turnover rate
will exceed 100% (for the Short Term Yield Fund), 150% (for the Equity Fund) or
200% (for the Bond Fund) under normal market conditions. For the period from the
date of initial public investment, January 29, 1993, to December 31, 1993, the
portfolio turnover rates for Bond Fund, Equity Fund, and Short Term Yield Fund
were 74%, 81%, and 98%, respectively.
Investment Limitations
Selling Short and Buying on Margin
The Funds will not sell any securities short or purchase any securities
on margin, but may obtain such short-term credits as may be necessary for
clearance of purchases and sales of portfolio securities. The deposit or
payment by a 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.
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 as a temporary
measure for extraordinary or emergency purposes and then only in amounts
not in excess of one-third of the value of its total assets; provided
that, while borrowings exceed 5% of a Fund's total assets, any such
borrowings will be repaid before additional investments are made. A Fund
will not borrow money or engage in reverse repurchase agreements for
investment leverage purposes.
Concentration of Investments
Each Fund will not purchase securities which would cause 25% or more of
the value of its total assets at the time of purchase to be invested in
the securities of one or more issuers conducting their principal
activities in the same industry; provided that (a) there is no limitation
with respect to obligations issued or guaranteed by the U.S. government,
its agencies or instrumentalities; (b) wholly-owned finance companies
will be considered to be in the industries of their parents if their
activities are primarily related to financing the activities of their
parents; and (c) utilities will be divided according to their services.
For example, gas, gas transmission, electric and gas, electric, and
telephone will each be considered a separate industry. The Short Term
Yield Fund will consider its investment in instruments issued by foreign
banks and instruments issued by domestic banks to be investments in
separate industries for purposes of concentration.
Investing in Commodities
The Funds will not purchase or sell commodities, commodity contracts, or
commodity futures contracts, except that the Equity Fund may purchase and
sell stock index futures contracts and write covered call options.
Investing in Real Estate
The Funds will not purchase or sell real estate, including limited
partnership interests in real estate, although a Fund may invest in
securities secured by real estate or interests in real estate.
Lending Cash or Securities
Each Fund will not lend any of its assets except portfolio securities up
to one-third the value of total assets. This shall not prevent a Fund
from purchasing or holding U.S. government obligations, money market
instruments, variable rate demand notes, 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 its
Declaration of Trust.
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.
Diversification of Investments
With respect to 75% of the value of its total assets, a Fund will not
purchase the securities of any issuer (other than cash, cash items, or
securities issued or guaranteed by the U.S. government, its agencies or
instrumentalities) if, as a result, more than 5% of the value of its
total assets at the time of purchase would be invested in the securities
of that issuer. Also, a Fund will not purchase more than 10% of the
outstanding voting securities of any one issuer.
The above investment limitations cannot be changed without approval of the
holders of a majority of the particular Fund's shares. The following
limitations, however, may be changed by the Trustees without shareholder
approval. Shareholders will be notified before any material changes in these
limitations become effective.
Restricted Securities
The Funds will not invest more than 10% of the value of their total
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 Trustees. To comply
with certain state restrictions, the Equity Fund will limit its
investment in restricted securities to 5% of its total assets. (If state
restrictions change, this latter restriction may be revised without
notice to shareholders.)
Investing in Illiquid Securities
The Funds will not invest more than 15% of the value of their net assets
in illiquid securities, including repurchase agreements providing for
settlement more than seven days after notice, over-the-counter options,
certain restricted securities which have not met the criteria for
liquidity established by the Trustees and non-negotiable time deposits
with maturities over seven days.
Investing to Exercise Control
The Equity Fund will not purchase securities for the purpose of
exercising control over the issuer of securities.
Pledging Assets
The Funds will not mortgage, pledge, or hypothecate any assets except to
secure permitted borrowings. In those cases, a 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 at the time of the pledge.
For purposes of this limitation, the purchase of securities on a
when-issued basis is not deemed to be a pledge.
Investing in Minerals
The Funds will not purchase interests in oil, gas, other mineral
exploration or development programs, or leases, although a Fund may
purchase the publicly traded securities of companies engaging in such
activities.
Investing in Securities of Other Investment Companies
The Funds will limit their investment in other investment companies to no
more than 3% of the total outstanding voting stock of any investment
company, will not invest more than 5% of their total assets in any one
investment company, or invest more than 10% of their total assets in
investment companies in general. A Fund will purchase securities of
closed-end investment companies only in open-market transactions
involving only customary brokerage commissions. However, these
limitations are not applicable if the securities are acquired in a
merger, consolidation, or acquisition of assets. It should be noted that
investment companies incur certain expenses, such as management fees,
and, therefore, any investment by a Fund in shares of another investment
company would be subject to such duplicate expenses. A Fund will invest
in other investment companies primarily for the purpose of investing its
short-term cash on a temporary basis. The adviser will waive its
investment advisory fee on assets invested in securities of open-end
investment companies.
Investing in Issuers Whose Securities are Owned by Officers and Trustees of
BayFunds
The Funds will not purchase or retain the securities of any issuer if the
officers and Trustees of BayFunds or the Funds' 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 New Issuers
The Funds 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. With
respect to asset-backed securities, the Bond and Short Term Yield Funds
will treat the originator of the asset pool as the company issuing the
securities for purposes of determining compliance with this limitation.
Investing in Warrants
The Equity Fund will not invest 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 Equity Fund
will limit its investment in such warrants not listed on the New York or
American Stock Exchange 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
acquired by the Equity Fund in units or attached to securities may be
deemed to be without value.
Writing Covered Call Options
The Equity Fund will not write call options on securities unless the
securities are held in the Equity Fund's portfolio or unless the Equity
Fund is entitled to them in deliverable form without further payment or
after segregating cash in the amount of any further payment.
Except with respect to 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 Funds have no present intent to borrow money or invest in
securities of other investment companies in excess of 5% of the value of their
respective net assets during the coming fiscal year.
The Funds consider instruments issued by a U.S. branch of a domestic bank,
having capital, surplus, and undivided profits in excess of $100,000,000 at the
time of investment to be "cash items."
BayFunds Management
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Trustees and Officers
Trustees and Officers are listed with their addresses, principal occupations,
and present positions, including any affiliation with BayBanks Investment
Management, Inc., BayBank Boston, N.A., BayBanks, Inc., Federated Investors,
Federated Securities Corp., and Federated Administrative Services.
<TABLE>
<CAPTION>
Positions with Principal Occupations
Name and Address BayFunds During Past Five Years
<S> <C> <C>
Kenneth G. Condon Trustee Treasurer (since June 1992) and Vice President for Financial Affairs
11 Dudley Road (1984 through present), Boston University; Member, BayBank Trust
Sudbury, MA Advisory Board; Member, Regional Strategic Planning Committee, BayBanks,
Inc; Director, Seragen, Inc.; Trustee and Chairman of the Finance/Audit
Committee, Newbury College; formerly, Director and Member of Audit Com-
mittee, BayBank Harvard Trust Co.; Director of the Boston Chapter of the
Financial Executives Institute.
Robert W. Eisenmenger Trustee Consultant; formerly, First Vice President of the Federal Reserve Bank
92 Woodland Street of Boston, and Executive Director for Priced Services for the Federal
Natick, MA Reserve System; Trustee, Massachusetts Congregational Fund; Trustee and
Consultant, Cape Cod Five Cents Savings Bank.
Sara L. Johnson Trustee Principal and Director of Regional Forecasting (since 1992), Managing
30 Eaton Court Economist for Regional Information Group's Eastern Regions (1988-1991)
Wellesley Hills, MA and Senior Economist, U.S. Economic Service (1983-1988), DRI/McGraw
Hill.
Ernest R. May Trustee Charles Warren Professor of History, Harvard University; Chair, Board of
John F. Kennedy Visitors, Joint Military Intelligence College; Chair, Board of Control,
School of Government John Anson Kittredge Educational Fund; Director, Charles Warren Center
Cambridge, MA for Studies on American History, Harvard University.
Alvin J. Silk Trustee Lincoln Filene Professor of Business Administration, Graduate School of
Soldiers Field Road Business Administration, Harvard University (1988-present); formerly,
Boston, MA Erwin H. Schell Professor of Management, Sloan School of Management,
Massachusetts Institute of Technology; formerly, Director, BayBank
Systems, Inc.; Trustee, Marketing Science Institute.
Glen R. Johnson President and Trustee, Federated Investors; President and/or Trustee of certain
Federated Investors Tower Treasurer investment companies distributed by Federated Securities Corp.; Staff
Pittsburgh, PA member, Federated Securities Corp. and Federated Administrative
Services.
Craig P. Churman Vice President and Vice President, Federated Administrative Services; Vice President and
Federated Investors Tower Assistant Treasurer Assistant Treasurer of certain investment companies distributed by
Pittsburgh, PA Federated Securities Corp.
Peter J. Germain Secretary Corporate Counsel, Federated Investors.
Federated Investors Tower
Pittsburgh, PA
</TABLE>
Fund Ownership
Officers and Trustees own less than 1% of each of the Fund's outstanding shares.
As of March 30, 1994, the following shareholder owned 5% or more of the
Institutional Shares of the Funds: Slatt & Co., Burlington, Massachusetts, owned
approximately 6,556,153 shares (99.99%) of Bond Fund; 8,028,421 shares (99.99%)
of Equity Fund; and 9,073,743 shares (99.99%) of Short Term Yield Fund.
Trustee Liability
BayFunds' Declaration of Trust provides that the Trustees are not 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
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Adviser to the Funds
The Funds' investment adviser is BayBanks Investment Management, Inc. (the
"Adviser"). The Adviser is a wholly-owned subsidiary of BayBanks, Inc., a bank
holding company organized under the laws of the Commonwealth of Massachusetts
with a number of commercial bank subsidiaries. Collectively, these bank
subsidiaries are referred to in this combined Statement of Additional
Information as "BayBanks."
The Adviser shall not be liable to BayFunds, the Funds or any shareholder 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 BayFunds.
Because of the internal controls maintained by BayBanks to restrict the flow of
non-public information, Fund investments are typically made without any
knowledge of BayBanks or its affiliates' lending relationships with an issuer.
Advisory Fees
For its advisory services, the Adviser receives an annual investment advisory
fee as described in the prospectuses.
From the Funds' date of initial public investment, January 29, 1993, through the
period ended December 31, 1993, the Adviser earned fees from Bond Fund, Equity
Fund, and Short Term Yield Fund in the amounts of $392,858, $560,943, and
$643,201, respectively, of which $95,417, $133,201, and $111,229, respectively,
were voluntarily waived.
State Expense Limitation
The Adviser has undertaken to comply with the expense limitations
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 expense
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.
Expenses of a Fund and Shares
Each Fund pays all of its own expenses and its allocable share of
BayFunds' expenses. The expenses borne by a Fund include, but are not
limited to, the cost of: organizing BayFunds and continuing its
existence; Trustee fees; investment advisory and administrative services;
printing prospectuses and other Fund documents for shareholders;
registering BayFunds, the Fund, and the shares with federal and state
securities authorities; taxes and commissions; issuing, purchasing,
repurchasing, and redeeming shares; fees for custodians, transfer agents,
dividend disbursing agents, portfolio accounting services, and
registrars; printing, mailing, auditing, accounting, and legal expenses;
reports to shareholders and governmental agencies; meetings of Trustees
and shareholders and proxy solicitations therefor; insurance premiums;
association membership dues, and such non-recurring and extraordinary
items as may arise.
As present, the only expenses allocated to shares as a class are expenses
under the Fund's Shareholder Servicing Plan which relate to the
Investment Shares. However, the Trustees reserve 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:
transfer agent fees as identified by the Transfer Agent as attributable
to holders of a class 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 service as
required to support holders of a class of shares; legal fees relating
solely to a class of shares; and trustees' fees incurred as a result of
issues relating solely to a class of 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 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
review by the Trustees.
The Adviser may select brokers and dealers who offer brokerage and research
services. These services may be furnished directly to a Fund, or to the Adviser
and may include:
. advice as to the advisability of investing in securities;
. security analysis and reports;
. economic studies;
. industry studies;
. receipt of quotations for portfolio evaluations; and
. 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.
Although investment decisions for the Funds are made independently from those of
the other accounts managed by the Adviser, investments of the types a Fund may
make also may be made by those other accounts. When a Fund and one or more other
accounts managed by the Adviser are prepared to invest in, or desire to dispose
of, the same security, available investments or opportunities for sales will be
allocated in a manner believed by the Adviser to be equitable to each. In some
cases, this procedure may adversely affect the price paid or received by a Fund
or the size of the position obtained or disposed by a Fund. In other cases,
however, it is believed that coordination and the ability to participate in
volume transactions will be to the benefit of a Fund.
For the period from January 29, 1993, to December 31, 1993, the Equity Fund paid
$79,878 in brokerage commissions on brokerage transactions.
As of December 31, 1993, the Bond Fund owned approximately $501,000 of the
securities of Bear Stearns Cos. Inc., $1,454,000 of the securities of Dean
Witter Discover & Co., and $1,473,000 of the securities of Paine Webber Group;
Equity Fund owned approximately $798,000 of the securities of Merrill Lynch &
Co., and $824,000 of Primerica Corp.; and Short Term Yield Fund owned
approximately $3,522,000 of the securities of Dean Witter Discover & Co.,
$5,022,000 of the securities of Goldman, Sachs & Co., $4,999,000 of the
securities of Merrill Lynch & Co., and $7,186,000 of the securities of Salomon
Brothers Inc., all of whom are regular brokers of the Funds that derive more
than 15% of gross revenues from securities-related activities.
Shareholder Servicing Arrangements
- --------------------------------------------------------------------------------
For the period ended December 31, 1993, the Funds did not pay any fees under the
Shareholder Servicing Plan.
Administrative Services
- --------------------------------------------------------------------------------
Federated Administrative Services, a subsidiary of Federated Investors, provides
administrative personnel and services to the Funds for the fees set forth in the
prospectuses. From the Funds' date of initial public investment, January 29,
1993, through the period ended December 31, 1993, the Funds incurred costs for
administrative services as follows:
<TABLE>
<CAPTION>
Administrative Waived by Reimbursed by
Portfolio Costs Administrator Administrator
<S> <C> <C> <C>
Bond Fund $ 74,221 $41,156 $13,169
Equity Fund $ 90,387 $46,661 $13,014
Short Term Yield Fund $145,120 $75,217 $20,605
</TABLE>
Purchasing Shares
- --------------------------------------------------------------------------------
The procedures for purchasing shares are explained in the prospectus of each
Fund under "Investing in Shares."
Exchanging Securities for Fund Shares
Each Fund may accept securities in exchange for Shares. A Fund will allow such
exchanges only upon the prior approval of the Fund and a determination by the
Fund and its Adviser that the securities to be exchanged are acceptable.
Any securities exchanged must meet the investment objective and policies of the
Fund, must have a readily ascertainable market value and must be liquid. The
market value of any securities exchanged in an initial investment, plus any
cash, must be at least $100,000.
Securities accepted by the Fund will be valued in the same manner as the Fund
values its assets. The basis of the exchange will depend upon the net asset
value of Shares on the day the securities are valued. One Share of the Fund will
be issued for each equivalent amount of securities accepted.
Any interest earned on the securities prior to the exchange will be considered
in valuing the securities. All interest, dividends, subscription or other rights
attached to the securities become the property of the Fund, along with the
securities.
Determining Net Asset Value
- --------------------------------------------------------------------------------
The net asset value generally changes each day. The days on which the net asset
value is calculated by a Fund are described in the Fund's prospectus.
Determining Market Value of Securities
Market value of a Fund's portfolio securities are determined as follows:
. for equity securities and bonds and other fixed income securities, according
to the last sale price on a national securities exchange, if available;
. in the absence of recorded sales of equity securities, according to the mean
between the last closing bid and asked prices, and for bonds and other fixed
income securities as determined by an independent pricing service;
. for unlisted equity securities, the latest bid prices;
. 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
. for all other securities, at fair value as determined in good faith by the
Trustees.
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.
Exchange Privileges
- --------------------------------------------------------------------------------
Requirements for Exchange
Upon receipt of proper instructions and required supporting documents, shares
submitted for exchange are redeemed and the proceeds invested in shares of the
other Participating Fund.
Please review the Fund prospectus for further information on the exchange
privileges.
Making an Exchange
Instructions for exchanges may be given in writing. Written instructions may
require a signature guarantee.
Redeeming Shares
- --------------------------------------------------------------------------------
Shares of the Funds are redeemed at the next computed net asset value after the
Funds receive the redemption request from the Funds' transfer agent in proper
form. Redemption procedures are explained in the prospectuses under "Redeeming
Shares."
Redemption in Kind
Although the Funds intend to redeem shares in cash, they reserve the right under
certain circumstances to pay the redemption price in whole or in part by a
distribution of securities from the respective 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
Trustees determine to be fair and equitable.
The Trust has elected to be governed by Rule 18f-1 under the Investment Company
Act of 1940, which obligates the Funds to redeem shares for any one shareholder
in cash only up to the lesser of $250,000 or 1% of a Fund's net asset value
during any 90-day period.
Redemption in kind is not as liquid as cash redemption. If redemption is made in
kind, shareholders receiving their securities and selling them before their
maturity could receive less than the redemption value of their securities and
could incur transaction costs.
Monthly Statements
Shareholders of the Funds who have eligible BayBanks deposit accounts will
receive combined monthly statements containing all information relating to their
deposit accounts and BayFunds transactions.
Companion Account Availability
Certain BayBanks deposit account customers may elect to open a companion
BayFunds account to facilitate BayFunds transactions.
Massachusetts Law
- --------------------------------------------------------------------------------
Under certain circumstances, shareholders may be held personally liable under
Massachusetts law for acts or obligations of BayFunds. To protect shareholders,
BayFunds has filed legal documents with Massachusetts that expressly disclaim
the liability of shareholders for such acts or obligations of BayFunds. These
documents require notice of this disclaimer to be given in each agreement,
obligation, or instrument BayFunds or its Trustees enter into or sign.
In the unlikely event a shareholder is held personally liable for BayFunds'
obligations, BayFunds is required, by its Declaration of Trust, to use its
property to protect or compensate the shareholder. On request, BayFunds will
defend any claim made and pay any judgment against a shareholder for any act or
obligation of BayFunds. Therefore, financial loss resulting from liability as a
shareholder will occur only if BayFunds cannot meet its obligations to indemnify
shareholders and pay judgments against them from its assets.
Tax Status
- --------------------------------------------------------------------------------
The Funds' Tax Status
Each Fund intends to meet the requirements of Subchapter M of the Internal
Revenue Code applicable to regulated investment companies in order not to be
liable for any federal income taxes on income or gains distributed to the Funds'
shareholders. To qualify for this treatment, each Fund must, among other
requirements:
. derive at least 90% of its gross income from dividends, interest, and gains
from the sale of securities;
. derive less than 30% of its gross income from the sale of securities held,
or deemed held, less than three months;
. diversify its holdings according to certain statutory requirements; and
. distribute to its shareholders at least 90% of its net income earned during
the year.
Each Fund will distribute substantially all of its net investment income and net
realized gains at least annually.
The Equity Fund's transactions in futures contracts and options, and certain
other investments and hedging activities of the Equity Fund will be subject to
special tax rules, the effect of which may be to alter the timing and character
of certain income gains and losses realized by the Equity Fund. These rules
could, therefore, affect the amount, timing and character of distributions paid
to the Equity Fund's shareholders.
Total Return
- --------------------------------------------------------------------------------
The average annual total return for both classes of shares of each Fund is the
average compounded rate of return for a given period that would equate a $1,000
initial investment in the Fund 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 (for the
Bond and Short Term Yield Funds) or quarterly (for the Equity Fund) reinvestment
of all dividends and distributions.
For the period from January 29, 1993 (date of initial public investment) to
December 31, 1993 (prior to the creation of separate classes), the cumulative
total return for the Bond Fund, Equity Fund, and Short Term Yield Fund was
7.97%, 11.28%, and 3.96%, respectively. On January 1, 1994, the existing shares
of the Funds were redesignated as Investment Shares. Institutional Shares were
not offered prior to January 1, 1994. Cumulative total return reflects the
Funds' total performance over a specific period of time.
Yield
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The yield for both classes of shares of each Fund is determined by dividing the
net investment income per share (as defined by the Securities and Exchange
Commission) earned by the Fund over a thirty-day period by the offering price
per share of the Fund on the last day of the period. This value is then
annualized using semi-annual compounding. This means that the amount of income
generated during the thirty-day period is assumed to be generated each month
over a twelve-month period and is reinvested every six months. The yield does
not necessarily reflect income actually earned by each 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.
To the extent that financial institutions and broker/dealers charge fees in
connection with services provided in conjunction with an investment in a Fund,
performance will be reduced for those shareholders paying those fees.
Prior to the creation of separate classes, the yield for the thirty-day period
ended December 31, 1993 for the Bond Fund, Equity Fund and Short Term Yield Fund
was 4.55%, 0.93%, and 4.51%, respectively.
Performance Comparisons
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The performance of both classes of shares of each Fund depends upon such
variables as:
. portfolio quality;
. average portfolio maturity (in the case of the Bond and Short Term Yield
Funds);
. type of instruments in which the portfolio is invested;
. changes in interest rates and market value of portfolio securities;
. changes in a Fund's expenses or a class of shares' expenses; and
. various other factors.
A Fund's performance fluctuates on a daily basis largely because net earnings
and net asset value per share fluctuate daily. Both net earnings and net asset
value per share are factors in the computation of yield and total return.
From time to time, the Funds may advertise the performance of both classes of
shares compared to similar funds or portfolios using certain indices, reporting
services and financial publications. The Funds may also advertise the
performance of Shares compared to certificates of deposit and savings accounts.
Investors may use financial publications and/or indices to obtain a more
complete view of the Funds' performance. When comparing performance, investors
should consider all relevant factors such as the composition of any index used,
prevailing market conditions, portfolio compositions of other funds, and methods
used to value portfolio securities and compute offering price. The financial
publications and/or indices which the Funds use in advertising may include the
following:
The Bond Fund may compare its performance to:
. Lehman Brothers Government/Corporate (Total) Index is comprised of
approximately 5,000 issues which include: non-convertible bonds publicly
issued by the U.S. government or its agencies; corporate bonds guaranteed by
the U.S. government and quasi-federal corporations; publicly issued, fixed
rate, non-convertible domestic bonds of companies in industry, public
utilities, and finance; and U.S. dollar denominated obligations of foreign
issuers. The average maturity of these bonds approximates ten years. Tracked
by Shearson Lehman Brothers, Inc., the index calculates total returns for
one month, three month, twelve month, and ten year periods and year-to-date.
. Lehman Brothers Intermediate Government/Corporate Bond Index is an unmanaged
index comprised of all the bonds issued by the Lehman Brothers
Government/Corporate Bond Index with maturities between 1 and 9.99 years.
Total return is based on price appreciation/depreciation and income as a
percentage of the original investment. Indices are rebalanced monthly by
market capitalization.
. Salomon Brothers AAA-AA Corporate Index calculates total returns of
approximately 775 issues which include long-term, high grade domestic
corporate taxable bonds, rated AAA-AA with maturities of twelve years or
more and companies in industry, public utilities, and finance.
The Equity Fund may compare its performance to:
. 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's index movements are leading economic indicators for the
stock market as a whole.
. Standard & Poor's Daily Stock Price Index of 500 Common Stocks (the
"Standard & Poor's Index"), a composite index of common stocks in industry,
transportation, and financial and public utility companies can be used to
compare to the total returns of funds whose portfolios are invested
primarily in common stocks. In addition, the Standard & Poor's Index assumes
reinvestments of all dividends paid by stocks listed on its index. Taxes due
on any of these distributions are not included, nor are brokerage or other
fees calculated, in Standard & Poor's figures.
. Bank Rate Monitor National Index, Miami Beach, 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.
The Short Term Yield Fund may compare its performance to:
. Merrill Lynch 1-3 Year Treasury Index is an unmanaged index tracking
short-term U.S. government securities with maturities between 1 and 2.99
years. The index is produced by Merrill Lynch, Pierce, Fenner & Smith, Inc.
The Bond, Equity and Short Term Yield Funds may compare their performance to:
. 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 Funds will quote their Lipper ranking in the
applicable category in advertising and sales literature.
. Bank Rate Monitor National Index, Miami Beach, 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.
Advertisements and other sales literature for both classes of shares of either
Fund may quote total returns which are calculated on standardized base periods.
These total returns also represent the historic change in the value of an
investment in either class of shares of the Bond and Short Term Yield Funds
based on monthly (quarterly for the Equity Fund) reinvestment of dividends over
a specified period of time.
Financial Statements
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The financial statements for the fiscal year ended December 31, 1993, are
incorporated herein by reference to the Annual Report of each Fund dated
December 31, 1993 (File No 811-6296). You may request a copy of the Annual
Reports free of charge by writing the Funds or by calling 1-800-BAY-FUND.
Appendix
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Standard and Poor's Corporation ("S&P") Corporate Bond Ratings
AAA--Debt rated AAA has the highest rating assigned by Standard & Poor's
Corporation. 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 effects 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.
NR--NR indicates that no public rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): S&P may apply a plus (+) or minus (-) sign to show
relative standing within the major rating categories.
Moody's Investors Service, Inc. ("Moody's") Corporate Bond Ratings
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 sometime 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.
NR--Not rated by Moody's.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from Aa through Baa in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
Fitch Investors Service, Inc. ("Fitch") 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 credit quality. The
obligor's ability to pay interest and repay principal is very strong, although
not quite as strong as bonds rated AAA. Because bonds rated in the AAA and AA
categories are not significantly vulnerable to foreseeable future developments,
short-term debt of these issuers is generally rated F-1+.
A--Bonds considered to be investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal is considered to be
strong, but may be more vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings.
BBB--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.
NR--NR indicates that Fitch does not rate 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 the AAA category.
Standard and Poor's Corporation Commercial Paper Ratings
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (-) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
A-1.
Moody's Investors Service, Inc. Commercial Paper Ratings
P-1--Issuers rated PRIME-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics:
conservative capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earning coverage of fixed financial charges
and high internal cash generation; and well-established access to a range of
financial markets and assured sources of alternative liquidity.
P-2--Issuers rated PRIME-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Fitch Investors Service, Inc. Commercial Paper Ratings
FITCH-1--(Highest Grade) Commercial paper assigned this rating is regarded as
having the strongest degree of assurance for timely payment.
FITCH-2--(Very Good Grade) Issues assigned this rating reflect an assurance of
timely payment only slightly less in degree than the strongest issues.
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