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[LOGO]
FMB MONEY MARKET FUND
FMB INTERMEDIATE
GOVERNMENT INCOME FUND
O
FMB MICHIGAN
TAX-FREE BOND FUND
O
FMB DIVERSIFIED
EQUITY FUND
O O
Consumer Service Class
PROSPECTUS
April 1, 1996
SEI Financial Services Company
Distributor
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
ENDORSED OR GUARANTEED BY, FMB-TRUST OR ITS AFFILIATES, NOR ARE THEY
FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE
FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE FUNDS INVOLVE
INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL.
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FMB FUNDS, INC.
P.O. BOX 8526
BOSTON, MASSACHUSETTS 02266-8526
800-453-4234
FMB-TRUST
INVESTMENT ADVISER
FIRST MICHIGAN BANK CORPORATION
INVESTMENT SUB-ADVISER
SEI FINANCIAL MANAGEMENT CORPORATION
ADMINISTRATOR
SEI FINANCIAL SERVICES COMPANY
DISTRIBUTOR
This Prospectus describes the "Consumer Service Classes" of four mutual
funds (collectively, the "Funds" and individually, a "Fund"), which are separate
investment portfolios of FMB Funds, Inc. ("FMB Funds" or the "Company"). The
Funds, for which FMB-Trust (the "Adviser") and First Michigan Bank Corporation
(the "Sub-Adviser") serve as investment adviser and investment sub-adviser,
respectively, and which are distributed by SEI Financial Services Company (the
"Distributor") and administered by SEI Financial Management Corporation (the
"Administrator"), are:
- FMB Money Market Fund
- FMB Intermediate Government Income Fund
- FMB Michigan Tax-Free Bond Fund
- FMB Diversified Equity Fund
This Prospectus relates only to the "Consumer Service Class" of each Fund's
shares, and no other class of shares of the Fund is offered hereby. INVESTMENTS
IN THE MONEY MARKET FUND ARE NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES
GOVERNMENT. THE MONEY MARKET FUND ATTEMPTS TO MAINTAIN THE VALUE OF ITS SHARES
AT A CONSTANT $1.00 PER SHARE, ALTHOUGH THERE CAN BE NO ASSURANCE THAT IT WILL
ALWAYS BE ABLE TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF,
OR ENDORSED OR GUARANTEED BY, FMB-TRUST OR ITS AFFILIATES, NOR ARE THEY
FEDERALLY INSURED BY THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY.
SHARES OF THE FUNDS INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF
PRINCIPAL. THIS PROSPECTUS SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE
INVESTOR SHOULD KNOW BEFORE INVESTING IN ANY OF THE FUNDS. INVESTORS SHOULD READ
THIS PROSPECTUS CAREFULLY AND RETAIN IT FOR FUTURE REFERENCE.
A Statement of Additional Information ("SAI"), dated March 29, 1996
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. The SAI is available without
charge and can be obtained by writing or calling the Funds at the address and
telephone number printed above.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
March 29, 1996.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights......................................................... 1
Fund Expenses...................................................... 3
Fee Table.......................................................... 4
Financial Highlights............................................... 5
Investment Policies of the Funds................................... 8
Description of Securities, Investment Practices and Restrictions... 10
Management of the Funds............................................ 18
Fund Share Valuation............................................... 20
Pricing of Fund Shares............................................. 21
Purchase of Fund Shares............................................ 23
Individual Retirement Accounts..................................... 25
Exchange Privileges................................................ 26
Redemption of Fund Shares.......................................... 27
Dividends, Distributions and Federal Income Tax.................... 30
Regulatory Matters................................................. 32
Other Information.................................................. 33
</TABLE>
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HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
This Prospectus describes the Funds, each of which has its own distinct
investment objectives and policies, which are described and summarized here.
FMB MONEY MARKET FUND. The investment objective of the Money Market Fund
is to provide investors with a high level of current income, consistent with
preservation of capital and liquidity. The Money Market Fund pursues its
objective by investing its assets in a broad range of high quality, short-term,
money market instruments which have remaining maturities not exceeding thirteen
months and by maintaining a dollar-weighted average portfolio maturity of 90
days or less. Money market instruments in which the Money Market Fund may invest
include: securities issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities, bank obligations of certain U.S. and foreign banks,
certain U.S. savings and loan obligations, commercial paper, corporate debt
securities, variable rate demand notes and repurchase agreements. All
investments by the Money Market Fund will be denominated in U.S. dollars. The
Money Market Fund attempts to maintain the value of its shares at a constant
$1.00 per share, although there can be no assurance that the Money Market Fund
will always be able to do so.
FMB INTERMEDIATE GOVERNMENT INCOME FUND. The primary investment objective
of the Intermediate Government Income Fund is to provide investors with a high
level of current income, consistent with prudent risk of capital. Total return,
which includes capital appreciation as well as current income, is a secondary
objective of the Intermediate Government Income Fund. Securities held by the
Intermediate Government Income Fund will include obligations issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities, in the
form of U.S. Treasury bills, notes and bonds which have a dollar-weighted
average maturity not exceeding seven years; and, mortgage-backed securities and
collateralized mortgage obligations which have a dollar-weighted average
maturity not exceeding five years. As a matter of operating policy, under normal
market conditions, the Intermediate Government Income Fund's dollar-weighted
average portfolio maturity will not be less than three years.
FMB MICHIGAN TAX-FREE BOND FUND. The investment objective of the Michigan
Tax-Free Bond Fund is to provide investors with a high level of current income,
exempt from both federal and Michigan personal income taxes, while limiting the
risk of potential capital loss. The Michigan Tax-Free Bond Fund pursues this
objective by investing primarily in debt obligations with short-to-intermediate
remaining maturities (less than 15 years) issued by or on behalf of the State of
Michigan and its political subdivisions, agencies, and instrumentalities or by
other issuers outside the State of Michigan if such obligations pay interest
that, in the opinion of counsel to the issuer, is exempt from federal and
Michigan personal income tax ("Michigan Municipal Obligations"). The Michigan
Tax-Free Bond Fund invests primarily in Michigan Municipal Obligations that
present acceptable credit risks in the judgment of the Adviser and that at the
time of purchase are rated "investment-grade" or better or are unrated but are
determined by the Adviser to be of comparable quality. See Appen-
1
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dix A to the SAI for a description of rating categories. The lowest rated
investment-grade securities are deemed to have speculative characteristics. As a
fundamental policy, under normal market conditions, the Michigan Tax-Free Bond
Fund will have at least 80% of its net assets invested in securities the
interest on which is exempt from federal income tax and the federal alternative
minimum tax. As a matter of operating policy, under normal market conditions, at
least 65% of the value of its total assets will be invested in Michigan
Municipal Obligations consisting of bonds, as contrasted with notes or bills.
For temporary defensive purposes, including times when sufficient Michigan
Municipal Obligations may not be available in the marketplace at prices
considered by the Adviser to be acceptable, the Adviser may invest more than 20%
of the Fund's assets in securities that are subject to federal income tax,
Michigan personal income tax or both.
FMB DIVERSIFIED EQUITY FUND. The primary investment objective of the
Diversified Equity Fund is to provide investors with long-term capital
appreciation. Income generation is a secondary objective of the Diversified
Equity Fund. The Diversified Equity Fund pursues these objectives by investing
primarily in common stocks of both domestic and foreign companies. The
Diversified Equity Fund may invest in securities issued by large,
well-established companies, as well as those issued by smaller companies,
subject to a minimum market capitalization of $50 million. There may be some
additional risks associated with investments in smaller companies because their
shares tend to be less liquid than securities of larger companies. Further,
stocks of small companies are generally more sensitive to purchase and sale
transactions and changes in the issuer's financial condition and, therefore, the
prices of such stocks may be more volatile than those of larger company stocks.
---------------------
Each of the Funds is subject to the general risks and considerations
associated with the types of investments it may make, as described above and
under "Description of Securities, Investment Practices and Restrictions" below.
The net asset value of the shares of each of the Funds (other then the Money
Market Fund) can be expected to fluctuate. With respect to the Money Market
Fund, there can be no assurance of maintaining the value of its shares at a
constant $1.00 per share.
MANAGEMENT OF THE FUNDS
FMB-Trust acts as investment adviser and First Michigan Bank Corporation
acts as investment sub-adviser to the Funds. For its services, the Adviser
receives a fee from each Fund at an annual rate that is based on the Fund's
average daily net assets. The Adviser, at no additional expense to the Fund,
remits to the Sub-Adviser a portion of its fee as determined by agreement with
the Sub-Adviser from time to time for the services performed by the Sub-Adviser.
See "Fee Table" and "Management of the Funds" in this Prospectus.
The Distributor distributes the Funds' shares, for which it may receive
certain additional fees. The Administrator provides certain administrative
services to the Funds, for which each Fund pays it a fee at an annual rate based
on the Fund's average daily net assets.
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PURCHASE OF SHARES
Shares of the Consumer Service Class of the Funds are offered at net asset
value plus a sales load, where applicable, except for the Money Market Fund
which is offered at net asset value. See "Fund Share Valuation," "Pricing of
Fund Shares" and "Purchase of Fund Shares." Purchases may be made through an
authorized broker or financial institution, including FMB-Brokerage Services,
Inc., an affiliate of the Adviser and Sub-Adviser, by mail or by wire. Purchases
may only be made in cash (except for certain in-kind purchases with acceptable
securities) with a minimum initial investment of $500 (the $500 minimum may be
waived or reduced for certain accounts; the minimum initial purchase is $250 for
Individual Retirement Accounts ("IRAs")). Subsequent investments may be made for
as little as $50.
REDEMPTION OF SHARES
Shares may be redeemed at their next determined net asset value. See
"Redemption of Fund Shares" and "Fund Share Valuation." Requests for redemptions
may be placed through an authorized broker or financial institution, including
FMB-Brokerage Services, Inc., an affiliate of the Adviser and Sub-Adviser, by
mail or by telephone. The Funds reserve the right to redeem, upon not less than
30 days' notice, all shares in a Fund account (other than the account of an IRA
investor) which has been reduced by redemptions to a value below $500.
DIVIDENDS AND DISTRIBUTIONS
The Diversified Equity Fund will declare and pay as a dividend
substantially all of its net income quarterly. The other Funds will declare
dividends of substantially all of their net income daily and accrue and pay
those dividends monthly. Any net capital gains of a Fund will be distributed at
least annually. All dividends and distributions will be reinvested automatically
at net asset value in additional shares of the Fund unless cash payment is
requested by a shareholder.
FUND EXPENSES
The following fee table is provided to assist investors in understanding
the various costs and expenses that a shareholder can expect to incur as an
investor in the Consumer Service Class of a Fund.
3
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FEE TABLE*
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET INCOME BOND EQUITY
FUND FUND FUND FUND
------ ------------ -------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on the Purchase of
Shares (as a percentage of offering price)....... 0.00% 3.00% 3.00% 4.00%
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
Advisory Fees (after waiver)**..................... 0.35% 0.45% 0.15% 1.00%
12b-1 Fees (after waivers)+........................ 0.25% 0.25% 0.25% 0.25%
Other Expenses***.................................. 0.35% 0.34% 0.47% 0.40%
----- ----- ----- -----
Total Fund Operating Expenses (after
waivers)****................................. 0.95% 1.04% 0.87% 1.65%
===== ===== ===== =====
</TABLE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return***** and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET INCOME BOND EQUITY
FUND FUND FUND FUND
------ ------------ -------- -----------
<S> <C> <C> <C> <C>
1 year............................................. $ 10 $ 40 $ 39 $ 56
3 years............................................ $ 30 $ 62 $ 57 $ 90
5 years............................................ $ 53 $ 86 $ 77 $126
10 years........................................... $117 $153 $134 $228
</TABLE>
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* The expense information in the table has been restated to reflect the
elimination of certain expense waivers which were in effect for the prior
year, and includes operating expenses at the levels estimated for the
current fiscal year.
** Absent such waiver, Advisory Fees would be 0.55% for the Michigan Tax-Free
Bond Fund.
*** Other Expenses include, but are not limited to, administrative service,
legal, audit, insurance, printing and registration fees.
**** Absent such waivers, Total Fund Operating Expenses would be 1.14% for the
Intermediate Government Income Fund, 1.37% for the Michigan Tax-Free Bond
Fund and 1.75% for the Diversified Equity Fund.
***** The assumed 5% annual return is hypothetical and should not be considered
a representation of past or future annual return; the actual rate of
return may be greater or less than the assumed rate.
+ Absent waivers, 12b-1 Fees would be 0.35%, 0.35% and 0.35%, respectively,
for the Intermediate Government Income Fund, Michigan Tax-Free Bond Fund
and Diversified Equity Fund.
Long-term shareholders in mutual funds with 12b-1 fees such as those
provided for under the Company's Distribution Plan with respect to the Consumer
Service Class of each Fund may pay more than the economic equivalent of the
maximum front-end sales charge permitted by the rules of the National
Association of Securities Dealers, Inc. ("NASD"). The Funds will comply with the
limitations on sales charges imposed by NASD rules.
4
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FMB FUNDS, INC.
CONSUMER SERVICE CLASS
The following financial highlights have been audited by Price Waterhouse
LLP, Independent Accountants, whose report on the Financial Statements, which
includes this data, is included in the SAI. This information should be read in
conjunction with the Financial Statements and notes thereto which are included
in the SAI. The SAI may be obtained by shareholders by writing or calling at the
address or telephone number printed on the cover of this Prospectus.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FMB MONEY MARKET FUND
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- -------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................ $1.000 $1.000 $1.000 $1.000
------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income......... 0.051 0.035 0.029 0.035
------------ ------------ ------------ ------------
Less dividends from net
investment income............. (0.051) (0.035) (0.029) (0.035)
------------ ------------ ------------ ------------
Net Asset Value, End of
Period........................ $1.000 $1.000 $1.000 $1.000
============ ============ ============ ============
Total return (not reflecting
sales load)................... 5.28% 3.51% 2.97% 3.67%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)..................... $17,489 $7,154 $1,485 $208
Ratios of Expenses to Average
Net Assets.................. 0.65% 0.68% 0.32% 0.39%
Ratios of Expenses before
effect of waivers........... 0.65% 0.70% 0.68% 1.03%
Ratios of Net Investment
Income to Average Net
Assets...................... 5.16% 3.46% 2.91% 3.46%
- ---------------
* Fund Commenced Operations on
December 2, 1991.
</TABLE>
5
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FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB INTERMEDIATE GOVERNMENT INCOME FUND
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- -------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................ $9.66 $10.46 $10.10 $10.00
------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income....... 0.61 0.57 0.59 0.58
Net gain (loss) on
securities (both realized
and unrealized)........... 0.58 (0.80) 0.36 0.10
------------ ------------ ------------ ------------
Total from Investment
Operations................ 1.19 (0.23) 0.95 0.68
------------ ------------ ------------ ------------
Less Distributions:
Dividends from net
investment income......... (0.61) (0.57) (0.59) (0.58)
------------ ------------ ------------ ------------
Net Asset Value, End of
Period........................ $10.24 $9.66 $10.46 $10.10
============ ============ ============ ============
Total Return (not reflecting
sales load)................... 12.64% (2.23%) 9.60% 6.95%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)................... $7,610 $9,718 $ 10,872 $5,440
Ratios of Expenses to
Average Net Assets........ 0.78% 0.83% 0.50% 0.61%
Ratios of Expenses before
effect of waivers......... 0.78% 0.85% 0.78% 1.08%
Ratios of Net Investment
Income to Average Net
Assets.................... 6.09% 6.45% 5.66% 5.67%
Portfolio Turnover Rate..... 27% 20% 17% 29%
- ---------------
* Fund Commenced Operations on
December 2, 1991.
</TABLE>
6
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FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB MICHIGAN TAX-FREE BOND FUND
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- -------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................ $9.97 $10.61 $10.24 $10.00
------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income....... 0.49 0.47 0.49 0.46
Net gain (loss) on
securities (both realized
and unrealized)........... 0.82 (0.63) 0.37 0.24
------------ ------------ ------------ ------------
Total from Investment
Operations................ 1.31 (0.16) 0.86 0.70
------------ ------------ ------------ ------------
Less Distributions:
Dividends from net
investment income......... (0.49) (0.47) (0.49) (0.46)
Realized capital gains...... 0 (0.01) 0 0
------------ ------------ ------------ ------------
Net Asset Value, End of
Period........................ $10.79 $9.97 $10.61 $10.24
============ ============ ============ ============
Total Return (not reflecting
sales load)................... 13.21% (1.49%) 8.53% 7.17%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)................... $ 12,619 $ 12,249 $ 14,771 $4,572
Ratios of Expenses to
Average Net Assets........ 0.70% 0.51% 0.35% 0.46%
Ratios of Expenses before
effect of waivers/
reimbursements............ 1.18% 1.19% 1.38% 2.72%
Ratios of Net Investment
Income to Average Net
Assets.................... 4.62% 4.50% 4.59% 4.50%
Portfolio Turnover Rate..... 35% 22% 13% 30%
- ---------------
* Fund Commenced Operations on
December 2, 1991.
</TABLE>
7
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FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB DIVERSIFIED EQUITY FUND
---------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- -------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................ $11.44 $11.37 $11.61 $10.00
------------ ------------ ------------ ------------
Income from Investment
Operations:
Net investment income......... 0.12 0.07 0.09 0.10
Net gain (loss) on securities
(both realized and
unrealized)................. 3.13 0.08 (0.25) 1.60
------------ ------------ ------------ ------------
Total from Investment
Operations.................. 3.25 0.15 (0.16) 1.70
------------ ------------ ------------ ------------
Less Distributions:
Dividends from net investment
income...................... (0.11) (0.08) (0.08) (0.09)
------------ ------------ ------------ ------------
Net Asset Value, End of
Period........................ $14.58 $11.44 $11.37 $11.61
============ ============ ============ ============
Total Return (not reflecting
sales load)................... 28.54% 1.34% (1.40%) 17.16%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)..................... $5,833 $4,985 $5,634 $3,377
Ratios of Expenses to Average
Net Assets.................. 1.50% 1.61% 1.50% 1.64%
Ratios of Expenses before
effect of
waivers/reimbursements...... 1.50% 1.61% 1.53% 2.29%
Ratios of Net Investment
Income to Average Net
Assets...................... 0.92% 0.69% 0.82% 0.97%
Portfolio Turnover Rate....... 20% 49% 22% 5%
- ---------------
* Fund Commenced Operations on
December 2, 1991.
</TABLE>
INVESTMENT POLICIES OF THE FUNDS
Each Fund has its own investment objectives, as described earlier in this
Prospectus, which are fundamental. Each Fund also follows its own investment
policies and practices, subject to certain investment restrictions, all as
described further below. The SAI also contains more specific descriptions of
investment restrictions which govern the investments of the Funds.
FMB MONEY MARKET FUND. The Money Market Fund, a diversified portfolio,
invests only in U.S. dollar-denominated "Eligible Securities" that the Board of
Directors of the Company, or the Adviser on its behalf, determines present
minimal credit risks and that have remaining maturities not exceeding thirteen
months, as defined in Rule 2a-7 under the Investment Company Act of 1940 (the
"Act"), and maintains a dollar-weighted average portfolio maturity of 90 days or
less. The Money
8
<PAGE> 12
Market Fund will endeavor to maintain a net asset value of $1.00 per share;
however, there is no assurance that this objective will be achieved.
The Money Market Fund may invest only in:
(i) securities issued or guaranteed by the U.S. Government, its
agencies or its instrumentalities;
(ii) negotiable certificates of deposit, fixed time deposits, bankers'
acceptances, interest bearing demand accounts or other short-term
obligations of U.S. or foreign banks which have more than $500 million in
total assets at the time of investment and, in the case of U.S. banks, are
members of the Federal Reserve System or are examined by the Comptroller of
the Currency, or whose deposits are insured by the FDIC;
(iii) negotiable certificates of deposit and time deposits of U.S.
savings and loan associations that have more than $1 billion in total
assets at the time of investment;
(iv) commercial paper rated at the date of purchase P-2 or better by
Moody's Investors Service, Inc. ("Moody's") or A-2 or better by Standard &
Poor's Corporation ("S&P"), provided that investments in commercial paper
in the lowest of the rating categories described above does not exceed five
percent of total assets and that investments in any single issuer of
commercial paper rated P-2 or A-2 does not exceed one million dollars or
one percent of the total assets of the Money Market Fund at the time of
such investment; and
(v) repurchase agreements relating to any of the foregoing instruments
which are fully collateralized by the instruments described in (i), above.
FMB INTERMEDIATE GOVERNMENT INCOME FUND. The Intermediate Government
Income Fund, a diversified portfolio, invests primarily in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities in the form
of U.S. Treasury bills, notes and bonds, mortgage-backed securities and
collateralized mortgage obligations. As a fundamental policy, under normal
market conditions, the Intermediate Government Income Fund invests at least 65%
of its assets in such securities. Certain of these securities may be subject to
repurchase agreements and this Fund also may engage in transactions in interest
rate futures contracts and options thereon. For a further description of these
securities and other investment activities, see "Description of Securities,
Investment Practices and Restrictions" below.
FMB MICHIGAN TAX-FREE BOND FUND. The Michigan Tax-Free Bond Fund, a
non-diversified portfolio, purchases primarily Michigan Municipal Obligations
that, at the time of purchase, are rated investment-grade or better by Moody's
or S&P or are unrated but are determined by the Adviser to be of comparable
quality, and/or are fully collateralized by U.S. Government securities. The
Michigan Tax-Free Bond Fund will have, under normal market conditions, at least
80% of its net assets invested in securities paying interest that is exempt from
federal income tax and the federal alternative minimum tax, with at least 65% of
the value of its total assets invested in
9
<PAGE> 13
Michigan Municipal Obligations consisting of bonds, as contrasted with notes or
bills. The remaining assets of this Fund may be invested in bank obligations,
commercial paper, corporate debt securities, mortgage-related securities and
other asset-backed securities.
FMB DIVERSIFIED EQUITY FUND. The Diversified Equity Fund, a diversified
portfolio, may invest in a broad range of common stocks of both domestic and
foreign issuers. The Adviser also may invest in other securities in addition to
common stock, such as preferred stocks, debt securities convertible into common
stocks and warrants or other rights to acquire common stocks. The Diversified
Equity Fund will not invest more than 5% of its net assets in warrants,
including no more than 2% of its net assets in warrants that are not listed on
the New York or American Stock Exchanges. Under normal market conditions, the
Diversified Equity Fund will invest at least 65% of its total assets in common
stocks or securities convertible into common stocks. The Diversified Equity Fund
may also invest in American Depositary Receipts ("ADRs"), as described below in
"Description of Securities, Investment Practices and Restrictions -- Investment
in Foreign Securities." For temporary defensive purposes and to meet anticipated
liquidity needs, the Diversified Equity Fund may invest in U.S. Government
securities, certificates of deposit, bankers' acceptances, commercial paper,
repurchase agreements fully collateralized by U.S. Government securities
(maturing in seven days or less) and debt obligations of corporations (corporate
bonds, debentures, notes and other similar corporate debt instruments) which are
rated investment-grade or better by Moody's or S&P.
The following Section describes in greater detail different types of
securities, investment practices and restrictions of the various Funds.
DESCRIPTION OF SECURITIES, INVESTMENT
PRACTICES AND RESTRICTIONS
U.S. GOVERNMENT SECURITIES (All Funds). U.S. Government securities are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have maturities of up to one year,
notes, which have maturities ranging from one year to 10 years, and bonds, which
have maturities of 10 to 30 years, are direct obligations of the United States.
Other U.S. Government securities include debt securities issued or
guaranteed by U.S. Government-sponsored enterprises and federal agencies and
instrumentalities. Some types of U.S. Government securities are supported by the
full faith and credit of the United States or U.S. Treasury guarantees, such as
mortgage-backed certificates guaranteed by the Government National Mortgage
Association ("GNMA"). Other types of U.S. Government securities, such as
obligations of the Student Loan Marketing Association, provide recourse only to
the credit of the agency or instrumentality issuing the obligation. In the case
of obligations not backed by the full faith and credit of the United States, the
investor must look to the agency issuing or guaranteeing the obligation for
ultimate repayment.
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MICHIGAN MUNICIPAL OBLIGATIONS (FMB Michigan Tax-Free Bond Fund only). The
municipal obligations which the Michigan Tax-Free Bond Fund may purchase include
fixed and floating rate and variable rate municipal obligations, participation
interests in municipal bonds, tax-exempt commercial paper, short-term municipal
notes, and stand-by commitments. The Michigan Tax-Free Bond Fund will only
purchase Michigan Municipal Obligations that, at the time of purchase, are rated
investment-grade or better by Moody's or S&P or are unrated but are determined
by the Adviser to be of comparable quality, and/or are fully collateralized by
U.S. Government securities. The Michigan Tax-Free Bond Fund's concentration in
investments in Michigan Municipal Obligations will subject the Fund to greater
risk with respect to its portfolio securities than an investment company that is
permitted to invest in a broader range of investments, because changes in the
financial condition or market assessment of issuers of Michigan Municipal
Obligations generally may cause substantial fluctuations in the Fund's yield and
price of Fund shares. Also, political or economic developments that affect one
such security might affect the other securities. See "Special Factors Affecting
the Michigan Tax-Free Bond Fund" in the SAI.
BANK AND SAVINGS AND LOAN OBLIGATIONS (All Funds except FMB Intermediate
Government Income Fund). These obligations include negotiable certificates of
deposit, fixed time deposits, bankers' acceptances, and interest bearing demand
accounts. The Funds limit their bank investments to dollar-denominated
obligations of U.S., Canadian, Asian or European banks which have more than $500
million in total assets at the time of investment or of United States savings
and loan associations which have more than $1 billion in total assets at the
time of investment and, in the case of U.S. banks, are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC.
COMMERCIAL PAPER (All Funds except FMB Intermediate Government Income
Fund). Commercial paper includes short-term unsecured promissory notes, and
variable floating rate demand notes issued by domestic and foreign bank holding
companies, corporations and financial institutions as well as similar taxable
and tax-exempt instruments issued by government agencies and instrumentalities.
The Money Market Fund purchases only commercial paper that is rated at the time
of purchase, P-2 or better by Moody's or A-2 or better by S&P, and is deemed to
present minimal credit risks. The Money Market Fund limits its purchases of
commercial paper in the lowest of the rating categories described above to five
percent of its total assets. The Money Market Fund also limits its investment in
any single issuer of commercial paper rated P-2 or A-2 to the lesser of one
million dollars or one percent of the total assets of the Money Market Fund at
the time of investment in such commercial paper.
REPURCHASE AGREEMENTS (All Funds). Securities held by the Funds may be
subject to repurchase agreements. A repurchase agreement is a transaction in
which the seller of a security commits itself at the time of the sale to
repurchase that security from the purchaser (a Fund) at a mutually agreed upon
time and price. For certain purposes, these agreements may be considered to be
loans by the purchaser (a Fund) collateralized by the underlying securities.
These agreements will be fully collateralized and the collateral will be
marked-to-market daily. The Funds will enter into repurchase
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agreements only with dealers, domestic banks or recognized financial
institutions which, in the opinion of the Adviser, present minimal credit risks
in accordance with guidelines approved by the Board of Directors of the Company
(the "Board of Directors"). While the maturity of the securities underlying a
repurchase agreement transaction may be more than one year, the term of the
repurchase agreement generally will be seven days or less. A repurchase
agreement with a maturity of more than seven days will be treated as an illiquid
security for the purposes described below (under "Illiquid or Restricted
Investments"). In the event of default by the seller under a repurchase
agreement, a Fund could experience losses that include (i) possible decline in
the value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (ii) additional expenses to the Fund for enforcing
those rights; (iii) possible loss of all or part of the income or proceeds of
the repurchase agreement, and (iv) possible delay in the disposition of the
underlying security pending court action or possible loss of rights in such
securities.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (All Funds except
FMB Intermediate Government Income Fund). The Funds may, from time to time, buy
variable or floating rate demand notes issued by corporations, bank holding
companies and financial institutions and similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. These
securities typically will have a nominal maturity of over one year but will give
the holder the right to "put" the securities to a remarketing agent or other
entity at designated time intervals and on specified notice. The obligation of
the issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Generally, the remarketing
agent will adjust the interest rate every seven days (or at other specified
intervals) in order to maintain the interest rate at the prevailing rate for
securities with a seven-day or other designated maturity. The Money Market Fund
will only purchase demand instruments which provide that the Fund may receive
the principal amount of the note on seven or fewer days notice.
The Funds also may buy variable rate master demand notes. The terms of
these obligations permit a Fund to invest fluctuating amounts at varying rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including situations in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, if
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not so rated, a Fund may, under its minimum rating standards, invest in them
only if, at the time of an investment, the issuer meets the criteria set forth
in this Prospectus for commercial paper obligations.
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES (FMB Michigan Tax-Free Bond
Fund only). The Michigan Tax-Free Bond Fund may purchase when-issued securities
and make contracts to purchase securities for a fixed price at a future date
beyond customary settlement time ("forward commitments") if the Fund holds, and
maintains until the settlement date in a segregated account, cash, U.S.
Government securities or high-grade debt obligations in an amount sufficient to
meet the purchase price, or if the Fund enters into offsetting contracts for the
forward sale of other securities it owns. Purchasing securities on a when-issued
basis and forward commitments involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Michigan Tax-Free Bond Fund's
other assets. No income accrues on securities purchased on a when-issued basis
prior to the time delivery of the securities is made, although a Fund may earn
income on securities it has deposited in the segregated account. The Michigan
Tax-Free Bond Fund does not pay for when-issued securities until they are
delivered. Although it would generally purchase securities on a when-issued
basis or enter into forward commitments with the intention of actually acquiring
securities, the Michigan Tax-Free Bond Fund may dispose of a when-issued
security or forward commitment prior to settlement, if the Adviser deems it
appropriate to do so, and may realize short-term profits or losses upon such a
sale.
MORTGAGE-RELATED SECURITIES (FMB Intermediate Government Income Fund
only). Mortgage pass-through securities are securities representing interests
in "pools" of mortgages in which payments of both interest and principal on the
securities are made monthly, in effect, "passing through" monthly payments made
by the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose the Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of mortgaged-related securities
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities. In recognition of this prepayment risk to
investors, the Public Securities Association (the "PSA") has standardized the
method of measuring the rate of mortgage loan principal prepayments. The PSA
formula, the Constant Prepayment Rate (the "CPR") or other similar models that
are standard in the industry will be used by the Fund in calculating maturity
for purposes of its investment in mortgage-related securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith
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and credit of the U.S. Government (in the case of securities guaranteed by
GNMA); or guaranteed by agencies or instrumentalities of the U.S. Government (in
the case of securities guaranteed by the Federal National Mortgage Association
("FNMA") or the Federal Home Loan Mortgage Corporation ("FHLMC"), which are
supported only by the discretionary authority of the U.S. Government to purchase
the agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees issued by governmental entities.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple
classes, with each class bearing a different stated maturity or interest rate.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been retired.
INVESTMENT IN FOREIGN SECURITIES (FMB Diversified Equity Fund and FMB Money
Market Fund only). The Diversified Equity Fund and the Money Market Fund may
invest in securities of foreign private issuers that are denominated in and pay
interest in U.S. dollars. In addition, the Diversified Equity Fund may invest in
ADRs. ADRs are receipts issued by U.S. banks or trust companies in respect of
securities of foreign issuers held on deposit for use in the U.S. securities
markets. The Diversified Equity Fund treats ADRs as interests in the underlying
securities for purposes of its investment policies.
Investments in foreign securities involve certain considerations that are
not typically associated with investing in domestic securities. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic issuers. In addition, with respect to certain foreign countries,
interest may be withheld at the source under foreign income tax laws, and there
is a possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect investments
in securities of issuers located in those countries. Investments in ADRs are
subject to some, but not all, of the foregoing risks.
OPTIONS ON SECURITIES AND INDICES OF SECURITIES (FMB Intermediate
Government Income Fund and FMB Diversified Equity Fund only). The FMB
Intermediate Government Income Fund and the FMB Diversified Equity Fund may
purchase and write (i.e., sell) call options ("calls") and put options ("puts")
on securities and indices of securities. In the case of the FMB Intermediate
Government Income Fund, such options will only involve debt securities and
indices of debt securities; in the case
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of the FMB Diversified Equity Fund, such options will only involve common stocks
and indices of common stocks.
When a Fund purchases an option, it pays a premium in return for the right
to buy (in the case of a call) or sell (in the case of a put) the underlying
security or index at the exercise price at any time during the option period
(usually not more than nine months in the case of common stock or fifteen months
in the case of debt securities). If an option is not exercised or sold, it will
become worthless on its expiration date. If an option is purchased and becomes
worthless on its expiration date, the Fund will have lost the premium, which
will result in a reduction in the Fund's net asset value or total return.
When a Fund writes an option, it receives a premium and gives the purchaser
the right to buy (in the case of a call) or sell (in the case of a put) the
underlying security or index at any time during the option period at a fixed
exercise price, regardless of market price changes during the option period. If
a call written by a Fund is exercised, the Fund forgoes any gain from an
increase in the market price of the underlying security or index over the
exercise price; if a put written by a Fund is exercised, the Fund may be
required to buy the underlying security or index at a disadvantageous price
above the market price.
Any option written by a Fund will be "covered" throughout the life of the
option. A call is "covered" if the Fund (i) owns the optioned securities, (ii)
maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value sufficient to enable the Fund to purchase the optioned securities or
index or (iii) owns an offsetting call option. A put is "covered" if the Fund
(i) maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value equal to the exercise price of the put or (ii) owns an offsetting put
option.
Options on securities generally settle by physical delivery of the
underlying security. Frequently, rather than taking or making delivery of the
underlying security through the process of exercising the option, options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option. Index options are generally cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying securities exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option)
at the time the option is exercised.
A Fund will realize a gain (or loss) on a closing purchase transaction with
respect to an option previously written by the Fund if the premium, plus
commission costs, paid to purchase the option is less (or greater) than the
premium, less commission costs, received on the sale of the option. A gain also
will be realized if an option which the Fund has written lapses unexercised,
because the Fund would retain the premium.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option.
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FUTURES CONTRACTS (FMB Intermediate Government Income Fund and FMB
Diversified Equity Fund only). The Intermediate Government Income Fund may
purchase and sell interest rate futures contracts and options thereon as a hedge
against changes in interest rates, provided that not more than 5% of the Fund's
net assets are committed to such contracts and options thereon for purposes
other than bona fide hedging. See the SAI for further information about interest
rate futures contracts and options thereon.
The Diversified Equity Fund may enter into stock index futures contracts
and options thereon, in order to protect the value of its common stock
investments, provided that not more than 5% of the Fund's assets are committed
to such contracts and options thereon for purposes other than bona fide hedging.
See the SAI for further information about stock index futures contracts and
options thereon.
UNRATED INVESTMENTS (All Funds). Each Fund may purchase instruments that
are not rated if such obligations are of investment quality comparable to other
rated investments that are permitted to be purchased by such Fund and, in the
case of the Money Market Fund, if they are purchased in accordance with the
respective Fund's procedures adopted by the Company's Board of Directors in
accordance with Rule 2a-7 under the Act.
FIXED INCOME SECURITIES (All Funds). The FMB Money Market Fund, the
Intermediate Government Income Fund and the Michigan Tax-Free Bond Fund will
invest primarily in fixed income securities. As interest rates increase, the
value of the fixed income securities held by a Fund tends to decrease. This
effect will be more pronounced with respect to investments by a Fund in
mortgage-related securities, the value of which are more sensitive to interest
rate changes, as well as with respect to investments in fixed income securities
with longer maturities.
LOANS OF PORTFOLIO SECURITIES (All Funds except FMB Intermediate Government
Income Fund). To increase current income, each Fund may lend portfolio
securities comprising up to 5% of the Fund's total assets to brokers, dealers
and financial institutions, provided certain conditions are met, including the
condition that each loan is secured continuously by collateral maintained on a
daily marked-to-market basis in an amount at least equal to the current market
value of the securities loaned. For further information about portfolio security
lending, see the SAI.
BORROWING AND LENDING POLICIES (All Funds). As a matter of fundamental
policy, (i) no Fund may borrow money or pledge or mortgage its assets, except
that a Fund may borrow from banks up to 10% of the current value of its total
net assets for temporary or emergency purposes and those borrowings may be
secured by the pledge of not more than 15% of the current value of its total net
assets (but investments may not be purchased by a Fund while any such borrowings
are outstanding), and (ii) no Fund may make loans, except loans of portfolio
securities and except that a Fund may enter into repurchase agreements with
respect to its portfolio securities and may purchase the types of debt
instruments described in this Prospectus.
ILLIQUID OR RESTRICTED INVESTMENTS (All Funds). The Funds may purchase
securities for which there is a limited trading market or which are subject to
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restrictions on resale to the public. It is the policy of each Fund that
illiquid securities (including repurchase agreements of more than seven days'
duration, variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount on seven days' notice or less,
securities of foreign issuers that are not listed on a recognized domestic or
foreign securities exchange and restricted securities which are determined to be
"illiquid") may not constitute, at the time of purchase, more than 10% of the
value of the total net assets of the Fund in which they are held. Each Fund may
purchase certain restricted securities ("Rule 144A Securities") for which there
may be a secondary market of qualified institutional buyers as contemplated by
recently adopted Rule 144A under the Securities Act of 1933. Rule 144A is a
recent development and there is no assurance that a liquid market in Rule 144A
Securities will develop or be maintained. To the extent that the number of
qualified institutional buyers is reduced, a previously liquid Rule 144A
Security may be determined to be illiquid, thus increasing the percentage of
illiquid assets in a Fund's portfolio.
OTHER MUTUAL FUNDS (All Funds). Each of the Funds may invest in shares of
other open-end, management investment companies, subject to the limitations of
the Act and subject to such investments being consistent with the overall
objective and policies of the Fund making such investment, provided that any
such purchases will be limited to short-term investments in shares of
unaffiliated investment companies and the Adviser will waive its advisory fees
for that portion of the Fund's assets so invested, except when such purchase is
part of a plan of merger, consolidation, reorganization or acquisition.
DIVERSIFICATION AND CONCENTRATION POLICIES (All Funds). Each Fund (except
the Michigan Tax-Free Bond Fund) is a diversified fund. As such, each such Fund
will not, with respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one issuer (except for U.S. Government
securities) or purchase more than 10% of the outstanding voting securities of
any such issuer. The Money Market Fund may be subject to additional
diversification obligations pursuant to Rule 2a-7 under the Act. The Michigan
Tax-Free Bond Fund is non-diversified.
Also, each Fund will not invest more than 25% of its total assets in the
securities of any one industry, excluding the Money Market Fund which may invest
more than 25% of its total assets in instruments issued by domestic banks. For
this purpose, U.S. Government securities (and repurchase agreements related
thereto) and Michigan Municipal Obligations are not considered securities of a
single industry.
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MANAGEMENT OF THE FUNDS
THE DIRECTORS AND OFFICERS. The business and affairs of each Fund are
managed under the direction of the Board of Directors. Additional information
about the Directors, as well as the Funds' executive officers, is set forth in
the SAI under the heading "Management."
THE ADVISER AND SUB-ADVISER. The Adviser, FMB-Trust, is a wholly owned
subsidiary of the Sub-Adviser, First Michigan Bank Corporation (together with
FMB-Trust, "FMB"). As of November 30, 1995, the Adviser, together with its
affiliates, was providing investment services, through its portfolio managers,
with respect to trust and bank assets in excess of $2 billion.
The Investment Management group at FMB is led by Mr. Stanley P. Roberts,
Senior Vice President and Director of Investments, with over twenty years of
investment management experience with FMB. Mr. Duane C. Carpenter, Senior
Portfolio Manager, with eight years of investment management experience at FMB,
has been primarily responsible for the day-to-day management of the FMB Money
Market Fund since November 1993 and the FMB Intermediate Government Income Fund
since its inception. Mr. Daniel S. VanTimmeren, Assistant Vice President and
Senior Portfolio Manager, with eleven years of investment management experience
with FMB, has been primarily responsible for the day-to-day management of the
FMB Michigan Tax-Free Bond Fund since inception and the FMB Diversified Equity
Fund since November 1993.
Pursuant to an Advisory Agreement, the Adviser manages the investment of
the assets of the Funds and continuously reviews, supervises and administers the
Funds' investments. The Adviser is responsible for placing orders for the
purchase and sale of the Funds' investments directly with brokers and dealers
that are selected by it in its discretion. Pursuant to a Sub-Advisory Agreement
and subject to the supervision of the Adviser, the Sub-Adviser monitors approved
lists of broker-dealers, repurchase dealers and commercial paper issuers,
obtains and analyzes performance and market pricing information, and performs
such other services as delegated to it by the Adviser from time to time.
For the advisory services it provides to the Money Market Fund, the Adviser
is entitled to receive fees at annual rates of 0.35% of the first $500 million
of average net assets, 0.30% of the next $500 million of such assets, and 0.25%
of such assets in excess of $1 billion. For the advisory services it provides to
the other Funds, the Adviser is entitled to receive fees at annual rates of
0.45% of the average daily net assets in the Intermediate Government Income
Fund, 0.55% of the average daily net assets in the Michigan Tax-Free Bond Fund,
and 1.00% of the average daily net assets in the Diversified Equity Fund. Such
fees are payable monthly. Pursuant to the Sub-Advisory Agreement, the Adviser,
at no additional expense to the Fund, remits a portion of its fee as determined
by agreement with the Sub-Adviser from time to time for the services provided by
the Sub-Adviser.
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Purchase and sale orders of the portfolio securities held by each Fund may
be combined with those of other accounts that the Adviser manages or advises,
and for which it has brokerage placement authority, in the interest of seeking
the most favorable overall net results. When the Adviser determines that a
particular security should be bought or sold for a Fund and other accounts
managed by the Adviser, the Adviser undertakes to allocate those transactions
among the participants equitably.
THE DISTRIBUTOR AND ADMINISTRATOR. Pursuant to a Distribution Agreement,
the Distributor, whose address is 680 East Swedesford Road, Wayne, Pennsylvania
19087, acts as distributor of the Funds. The Distributor is a wholly-owned
subsidiary of SEI Corporation ("SEI"), a leading provider of investment services
to banks, institutional investors, investment advisers and insurance companies.
Under the Distribution Plan (the "Plan") adopted by the Company with
respect to the Consumer Service Class of each Fund, each Fund may reimburse the
Distributor monthly (subject to a limit of 0.35% per annum of each Fund's
Consumer Service Class average daily net assets, except in the case of the Money
Market Fund in which case the limit shall be 0.25% per annum of those Funds'
Consumer Service Class's average daily net assets) for costs and expenses of the
Distributor in connection with the distribution of Fund shares of the Consumer
Service Classes. These costs and expenses include (i) advertising by radio,
television, newspapers, magazines, brochures, sales literature, direct mail or
any other form of advertising, (ii) expenses of sales employees or agents of the
Distributor, including salary, commissions, travel and related expenses, (iii)
payments to broker-dealers and financial institutions for services in connection
with the distribution of shares, including promotional incentives and fees
calculated with reference to the average daily net asset value of shares of the
Consumer Service Classes held by shareholders who have a brokerage or other
service relationship with the broker-dealer or other institution receiving such
fees, (iv) costs of printing prospectuses and other materials to be given or
sent to prospective investors and (v) such other similar services as the Board
of Directors determines to be reasonably calculated to result in the sale of
shares of the Consumer Service Classes of the Funds. Each Fund's Consumer
Service Class will pay all costs and expenses in connection with the
preparation, printing and distribution of its Prospectus to current shareholders
and the operation of its Plan, including related legal and accounting fees. No
Fund's Consumer Service Class will be liable for distribution expenditures made
by the Distributor in any given year in excess of the maximum amount payable
under the Plan for that Fund in that year.
The Company has entered into an Administration Agreement with the
Administrator pursuant to which the Administrator, a wholly-owned subsidiary of
SEI, provides certain administrative services, other than investment advisory
services, necessary for each Fund's operations, including all regulatory
reporting, accounting services and all necessary office space, equipment,
personnel and facilities. For these services, the Administrator receives from
each Fund a fee, payable monthly, at a maximum annual rate of 0.20% of each
Fund's average daily net assets. The Administrator also serves as transfer agent
for the Company.
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Each Fund bears all costs of its operations other than expenses
specifically assumed by the Distributor, the Adviser, the Sub-Adviser or the
Administrator. The costs borne by the Funds include legal and accounting
expenses, Directors' fees and expenses, insurance premiums, custodian and
transfer agent fees and expenses, expenses incurred in acquiring or disposing of
the portfolio securities of a Fund, expenses of registering and qualifying the
shares of the Funds for sale with the SEC and with various state securities
commissions, expenses of obtaining quotations on the Funds' portfolio securities
and pricing of the Funds' shares, expenses of maintaining the Funds' legal
existence, and of shareholders' meetings, and expenses of preparation and
distribution to existing shareholders of reports, proxies and prospectuses. Each
Fund bears its own expenses associated with its establishment as a series; these
expenses are being amortized over a five-year period from the commencement of a
Fund's operations. See "Management" in the SAI. Fund expenses directly
attributable to a Fund are charged to that Fund. All other expenses are
allocated appropriately among all the Funds in the Fund group in relation to the
net assets of each Fund or as is otherwise determined to be fair and equitable
by the Board of Directors.
FUND SHARE VALUATION
The net asset value per share is calculated as of 12:00 noon (New York
time) for the Money Market Fund and as of the close of regular trading on the
New York Stock Exchange (which is currently 4:00 p.m. (New York time)) for the
other three Funds, Monday through Friday, except for the following business
holidays with respect to all of the Funds: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the following additional business holidays with respect to the
Money Market Fund: Martin Luther King's Birthday, Lincoln's Birthday, Columbus
Day and Veteran's Day.
The net asset value per share of the Intermediate Government Income Fund,
the Michigan Tax-Free Bond Fund and the Diversified Equity Fund is computed by
dividing the value of its net assets attributed to a class of shares by the
total number of the Funds' outstanding shares for that class. All expenses,
including fees paid to the Adviser, Distributor and the Administrator, are
accrued daily and taken into account for the purpose of determining the net
asset value. In calculating net asset value, each such Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Funds may
determine the market value of individual portfolio securities by using prices
provided by one or more professional independent pricing services to determine
reliable market quotations for securities held by a Fund. See the SAI for a more
complete description of these Funds' valuation methods. The Money Market Fund
uses the amortized cost method to value their portfolio securities and seek to
maintain a constant net asset value of $1.00 per share, although there can be no
assurance that this objective can be achieved. The amortized cost method
involves valuing a security at its cost and
20
<PAGE> 24
amortizing any discount or premium over the period until maturity, regardless of
the impact of fluctuating interest rates on the market value of the security.
See the SAI for a more complete description of the amortized cost method.
PRICING OF FUND SHARES
Orders for purchases of shares of the Consumer Service Classes will be
executed at the net asset value per share plus any applicable sales load (the
"Public Offering Price") next determined after an order has become effective.
There are no sales loads charged on purchases of shares of the Money Market
Fund. Sales loads relating to the Consumer Service Classes of the other three
Funds (the "Load Funds") are as follows:
FMB INTERMEDIATE GOVERNMENT INCOME FUND AND
FMB MICHIGAN TAX-FREE BOND FUND
<TABLE>
<CAPTION>
SALES LOAD AS A AMOUNT OF SALES
PERCENTAGE OF LOAD REALLOWED
-------------------- TO DEALERS AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF INVESTMENT PRICE INVESTED PRICE
----------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Less than $100,000................. 3.00% 3.09% 2.75%
$100,000 but less than $250,000.... 2.50% 2.56% 2.25%
$250,000 but less than $500,000.... 2.00% 2.04% 1.75%
$500,000 but less than
$1,000,000....................... 1.00% 1.01% 0.75%
$1,000,000 and over................ 0.50% 0.50% 0.40%
</TABLE>
FMB DIVERSIFIED EQUITY FUND
<TABLE>
<CAPTION>
SALES LOAD AS A AMOUNT OF SALES
PERCENTAGE OF LOAD REALLOWED
-------------------- TO DEALERS AS
PUBLIC NET A PERCENTAGE OF
OFFERING AMOUNT PUBLIC OFFERING
AMOUNT OF INVESTMENT PRICE INVESTED PRICE
---------------------------------- -------- -------- ---------------
<S> <C> <C> <C>
Less than $100,000................ 4.00% 4.17% 3.75%
$100,000 but less than $250,000... 3.00% 3.09% 2.75%
$250,000 but less than $500,000... 2.00% 2.04% 1.75%
$500,000 but less than
$1,000,000...................... 1.00% 1.01% 0.75%
$1,000,000 and over............... 0.50% 0.50% 0.40%
</TABLE>
The Distributor reserves the right to change the amount of the sales load
reallowed to dealers as a percentage of public offering price from time to time,
and at times the Distributor may reallow the entire sales load to such dealers.
In such circumstances, dealers may be deemed to be "underwriters" as that term
is defined in the Securities Act of 1933.
The sales loads shown above will not apply to shares purchased by (i)
trust, investment management and other accounts managed or administered by the
Adviser
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<PAGE> 25
pursuant to a written management or administration agreement, (ii) any person
purchasing shares with the proceeds of a redemption from any registered open-end
management investment company (other than another Fund) which assesses a front-
end sales charge, (iii) the Distributor or any of its affiliates, (iv) Directors
or officers of the Company, (v) directors or officers of the Distributor, the
Adviser, the Sub-Adviser or their affiliates or full-time employees of any of
the foregoing who have been so employed for not less than 90 days (including
members of their immediate families and their retirement plans or accounts),
provided the Adviser, Sub-Adviser, Distributor or affiliate, as the case may be,
agrees to permit such purchases at net asset value, or (vi) representatives of
selling brokers purchasing shares for themselves or for members of their
immediate families. Any person entitled to receive compensation for selling or
servicing shares may receive different compensation with respect to one class of
shares over another.
QUANTITY DISCOUNTS IN SALES LOADS -- CUMULATIVE DISCOUNT PROGRAM
RIGHT OF ACCUMULATION. The reduced sales loads applicable to single
purchases of shares may also be applied to subsequent purchases of shares of the
Load Funds. Under the Right of Accumulation, the dollar amount of a purchase is
added to the net asset value of any other shares of the Load Funds owned at the
time by the investor. The sales load applied to the shares being purchased will
then be calculated at the rate applicable to the aggregate shares of the Load
Funds then owned. For example, if the investor held shares of a Load Fund valued
at $90,000 and purchased an additional $20,000 of Load Fund shares (totalling a
current account value of $110,000), the sales load for the $20,000 purchase
would be at the next lower sales load on the schedule (i.e., the sales load for
purchases of $100,000 but less than $250,000). There can be no assurance that
investors will receive the cumulative discounts to which they may be entitled
unless, at the time of placing their purchase order, the investors or their
authorized brokers or financial institutions make a request for the discount.
The cumulative discount program may be amended or terminated at any time. This
particular privilege does not entitle the investor to any adjustment in the
sales load paid previously on purchases of shares of the Funds. If the investor
knows that he or she will be making additional purchases of shares in the
future, the investor may wish to consider executing a Letter of Intent as
described below.
LETTER OF INTENT. The schedule of reduced sales loads is also available to
investors who enter into a written Letter of Intent providing for the purchase,
within a thirteen-month period, of shares of a Load Fund. Shares of a Load Fund
previously purchased during a 90-day period prior to the date of receipt by the
Distributor of the Letter of Intent which are still owned by the shareholder may
also be included in determining the applicable reduction, at the net asset value
as of the time the Letter of Intent is executed, provided the shareholder or the
dealer notifies the Distributor of such prior purchases.
A Letter of Intent permits an investor to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales commission
applicable to the
22
<PAGE> 26
amount represented by the goal. The initial purchase under a Letter of Intent
must equal at least 5% of the stated investment goal.
The Letter of Intent does not obligate the investor to purchase, or a Fund
to sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the investor is required to pay the
difference between the sales loads otherwise applicable to the purchases made
during this period and sales loads actually paid. At any time while a Letter of
Intent is in effect, a shareholder may, by written notice to the Distributor,
increase the amount of the stated goal. In that event, shares of a Load Fund
purchased during the previous 90-day period and still owned by the shareholder
will be included, at net asset value, in determining the applicable sales load
reduction. Investors electing to purchase Fund shares pursuant to a Letter of
Intent should carefully read the application for Letter of Intent which is
available from the Distributor.
PURCHASE OF FUND SHARES
All monies received by the Funds, net of any applicable sales loads, are
invested in full and fractional shares of the appropriate Fund. Certificates for
shares are not issued. The Company maintains records of each shareholder's
holdings of Fund shares, and each shareholder receives a statement confirming
transactions and dividends. The Company reserves the right to reject any
purchase order.
MINIMUM PURCHASE REQUIREMENTS. The minimum initial investment in a Fund is
$500, except that, when the investment is for an IRA, the minimum investment is
$250. Subsequent investments must be at least $50. All initial investments
should be accompanied by a completed Purchase Application, a form of which
accompanies this Prospectus. A separate application is required for IRA
investments. The Company and the Distributor reserve the right to waive or
reduce the minimum initial investment amount with respect to certain accounts.
An investment may be made by using any of the following methods:
BY MAIL. Shares are available for purchase by new and existing
shareholders through the mail by forwarding a completed Purchase Application, in
the case of new shareholders, or a check with the proper account information in
the case of existing shareholders, along with a check to FMB Funds, Inc., P.O.
Box 8526, Boston, Massachusetts 02266-8526.
THROUGH AN AUTHORIZED BROKER OR FINANCIAL INSTITUTION. Shares are
available to new and existing shareholders through an authorized broker or
financial institution such as FMB-Brokerage Services, Inc., an affiliate of the
Adviser and the Sub-Adviser, which has entered into a Selling Group Agreement
with the Fund's Distributor. To make an investment using this method, simply
complete a Purchase Application and contact your authorized broker or financial
institution with instructions as to the amount you wish to invest. Your
authorized broker or financial institution will then contact the Distributor to
place the order on your behalf on that day.
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<PAGE> 27
Completed Purchase Applications received by your authorized broker or
financial institution for the Funds (other than the Money Market Fund) prior to
the determination of net asset value and transmitted to the Distributor prior to
the close of its business day (which is currently 4:00 p.m., New York time),
will become effective that day. Orders for the Money Market Fund received by the
Distributor prior to 12:00 noon, New York time, on a business day, will become
effective that day, if federal funds are received that same day by the
Distributor. Authorized brokers or financial institutions which receive orders
from their customers are obligated to transmit them to the Distributor promptly.
You should receive written confirmation of your order within a few days of the
Distributor's receipt of instructions from your authorized broker or financial
institution.
BY WIRE. Investments may be made directly through the use of wire
transfers of federal funds. To purchase shares by a federal funds wire, please
first contact the Distributor's Wire Desk. The Wire Desk will establish a record
of information for the wire to insure the correct processing of monies. You can
reach the Wire Desk at 800-453-4234.
Then, contact your bank and request it to wire monies using the following
instructions:
State Street Bank & Trust Company
Boston, MA
ABA #011000028
Account #99051773
Attention: FMB Fund Name
Further Credit to: Your Account Name and
Account Number
Your bank will normally charge you a fee for handling a federal funds wire
transfer.
As long as you have received and read the Prospectus, you may establish a
new account through the Wire Desk, except that IRAs may not be opened in this
manner. When new accounts are established by wire, the investor's social
security or tax identification number ("TIN") will not be considered certified,
and dividends and distributions will be reinvested, until a signed application
is received. Should any dividend distributions or redemptions be paid before the
TIN is certified, they may be subject to 20% federal tax withholding. With the
application, the shareholder can specify an alternative distribution option and
add any special features offered by the Fund. Completed applications should be
forwarded immediately after making a purchase by wire to FMB Funds, Inc., P.O.
Box 8526, Boston, Massachusetts 02266-8526.
BY AUTOMATIC INVESTMENT. Investors may participate in the Automatic
Investment Program, which is an investment plan that automatically debits money
from the shareholder's designated bank account and invests it in one or more of
the Funds through the use of electronic fund transfers or automatic bank drafts.
Shareholders may elect to make investments by transfers of a minimum of $50 on
any day of the
24
<PAGE> 28
month into their established Fund account. The $50 fee may be reduced or waived
from time to time by the Fund or the Distributor. No minimum initial investment
applies when an account is established through the Automatic Investment Program.
Contact the Funds for more information about the Automatic Investment Program.
BY PAYROLL DIRECT DEPOSITS. Investors may set up a payroll direct deposit
arrangement for amounts to be automatically invested in any of the Funds with no
initial investment minimum. Participants in the Payroll Direct Deposit Program
may make periodic investments of at least $25 per pay period. The $25 fee may be
reduced or waived from time to time by the Fund or the Distributor. Contact the
Funds for more information about Payroll Direct Deposits.
IN-KIND PURCHASES. If accepted by a Fund, shares of a Fund may be
purchased in exchange for securities which are eligible for acquisition by the
Fund as described in this Prospectus. Securities to be exchanged which are
accepted by a Fund will be valued in accordance with the procedures referenced
under "Fund Share Valuation" in this Prospectus at the time of the next
determination of net asset value after such acceptance. Shares issued by a Fund
in exchange for securities will be issued at net asset value determined as of
the same time. All dividends, interest, subscription, or other rights pertaining
to such securities shall become the property of the Fund whose shares are being
acquired and must be delivered to the Fund by the investor upon receipt from the
issuer.
The Funds will accept securities for their portfolios in exchange for
shares issued by them, but only if: (1) such securities are, at the time of the
exchange, eligible to be included in the Fund whose shares are to be issued and
current market quotations are readily available for such securities; (2) the
investor represents and agrees that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the Securities
Act of 1933 or under the laws of the country in which the principal market for
such securities exists, or otherwise; (3) the value of any such security (except
U.S. Government securities) being exchanged together with other securities of
the same issuer owned by the Fund will not exceed 5% of the net assets of the
Fund immediately after the transaction; and (4) such securities are consistent
with the Fund's investment objectives and policies, as applied by the Adviser,
and otherwise acceptable to the Adviser in its sole discretion.
A gain or loss for federal income tax purposes may be realized by taxable
investors making in-kind purchases upon the exchange depending upon the cost of
the securities exchanged. Investors interested in such exchanges should contact
the Adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Any of the Funds may be used as an investment for existing or new IRAs,
although the Michigan Tax-Free Bond Fund is unlikely to be an appropriate choice
for this purpose. IRAs are subject to a minimum initial investment of $250 in a
Fund and applicable contribution limits set by the Internal Revenue Service. If
you do not have an existing IRA that permits investments in the Funds, you may
establish one, using a special application form available from the FMB Funds,
through an account with State
25
<PAGE> 29
Street Bank & Trust Company as custodian. There is an annual $10.00 per Fund fee
with a maximum of $30.00 per year with respect to each such IRA, in addition to
fees which may be charged by a bank as trustee. The telephone, wire and
checkwriting privileges described below, are not available to IRA investors. For
more information about IRA accounts, call the FMB Funds at 800-453-4234.
EXCHANGE PRIVILEGES
The Funds offer two convenient ways to exchange shares in one Fund for
shares in another Fund in an identically registered account by mail or by
telephone. Before engaging in an exchange transaction, a shareholder should read
carefully the portions of this Prospectus describing the Fund into which the
exchange will occur. A shareholder may not exchange shares of one Fund for
shares of another Fund if shares of the Fund into which the investor desires to
exchange are not qualified for sale in the state of the shareholder's residence.
Shares of each class may be exchanged only for shares of the same class in
another Fund. The Company may terminate or amend the terms of the exchange
privileges at any time. Under SEC rules, 60 days' prior notice of any amendments
or termination of exchange privileges will be given to shareholders, except in
certain extraordinary circumstances. An exchange is treated as a sale of a
security on which a gain or loss may be recognized.
Some or all of the shares of the Funds for which payment has been received
(i.e. an established account), may be exchanged for shares at their net asset
value of other Funds within the Company with similar or lower sales loads or for
shares of other Funds within the Company which do not have sales loads. No
service fee is imposed. All exchanges will be made based on the net asset value
next determined following receipt of the request by a Fund in good order. See
"Dividends, Distributions and Federal Income Tax" for an explanation of
circumstances in which sales loads paid to acquire shares of the Funds may not
be taken into account in determining gain or loss on the disposition of those
shares.
EXCHANGE BY MAIL. To exchange Fund shares by mail, send a letter of
instruction to FMB Funds, Inc., P.O. Box 8526, Boston, Massachusetts 02266-8526.
The letter of instruction must include: (i) your account number and the
registered name(s) on the account, (ii) the name of the Fund from which, and the
name of the Fund into which you wish to exchange your investment, (iii) the
dollar amount of shares you wish to exchange, and (iv) the signatures of all
registered owners or authorized parties. All signatures must be guaranteed by a
member of a national securities exchange or by a commercial bank or trust
company. Signature guarantees by savings banks or notaries public are not
acceptable. Corporations, partnerships, trusts or other legal entities will be
required to submit additional documentation.
EXCHANGE BY TELEPHONE. To exchange Fund shares by telephone, or if you
have any questions, simply call the Funds toll free at 800-453-4234. You should
be prepared to give the telephone representative the following information: (i)
your account number, TIN and the registered name(s) on the account, (ii) the
names of the Fund from which, and the Fund into which, you wish to exchange your
investment, and
26
<PAGE> 30
(iii) the dollar or share amount you wish to exchange. The Funds employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If the Funds fail to employ such reasonable procedures, they may be
liable for any loss, damage or expense arising out of any telephone transactions
purporting to be on a shareholder's behalf. In order to assure the accuracy of
instructions received by telephone, the Funds require some form of personal
identification prior to acting upon instructions received by telephone, record
telephone instructions and provide written confirmation to investors of such
transactions. Telephone exchange privileges are available unless you have
declined the option by checking the appropriate "no" box on the Purchase
Application.
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business
day on which the Funds are open for business. Shares will be redeemed at the net
asset value next determined after a redemption request in good order has been
received and accepted by the applicable Fund. See "Fund Share Valuation." A
redemption may be a taxable transaction on which gain or loss may be recognized.
Generally, however, gain or loss is not expected to be realized on a redemption
of shares of the Money Market Fund, which seeks to maintain a net asset value
per share of $1.00.
If the shares to be redeemed have been purchased by check, the redemption
proceeds will not be forwarded until the check received in payment for such
shares has been collected, which may take up to 15 days. Shareholders may avoid
this delay by investing through wire transfers of federal funds. During the
period prior to the time the shares are redeemed, dividends on the shares will
continue to accrue and be payable and the shareholder will be entitled to
exercise all other beneficial rights of ownership.
A Fund will ordinarily send the proceeds of a redemption by check to the
shareholder at the address of record on the next business day following the
redemption, although the Fund is permitted to take up to seven calendar days to
make payment. If the New York Stock Exchange is closed (or trading is
restricted) for any reason other than customary weekend or holiday closings or
if an emergency condition as determined by the SEC merits such action, the Funds
may suspend redemptions or postpone payment dates.
You may redeem your shares using any of the following methods:
THROUGH AN AUTHORIZED BROKER OR FINANCIAL INSTITUTION. You may redeem your
shares by contacting your authorized broker or financial institution and
instructing them to redeem your shares. They will promptly contact the
Distributor and execute the redemption order on your behalf. A redemption of
shares is effected based on receipt by the authorized broker or financial
institution of the shareholder's redemption request. An authorized broker or
financial institution may charge you a fee for this service.
27
<PAGE> 31
BY MAIL. You may redeem your shares by sending a letter to FMB Funds,
Inc., P.O. Box 8526, Boston, Massachusetts 02266-8526. To be accepted, a letter
requesting redemption must include: (i) the Fund name and the registered name(s)
on the account from which you are redeeming shares, (ii) your account number,
(iii) the dollar amount of shares to be redeemed, (iv) the signatures of all
registered owners or authorized parties, and (v) a signature guarantee by a
member of a national securities exchange or a commercial bank or trust company
(a signature guarantee by a savings bank or a notary public is not acceptable),
provided that no signature guarantee is required if the amount to be redeemed is
less than $5,000. Corporations, partnerships, trusts or other legal entities
will be required to submit additional documentation.
TELEPHONE REDEMPTION BY CHECK. You may redeem your shares by calling the
Funds toll free at 800-453-4234. You should be prepared to give the telephone
representative the following information: (i) your account number, TIN and the
registered name(s) on the account, (ii) the name of the Fund from which you are
redeeming shares, and (iii) the dollar amount of shares to be redeemed. The
Funds employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Funds fail to employ such reasonable procedures,
they may be liable for any loss, damage or expense arising out of any telephone
transactions purporting to be on a shareholder's behalf. In order to assure the
accuracy of instructions received by telephone, the Funds require some form of
personal identification prior to acting upon instructions received by telephone,
record telephone instructions and provide written confirmation to investors of
such transactions. Telephone redemption privileges are available unless you have
declined the privilege by checking the appropriate "no" box on the Purchase
Application.
TELEPHONE REDEMPTION BY WIRE. You may redeem your shares by contacting the
Funds by mail or telephone and instructing them to send a wire transmission to a
designated account at your personal bank. Wire redemptions for the Money Market
Fund generally will be transferred to the designated account on the day the
request is received provided that it is received by 12:00 noon (New York time).
Your instructions should include: (i) your account number, TIN and the
registered name(s) on the account, (ii) the name of the Fund from which you are
redeeming shares, (iii) the dollar amount of shares to be redeemed, and (iv)
confirmation of your designated bank name and account number. The Funds employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If the Funds fail to employ such reasonable procedures, they may be
liable for any loss, damage or expense arising out of any telephone transactions
purporting to be on a shareholder's behalf. In order to assure the accuracy of
instructions received by telephone, the Funds require some form of personal
identification prior to acting upon instructions received by telephone, record
telephone instructions and provide written confirmation to investors of such
transactions. Wire redemption privileges are available unless you have declined
the privilege by checking the appropriate "no" box on your Purchase Application.
Your bank may charge you a fee for receiving a wire payment on your behalf. In
order to redeem by wire, a copy of a voided check of the account where proceeds
are to be wired must have been attached to the Purchase Application.
28
<PAGE> 32
CHECKWRITING. A checkwriting ($500 minimum, no maximum) feature is
available with respect to the Money Market Fund. There are no limits on the
number of checks that may be written on an account. Checks are free and may be
obtained from the Distributor. It is not possible to use a check to close out
your account since income will accrue to your account daily from the time a
check is written through the time it clears.
The above-mentioned telephone, wire and checkwriting privileges are not
available for IRAs or trust accounts.
SYSTEMATIC WITHDRAWAL PLAN. A holder of $10,000 or more of shares of a
Fund may elect to have periodic redemptions from his account paid on a monthly,
quarterly or annual basis. The minimum periodic payment is $100. A sufficient
number of shares to make the scheduled redemption will normally be redeemed on
the date selected by the shareholder. Depending on the size of the payment
requested and fluctuation in the net asset value, if any, of the shares
redeemed, redemptions for the purpose of making such payments may reduce or even
exhaust the account. A shareholder may request that these payments be sent to a
predesignated bank or other designated party.
REDEMPTION OF SMALL ACCOUNTS. Due to the disproportionately higher cost of
servicing small accounts, each Fund reserves the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder to $500 or less. However, if during the 30-day notice period the
shareholder purchases sufficient shares to bring the value of the account above
$500, the redemption will not occur.
REDEMPTION IN KIND. All redemptions of shares of the Funds shall be made
in cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC and is a fundamental policy of the Funds that may not be
changed without shareholder approval. In the case of redemption requests by
shareholders in excess of such amounts, the Board of Directors reserves the
right to have the Funds make payment, in whole or in part, in securities or
other assets, in case of an emergency or any time a cash distribution would
impair the liquidity of a Fund to the detriment of the existing shareholders. In
this event, the securities would be valued in the same manner as the securities
of that Fund are valued. If the recipient were to sell such securities, he or
she would incur brokerage charges.
REINSTATEMENT PRIVILEGE. A shareholder in the Funds who has redeemed
shares may reinvest, without a sales charge, up to the full amount of such
redemption at the net asset value determined at the time of the reinvestment
within 90 days of the original redemption. The shareholder must reinvest in the
same Fund and the same account from which the shares were redeemed. A redemption
is a taxable transaction and gain or loss may be recognized for Federal income
tax purposes even if the reinstatement privilege is exercised. Any loss realized
upon the redemption will not be recognized as to the number of shares acquired
by reinstatement, except through an adjustment in the tax basis of the shares so
acquired.
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<PAGE> 33
The redemption methods and procedures described above may be modified or
terminated at any time by the Funds. If the Funds terminate any redemption
methods or procedures, they will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX
The following discussion is only a brief summary of some of the important
tax considerations affecting the Funds and their shareholders. No attempt is
made to present a detailed explanation of all federal, state and local income
tax considerations, and this discussion is not intended as a substitute for
careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers with specific reference to their own tax situation.
The Funds intend to operate as "regulated investment companies" under the
Internal Revenue Code of 1986, as amended (the "Code"). If so qualified, each
Fund will not be subject to federal income taxes with respect to net investment
income and capital gain net income, if any, that are distributed to its
shareholders, provided that a Fund distributes each tax year (i) at least 90% of
its net investment income (including net short-term capital gains), and (ii) at
least 90% of the excess of its tax-exempt interest income net of certain
deductions allocable to such income. Each Fund will be subject to a 4%
nondeductible excise tax on its taxable income to the extent it does not meet
certain distribution requirements by the end of each calendar year. Each Fund
intends to make sufficient distributions to avoid application of this excise
tax.
Except for tax-exempt dividends from the Michigan Tax-Free Bond Fund, all
dividends and capital gains are taxable whether they are reinvested in a Fund or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Each year, you will be notified as to the amount and federal tax
status of all dividends and capital gains paid during the prior year.
Distributions of net realized long-term capital gains designated by a Fund as a
capital gain distribution will be taxable as long-term capital gains, regardless
of how long a shareholder has held the Fund shares, and regardless of whether
the distributions are reinvested in additional shares or received in cash.
Dividends paid from a Fund's net investment income and distributions of a Fund's
net realized short-term capital gains are taxable to shareholders as ordinary
income.
If in any year a Fund should fail to qualify under Subchapter M of the Code
for tax treatment as a regulated investment company, the Fund would incur a
regular corporate federal income tax upon its taxable income for that year, and
distributions to shareholders would be taxable to such shareholders as ordinary
dividend income to the extent of the current and accumulated earnings and
profits of the Fund.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year in which declared.
30
<PAGE> 34
The Diversified Equity Fund will declare and pay as a dividend
substantially all of its net income quarterly. The Money Market Fund, the
Intermediate Government Income Fund and the Michigan Tax-Free Bond Fund will
declare dividends of substantially all of their net income daily and accrue and
pay those dividends monthly. Each Fund will distribute, at least annually,
substantially all net capital gains, if any, earned by such Fund. Each Fund will
inform shareholders of the amount and nature of all such income or gains.
Distributions will be reinvested in additional Fund shares based on the net
asset value at the close of business on the payment date of the distribution,
unless the shareholder elects in writing, not less than five business days prior
to the record date, to receive such distributions in cash. Dividends will be
paid within five business days after the end of the month in which they are
declared.
In the case of the Money Market Fund, shares purchased will begin earning
dividends on the day the purchase order is executed and shares redeemed will
earn dividends through the day prior to the date of redemption. Net investment
income of the Money Market Fund for a Saturday, Sunday or a holiday will be
declared as a dividend on the previous business day. In the case of the other
Funds that declare daily dividends, shares purchased will begin earning
dividends on the day after the purchase order is executed, and shares redeemed
will earn dividends through the day the redemption is executed. Investors who
redeem all or a portion of Fund shares prior to a dividend payment date will be
entitled on the next dividend payment date to all dividends declared but unpaid
on those shares at the time of their redemption.
If you have not furnished a certified correct TIN (generally your social
security number) or have not certified that withholding does not apply, or if
the Internal Revenue Service has notified the Fund that the TIN listed on your
account is incorrect according to their records or that you are subject to
backup withholding, federal law generally requires the Fund to withhold 31% from
any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to your federal tax liability; a refund may be obtained
from the Internal Revenue Service if withholding results in overpayment of
taxes. Federal law also requires the Fund to withhold 30% or the applicable tax
treaty rate from dividends paid to certain non-resident alien, non-U.S.
partnership and non-U.S. corporation shareholder accounts. Certain non-resident
aliens will be subject to non-resident alien tax withholding. The amount
withheld is dependent on the country of citizenship. For more information,
please contact the Company at 800-453-4234.
Dividends and distributions from the Diversified Equity Fund, the Money
Market Fund and the Intermediate Government Income Fund may be subject to state
and local income taxes. Shareholders are advised to consult with their own tax
advisors about state and local tax matters.
THE MICHIGAN TAX-FREE BOND FUND. The Michigan Tax-Free Bond Fund intends
to qualify to pay "exempt-interest dividends," as that term is defined in the
Code, by holding at the end of each quarter of its taxable year at least 50% of
the value of its total assets in the form of obligations described in section
103(a) of the Code.
31
<PAGE> 35
Exempt-interest dividends are generally exempt from federal income tax.
Dividends from the Michigan Tax-Free Bond Fund will not be subject to Michigan
personal income taxes to the extent that such distributions qualify as
exempt-interest dividends and represent interest income attributable to
federally tax-exempt obligations of the State of Michigan and its political
subdivisions.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholders liability (if any) under the federal alternative minimum tax under
the Code.
The exemption of interest income for federal income tax purposes and
Michigan personal income tax purposes may not result in similar exemptions under
the tax law of state and local authorities outside Michigan. In general, a state
exempts from state income tax only interest earned on obligations issued by that
state or its political subdivisions.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, 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 a customer. The Adviser, the Sub-Adviser and the Company believe that
the Adviser or the Sub-Adviser or any of their affiliates may perform the
investment advisory services for the Company described in this Prospectus,
without violation of such banking laws or regulations. However, future changes
in legal requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the Adviser, the Sub-Adviser or any of their affiliates from continuing
to perform investment advisory services for the Company.
If the Adviser, the Sub-Adviser or any of their affiliates were prohibited
from performing investment advisory services for the Company, it is expected
that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. The
Company does not anticipate that investors would suffer any adverse financial
consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
32
<PAGE> 36
OTHER INFORMATION
CAPITALIZATION
The Company was organized as a Maryland corporation on September 20, 1991,
and currently consists of four separately managed series, each representing an
interest in one of the Funds described herein. The Board of Directors may
establish additional series in the future. The capitalization of the Company
consists of 10,000,000,000 shares of common stock with a par value of $0.001
each. When issued in accordance with the terms and procedures described in this
Prospectus, shares of the Funds are fully paid, non-assessable and freely
transferable.
The Company's Board of Directors has authorized the Funds to issue multiple
classes of shares. This Prospectus relates only to the Consumer Service Class of
shares of the Fund. The Funds currently offer one other class of shares in
addition to the Consumer Service Class. The categories of investors that are
eligible to purchase shares may be different for each class of a Fund's shares.
In addition, other classes of a Fund's shares may be subject to differences in
sales charge arrangements, ongoing distribution and service fee levels, and
levels of certain other expenses, which may effect the relative performance of
the different classes of each Fund's shares. Investors may call the Company at
1-800-453-4234 to obtain additional information about other classes of shares of
each Fund that are offered. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different levels of
compensation with respect to one class of shares over another.
VOTING
Shareholders have the right to vote on the election of Directors and on any
and all matters as to which, by law or the provisions of the Articles of
Incorporation of the Company, they may be entitled to vote. All shares of the
Company have equal voting rights and will be voted in the aggregate, and not by
class or series, except where voting by class or series is required by law or
where the matter involved affects only one class or series. The Company is not
required to hold annual meetings of the Funds' shareholders, and does not intend
to do so, in any fiscal year in which it is not required by law to elect
directors. The Directors are required to call a meeting for the purpose of
considering the removal of persons serving as Director, if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Company. See "Capital Stock" in the SAI.
PERFORMANCE INFORMATION
A Fund may, from time to time, include yield and/or total return
information in advertisements or reports to shareholders or prospective
investors. The methods used to calculate the yield and/or total return of a Fund
are mandated by the SEC. See "Calculation of Yield and Total Return" in the SAI.
Quotations of "yield" for the Intermediate Government Income Fund or
Michigan Tax-Free Bond Fund are based on the investment income per share during
a
33
<PAGE> 37
particular 30-day (or one month) period (including dividends and interest), less
expenses accrued by such Fund during the period ("net investment income"), and
will be computed by dividing net investment income by the maximum public
offering price per share on the last day of the period. Quotations of "yield"
for the Money Market Fund are based on the income received by a hypothetical
investment (less a pro-rata share of Fund expenses) over a particular seven-day
period, which is then "annualized" (i.e., assuming that the seven-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). Quotations of "effective yield" for the Money Market Fund
are calculated in a manner similar to that used to calculate yield, but include
the compounding effect of earnings on reinvested dividends.
The Michigan Tax-Free Bond Fund may also advertise its "taxable-equivalent
yield" or "taxable-equivalent effective yield." Taxable-equivalent yield or
taxable-equivalent effective yield is the yield or effective yield that an
investment, subject to federal and Michigan personal income taxes, would need to
earn in order to equal, on an after-tax basis, the yield or effective yield,
respectively, on an investment exempt from such taxes (normally calculated
assuming the maximum combined federal and Michigan marginal tax rate). A
taxable-equivalent yield or taxable-equivalent effective yield quotation for the
Michigan Tax-Free Bond Fund will be higher than the yield or the effective yield
quotation respectively for the Michigan Tax-Free Bond Fund.
A Fund may advertise its "total return." Total return will be calculated
for a Fund by (A) subtracting (i) the public offering price (which includes the
maximum sales load) of one share at the beginning of the period, from (ii) the
net asset value of all shares an investor would own at the end of the period for
the share held at the beginning of the period (assuming reinvestment of all
dividends and capital gain distributions), and dividing by (iii) the public
offering price per share at the beginning of the period or (B) on the basis of
net asset value per share (rather than the public offering price), in which case
the figures would not reflect the effect of any sales loads that would have been
paid by an investor, or by assuming that a sales load other than the maximum
sales load is assessed, provided that total return data derived pursuant to the
calculation described in (A) are also presented. Quotations of average annual
total return are expressed in terms of the average annual compounded rate of
return of a hypothetical investment in a Fund over periods of one, five and 10
years (up to the life of the Fund), reflect the deduction of a proportional
share of Fund expenses (on an annual basis), and assume that all dividends and
distributions are reinvested when paid.
Performance quotations reflect only a Fund's performance during the
particular period on which the calculations are based. Performance quotations
for a Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
The Company's annual report to shareholders, which is available without
charge upon request, contains a discussion of the performance of the
Intermediate Government Income Fund, the Michigan Tax-Free Bond Fund and the
Diversified Equity Fund for the fiscal year ended November 30, 1995.
34
<PAGE> 38
CUSTODY AND TRANSFER AGENCY
First National Bank of Chicago, which has its principal business address at
One First National Plaza, Chicago, Illinois 60670, serves as Custodian. SEI
Financial Management Corporation acts as transfer agent to the Company. SEI
Financial Management Corporation has sub-contracted certain of the services
which it would otherwise be obligated to provide, to Boston Financial Data
Services, Inc.
EXPERTS
Price Waterhouse LLP serves as independent accountants for the Company.
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Distributor's Client
Service Department at 800-453-4234.
35
<PAGE> 39
FMB FUNDS, INC.
680 East Swedesford Road
Wayne, PA 10987
(800) 453-4234
INVESTMENT ADVISER
FMB--TRUST
One Financial Plaza
Holland, MI 49423
INVESTMENT SUB-ADVISER
FIRST MICHIGAN BANK CORPORATION
One Financial Plaza
Holland, MI 49423
DISTRIBUTOR
SEI FINANCIAL SERVICES COMPANY
680 East Swedesford Road
Wayne, PA 10987
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT CORPORATION
680 East Swedesford Road
Wayne, PA 10987
CUSTODIAN
THE FIRST NATIONAL BANK OF CHICAGO
One First National Plaza
Chicago, IL 60670
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
30 South Seventeenth Street
Philadelphia, PA 19103
LEGAL COUNSEL
SIMPSON THACHER & BARTLETT
425 Lexington Avenue
New York, NY 10017
<PAGE> 40
[LOGO]
FMB MONEY MARKET FUND
FMB INTERMEDIATE
GOVERNMENT INCOME FUND
O
FMB MICHIGAN
TAX-FREE BOND FUND
O
FMB DIVERSIFIED
EQUITY FUND
O O
Institutional Class
PROSPECTUS
April 1, 1996
SEI Financial Services Company
Distributor
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, FMB-TRUST OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION ("FDIC"), THE FEDERAL RESERVE
BOARD OR ANY OTHER AGENCY. SHARES OF THE FUNDS INVOLVE INVESTMENT RISK,
INCLUDING POSSIBLE LOSS OF PRINCIPAL.
<PAGE> 41
FMB FUNDS, INC.
P.O. BOX 8526
BOSTON, MASSACHUSETTS 02266-8526
800-453-4234
FMB-TRUST
INVESTMENT ADVISER
FIRST MICHIGAN BANK CORPORATION
INVESTMENT SUB-ADVISER
SEI FINANCIAL MANAGEMENT CORPORATION
ADMINISTRATOR
SEI FINANCIAL SERVICES COMPANY
DISTRIBUTOR
This Prospectus describes the "Institutional Classes" of four mutual funds
(collectively, the "Funds" and individually, a "Fund"), which are separate
investment portfolios of FMB Funds, Inc. ("FMB Funds" or the "Company"). The
Funds, for which FMB-Trust (the "Adviser") and First Michigan Bank Corporation
(the "Sub-Adviser") serve as investment adviser and investment sub-adviser
respectively, and which are distributed by SEI Financial Services Company (the
"Distributor") and administered by SEI Financial Management Corporation (the
"Administrator"), are:
- FMB Money Market Fund
- FMB Intermediate Government Income Fund
- FMB Michigan Tax-Free Bond Fund
- FMB Diversified Equity Fund
This Prospectus relates only to the "Institutional Class" of each Fund's
shares which only certain investors are qualified to purchase, and no other
class of shares of the Fund is offered hereby. INVESTMENTS IN THE MONEY MARKET
FUND ARE NEITHER INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. THE
MONEY MARKET FUND ATTEMPTS TO MAINTAIN THE VALUE OF ITS SHARES AT A CONSTANT
$1.00 PER SHARE, ALTHOUGH THERE CAN BE NO ASSURANCE THAT IT WILL ALWAYS BE ABLE
TO DO SO. SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, FMB-TRUST OR ITS AFFILIATES, NOR ARE THEY FEDERALLY INSURED BY
THE FDIC, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY. SHARES OF THE FUNDS
INVOLVE INVESTMENT RISK, INCLUDING POSSIBLE LOSS OF PRINCIPAL. THIS PROSPECTUS
SETS FORTH CONCISELY THE INFORMATION A PROSPECTIVE INVESTOR SHOULD KNOW BEFORE
INVESTING IN ANY OF THE FUNDS. INVESTORS SHOULD READ THIS PROSPECTUS CAREFULLY
AND RETAIN IT FOR FUTURE REFERENCE.
A Statement of Additional Information ("SAI"), dated March 29, 1996
containing additional and more detailed information about the Funds, has been
filed with the Securities and Exchange Commission ("SEC") and is hereby
incorporated by reference into this Prospectus. The SAI is available without
charge and can be obtained by writing or calling the Funds at the address and
telephone number printed above.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION OR ANY OTHER REGULATORY
AUTHORITY, NOR HAVE ANY OF THE FOREGOING AUTHORITIES PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
March 29, 1996
<PAGE> 42
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Highlights......................................................... 1
Fund Expenses...................................................... 4
Fee Table.......................................................... 4
Financial Highlights............................................... 5
Investment Policies of the Funds................................... 8
Description of Securities, Investment Practices and Restrictions... 10
Management of the Funds............................................ 17
Fund Share Valuation............................................... 19
Pricing and Purchase of Fund Shares................................ 20
Individual Retirement Accounts..................................... 22
Exchange Privileges................................................ 23
Redemption of Fund Shares.......................................... 24
Dividends, Distributions and Federal Income Tax.................... 26
Regulatory Matters................................................. 28
Other Information.................................................. 29
</TABLE>
ii
<PAGE> 43
HIGHLIGHTS
INVESTMENT OBJECTIVES AND POLICIES OF THE FUNDS
This Prospectus describes the Funds, each of which has its own distinct
investment objectives and policies, which are described and summarized here.
FMB MONEY MARKET FUND. The investment objective of the Money Market Fund
is to provide investors with a high level of current income, consistent with
preservation of capital and liquidity. The Money Market Fund pursues its
objective by investing its assets in a broad range of high quality, short-term,
money market instruments which have remaining maturities not exceeding thirteen
months and by maintaining a dollar-weighted average portfolio maturity of 90
days or less. Money market instruments in which the Money Market Fund may invest
include: securities issued or guaranteed by the U.S. Government, its agencies or
its instrumentalities, bank obligations of certain U.S. and foreign banks,
certain U.S. savings and loan obligations, commercial paper, corporate debt
securities, variable rate demand notes and repurchase agreements. All
investments by the Money Market Fund will be denominated in U.S. dollars. The
Money Market Fund attempts to maintain the value of its shares at a constant
$1.00 per share, although there can be no assurance that the Money Market Fund
will always be able to do so.
FMB INTERMEDIATE GOVERNMENT INCOME FUND. The primary investment objective
of the Intermediate Government Income Fund is to provide investors with a high
level of current income, consistent with prudent risk of capital. Total return,
which includes capital appreciation as well as current income, is a secondary
objective of the Intermediate Government Income Fund. Securities held by the
Intermediate Government Income Fund will include obligations issued or
guaranteed by the U.S. Government, its agencies or its instrumentalities, in the
form of U.S. Treasury bills, notes and bonds which have a dollar-weighted
average maturity not exceeding seven years; and, mortgage-backed securities and
collateralized mortgage obligations which have a dollar-weighted average
maturity not exceeding five years. As a matter of operating policy, under normal
market conditions, the Intermediate Government Income Fund's dollar-weighted
average portfolio maturity will not be less than three years.
FMB MICHIGAN TAX-FREE BOND FUND. The investment objective of the Michigan
Tax-Free Bond Fund is to provide investors with a high level of current income,
exempt from both federal and Michigan personal income taxes, while limiting the
risk of potential capital loss. The Michigan Tax-Free Bond Fund pursues this
objective by investing primarily in debt obligations with short-to-intermediate
remaining maturities (less than 15 years) issued by or on behalf of the State of
Michigan and its political subdivisions, agencies, and instrumentalities or by
other issuers outside the State of Michigan if such obligations pay interest
that, in the opinion of counsel to the issuer, is exempt from federal and
Michigan personal income tax ("Michigan Municipal Obligations"). The Michigan
Tax-Free Bond Fund invests primarily in Michigan Municipal Obligations that
present acceptable credit risks in the judgment of the Adviser and that at the
time of purchase are rated "investment-grade" or better or are unrated but are
determined by the Adviser to be of comparable quality. See
1
<PAGE> 44
Appendix A to the SAI for a description of rating categories. The lowest rated
investment-grade securities are deemed to have speculative characteristics. As a
fundamental policy, under normal market conditions, the Michigan Tax-Free Bond
Fund will have at least 80% of its net assets invested in securities the
interest on which is exempt from federal income tax and the federal alternative
minimum tax. As a matter of operating policy, under normal market conditions, at
least 65% of the value of its total assets will be invested in Michigan
Municipal Obligations consisting of bonds, as contrasted with notes or bills.
For temporary defensive purposes, including times when sufficient Michigan
Municipal Obligations may not be available in the marketplace at prices
considered by the Adviser to be acceptable, the Adviser may invest more than 20%
of the Fund's assets in securities that are subject to federal income tax,
Michigan personal income tax or both.
FMB DIVERSIFIED EQUITY FUND. The primary investment objective of the
Diversified Equity Fund is to provide investors with long-term capital
appreciation. Income generation is a secondary objective of the Diversified
Equity Fund. The Diversified Equity Fund pursues these objectives by investing
primarily in common stocks of both domestic and foreign companies. The
Diversified Equity Fund may invest in securities issued by large,
well-established companies, as well as those issued by smaller companies,
subject to a minimum market capitalization of $50 million. There may be some
additional risks associated with investments in smaller companies because their
shares tend to be less liquid than securities of larger companies. Further,
shares of small companies are generally more sensitive to purchase and sale
transactions and changes in the issuer's financial condition and, therefore, the
prices of such stocks may be more volatile than those of larger company stocks.
---------------------
Each of the Funds is subject to the general risks and considerations
associated with the types of investments it may make, as described above and
under "Description of Securities, Investment Practices and Restrictions" below.
The net asset value of the shares of each of the Funds (other than the Money
Market Fund) can be expected to fluctuate. With respect to the Money Market
Fund, there can be no assurance of maintaining the value of its shares at a
constant $1.00 per share.
MANAGEMENT OF THE FUNDS
FMB-Trust acts as investment adviser and First Michigan Bank Corporation
acts as investment sub-adviser to the Funds. For its services, the Adviser
receives a fee from each Fund at an annual rate that is based on the Fund's
average daily net assets. The Adviser, at no additional expense to the Fund,
remits to the Sub-Adviser a portion of its fee as determined by agreement with
the Sub-Adviser from time to time for the services performed by the Sub-Adviser.
See "Fee Table" and "Management of the Funds" in this Prospectus.
The Distributor distributes the Funds' shares, for which it may receive
certain additional fees. The Administrator provides certain administrative
services to the Funds, for which each Fund pays it a fee at an annual rate based
on the Fund's average daily net assets.
2
<PAGE> 45
PURCHASE OF SHARES
Shares of the Institutional Class of the Funds are offered at net asset
value without a sales load. See "Fund Share Valuation" and "Pricing and Purchase
of Fund Shares." Purchases of Institutional Class shares may only be made by one
of the following types of "Institutional Investors": (i) a purchaser through a
trust, investment management or other account managed or administered by the
Adviser; (ii) a purchaser who at the time of placing an order for shares has an
investment balance in the Funds of one million dollars or more; or (iii) a
purchaser making an initial investment of one million dollars or more. Purchases
may be made through an authorized broker or financial institution, including
FMB-Brokerage Services, Inc., an affiliate of the Adviser and Sub-Adviser, by
mail or by wire.
REDEMPTION OF SHARES
Shares may be redeemed at their next determined net asset value. See
"Redemption of Fund Shares" and "Fund Share Valuation." Requests for redemptions
may be placed through an authorized broker or financial institution, including
FMB-Brokerage Services, Inc., an affiliate of the Adviser and Sub-Adviser, by
mail or by telephone. The Funds reserve the right to redeem, upon not less than
30 days' notice, all shares in a Fund account (other than the account of an IRA
investor) which has been reduced by redemptions to a value below $500.
DIVIDENDS AND DISTRIBUTIONS
The Diversified Equity Fund will declare and pay as a dividend
substantially all of its net income quarterly. The other Funds will declare
dividends of substantially all of their net income daily and accrue and pay
those dividends monthly. Any net capital gains of a Fund will be distributed at
least annually. All dividends and distributions will be reinvested automatically
at net asset value in additional shares of the Fund unless cash payment is
requested by a shareholder.
3
<PAGE> 46
FUND EXPENSES
The following fee table is provided to assist investors in understanding
the various costs and expenses that a shareholder can expect to incur as an
investor in the Institutional Class of a Fund.
FEE TABLE*
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET INCOME BOND EQUITY
FUND FUND FUND FUND
------ ------------ -------- -----------
<S> <C> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Charge Imposed on the Purchase of
Shares (as a percentage of
offering price).................................. None None None None
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF
AVERAGE NET ASSETS)
Advisory Fees (after waiver)**..................... 0.35% 0.45% 0.15% 1.00%
12b-1 Fees......................................... None None None None
Other Expenses***.................................. 0.35% 0.34% 0.47% 0.40%
------ ----- ----- -----
Total Fund Operating Expenses (after waiver and
reimbursement)****............................. 0.70% 0.79% 0.62% 1.40%
===== ===== ===== =====
</TABLE>
EXAMPLE: A shareholder would pay the following expenses on a $1,000 investment
assuming (1) a 5% annual return***** and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET INCOME BOND EQUITY
FUND FUND FUND FUND
------ ------------ -------- -----------
<S> <C> <C> <C> <C>
1 year............................................. $ 7 $ 8 $ 6 $ 14
3 years............................................ $22 $25 $20 $ 44
5 years............................................ $39 $44 $35 $ 77
10 years........................................... $87 $98 $77 $168
</TABLE>
- ---------------
* The expense information in the table has been restated to reflect the
elimination of certain expense waivers which were in effect for the prior
year, and includes operating expenses at the levels estimated for the
current fiscal year.
** Absent such waiver, Advisory Fees would be 0.55% for the Michigan Tax-Free
Bond Fund.
*** Other Expenses include, but are not limited to, administrative service,
legal, audit, insurance, printing and registration fees.
**** Absent such waiver, Total Fund Operating Expenses would be 1.02% for the
Michigan Tax-Free Bond Fund.
***** The assumed 5% annual return is hypothetical and should not be considered
a representation of past or future annual return; the actual rate of
return may be greater or less than the assumed rate.
4
<PAGE> 47
FMB FUNDS, INC.
INSTITUTIONAL CLASS
The following financial highlights have been audited by Price Waterhouse
LLP, Independent Accountants, whose report on the Financial Statements, which
includes this data, is included in the SAI. This information should be read in
conjunction with the Financial Statements and notes thereto, which are included
in the SAI. The SAI may be obtained by shareholders by writing or calling at the
address or telephone number printed on the cover of this Prospectus.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FMB MONEY MARKET FUND
------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- ----------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................... $1.000 $1.000 $1.000 $1.000
------------ ------------ ------------ ------------
Income from Investment Operations:
Net investment income............ 0.051 0.035 0.029 0.036
------------ ------------ ------------ ------------
Less dividends from net investment
income........................... (0.051) (0.035) (0.029) (0.036)
------------ ------------ ------------ ------------
Net Asset Value, End of Period..... $1.000 $1.000 $1.000 $1.000
============ ============ ============ ============
Total return....................... 5.28% 3.51% 2.97% 3.78%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)........................ $ 87,238 $103,301 $ 65,448 $ 58,596
Ratios of Expenses to Average Net
Assets......................... 0.65% 0.68% 0.32% 0.27%
Ratios of Expenses before effect
of waivers..................... 0.65% 0.70% 0.68% 0.91%
Ratios of Net Investment Income
to Average Net Assets.......... 5.16% 3.46% 2.91% 3.59%
- ---------------
* Fund Commenced Operations on
December 2, 1991
</TABLE>
5
<PAGE> 48
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB INTERMEDIATE GOVERNMENT INCOME FUND
------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- ----------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................... $9.66 $10.46 $10.10 $10.00
------------ ------------ ------------ ------------
Income from Investment Operations:
Net investment income............ 0.61 0.57 0.59 0.60
Net gain (loss) on securities
(both realized and
unrealized).................... 0.58 (0.80) 0.36 0.10
------------ ------------ ------------ ------------
Total from Investment
Operations..................... 1.19 (0.23) 0.95 0.70
------------ ------------ ------------ ------------
Less Distributions:
Dividends from net investment
income......................... (0.61) (0.57) (0.59) (0.60)
------------ ------------ ------------ ------------
Net Asset Value, End of Period... $10.24 $9.66 $10.46 $10.10
============ ============ ============ ============
Total Return....................... 12.64% (2.23%) 9.60% 7.10%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)........................ $114,646 $115,449 $105,820 $ 81,371
Ratios of Expenses to Average Net
Assets......................... 0.78% 0.83% 0.50% 0.43%
Ratios of Expenses before effect
of waivers..................... 0.78% 0.85% 0.78% 0.90%
Ratios of Net Investment Income
to Average Net Assets.......... 6.09% 6.45% 5.66% 5.85%
Portfolio Turnover Rate.......... 27% 20% 17% 29%
- ---------------
* Fund Commenced Operations on
December 2, 1991
</TABLE>
6
<PAGE> 49
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB MICHIGAN TAX-FREE BOND FUND
------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- ----------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................... $9.97 $10.61 $10.24 $10.00
------------ ------------ ------------ ------------
Income from Investment Operations:
Net investment income............ 0.49 0.47 0.49 0.48
Net gain (loss) on securities
(both realized and
unrealized).................... 0.82 (0.63) 0.37 0.24
------------ ------------ ------------ ------------
Total from Investment
Operations..................... 1.31 (0.16) 0.86 0.72
------------ ------------ ------------ ------------
Less Distributions:
Dividends from net investment
income......................... (0.49) (0.47) (0.49) (0.48)
Realized capital gains........... 0 (0.01) 0 0
------------ ------------ ------------ ------------
Net Asset Value, End of Period..... $10.79 $9.97 $10.61 $10.24
============ ============ ============ ============
Total Return....................... 13.21% (1.49%) 8.53% 7.29%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)........................ $ 20,700 $ 15,495 $ 11,779 $6,043
Ratios of Expenses to Average Net
Assets......................... 0.70% 0.51% 0.35% 0.29%
Ratios of Expenses before effect
of waivers/reimbursements...... 1.18% 1.19% 1.38% 2.55%
Ratios of Net Investment Income
to Average Net Assets.......... 4.62% 4.50% 4.59% 4.68%
Portfolio Turnover Rate.......... 35% 22% 13% 30%
- ---------------
* Fund Commenced Operations on
December 2, 1991
</TABLE>
7
<PAGE> 50
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB DIVERSIFIED EQUITY FUND
------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
FOR A SHARE OUTSTANDING NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
THROUGHOUT EACH PERIOD 1995 1994 1993 1992*
- ----------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of
Period........................... $11.44 $11.37 $11.61 $10.00
------------ ------------ ------------
Income from Investment Operations:
Net investment income............ 0.12 0.07 0.09 0.12
Net gain (loss) on securities
(both realized and
unrealized).................... 3.13 0.08 (0.25) 1.60
------------ ------------ ------------
Total from Investment
Operations..................... 3.25 0.15 (0.16) 1.72
------------ ------------ ------------
Less Distributions:
Dividends from net investment
income......................... (0.11) (0.08) (0.08) (0.11)
------------ ------------ ------------
Net Asset Value, End of Period..... $14.58 $11.44 $11.37 $11.61
============ ============ ============
Total Return....................... 28.54% 1.34% (1.40%) 17.31%
Ratios/Supplemental Data:
Net Assets, End of Period
(000's)........................ $ 53,325 $ 42,229 $ 38,979 $ 29,596
Ratios of Expenses to Average Net
Assets......................... 1.50% 1.61% 1.50% 1.42%
Ratios of Expenses before effect
of waivers/reimbursements...... 1.50% 1.61% 1.53% 2.05%
Ratios of Net Investment Income
to Average Net Assets.......... 0.92% 0.69% 0.82% 1.12%
Portfolio Turnover Rate.......... 20% 49% 22% 5%
- ---------------
* Fund Commenced Operations on
December 2, 1991
</TABLE>
INVESTMENT POLICIES
OF THE FUNDS
Each Fund has its own investment objectives, as described earlier in this
Prospectus, which are fundamental. Each Fund also follows its own investment
policies and practices, subject to certain investment restrictions, all as
described further below. The SAI also contains more specific descriptions of
investment restrictions which govern the investments of the Funds.
FMB MONEY MARKET FUND. The Money Market Fund, a diversified portfolio,
invests only in U.S. dollar-denominated "Eligible Securities" that the Board of
Directors of the Company, or the Adviser on its behalf, determines present
minimal credit risks and that have remaining maturities not exceeding thirteen
months, as defined in Rule 2a-7 under the Investment Company Act of 1940 (the
"Act"), and maintains a dollar-weighted average portfolio maturity of 90 days or
less. The Money Market Fund will endeavor to maintain a net asset value of $1.00
per share; however, there is no assurance that this objective will be achieved.
8
<PAGE> 51
The Money Market Fund may invest only in:
(i) securities issued or guaranteed by the U.S. Government, its
agencies or its instrumentalities;
(ii) negotiable certificates of deposit, fixed time deposits, bankers'
acceptances, interest bearing demand accounts or other short-term
obligations of U.S. or foreign banks which have more than $500 million in
total assets at the time of investment and, in the case of U.S. banks, are
members of the Federal Reserve System or are examined by the Comptroller of
the Currency, or whose deposits are insured by the FDIC;
(iii) negotiable certificates of deposit and time deposits of U.S.
savings and loan associations that have more than $1 billion in total
assets at the time of investment;
(iv) commercial paper rated at the date of purchase P-2 or better by
Moody's Investors Service, Inc. ("Moody's") or A-2 or better by Standard &
Poor's Corporation ("S&P"), provided that investment in commercial paper in
the lowest of the rating categories described above does not exceed five
percent of total assets and that investment in any single issuer of
commercial paper rated P-2 or A-2 does not exceed one million dollars or
one percent of the total assets of the Money Market Fund at the time of
such investment; and
(v) repurchase agreements relating to any of the foregoing instruments
which are fully collateralized by the instruments described in (i), above.
FMB INTERMEDIATE GOVERNMENT INCOME FUND. The Intermediate Government
Income Fund, a diversified portfolio, invests primarily in obligations issued or
guaranteed by the U.S. Government, its agencies or instrumentalities in the form
of U.S. Treasury bills, notes and bonds, mortgage-backed securities and
collateralized mortgage obligations. As a fundamental policy, under normal
market conditions, the Intermediate Government Income Fund invests at least 65%
of its assets in such securities. Certain of these securities may be subject to
repurchase agreements and this Fund also may engage in transactions in interest
rate futures, contracts and options thereon. For a further description of these
securities and other investment activities, see "Description of Securities,
Investment Practices and Restrictions" below.
FMB MICHIGAN TAX-FREE BOND FUND. The Michigan Tax-Free Bond Fund, a
non-diversified portfolio, purchases primarily Michigan Municipal Obligations
that, at the time of purchase, are rated investment grade or better by Moody's
or S&P or are unrated but are determined by the Adviser to be of comparable
quality, and/or are fully collateralized by U.S. Government securities. The
Michigan Tax-Free Bond Fund will have, under normal market conditions, at least
80% of its net assets invested in securities paying interest that is exempt from
federal income tax and the federal alternative minimum tax, with at least 65% of
the value of its total assets invested in Michigan Municipal Obligations
consisting of bonds, as contrasted with notes or bills. The remaining assets of
this Fund may be invested in bank obligations, commercial
9
<PAGE> 52
paper, corporate debt securities, mortgage-related securities and other
asset-backed securities.
FMB DIVERSIFIED EQUITY FUND. The Diversified Equity Fund, a diversified
portfolio, may invest in a broad range of common stocks of both domestic and
foreign issuers. The Adviser also may invest in other securities in addition to
common stock, such as preferred stocks, debt securities convertible into common
stocks and warrants or other rights to acquire common stocks. The Diversified
Equity Fund will not invest more than 5% of its net assets in warrants,
including no more than 2% of its net assets in warrants that are not listed on
the New York or American Stock Exchanges. Under normal market conditions, the
Diversified Equity Fund will invest at least 65% of its total assets in common
stocks or securities convertible into common stocks. The Diversified Equity Fund
may also invest in American Depositary Receipts ("ADRs"), as described below in
"Description of Securities, Investment Practices and Restrictions -- Investment
in Foreign Securities." For temporary defensive purposes and to meet anticipated
liquidity needs, the Diversified Equity Fund may invest in U.S. Government
securities, certificates of deposit, bankers' acceptances, commercial paper,
repurchase agreements fully collateralized by U.S. Government securities
(maturing in seven days or less) and debt obligations of corporations (corporate
bonds, debentures, notes and other similar corporate debt instruments) which are
rated investment-grade or better by Moody's or S&P.
The following Section describes in greater detail different types of
securities, investment practices and restrictions of the various Funds.
DESCRIPTION OF SECURITIES, INVESTMENT
PRACTICES AND RESTRICTIONS
U.S. GOVERNMENT SECURITIES (All Funds). U.S. Government securities are
obligations issued or guaranteed by the U.S. Government, its agencies or
instrumentalities. U.S. Treasury bills, which have maturities of up to one year,
notes, which have maturities ranging from one year to 10 years, and bonds, which
have maturities of 10 to 30 years, are direct obligations of the United States.
Other U.S. Government securities include debt securities issued or
guaranteed by U.S. Government-sponsored enterprises and federal agencies and
instrumentalities. Some types of U.S. Government securities are supported by the
full faith and credit of the United States or U.S. Treasury guarantees, such as
mortgage-backed certificates guaranteed by the Government National Mortgage
Association ("GNMA"). Other types of U.S. Government securities, such as
obligations of the Student Loan Marketing Association, provide recourse only to
the credit of the agency or instrumentality issuing the obligation. In the case
of obligations not backed by the full faith and credit of the United States, the
investor must look to the agency issuing or guaranteeing the obligation for
ultimate repayment.
MICHIGAN MUNICIPAL OBLIGATIONS (FMB Michigan Tax-Free Bond Fund only). The
municipal obligations which the Michigan Tax-Free Bond Fund may purchase include
fixed and floating rate and variable rate municipal obligations, participation
10
<PAGE> 53
interests in municipal bonds, tax-exempt commercial paper, short-term municipal
notes, and stand-by commitments. The Michigan Tax-Free Bond Fund will only
purchase Michigan Municipal Obligations that, at the time of purchase, are rated
investment-grade or better by Moody's or S&P or are unrated but are determined
by the Adviser to be of comparable quality, and/or are fully collateralized by
U.S. Government securities. The Michigan Tax-Free Bond Fund's concentration in
investments in Michigan Municipal Obligations will subject the Fund to greater
risk with respect to its portfolio securities than an investment company that is
permitted to invest in a broader range of investments, because changes in the
financial condition or market assessment of issuers of Michigan Municipal
Obligations generally may cause substantial fluctuations in the Fund's yield and
price of Fund shares. Also, political or economic developments that affect one
such security might affect the other securities. See "Special Factors Affecting
the Michigan Tax-Free Bond Fund" in the SAI.
BANK AND SAVINGS AND LOAN OBLIGATIONS (All Funds except FMB Intermediate
Government Income Fund). These obligations include negotiable certificates of
deposit, fixed time deposits, bankers' acceptances, and interest bearing demand
accounts. The Funds limit their bank investments to dollar-denominated
obligations of U.S., Canadian, Asian or European banks which have more than $500
million in total assets at the time of investment or of United States savings
and loan associations which have more than $1 billion in total assets at the
time of investment and, in the case of U.S. banks, are members of the Federal
Reserve System or are examined by the Comptroller of the Currency or whose
deposits are insured by the FDIC.
COMMERCIAL PAPER (All Funds except FMB Intermediate Government Income
Fund). Commercial paper includes short-term unsecured promissory notes, and
variable floating rate demand notes issued by domestic and foreign bank holding
companies, corporations and financial institutions as well as similar taxable
and tax-exempt instruments issued by government agencies and instrumentalities.
The Money Market Fund purchases only commercial paper that is rated at the time
of purchase, P-2 or better by Moody's or A-2 or better by S&P, and is deemed to
present minimal credit risks. The Money Market Fund limits its purchases of
commercial paper in the lowest of the rating categories described above to five
percent of its total assets. The Money Market Fund also limits its investment in
any single issuer of commercial paper rated P-2 or A-2 to the lesser of one
million dollars or one percent of the total assets of the Money Market Fund at
the time of investment in such commercial paper.
REPURCHASE AGREEMENTS (All Funds). Securities held by the Funds may be
subject to repurchase agreements. A repurchase agreement is a transaction in
which the seller of a security commits itself at the time of the sale to
repurchase that security from the purchaser (a Fund) at a mutually agreed upon
time and price. For certain purposes, these agreements may be considered to be
loans by the purchaser (a Fund) collateralized by the underlying securities.
These agreements will be fully collateralized and the collateral will be
marked-to-market daily. The Funds will enter into repurchase agreements only
with dealers, domestic banks or recognized financial institutions which, in the
opinion of the Adviser, present minimal credit risks in accordance with
guidelines approved by the Board of Directors of the Company (the "Board of
11
<PAGE> 54
Directors"). While the maturity of the securities underlying a repurchase
agreement transaction may be more than one year, the term of the repurchase
agreement generally will be seven days or less. A repurchase agreement with a
maturity of more than seven days will be treated as an illiquid security for the
purposes described below (under "Illiquid or Restricted Investments"). In the
event of default by the seller under a repurchase agreement, a Fund could
experience losses that include (i) possible decline in the value of the
underlying security during the period while the Fund seeks to enforce its rights
thereto; (ii) additional expenses to the Fund for enforcing those rights; (iii)
possible loss of all or part of the income or proceeds of the repurchase
agreement; and (iv) possible delay in the disposition of the underlying security
pending court action or possible loss of rights in such securities.
VARIABLE AND FLOATING RATE DEMAND AND MASTER DEMAND NOTES (All Funds except
FMB Intermediate Government Income Fund). The Funds may, from time to time, buy
variable or floating rate demand notes issued by corporations, bank holding
companies and financial institutions and similar taxable and tax-exempt
instruments issued by government agencies and instrumentalities. These
securities typically will have a nominal maturity of over one year but will give
the holder the right to "put" the securities to a remarketing agent or other
entity at designated time intervals and on specified notice. The obligation of
the issuer of the put to repurchase the securities may be backed by a letter of
credit or other obligation issued by a financial institution. The purchase price
is ordinarily par plus accrued and unpaid interest. Generally, the remarketing
agent will adjust the interest rate every seven days (or at other specified
intervals) in order to maintain the interest rate at the prevailing rate for
securities with a seven-day or other designated maturity. The Money Market Fund
will only purchase demand instruments which provide that the Fund may receive
the principal amount of the note on seven or fewer days notice.
The Funds also may buy variable rate master demand notes. The terms of
these obligations permit a Fund to invest fluctuating amounts at varying rates
of interest pursuant to direct arrangements between the Fund, as lender, and the
borrower. These instruments permit weekly and, in some instances, daily changes
in the amounts borrowed. The Fund has the right to increase the amount under the
note at any time up to the full amount provided by the note agreement, or to
decrease the amount, and the borrower may repay up to the full amount of the
note without penalty. The notes may or may not be backed by bank letters of
credit. Because the notes are direct lending arrangements between the Fund and
borrower, it is not generally contemplated that they will be traded, and there
is no secondary market for them, although they are redeemable (and, thus,
immediately repayable by the borrower) at principal amount, plus accrued
interest, at any time. In connection with any such purchase and on an ongoing
basis, the Adviser will consider the earning power, cash flow and other
liquidity ratios of the issuer, and its ability to pay principal and interest on
demand, including situations in which all holders of such notes make demand
simultaneously. While master demand notes, as such, are not typically rated by
credit rating agencies, if not so rated, a Fund may, under its minimum rating
standards, invest in them only if, at the time of an investment, the issuer
meets the criteria set forth in this Prospectus for commercial paper
obligations.
12
<PAGE> 55
FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES (FMB Michigan Tax-Free Bond
Fund only). The Michigan Tax-Free Bond Fund may purchase when-issued securities
and make contracts to purchase securities for a fixed price at a future date
beyond customary settlement time ("forward commitments") if the Fund holds, and
maintains until the settlement date in a segregated account, cash, U.S.
Government securities or high-grade debt obligations in an amount sufficient to
meet the purchase price, or if the Fund enters into offsetting contracts for the
forward sale of other securities it owns. Purchasing securities on a when-issued
basis and forward commitments involves a risk of loss if the value of the
security to be purchased declines prior to the settlement date, which risk is in
addition to the risk of decline in value of the Michigan Tax-Free Bond Fund's
other assets. No income accrues on securities purchased on a when-issued basis
prior to the time delivery of the securities is made, although a Fund may earn
income on securities it has deposited in the segregated account. The Michigan
Tax-Free Bond Fund does not pay for when-issued securities until they are
delivered. Although it would generally purchase securities on a when-issued
basis or enter into forward commitments with the intention of actually acquiring
securities, the Michigan Tax-Free Bond Fund may dispose of a when-issued
security or forward commitment prior to settlement, if the Adviser deems it
appropriate to do so, and may realize short-term profits or losses upon such a
sale.
MORTGAGE-RELATED SECURITIES (FMB Intermediate Government Income Fund
only). Mortgage pass-through securities are securities representing interests
in "pools" of mortgages in which payments of both interest and principal on the
securities are made monthly, in effect, "passing through" monthly payments made
by the individual borrowers on the residential mortgage loans which underlie the
securities (net of fees paid to the issuer or guarantor of the securities).
Early repayment of principal on mortgage pass-through securities (arising from
prepayments of principal due to sale of the underlying property, refinancing, or
foreclosure, net of fees and costs which may be incurred) may expose the Fund to
a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, in the event of
prepayment the value of the premium would be lost. Like other fixed-income
securities, when interest rates rise, the value of mortgaged-related securities
generally will decline; however, when interest rates decline, the value of
mortgage-related securities with prepayment features may not increase as much as
other fixed-income securities. In recognition of this prepayment risk to
investors, the Public Securities Association (the "PSA") has standardized the
method of measuring the rate of mortgage loan principal prepayments. The PSA
formula, the Constant Prepayment Rate (the "CPR") or other similar models that
are standard in the industry will be used by the Fund in calculating maturity
for purposes of its investment in mortgage-related securities.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by the
full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the U.S.
Government (in the case of securities guaranteed by the Federal National
Mortgage Association ("FNMA") or the Federal Home Loan Mortgage Corporation
("FHLMC"), which are supported
13
<PAGE> 56
only by the discretionary authority of the U.S. Government to purchase the
agency's obligations). Mortgage pass-through securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees issued by governmental entities.
Collateralized mortgage obligations ("CMOs") are hybrid instruments with
characteristics of both mortgage-backed bonds and mortgage pass-through
securities. Similar to a bond, interest and prepaid principal on a CMO are paid,
in most cases, monthly. CMOs may be collateralized by whole mortgage loans but
are more typically collateralized by portfolios of mortgage pass-through
securities guaranteed by GNMA, FHLMC or FNMA. CMOs are structured in multiple
classes, with each class bearing a different stated maturity or interest rate.
Monthly payments of principal, including prepayments, are first returned to
investors holding the shortest maturity class; investors holding the longer
maturity classes receive principal only after the first class has been retired.
INVESTMENT IN FOREIGN SECURITIES (FMB Diversified Equity Fund and FMB Money
Market Fund only). The Diversified Equity Fund and the Money Market Fund may
invest in securities of foreign private issuers that are denominated in and pay
interest in U.S. dollars. In addition, the Diversified Equity Fund may invest in
ADRs. ADRs are receipts issued by U.S. banks or trust companies in respect of
securities of foreign issuers held on deposit for use in the securities markets.
The Diversified Equity Fund treats ADRs as interests in the underlying
securities for purposes of its investment policies.
Investments in foreign securities involve certain considerations that are
not typically associated with investing in domestic securities. There may be
less publicly available information about a foreign issuer than about a domestic
issuer. Foreign issuers also are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic issuers. In addition, with respect to certain foreign countries,
interest may be withheld at the source under foreign income tax laws, and there
is a possibility of expropriation or confiscatory taxation, political or social
instability or diplomatic developments that could adversely affect investments
in securities of issuers located in those countries. Investments in ADRs are
subject to some, but not all, of the foregoing risks.
OPTIONS ON SECURITIES AND INDICES OF SECURITIES (FMB Intermediate
Government Income Fund and FMB Diversified Equity Fund only). The FMB
Intermediate Government Income Fund and the FMB Diversified Equity Fund may
purchase and write (i.e., sell) call options ("calls") and put options ("puts")
on securities and indices of securities. In the case of the FMB Intermediate
Government Income Fund, such options will only involve debt securities and
indices of debt securities; in the case of the FMB Diversified Equity Fund, such
options will only involve common stocks and indices of common stocks.
When a Fund purchases an option, it pays a premium in return for the right
to buy (in the case of a call) or sell (in the case of a put) the underlying
security or index at
14
<PAGE> 57
the exercise price at any time during the option period (usually not more than
nine months in the case of common stock or fifteen months in the case of debt
securities). If an option is not exercised or sold, it will become worthless on
its expiration date. If an option is purchased and becomes worthless on its
expiration date, the Fund will have lost the premium, which will result in a
reduction in the Fund's net asset value or total return.
When a Fund writes an option, it receives a premium and gives the purchaser
the right to buy (in the case of a call) or sell (in the case of a put) the
underlying security or index at any time during the option period at a fixed
exercise price, regardless of market price changes during the option period. If
a call written by a Fund is exercised, the Fund forgoes any gain from an
increase in the market price of the underlying security or index over the
exercise price; if a put written by a Fund is exercised, the Fund may be
required to buy the underlying security or index at a disadvantageous price
above the market price.
Any option written by a Fund will be "covered" throughout the life of the
option. A call is "covered" if the Fund (i) owns the optioned securities, (ii)
maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value sufficient to enable the Fund to purchase the optioned securities or
index or (iii) owns an offsetting call option. A put is "covered" if the Fund
(i) maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value equal to the exercise price of the put or (ii) owns an offsetting put
option.
Options on securities generally settle by physical delivery of the
underlying security. Frequently, rather than taking or making delivery of the
underlying security through the process of exercising the option, options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option. Index options are generally cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying securities exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option)
at the time the option is exercised.
A Fund will realize a gain (or loss) on a closing purchase transaction with
respect to an option previously written by the Fund if the premium, plus
commission costs, paid to purchase the option is less (or greater) than the
premium, less commission costs, received on the sale of the option. A gain also
will be realized if an option which the Fund has written lapses unexercised,
because the Fund would retain the premium.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option.
FUTURES CONTRACTS (FMB Intermediate Government Income Fund and FMB
Diversified Equity Fund only). The Intermediate Government Income Fund may
purchase and sell interest rate futures contracts and options thereon as a hedge
against changes in interest rates, provided that not more than 5% of the Fund's
net assets are committed to such contracts and options thereon for purposes
other than bona fide
15
<PAGE> 58
hedging. See the SAI for further information about interest rate futures
contracts and options thereon.
The Diversified Equity Fund may enter into stock index futures contracts
and options thereon, in order to protect the value of its common stock
investments, provided that not more than 5% of the Fund's assets are committed
to such contracts and options thereon for purposes other than bona fide hedging.
See the SAI for further information about stock index futures contracts and
options thereon.
UNRATED INVESTMENTS (All Funds). Each Fund may purchase instruments that
are not rated if such obligations are of investment quality comparable to other
rated investments that are permitted to be purchased by such Fund and, in the
case of the Money Market Fund, if they are purchased in accordance with the
respective Fund's procedures adopted by the Company's Board of Directors in
accordance with Rule 2a-7 under the Act.
FIXED INCOME SECURITIES (All Funds). The FMB Money Market Fund, the
Intermediate Government Income Fund and the Michigan Tax-Free Bond Fund will
invest primarily in fixed income securities. As interest rates increase, the
value of the fixed income securities held by a Fund tends to decrease. This
effect will be more pronounced with respect to investments by a Fund in
mortgage-related securities, the value of which are more sensitive to interest
rate changes, as well as with respect to investments in fixed income securities
with longer maturities.
LOANS OF PORTFOLIO SECURITIES (All Funds except FMB Intermediate Government
Income Fund). To increase current income, each Fund may lend portfolio
securities comprising up to 5% of the Fund's total assets to brokers, dealers
and financial institutions, provided certain conditions are met, including the
condition that each loan is secured continuously by collateral maintained on a
daily marked-to-market basis in an amount at least equal to the current market
value of the securities loaned. For further information about portfolio security
lending, see the SAI.
BORROWING AND LENDING POLICIES (All Funds). As a matter of fundamental
policy, (i) no Fund may borrow money or pledge or mortgage its assets, except
that a Fund may borrow from banks up to 10% of the current value of its total
net assets for temporary or emergency purposes and those borrowings may be
secured by the pledge of not more than 15% of the current value of its total net
assets (but investments may not be purchased by a Fund while any such borrowings
are outstanding), and (ii) no Fund may make loans, except loans of portfolio
securities and except that a Fund may enter into repurchase agreements with
respect to its portfolio securities and may purchase the types of debt
instruments described in this Prospectus.
ILLIQUID OR RESTRICTED INVESTMENTS (All Funds). The Funds may purchase
securities for which there is a limited trading market or which are subject to
restrictions on resale to the public. It is the policy of each Fund that
illiquid securities (including repurchase agreements of more than seven days'
duration, variable and floating rate demand and master demand notes not
requiring receipt of the principal note amount on seven days' notice or less,
securities of foreign issuers that are not listed on a recognized domestic or
foreign securities exchange and restricted securities which
16
<PAGE> 59
are determined to be "illiquid") may not constitute, at the time of purchase,
more than 10% of the value of the total net assets of the Fund in which they are
held. The Fund may purchase certain restricted securities ("Rule 144A
Securities") for which there may be a secondary market of qualified
institutional buyers as contemplated by recently adopted Rule 144A under the
Securities Act of 1933. Rule 144A is a recent development and there is no
assurance that a liquid market in Rule 144A Securities will develop or be
maintained. To the extent that the number of qualified institutional buyers is
reduced, a previously liquid Rule 144A Security may be determined to be
illiquid, thus increasing the percentage of illiquid assets in a Fund's
portfolio.
OTHER MUTUAL FUNDS (All Funds). Each of the Funds may invest in shares of
other open-end, management investment companies, subject to the limitations of
the Act and subject to such investments being consistent with the overall
objective and policies of the Fund making such investment, provided that any
such purchases will be limited to short-term investments in shares of
unaffiliated investment companies and the Adviser will waive its advisory fees
for that portion of the Fund's assets so invested, except when such purchase is
part of a plan of merger, consolidation, reorganization or acquisition.
DIVERSIFICATION AND CONCENTRATION POLICIES (All Funds). Each Fund (except
the Michigan Tax-Free Bond Fund) is a diversified fund. As such, each such Fund
will not, with respect to 75% of its total assets, invest more than 5% of its
total assets in the securities of any one issuer (except for U.S. Government
securities) or purchase more than 10% of the outstanding voting securities of
any such issuer. The Money Market Fund may be subject to additional
diversification obligations pursuant to Rule 2a-7 under the Act. The Michigan
Tax-Free Bond Fund is non-diversified.
Also, each Fund will not invest more than 25% of its total assets in the
securities of any one industry, excluding the Money Market Fund which may invest
more than 25% of its total assets in instruments issued by domestic banks. For
this purpose, U.S. Government securities (and repurchase agreements related
thereto) and Michigan Municipal Obligations are not considered securities of a
single industry.
MANAGEMENT OF THE FUNDS
THE DIRECTORS AND OFFICERS. The business and affairs of each Fund are
managed under the direction of the Board of Directors. Additional information
about the Directors, as well as the Funds' executive officers, is set forth in
the SAI under the heading "Management."
THE ADVISER AND SUB-ADVISER. The Adviser, FMB-Trust, is a wholly owned
subsidiary of the Sub-Adviser, First Michigan Bank Corporation (together with
FMB-Financial Group, "FMB"). As of November 30, 1995, the Adviser, together with
its affiliates, was providing investment services, through its portfolio
managers, with respect to trust and bank assets in excess of $2 billion.
The Investment Management group at FMB is led by Mr. Stanley P. Roberts,
Senior Vice President and Director of Investments, with over twenty years of
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investment management experience with FMB. Mr. Duane C. Carpenter, Senior
Portfolio Manager, with eight years of investment management experience at FMB,
has been primarily responsible for the day-to-day management of the FMB Money
Market Fund since November 1993 and the FMB Intermediate Government Income Fund
since its inception. Mr. Daniel S. VanTimmeren, Assistant Vice President and
Senior Portfolio Manager, with eleven years of investment management experience
with FMB, has been primarily responsible for the day-to-day management of the
FMB Michigan Tax-Free Bond Fund since inception and the FMB Diversified Equity
Fund since November 1993.
Pursuant to an Advisory Agreement, the Adviser manages the investment of
the assets of the Funds and continuously reviews, supervises and administers the
Funds' investments. The Adviser is responsible for placing orders for the
purchase and sale of the Funds' investments directly with brokers and dealers
that are selected by it in its discretion. Pursuant to a Sub-Advisory Agreement
and subject to the supervision of the Adviser, the Sub-Adviser monitors approved
lists of broker-dealers, repurchase dealers and commercial paper issuers,
obtains and analyzes performance and market pricing information, and performs
such other services as delegated to it by the Adviser from time to time.
For the advisory services it provides to the Money Market Fund, the Adviser
is entitled to receive fees at annual rates of 0.35% of the first $500 million
of average net assets, 0.30% of the next $500 million of such assets, and 0.25%
of such assets in excess of $1 billion. For the advisory services it provides to
the other Funds, the Adviser is entitled to receive fees at annual rates of
0.45% of the average daily net assets in the Intermediate Government Income
Fund, 0.55% of the average daily net assets in the Michigan Tax-Free Bond Fund,
and 1.00% of the average daily net assets in the Diversified Equity Fund. Such
fees are payable monthly. Pursuant to the Sub-Advisory Agreement, the Adviser,
at no additional expense to the Fund, remits a portion of its fee as determined
by agreement with the Sub-Adviser from time to time for the services provided by
the Sub-Adviser.
Purchase and sale orders of the portfolio securities held by each Fund may
be combined with those of other accounts that the Adviser manages or advises,
and for which it has brokerage placement authority, in the interest of seeking
the most favorable overall net results. When the Adviser determines that a
particular security should be bought or sold for a Fund and other accounts
managed by the Adviser, the Adviser undertakes to allocate those transactions
among the participants equitably.
THE DISTRIBUTOR AND ADMINISTRATOR. Pursuant to a Distribution Agreement,
the Distributor, whose address is 680 East Swedesford Road, Wayne, Pennsylvania
19087, acts as sponsor and distributor of the Funds. The Distributor is a
wholly-owned subsidiary of SEI Corporation ("SEI"), a leading provider of
investment services to banks, institutional investors, investment advisers and
insurance companies.
The Company has entered into an Administration Agreement with the
Administrator pursuant to which the Administrator, a wholly owned subsidiary of
SEI, provides certain administrative services, other than investment advisory
services, necessary for
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each Fund's operations including all regulatory reporting, accounting services
and all necessary office space, equipment, personnel and facilities. For these
services, the Administrator receives from each Fund a fee, payable monthly, at a
maximum annual rate of up to 0.20% of each Fund's average daily net assets. The
Administrator also serves as transfer agent for the Company.
---------------------
Each Fund bears all costs of its operations other than expenses
specifically assumed by the Distributor, the Adviser, the Sub-Adviser or the
Administrator. The costs borne by the Funds include legal and accounting
expenses, Directors' fees and expenses, insurance premiums, custodian and
transfer agent fees and expenses, expenses incurred in acquiring or disposing of
the portfolio securities of a Fund, expenses of registering and qualifying the
shares of the Funds for sale with the SEC and with various state securities
commissions, expenses of obtaining quotations on the Funds' portfolio securities
and pricing of the Funds' shares, expenses of maintaining the Funds' legal
existence, and of shareholders' meetings, and expenses of preparation and
distribution to existing shareholders of reports, proxies and prospectuses. Each
Fund bears its own expenses associated with its establishment as a series; these
expenses are being amortized over a five-year period from the commencement of a
Fund's operations. See "Management" in the SAI. Fund expenses directly
attributable to a Fund are charged to that Fund. All other expenses are
allocated appropriately among all the Funds in the Fund group in relation to the
net assets of each Fund or as is otherwise determined to be fair and equitable
by the Board of Directors.
FUND SHARE VALUATION
The net asset value per share is calculated as of 12:00 noon (New York
time) for the Money Market Fund and as of the close of regular trading on the
New York Stock Exchange (which is currently 4:00 p.m. (New York time)) for the
other three Funds, Monday through Friday, except for the following business
holidays with respect to all of the Funds: New Year's Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day and the following additional business holidays with respect to the
Money Market Fund: Martin Luther King's Birthday, Lincoln's Birthday, Columbus
Day, and Veteran's Day.
The net asset value per share of the Intermediate Government Income Fund,
the Michigan Tax-Free Bond Fund and the Diversified Equity Fund is computed by
dividing the value of its net assets attributed to a class of shares by the
total number of the Funds' outstanding shares for that class. All expenses,
including fees paid to the Adviser, Distributor and the Administrator, are
accrued daily and taken into account for the purpose of determining the net
asset value. In calculating net asset value, each such Fund's portfolio
securities will be valued at market value where there is a reliable market
quotation available for the securities and otherwise at fair value as determined
by or under the direction of the Company's Board of Directors. The Funds may
determine the market value of individual portfolio securities by using prices
provided by one or more professional independent pricing services to determine
reliable market
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quotations for securities held by a Fund. See the SAI for a more complete
description of these Funds' valuation methods. The Money Market Fund uses the
amortized cost method to value their portfolio securities and seek to maintain a
constant net asset value of $1.00 per share, although there can be no assurance
that this objective can be achieved. The amortized cost method involves valuing
a security at its cost and amortizing any discount or premium over the period
until maturity, regardless of the impact of fluctuating interest rates on the
market value of the security. See the SAI for a more complete description of the
amortized cost method.
PRICING AND PURCHASE OF FUND SHARES
Orders for purchases of Institutional Class shares will be executed at the
net asset value per share next determined after an order has become effective.
All monies received by the Funds for purchases of Institutional Class shares are
invested in full and fractional shares of the appropriate Fund. Certificates for
shares are not issued. The Company maintains records of each shareholder's
holdings of Fund shares, and each shareholder receives a statement confirming
transactions and dividends. The Company reserves the right to reject any
purchase order. All initial investments should be accompanied by a completed
Purchase Application, a form of which accompanies this Prospectus. A separate
application is required for Individual Retirement Account investments. The
Company and the Distributor reserve the right to waive or reduce the minimum
initial investment amount with respect to certain accounts.
An investment may be made by using any of the following methods:
BY MAIL. Shares are available for purchase by new and existing
shareholders through the mail by forwarding a completed Purchase Application, in
the case of new shareholders or a check with the proper account information in
the case of existing shareholders, along with a check to FMB Funds, Inc., P.O.
Box 8526, Boston, Massachusetts 02266-8526.
THROUGH AN AUTHORIZED BROKER OR FINANCIAL INSTITUTION. Shares are
available to new and existing shareholders through an authorized broker or
financial institution such as FMB-Brokerage Services, Inc., an affiliate of the
Adviser and the Sub-Adviser, which has entered into a Selling Group Agreement
with the Funds' Distributor. To make an investment using this method, simply
complete a Purchase Application and contact your authorized broker or financial
institution with instructions as to the amount you wish to invest. Your
authorized broker or financial institution will then contact the Distributor to
place the order on your behalf on that day.
Completed Purchase Applications received by your authorized broker or
financial institution for the Funds (other than the Money Market Fund) prior to
the determination of net asset value and transmitted to the Distributor prior to
the close of its business day (which is currently 4:00 p.m., New York time),
will become effective that day. Orders for the Money Market Fund received by the
Distributor prior to 12:00 noon, New York time, on a business day, will become
effective that day, if federal funds are received that same day by the
Distributor. Authorized brokers or financial institutions which receive orders
from their customers are obligated to transmit them to
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the Distributor promptly. You should receive written confirmation of your order
within a few days of the Distributor's receipt of instructions from your
authorized broker or financial institution.
BY WIRE. Investments may be made directly through the use of wire
transfers of federal funds. To purchase shares by a federal funds wire, please
first contact the Distributor's Wire Desk. The Wire Desk will establish a record
of information for the wire to insure the correct processing of monies. You can
reach the Wire Desk at 800-453-4234.
Then, contact your bank and request it to wire monies using the following
instructions:
State Street Bank & Trust Company
Boston, MA
ABA #011000028
Account #99051773
Attention: FMB Fund Name
Further Credit to: Your Account Name and Account Number
Your bank will normally charge you a fee for handling a federal funds wire
transfer.
As long as you have received and read the Prospectus, you may establish a
new account through the Wire Desk, except that IRAs may not be opened in this
manner. When new accounts are established by wire, the investor's social
security or tax identification number ("TIN") will not be considered certified,
and dividends and distributions will be reinvested, until a signed application
is received. Should dividends, distributions or redemptions be paid before the
TIN is certified, they may be subject to 20% federal tax withholding. With the
application, the shareholder can specify an alternative distribution option and
add any special features offered by the Fund. Completed applications should be
forwarded immediately after making a purchase by wire to FMB Funds, Inc., P.O.
Box 8526, Boston, Massachusetts 02266-8526.
BY AUTOMATIC INVESTMENT. Investors may participate in the Automatic
Investment Program, which is an investment plan that automatically debits money
from the shareholder's designated bank account and invests it in one or more of
the Funds through the use of electronic fund transfers or automatic bank drafts.
Shareholders may elect to make investments by transfers of a minimum of $50 on
any day of the month into their established Fund account. The $50 fee may be
reduced or waived from time to time by the Fund or the Distributor. No minimum
initial investment applies when an account is established through the Automatic
Investment Program. Contact the Funds for more information about the Automatic
Investment Program.
BY PAYROLL DIRECT DEPOSITS. Investors may set up a payroll direct deposit
arrangement for amounts to be automatically invested in any of the Funds with no
initial investment minimum. Participants in the Payroll Direct Deposit Program
may make periodic investments of at least $25 per pay period. The $25 fee may be
reduced or waived from time to time by the Fund or the Distributor. Contact the
Funds for more information about Payroll Direct Deposits.
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IN-KIND PURCHASES. If accepted by a Fund, shares of a Fund may be
purchased in exchange for securities which are eligible for acquisition by the
Fund as described in this Prospectus. Securities to be exchanged which are
accepted by a Fund will be valued in accordance with the procedures referenced
under "Fund Share Valuation" in this Prospectus at the time of the next
determination of net asset value after such acceptance. Shares issued by a Fund
in exchange for securities will be issued at net asset value determined as of
the same time. All dividends, interest, subscription, or other rights pertaining
to such securities shall become the property of the Fund whose shares are being
acquired and must be delivered to the Fund by the investor upon receipt from the
issuer.
The Funds will accept securities for their portfolios in exchange for
shares issued by them, but only if; (1) such securities are, at the time of the
exchange, eligible to be included in the Fund whose shares are to be issued and
current market quotations are readily available for such securities; (2) the
investor represents and agrees that all securities offered to be exchanged are
not subject to any restrictions upon their sale by the Fund under the Securities
Act of 1933 or under the laws of the country in which the principal market for
such securities exists, or otherwise; (3) the value of any such security (except
U.S. Government securities) being exchanged together with other securities of
the same issuer owned by the Fund will not exceed 5% of the net assets of the
Fund immediately after the transaction; and (4) such securities are consistent
with the Fund's investment objectives and policies, as applied by the Adviser,
and otherwise acceptable to the Adviser in its sole discretion.
A gain or loss for federal income tax purposes may be realized by taxable
investors making in-kind purchases upon the exchange depending upon the cost of
the securities exchanged. Investors interested in such exchanges should contact
the Adviser.
INDIVIDUAL RETIREMENT ACCOUNTS
Any of the Funds may be used as an investment for existing or new IRAs,
although the Michigan Tax-Free Bond Fund is unlikely to be an appropriate choice
for this purpose. IRAs are subject to a minimum initial investment of $250 in a
Fund and applicable contribution limits set by the Internal Revenue Service. If
you do not have an existing IRA that permits investments in the Funds, you may
establish one, using a special application form available from the FMB Funds,
through an account with State Street Bank & Trust Company as custodian. There is
an annual $10.00 per Fund fee with a maximum of $30.00 per year with respect to
each such IRA, in addition to fees which may be charged by a bank as trustee.
The telephone, wire and checkwriting privileges described below, are not
available to IRA investors. For more information about IRA accounts, call the
FMB Funds at 800-453-4234.
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EXCHANGE PRIVILEGES
The Funds offer two convenient ways to exchange shares in one Fund for
shares in another Fund in an identically registered account -- by mail or by
telephone. Before engaging in an exchange transaction, a shareholder should read
carefully the portions of this Prospectus describing the Fund into which the
exchange will occur. A shareholder may not exchange shares of one Fund for
shares of another Fund if shares of the Fund into which the investor desires to
exchange are not qualified for sale in the state of the shareholder's residence.
Shares of each class may be exchanged only for shares of the same class in
another Fund. The Company may terminate or amend the terms of the exchange
privilege at any time. Under SEC rules, 60 days' prior notice of any amendments
or termination of exchange privileges will be given to shareholders, except in
certain extraordinary circumstances. An exchange is treated as a sale of a
security on which a gain or loss may be recognized. All exchanges will be made
based on the net asset value next determined following receipt of the request by
a Fund in good order.
EXCHANGE BY MAIL. To exchange Fund shares by mail, send a letter of
instruction to FMB Funds, Inc., P.O. Box 8526, Boston, Massachusetts 02266-8526.
The letter of instruction must include: (i) your account number and the
registered name(s) of the account, (ii) the name of the Fund from which, and the
name of the Fund into which you wish to exchange your investment, (iii) the
dollar amount of shares you wish to exchange, and (iv) the signatures of all
registered owners or authorized parties. All signatures must be guaranteed by a
member of a national securities exchange or by a commercial bank or trust
company. Signature guarantees by savings banks or notaries public are not
acceptable. Corporations, partnerships, trusts or other legal entities will be
required to submit additional documentation.
EXCHANGE BY TELEPHONE. To exchange Fund shares by telephone, or if you
have any questions, simply call the Funds toll free at 800-453-4234. You should
be prepared to give the telephone representative the following information: (i)
your account number, TIN and the registered name(s) of the account, (ii) the
names of the Fund from which, and the Fund into which, you wish to exchange your
investment, and (iii) the dollar amount of shares you wish to exchange. The
Funds employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Funds fail to employ such reasonable procedures,
they may be liable for any loss, damage or expense arising out of any telephone
transactions purporting to be on a shareholder's behalf. In order to assure the
accuracy of instructions received by telephone, the Funds require some form of
personal identification prior to acting upon instructions received by telephone,
record telephone instructions and provide written confirmation to investors of
such transactions. Telephone exchange privileges are available unless you have
declined the option by checking the appropriate "no" box on the Purchase
Application.
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<PAGE> 66
REDEMPTION OF FUND SHARES
Shareholders may redeem their shares, in whole or in part, on any business
day in which the Funds are open for business. Shares will be redeemed at the net
asset value next determined after a redemption request in good order has been
received and accepted by the applicable Fund. See "Fund Share Valuation." A
redemption may be a taxable transaction on which gain or loss may be recognized.
Generally, however, gain or loss is not expected to be realized on a redemption
of shares of the Money Market Fund, which seeks to maintain a net asset value
per share of $1.00.
If the shares to be redeemed have been purchased by check, the redemption
proceeds will not be forwarded until the check received in payment for such
shares has been collected, which may take up to 15 days. Shareholders may avoid
this delay by investing through wire transfers of federal funds. During the
period prior to the time the shares are redeemed, dividends on the shares will
continue to accrue and be payable and the shareholder will be entitled to
exercise all other beneficial rights of ownership.
A Fund will ordinarily send the proceeds of a redemption by check to the
shareholder at the address of record on the next business day following the
redemption, although the Fund is permitted to take up to seven calendar days to
make payment. If the New York Stock Exchange is closed (or trading is
restricted) for any reason other than customary weekend or holiday closings or
if an emergency condition as determined by the SEC merits such action, the Funds
may suspend redemptions or postpone payment dates.
You may redeem your shares using any of the following methods:
THROUGH AN AUTHORIZED BROKER OR FINANCIAL INSTITUTION. You may redeem your
shares by contacting your authorized broker or financial institution and
instructing them to redeem your shares. They will promptly contact the
Distributor and execute the redemption order on your behalf. A redemption of
shares is effected based on receipt by the authorized broker or financial
institution of the shareholder's redemption request. An authorized broker or
financial institution may charge you a fee for this service.
BY MAIL. You may redeem your shares by sending a letter to FMB Funds,
Inc., P.O. Box 8526, Boston, Massachusetts 02266-8526. To be accepted, a letter
requesting redemption must include: (i) the Fund name and the registered name(s)
on the account from which you are redeeming shares, (ii) your account number,
(iii) the dollar amount of shares to be redeemed, (iv) the signatures of all
registered owners or authorized parties, and (v) a signature guarantee by a
member of a national securities exchange or a commercial bank or trust company
(a signature guarantee by a savings bank or a notary public is not acceptable),
provided that no signature guarantee is required if the amount to be redeemed is
less than $5,000. Corporations, partnerships, trusts or other legal entities
will be required to submit additional documentation.
TELEPHONE REDEMPTION BY CHECK. You may redeem your shares by calling the
Funds toll free at 800-453-4234. You should be prepared to give the telephone
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<PAGE> 67
representative the following information: (i) your account number, TIN and the
registered name(s) on the account, (ii) the name of the Fund from which you are
redeeming shares, and (iii) the dollar amount of shares to be redeemed. The
Funds employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If the Funds fail to employ such reasonable procedures,
they may be liable for any loss, damage or expense arising out of any telephone
transactions purporting to be on a shareholder's behalf. In order to assure the
accuracy of instructions received by telephone, the Funds require some form of
personal identification prior to acting upon instructions received by telephone,
record telephone instructions and provide written confirmation to investors of
such transactions. Telephone redemption privileges are available unless you have
declined the privilege by checking the appropriate "no" box on the Purchase
Application.
TELEPHONE REDEMPTION BY WIRE. You may redeem your shares by contacting the
Funds by mail or telephone and instructing them to send a wire transmission to a
designated account at your personal bank. Wire redemptions for the Money Market
Fund generally will be transferred to the designated account on the day the
request is received provided that it is received by 12:00 noon (New York time).
Your instructions should include: (i) your account number, TIN and the
registered name(s) on the account, (ii) the name of the Fund from which you are
redeeming shares, (iii) the dollar amount of shares to be redeemed, and (iv)
confirmation of your designated bank name and account number. The Funds employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. If the Funds fail to employ such reasonable procedures, they may be
liable for any loss, damage or expense arising out of any telephone transactions
purporting to be on a shareholder's behalf. In order to assure the accuracy of
instructions received by telephone, the Funds require some form of personal
identification prior to acting upon instructions received by telephone, record
telephone instructions and provide written confirmation to investors of such
transactions. Wire redemption privileges are available unless you have declined
the privilege by checking the appropriate "no" box on your Purchase Application.
Your bank may charge you a fee for receiving a wire payment on your behalf. In
order to redeem by wire, a copy of a voided check of the account where proceeds
are to be wired must have been attached to the Purchase Application.
CHECKWRITING. A checkwriting ($500 minimum, no maximum) feature is
available with respect to the Money Market Fund. There are no limits on the
number of checks that may be written on an account. Checks are free and may be
obtained from the Distributor. It is not possible to use a check to close out
your account since income will accrue to your account daily from the time a
check is written through the time it clears.
The above-mentioned telephone, wire and checkwriting privileges are not
available for IRAs or trust accounts.
REDEMPTION OF SMALL ACCOUNTS. Due to the disproportionately higher cost of
servicing small accounts, each Fund reserves the right to redeem, on not less
than 30 days' notice, an account in a Fund that has been reduced by a
shareholder to $500 or
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less. However, if during the 30-day notice period the shareholder purchases
sufficient shares to bring the value of the account above $500, the redemption
will not occur.
REDEMPTION IN KIND. All redemptions of shares of the Funds shall be made
in cash, except that the commitment to redeem shares in cash extends only to
redemption requests made by each shareholder of a Fund during any 90-day period
of up to the lesser of $250,000 or 1% of the net asset value of the Fund at the
beginning of such period. This commitment is irrevocable without the prior
approval of the SEC and is a fundamental policy of the Funds that may not be
changed without shareholder approval. In the case of redemption requests by
shareholders in excess of such amounts, the Board of Directors reserves the
right to have the Funds make payment, in whole or in part, in securities or
other assets, in case of an emergency or any time a cash distribution would
impair the liquidity of a Fund to the detriment of the existing shareholders. In
this event, the securities would be valued in the same manner as the securities
of that Fund are valued. If the recipient were to sell such securities, he or
she would incur brokerage charges.
The redemption methods and procedures described above may be modified or
terminated at any time by the Funds. If the Funds terminate any redemption
methods or procedures, they will do so only after giving written notice to
shareholders. Redemption by mail will always be available to shareholders.
DIVIDENDS, DISTRIBUTIONS AND FEDERAL INCOME TAX
The following discussion is only a brief summary of some of the important
tax considerations affecting the Funds and their shareholders. No attempt is
made to present a detailed explanation of all federal, state and local income
tax considerations, and this discussion is not intended as a substitute for
careful tax planning. Accordingly, potential investors are urged to consult
their own tax advisers with specific reference to their own tax situation.
The Funds intend to operate as "regulated investment companies" under the
Internal Revenue Code of 1986, as amended (the "Code"). If so qualified, each
Fund will not be subject to federal income taxes with respect to net investment
income and capital gain net income, if any, that are distributed to its
shareholders, provided that a Fund distributes each tax year (i) at least 90% of
its net investment income (including net short-term capital gains), and (ii) at
least 90% of the excess of its tax-exempt interest income net of certain
deductions allocable to such income. Each Fund will be subject to a 4%
nondeductible excise tax on its taxable income to the extent it does not meet
certain distribution requirements by the end of each calendar year. Each Fund
intends to make sufficient distributions to avoid application of this excise
tax.
Except for tax-exempt dividends from the Michigan Tax-Free Bond Fund, all
dividends and capital gains are taxable whether they are reinvested in a Fund or
received in cash, unless you are exempt from taxation or entitled to tax
deferral. Each year, you will be notified as to the amount and federal tax
status of all dividends and capital gains paid during the prior year.
Distributions of net realized long-term capital gains designated by a Fund as a
capital gain distribution will be taxable as long-term capital gains, regardless
of how long a shareholder has held the Fund shares, and regardless of whether
the distributions are reinvested in additional shares or received in
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cash. Dividends paid from a Fund's net investment income and distributions of a
Fund's net realized short-term capital gains are taxable to shareholders as
ordinary income.
If in any year a Fund should fail to qualify under Subchapter M of the Code
for tax treatment as a regulated investment company, the Fund would incur a
regular corporate federal income tax upon its taxable income for that year, and
distributions to shareholders would be taxable to such shareholders as ordinary
dividend income to the extent of the current and accumulated earnings and
profits of the Fund.
Although dividends generally will be treated as distributed when paid,
dividends declared in October, November or December, payable to shareholders of
record on a specified date in one of those months and paid during the following
January, will be treated as having been distributed by the Fund (and received by
the shareholders) on December 31 of the year in which declared.
The Diversified Equity Fund will declare and pay as a dividend
substantially all of its net income quarterly. The Money Market Fund, the
Intermediate Government Income Fund and the Michigan Tax-Free Bond Fund will
declare dividends of substantially all of their net income daily and accrue and
pay those dividends monthly. Each Fund will distribute, at least annually,
substantially all net capital gains, if any, earned by such Fund. Each Fund will
inform shareholders of the amount and nature of all such income or gains.
Distributions will be reinvested in additional Fund shares based on the net
asset value at the close of business on the payment date of the distribution,
unless the shareholder elects in writing, not less than five business days prior
to the record date, to receive such distributions in cash. Dividends will be
paid within five business days after the end of the month in which they are
declared.
In the case of the Money Market Fund, shares purchased will begin earning
dividends on the day the purchase order is executed and shares redeemed will
earn dividends through the day prior to the date of redemption. Net investment
income of the Money Market Fund for a Saturday, Sunday or a holiday will be
declared as a dividend on the previous business day. In the case of the other
Funds that declare daily dividends, shares purchased will begin earning
dividends on the day after the purchase order is executed, and shares redeemed
will earn dividends through the day the redemption is executed. Investors who
redeem all or a portion of Fund shares prior to a dividend payment date will be
entitled on the next dividend payment date, to all dividends declared but unpaid
on those shares at the time of their redemption.
If you have not furnished a certified correct TIN (generally your social
security number) or have not certified that withholding does not apply, or if
the Internal Revenue Service has notified the Fund that the TIN listed on your
account is incorrect according to their records or that you are subject to
backup withholding, federal law generally requires the Fund to withhold 31% from
any dividends and/or redemptions (including exchange redemptions). Amounts
withheld are applied to your federal tax liability; a refund may be obtained
from the Internal Revenue Service if withholding
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<PAGE> 70
results in overpayment of taxes. Federal law also requires the Fund to withhold
30% or the applicable tax treaty rate from dividends paid to certain
non-resident alien, non-U.S. partnership and non-U.S. corporation shareholder
accounts. Certain non-resident aliens will be subject to non-resident alien tax
withholding. The amount withheld is dependent on the country of citizenship. For
more information, please contact FMB Funds at 800-453-4234.
Dividends and distributions from the Diversified Equity Fund, the Money
Market Fund and the Intermediate Government Income Fund may be subject to state
and local income taxes. Shareholders are advised to consult with their own tax
advisors about state and local tax matters.
THE MICHIGAN TAX-FREE BOND FUND. The Michigan Tax-Free Bond Fund intends
to qualify to pay "exempt-interest dividends," as that term is defined in the
Code, by holding at the end of each quarter of its taxable year at least 50% of
the value of its total assets in the form of obligations described in section
103(a) of the Code. Exempt-interest dividends are generally exempt from federal
income tax. Dividends from the Michigan Tax-Free Bond Fund will not be subject
to Michigan personal income taxes to the extent that such distributions qualify
as exempt-interest dividends and represent interest income attributable to
federally tax-exempt obligations of the State of Michigan and its political
subdivisions.
Although exempt-interest dividends may be excluded from a shareholder's
gross income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholders liability (if any) under the federal alternative minimum tax under
the Code.
The exemption of interest income for federal income tax purposes and
Michigan personal income tax purposes may not result in similar exemptions under
the tax law of state and local authorities outside Michigan. In general, a state
exempts from state income tax only interest earned on obligations issued by that
state or its political subdivisions.
REGULATORY MATTERS
Banking laws and regulations, including the Glass-Steagall Act as currently
interpreted by the Board of Governors of the Federal Reserve System, prohibit a
bank holding company registered under the Bank Holding Company Act of 1956, as
amended, or any affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling or distributing securities, but do not
prohibit such a bank holding company or affiliate from acting as investment
adviser, administrator, 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 a customer. The Adviser, the Sub-Adviser and the Company believe that
the Adviser or the Sub-Adviser or any of their affiliates may perform the
investment advisory services for the Company described in this Prospectus,
without violation of such banking laws or regulations. However, future changes
in legal
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<PAGE> 71
requirements relating to the permissible activities of banks and their
affiliates, as well as future interpretations of present requirements, could
prevent the Adviser, the Sub-Adviser or any of their affiliates from continuing
to perform investment advisory services for the Company.
If the Adviser, the Sub-Adviser or any of their affiliates were prohibited
from performing investment advisory services for the Company, it is expected
that the Company's Board of Directors would recommend to the Company's
shareholders that they approve new agreements with another entity or entities
qualified to perform such services and selected by the Board of Directors. The
Company does not anticipate that investors would suffer any adverse financial
consequences as a result of these occurrences.
In addition, state securities laws on this issue may differ from the
interpretations of federal law expressed herein and banks and financial
institutions may be required to register as dealers pursuant to state laws.
OTHER INFORMATION
CAPITALIZATION
The Company was organized as a Maryland corporation on September 20, 1991,
and currently consists of four separately managed series, each representing an
interest in one of the Funds described herein. The Board of Directors may
establish additional series in the future. The capitalization of the Company
consists of 10,000,000,000 shares of common stock with a par value of $0.001
each. When issued in accordance with the terms and procedures described in this
prospectus, shares of the Funds are fully paid, non-assessable and freely
transferable.
The Company's Board of Directors has authorized the Funds to issue multiple
classes of shares. This Prospectus relates only to the Institutional Class of
shares of the Fund. The Funds currently offer one other class of shares in
addition to the Institutional Class. The categories of investors that are
eligible to purchase shares may be different for each class of a Fund's shares.
In addition, other classes of a Fund's shares may be subject to differences in
sales charge arrangements, ongoing distribution and service fee levels, and
levels of certain other expenses, which may effect the relative performance of
the different classes of each Fund's shares. Investors may call the Company at
1-800-453-4234 to obtain additional information about other classes of shares of
each Fund that are offered. Any person entitled to receive compensation for
selling or servicing shares of the Funds may receive different levels of
compensation with respect to one class of shares over another.
VOTING
Shareholders have the right to vote on the election of Directors and on any
and all matters which, by law or the provisions of the Articles of Incorporation
of the Company, they may be entitled to vote. All shares of the Company have
equal voting rights and will be voted in the aggregate, and not by class or
series, except where voting
29
<PAGE> 72
by class or series is required by law or where the matter involved affects only
one class or series. The Company is not required to hold annual meetings of the
Funds' shareholders, and does not intend to do so, in any fiscal year in which
it is not required by law to elect directors. The Directors are required to call
a meeting for the purpose of considering the removal of persons serving as
Director, if requested in writing to do so by the holders of not less than 10%
of the outstanding shares of the Company. See "Capital Stock" in the SAI.
PERFORMANCE INFORMATION
A Fund may, from time to time, include yield and/or total return
information in advertisements or reports to shareholders or prospective
investors. The methods used to calculate the yield and/or total return of a Fund
are mandated by the SEC. See "Calculation of Yield and Total Return" in the SAI.
Quotations of "yield" for the Intermediate Government Income Fund or
Michigan Tax-Free Bond Fund are based on the investment income per share during
a particular 30-day (or one month) period (including dividends and interest),
less expenses accrued by such Fund during the period ("net investment income"),
and will be computed by dividing net investment income by the maximum public
offering price per share on the last day of the period. Quotations of "yield"
for the Money Market Fund are based on the income received by a hypothetical
investment (less a pro-rata share of Fund expenses) over a particular seven-day
period, which is then "annualized" (i.e., assuming that the seven-day yield
would be received for 52 weeks, stated in terms of an annual percentage return
on the investment). Quotations of "effective yield" for the Money Market Fund
are calculated in a manner similar to that used to calculate yield, but include
the compounding effect of earnings on reinvested dividends.
The Michigan Tax-Free Bond Fund may also advertise its "taxable-equivalent
yield" or "taxable-equivalent effective yield." Taxable-equivalent yield or
taxable-equivalent effective yield is the yield or effective yield that an
investment, subject to federal and Michigan personal income taxes, would need to
earn in order to equal, on an after-tax basis, the yield or effective yield,
respectively, on an investment exempt from such taxes (normally calculated
assuming the maximum combined federal and Michigan marginal tax rate). A
taxable-equivalent yield or taxable-equivalent effective yield quotation for the
Michigan Tax-Free Bond Fund will be higher than the yield or the effective yield
quotation, respectively for the Michigan Tax-Free Bond Fund.
A Fund may advertise its "total return." Total return will be calculated
for a Fund by subtracting (i) the public offering price of one share at the
beginning of the period, from (ii) the net asset value of all shares an investor
would own at the end of the period for the share held at the beginning of the
period (assuming reinvestment of all dividends and capital gain distributions),
and dividing by (iii) the public offering price per share at the beginning of
the period. Quotations of average annual total return are expressed in terms of
the average annual compounded rate of return of a hypothetical investment in a
Fund over periods of one, five and 10 years (up to the life of the Fund),
reflect the deduction of a proportional share of Fund expenses (on an annual
basis), and assume that all dividends and distributions are reinvested when
paid.
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Performance quotations reflect only a Fund's performance during the
particular period on which the calculations are based. Performance quotations
for a Fund will vary based on changes in market conditions, the level of
interest rates and the level of the Fund's expenses, and no reported performance
figure should be considered an indication of performance which may be expected
in the future.
The Company's annual report to shareholders, which is available without
charge upon request, contains a discussion of the performance of the
Intermediate Government Income Fund, the Michigan Tax-Free Bond Fund and the
Diversified Equity Fund for the fiscal year ended November 30, 1995.
CUSTODY AND TRANSFER AGENCY
First National Bank of Chicago, which has its principal business address at
One First National Plaza, Chicago, Illinois 60670, serves as Custodian. SEI
Financial Management Corporation acts as transfer agent to the Company. SEI
Financial Management Corporation has sub-contracted certain of the services
which it would otherwise be obligated to provide, to Boston Financial Data
Services, Inc.
EXPERTS
Price Waterhouse LLP serves as independent accountants for the Company.
Simpson Thacher & Bartlett (a partnership which includes professional
corporations) serves as counsel to the Company.
SHAREHOLDER INQUIRIES
All shareholder inquiries should be directed to the Distributor's Client
Service Department at 800-453-4234.
31
<PAGE> 74
FMB FUNDS, INC.
680 East Swedesford Road
Wayne, PA. 19087
(800) 453-4234
INVESTMENT ADVISER
FMB--TRUST
One Financial Plaza
Holland, MI 49423
INVESTMENT SUB-ADVISER
FIRST MICHIGAN BANK CORPORATION
One Financial Plaza
Holland, MI 49423
DISTRIBUTOR
SEI FINANCIAL SERVICES COMPANY
680 East Swedesford Road
Wayne, PA. 19087
ADMINISTRATOR
SEI FINANCIAL MANAGEMENT CORPORATION
680 East Swedesford Road
Wayne, PA. 19087
CUSTODIAN
THE FIRST NATIONAL BANK OF CHICAGO
One First National Plaza
Chicago, IL 60670
INDEPENDENT ACCOUNTANTS
PRICE WATERHOUSE LLP
30 South Seventeenth Street
Philadelphia, PA 19103
LEGAL COUNSEL
SIMPSON THACHER & BARTLETT
425 Lexington Avenue
New York, NY 10017
<PAGE> 75
FMB FUNDS, INC.
TELEPHONE: 800/453-4234
STATEMENT OF ADDITIONAL INFORMATION DATED MARCH 29, 1996
FMB MONEY MARKET FUND
FMB INTERMEDIATE GOVERNMENT INCOME FUND
FMB MICHIGAN TAX-FREE BOND FUND
FMB DIVERSIFIED EQUITY FUND
FMB Funds, Inc. (the "Company") is a professionally managed, open-end,
series investment company. This Statement of Additional Information ("SAI")
contains information about both the "Consumer Service Class" and the
"Institutional Class" of all four of the Company's investment portfolios -- the
Money Market Fund, the Intermediate Government Income Fund, the Michigan
Tax-Free Bond Fund and the Diversified Equity Fund (each, a "Fund" and
collectively, the "Funds"). The investment objectives of each Fund are described
in the Prospectus. See "Investment Policies of the Funds."
This SAI is not a prospectus and should be read in conjunction with the
Funds' Prospectus, dated March 29, 1996. All terms used in this SAI are defined
in the Prospectus will have the meanings assigned in the Prospectus. Copies of
the Prospectus may be obtained without charge by writing to SEI Financial
Management Corporation, the Company's administrator or SEI Financial Services
Company, the Company's distributor, at 680 East Swedesford Road, Wayne,
Pennsylvania 19087-1658, or by calling the Funds at the telephone number
indicated above.
<PAGE> 76
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Restrictions............................................ 1
Additional Permitted Investment Activities......................... 2
Special Factors Affecting the Michigan Tax-Free
Bond Fund........................................................ 8
Management......................................................... 13
Rule 12b-1 Distribution Plan....................................... 16
Calculation of Yield and Total Return.............................. 17
Determination of Net Asset Value................................... 20
Portfolio Transactions............................................. 21
Federal Income Taxes............................................... 23
Capital Stock...................................................... 29
Principal Shareholders............................................. 29
Other Matters...................................................... 31
Custodian.......................................................... 31
Experts............................................................ 31
Financial Statements............................................... 31
Appendix A......................................................... A-1
</TABLE>
<PAGE> 77
INVESTMENT RESTRICTIONS
The Funds are subject to the following investment restrictions, all of
which are fundamental policies:
None of the Funds may:
(1) purchase the securities of issuers conducting their principal
business activity in the same industry if, immediately after the purchase
and as a result thereof, the value of any Fund's investments in that
industry would exceed 25% of the current value of such Fund's total assets,
provided that there is no limitation with respect to investments in (i)
tax-exempt Michigan Municipal Obligations (for the purpose of this
restriction, industrial development bonds and private activity bonds and
notes shall not be deemed tax-exempt Michigan Municipal Obligations if the
payments of principal and interest on such bonds or notes is the ultimate
responsibility of non-governmental issuers), (ii) obligations of the United
States Government, its agencies or instrumentalities, (iii) with respect to
the Money Market Fund, the obligations of domestic banks (for the purpose
of this restriction, domestic bank obligations do not include obligations
of U.S. branches of foreign banks or obligations of foreign branches of
U.S. banks);
(2) purchase or sell real estate (other than Michigan Municipal
Obligations or other securities secured by real estate or interests therein
or securities issued by companies that invest in real estate or interests
therein), commodities or commodity contracts; except that the Funds may
enter into financial futures contracts and may write call options and
purchase call and put options on financial futures contracts as generally
described in the Prospectus and this SAI;
(3) purchase securities on margin (except for short-term credits
necessary for the clearance of transactions and except for "margin"
payments in connection with financial futures contracts and options on
futures contracts) or make short sales of securities;
(4) underwrite securities of other issuers, except to the extent that
the purchase of Michigan Municipal Obligations or other permitted
investments directly from the issuer thereof or from an underwriter for an
issuer and the later disposition of such securities in accordance with the
Funds' investment program may be deemed to be an underwriting;
(5) invest more than 10% of the current value of its net assets in
repurchase agreements maturing in more than seven days, in fixed time
deposits that are subject to withdrawal penalties and that have maturities
of more than seven days, or in securities or other assets which the Board
of Directors determines to be illiquid securities or assets;
(6) acquire securities for the purpose of exercising control or
management over the issuers thereof; or
(7) issue senior securities, except that each Fund may borrow from
banks up to 10% of the current value of its net assets for temporary
purposes only in order to
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<PAGE> 78
meet redemptions, and these borrowings may be secured by the pledge of up
to 15% of the current value of its net assets (but new investments may not
be purchased while any such borrowing exists); and provided further that a
Fund may acquire when-issued securities, enter into other forward
commitments to acquire securities, and enter into or acquire financial
futures contracts and options thereon when the Fund's obligation
thereunder, if any, is "covered" (i.e., the Fund establishes a segregated
account in which it maintains liquid assets in an amount at least equal in
value to the Fund's obligations and marks to market daily such collateral).
None of the Funds except the Michigan Tax-Free Bond Fund may, as to 75% of
its total assets, purchase securities of any issuer (except securities issued or
guaranteed by the U.S. Government, its agencies and instrumentalities) if, as a
result, more than 5% of the value of its total assets would be invested in the
securities of any one issuer or, with respect to 100% of its assets, the Fund's
ownership would be more than 10% of the outstanding voting securities of such
issuer. The Money Market Fund may be subject to additional diversification
obligations pursuant to Rule 2a-7 under the Act.
The Funds are subject to the following non-fundamental policies:
(1) None of the Funds will purchase or retain securities of any issuer
if the officers or directors of the Fund or the Adviser owning beneficially
more than one-half of one percent (0.5%) of the securities of the issuer
together owned beneficially more than 5% of such securities.
(2) The Funds may not purchase interests, leases, or limited
partnership interests in oil, gas, or other mineral exploration or
development programs.
(3) No Fund may, with respect to more than 5% of its net assets,
invest in securities of issuers who, with their predecessors, have been in
existence less than three years, unless the securities are fully guaranteed
or insured by the U.S. Government, a state, commonwealth, possession,
territory, the District of Columbia or by an entity in existence at least
three years, or the securities are backed by the contract obligation of any
of the foregoing.
(4) Each of the Funds may invest in shares of other open-end,
management investment companies, subject to the limitations of the Act and
subject to such investments being consistent with the overall objective and
policies of the Fund making such investment, provided that any such
purchases will be limited to short-term investments in shares of
unaffiliated investment companies and the Adviser will waive its advisory
fees for that portion of the Fund's assets so invested, except when such
purchase is part of a plan of merger, consolidation, reorganization or
acquisition.
ADDITIONAL PERMITTED INVESTMENT ACTIVITIES
UNRATED INVESTMENTS
Each Fund may purchase instruments that are not rated if such obligations
are of investment quality comparable to other rated investments that are
permitted to be
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<PAGE> 79
purchased by such Fund and, in the case of the Money Market Fund, if purchased
in accordance with the Fund's procedures adopted by the Company's Board of
Directors in accordance with Rule 2a-7 under the Act.
After purchase by a Fund, a security may cease to be rated or its rating
may be reduced below the minimum required for purchase by such Fund. Neither
event will require a sale of such security by such Fund, provided that, in the
case of the Money Market Fund, when a security ceases to be rated, the Fund's
Board of Directors determines that such security presents minimal credit risks,
and provided further that, when a security rating is downgraded below eligible
quality or no longer presents minimal credit risks, the Board of Directors finds
that the sale of such security would not be in the Fund's best interest. To the
extent the ratings given by Moody's or S&P may change as a result of changes in
such organizations or their rating systems, each Fund will attempt to use
comparable ratings as standards for investments in accordance with the
investment policies contained in the Prospectus and in this SAI. The ratings of
Moody's and S&P are more fully described in the Appendix to this SAI.
LETTERS OF CREDIT
Each Fund may purchase debt obligations backed by an irrevocable letter of
credit of a bank, savings and loan association or insurance company which
assumes the obligation for payment of principal and interest in the event of
default by the issuer. Only banks, savings and loan associations and insurance
companies which, in the opinion of the Adviser are of investment quality
comparable to other permitted investments of such Fund, may be used for letter
of credit-backed investments.
MUNICIPAL BONDS
The Michigan Tax-Free Bond Fund may invest in municipal bonds. Municipal
bonds are principally classified as "general obligation" bonds, which are
secured by the pledge of the municipality's faith, credit and taxing power for
the payment of principal and interest, or as "revenue" bonds, which are payable
only from the revenues derived from a particular project or facility and
generally are dependent solely on a specific revenue source. Municipal bonds are
debt obligations issued to obtain funds for various public purposes, including
the construction of a wide range of public facilities such as bridges, highways,
housing, hospitals, mass transportation, schools, streets, and water and sewer
works. Other purposes for which municipal bonds may be issued include the
refunding of outstanding obligations and obtaining funds for general operating
expenses or to loan to other public institutions and facilities. Private
activity bonds are a specific type of revenue bond backed by the credit and
security of a private user. Certain types of private activity bonds are issued
by or on behalf of public authorities to obtain funds to provide
privately-operated housing facilities, sports facilities, convention or trade
show facilities, airport, mass transit, port or parking facilities, air or water
pollution control facilities and certain local facilities for water supply, gas,
electricity, or sewage or solid waste disposal. Assessment bonds, wherein a
specially created district or project area levies a tax (generally on its
taxable property) to pay for an improvement or project may be considered a
variant of either category. There are, of course, other
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<PAGE> 80
variations in the types of municipal bonds, both within a particular
classification and between classifications, depending on numerous factors.
OPTIONS ON SECURITIES AND INDICES OF SECURITIES
The Intermediate Government Income Fund and the Diversified Equity Fund may
purchase and write (i.e., sell) call options ("calls") and put options ("puts")
on securities and indices of securities. In the case of the Intermediate
Government Income Fund, such options will only involve debt securities and
indices of debt securities; in the case of the Diversified Equity Fund, such
options will only involve common stocks and indices of common stocks.
When a Fund purchases an option, it pays a premium in return for the right
to buy (in the case of a call) or sell (in the case of a put) the underlying
security or index at the exercise price at any time during the option period
(usually not more than nine months in the case of common stock or fifteen months
in the case of debt securities). If an option is not exercised or sold, it will
become worthless on its expiration date. If an option is purchased and becomes
worthless on its expiration date, the Fund will have lost the premium, which
will result in a reduction in the Fund's net asset value or total return.
When a Fund writes an option, it receives a premium and gives the purchaser
the right to buy (in the case of a call) or sell (in the case of a put) the
underlying security or index at any time during the option period at a fixed
exercise price, regardless of market price changes during the option period. If
a call written by a Fund is exercised, the Fund forgoes any gain from an
increase in the market price of the underlying security or index over the
exercise price; if a put written by a Fund is exercised, the Fund may be
required to buy the underlying security or index at a disadvantageous price
above the market price.
Any option written by a Fund will be "covered" throughout the life of the
option. A call is "covered" if the Fund (i) owns the optioned securities, (ii)
maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value sufficient to enable the Fund to purchase the optioned securities or
index or (iii) owns an offsetting call option. A put is "covered" if the Fund
(i) maintains in a segregated account with the Fund's custodian, cash, cash
equivalents, U.S. Government securities or other high grade debt securities with
a value equal to the exercise price of the put or (ii) owns an offsetting put
option.
Options on securities generally settle by physical delivery of the
underlying security. Frequently, rather than taking or making delivery of the
underlying security through the process of exercising the option, options are
closed by entering into offsetting purchase or sale transactions that do not
result in ownership of the new option. Index options are generally cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying securities exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option)
at the time the option is exercised.
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<PAGE> 81
A Fund will realize a gain (or loss) on a closing purchase transaction with
respect to an option previously written by the Fund if the premium, plus
commission costs, paid to purchase the option is less (or greater) than the
premium, less commission costs, received on the sale of the option. A gain also
will be realized if an option which the Fund has written lapses unexercised,
because the Fund would retain the premium.
There can be no assurance that a liquid secondary market will exist at a
given time for any particular option.
Writing of options involves the risk that there will be no market in which
to effect a closing transaction. An exchange-traded option may be closed out
only on an exchange that provides a secondary market for an option of the same
series. Over-the-Counter ("OTC") options, which are purchased from or sold to
securities dealers, financial institutions or other parties, are not generally
terminable at the option of the writer and may be closed out only by negotiation
with the holder. There is also no assurance that a liquid secondary market on an
exchange will exist. In addition, because OTC options are issued in privately
negotiated transactions exempt from registration under the Securities Act of
1933, there is no assurance that a Fund will succeed in negotiating a closing
out of a particular OTC option at any particular time. If a Fund as covered call
option writer is unable to effect a closing purchase transaction in the
secondary market or otherwise, it will not be able to sell the underlying
security or securities, as the case may be, until the option expires or it
delivers the underlying security or securities, as the case may be, upon
exercise.
The staff of the Commission has taken the position that purchased options
not traded on registered domestic securities exchanges and the assets used as
cover for written options not traded on such exchanges are generally illiquid
securities. However, the staff has also opined that, to the extent a mutual fund
sells an OTC option to a primary dealer that it considers creditworthy and
contracts with such primary dealer to establish a formula price at which the
fund would have the absolute right to repurchase the option, the fund would only
be required to treat as illiquid the portion of the assets used to cover such
option equal to the formula price minus the amount by which the option is
in-the-money. Pending resolution of the issue, each Fund will treat such options
and, except to the extent permitted through the procedure described in the
preceding sentence, such assets as subject to such Fund's limitation on
investments in securities that are not readily marketable.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
If and to the extent authorized to do so, a Fund may trade futures
contracts or purchase or sell put and call options on those contracts. Futures
contracts are generally bought and sold on the commodities exchanges on which
they are listed with payment of initial and variation margin as described below.
The sale of a futures contract creates a firm obligation by a Fund, as seller,
to deliver to the buyer the specific type of financial instrument called for in
the contract at a specific future time for a specified price (or, with respect
to certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
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<PAGE> 82
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Fund's use of futures contracts and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the Commodity Futures Trading Commission and will be entered
into for bona fide hedging or other appropriate portfolio management purposes.
Maintaining a futures contract or selling an option on a futures contract will
typically require a Fund to deposit with a financial intermediary, as security
for its obligations, an amount of cash or other specified assets ("initial
margin") that initially is from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets ("variation
margin") may be required to be deposited thereafter daily as the mark-to-market
value of the futures contract fluctuates. The purchase of an option on a futures
contract involves payment of a premium for the option without any further
obligation on the part of a Fund. If a Fund exercises an option on a futures
contract it will be obligated to post initial margin (and potentially variation
margin) for the resulting futures position just as it would for any futures
position. Futures contracts and options thereon are generally settled by
entering into an offsetting transaction, but no assurance can be given that a
position can be offset prior to settlement or that delivery will occur.
No Fund will enter into a futures contract or option thereon for purposes
other than bona fide hedging if, immediately thereafter, the sum of the amount
of its initial margin and premiums on open futures contracts and options thereon
would exceed 5% of the net liquidation value of the Fund's assets; however, in
the case of an option that is in-the-money at the time of the purchase, the
in-the-money amount may be excluded in calculating the 5% limitation. The value
of all futures contracts sold by a Fund (adjusted for the historical volatility
relationship between such portfolio and the contracts) will not exceed the total
market value of the Fund's securities.
There are several risks in connection with the use by the Funds of futures
contracts as a hedging device. One risk arises because of the imperfect
correlation between movements in the prices of the futures contracts and
movements in the prices of the underlying instruments which are the subject of
the hedge. The Funds will attempt to reduce this risk by selling, to the extent
possible, futures on interest rates (in the case of the Intermediate Government
Income Fund) or stock indexes (in the case of the Diversified Equity Fund) the
movements of which will, in the Adviser's judgment, have a significant
correlation with movements in the prices of the Funds' portfolio securities
sought to be hedged.
Successful use of the futures by each Fund for hedging purposes is also
subject to the Adviser's ability to predict correctly movements in the direction
of the underlying market. It is possible that, where a Fund has sold futures to
hedge its portfolio against a decline in the market, the value of the underlying
instruments on which the futures are written may advance and the value of
securities held in such Fund's portfolio may decline. If this occurs, such Fund
would lose money on the futures and also experience a decline in the value in
its portfolio securities. However, while this could occur to a certain degree,
the Adviser believes that over time the value of each Fund's portfolio will tend
to move in the same direction as the instruments underlying the futures
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<PAGE> 83
contracts, which are intended to correlate to the price movements of the
portfolio securities sought to be hedged. It is also possible that, if a Fund
has hedged against the possibility of a decline in the market adversely
affecting securities held in its portfolio and securities prices increase
instead, such Fund will lose part or all of the benefit of the increased value
of those securities that it has hedged because it will have offsetting losses in
its futures positions. In addition, in such situations, if a Fund has
insufficient cash, it may have to sell securities to meet daily variation margin
requirements.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures contracts and the
securities of the portfolio being hedged, the prices of futures contracts may
not correlate perfectly with movements in the underlying index due to certain
market distortions. First, all participants in the futures markets are subject
to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through
offsetting transactions which would distort the normal relationship between the
underlying instruments and futures markets. Second, margin requirements in the
futures market are less onerous than margin requirements in the securities
market, and as a result the futures market may attract more speculators than the
securities market. Increased participation by speculators in the futures market
may also cause temporary price distortions. Due to the possibility of price
distortions in the futures market and also because of the imperfect correlation
between movements in the value of the underlying instruments and movements in
the prices of futures, even a correct forecast of general market trends by the
Adviser may still not result in a successful hedging transaction.
Interest Rate Futures Contracts and Options Thereon. The Intermediate
Government Income Fund may use interest rate futures contracts and options
thereon principally as a hedge against the effects of interest rate changes.
The Intermediate Government Income Fund may engage in interest rate futures
contract transactions involving (i) the sale of the designated debt securities
underlying the futures contract (i.e., short positions) to hedge the value of
securities held by the Intermediate Government Income Fund; (ii) the purchase of
the designated debt securities underlying the futures contract when the
Intermediate Government Income Fund holds a short position having the same
delivery month (i.e., a long position offsetting a short position); or (iii)
other strategies which the Adviser deems appropriate. If the market moves
favorably after the Intermediate Government Income Fund enters into an interest
rate futures contract as a hedge against anticipated adverse market movements,
the benefits from such favorable market movements on the value of the securities
so hedged will be offset in whole or in part, by a loss on the futures contract.
The Intermediate Government Income Fund may engage in a futures contract
sale to maintain the income advantage from continued holding of a long-term
security while endeavoring to avoid part or all of the loss in market value that
would otherwise accompany a decline in long-term security prices. If, however,
securities prices rise, the Intermediate Government Income Fund would realize a
loss in closing out its futures contract sales that would offset any increases
in prices of the long-term securities it holds.
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<PAGE> 84
Stock Index Futures Contracts and Options Thereon. The Diversified Equity
Fund may enter into stock index futures contracts and may purchase and sell
options thereon principally as a hedge against the effects of changes in the
price of stocks which it owns or wishes to purchase.
Options on stock index futures are similar to options on equity securities
except that options on index futures give the purchaser the right, in return for
the premium paid, to assume a position in an index futures contract (a long
position if the option is a call and a short position if the option is a put),
at a specified exercise price at any time during the period of the option. Upon
exercise of the option, the delivery of the futures position by the writer of
the option to the holder of the option will be accompanied by delivery of the
accumulated balance in the writer's futures margin account which represents the
amount by which the market price of the index futures contract, at exercise,
exceeds (in the case of a call) or is less than (in the case of a put) the
exercise price of the option on the stock index future. If an option is
exercised on the last trading day prior to the expiration date of the option,
the settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing level of the index on which the
future is based on the expiration date. Purchasers of options who fail to
exercise their options prior to the exercise date suffer a loss of the premium
paid.
Segregation. The use of futures transactions by any Fund will require,
among other things, that such Fund segregate cash, liquid high grade debt
obligations or other assets with its custodian, or a designated sub-custodian,
to the extent its obligations are not otherwise "covered" through ownership of
the underlying securities. In general, either the full amount of any obligation
by the Funds to pay or deliver securities must be covered at all times by the
securities required to be delivered, or, subject to any regulatory restrictions,
an amount of cash or liquid high grade debt obligations at least equal to the
current amount of the obligation must be segregated with the custodian or
sub-custodian. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them.
Risks Involving Futures Transactions. Transactions in futures contracts
and options thereon involve certain risks. The successful use of hedging
techniques also requires skills different from those necessary to select
portfolio securities. Commodity exchanges generally limit the amount of
fluctuation permitted in futures contract and option prices during a single
trading day, and the existence of such limits may prevent the prompt liquidation
of futures and option positions in certain cases. Inability to liquidate
positions in a timely manner could result in the Fund's incurring larger losses
than would otherwise be the case.
The degree to which a Fund may use futures contracts and options thereon
and options on securities may also be affected by certain provisions of the
Internal Revenue Code of 1986, as amended (the "Code").
SPECIAL FACTORS AFFECTING THE
MICHIGAN TAX-FREE BOND FUND
Because the Michigan Tax-Free Bond Fund will invest primarily in Michigan
Municipal Obligations, its investment performance is especially dependent on
Michi-
8
<PAGE> 85
gan's prevailing economic conditions. To provide somewhat greater investment
flexibility, the Michigan Tax-Free Bond Fund is a "non-diversified" fund and, as
such, is not required to meet any diversification requirements under the Act.
The Fund may use its ability as a non-diversified fund to concentrate its assets
in the securities of a smaller number of issuers which the Adviser deems to be
attractive investments, rather than invest in a larger number of securities
merely to satisfy non-tax diversification requirements. While the Adviser
believes that the ability to concentrate the investments of the Michigan
Tax-Free Bond Fund in particular issuers is an advantage when investing in
Michigan Municipal obligations, such concentration also involves a risk of loss
to the Michigan Tax-Free Bond Fund should the issuer be unable to make interest
or principal payments thereon or should the market value of such securities
decline. Investment in a non-diversified fund could, therefore, entail greater
risks than investment in a "diversified" fund, including a risk of greater
fluctuations in yield and share price. The Michigan Tax-Free Bond Fund must,
nevertheless, meet certain diversification tests to qualify as a "regulated
investment company" under the Code.
Obligations of issuers of Michigan Municipal Obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors. In addition, the obligations of such issuers may become
subject to the laws enacted in the future by Congress or the Michigan
legislatures or by referenda extending the time for payment of principal and/or
interest, or imposing other constraints upon enforcement of such obligations or
upon municipalities to levy taxes. There is also the possibility that, as a
result of legislation or other conditions, the power or ability of any issuer to
pay, when due, the principal of and interest on its Michigan Municipal
Obligations may be materially affected.
The information set forth below is derived from official statements
prepared in connection with the issuance of Michigan Municipal Obligations and
other sources that are generally available to investors. The information is
provided as general information intended to give a recent historical description
and is not intended to indicate future or continuing trends in the financial or
other positions of the State of Michigan. This information has not been
independently verified.
The budget of the State of Michigan is a complete financial plan and
encompasses the revenues and expenditures, both operating and capital outlay, of
the General Fund and special revenue funds. The budget is prepared on a basis
consistent with generally accepted accounting principles (GAAP). The State's
Fiscal Year begins on October 1 and ends on September 30. Under Michigan law,
the executive budget recommendations for any fund may not exceed the estimated
revenue thereof, and an itemized statement of estimated revenues in each
operating fund must be contained in an appropriation bill as passed by the
Legislature, the total of which may not be less than the total of all
appropriations made from the fund for that fiscal year. The Michigan
Constitution provides that proposed expenditures from and revenues of any fund
must be in balance and that any prior year's surplus or deficit in any fund must
be included in the succeeding year's budget for that fund.
The Michigan Constitution limits the amount of total revenues that may be
raised from taxes and other sources. State revenues (excluding federal aid and
revenues for
9
<PAGE> 86
payment of principal and interest on general obligation bonds) in any fiscal
year are limited to a fixed percentage of State personal income in the prior
calendar year or average of the prior three calendar years, whichever is
greater. The State may raise taxes in excess of the limit in emergency
situations.
The State of Michigan finances its operations through the State's General
Fund and special revenue funds. The General Fund receives revenues of the State
that are not specifically required to be included in the special revenue funds.
General Fund revenues are obtained approximately 59% from the payment of State
taxes and 41% from federal and non-tax revenue sources. The majority of the
revenues from the State taxes are from the State's personal income tax, single
business tax, use tax, and sales tax. In addition the State levies various other
taxes.
Despite modest surpluses in the three preceding fiscal years, Michigan
ended fiscal years 1989-90 and 1990-91 with negative balances of $310.3 million
and $169.4 million, respectively. This negative balance had been eliminated as
of the end of fiscal year 1991-92 which ended September 30, 1992. The State
ended fiscal year 1992-93 with a positive balance of $26.0 million, following
transfer of $282.6 million to the State's Budget Stabilization Fund.
In 1993, statutory limits were placed on the amount of funds carried
forward in the State's general fund. Any unreserved fund balances from the
State's general fund at final book closing must be deposited to the State's
Budget Stabilization Fund, except for the amount which was carried forward into
fiscal year 1993-94. At the close of fiscal year 1993-94, all unreserved general
fund balances were required to be deposited in the State's Budget Stabilization
Fund.
The State's Budget Stabilization Fund ("BSF"), created pursuant to
legislation enacted in 1977, is designed to accumulate balances during years of
significant economic growth which may be utilized in years when the State's
economy experiences cyclical downturns or unforeseen fiscal emergencies.
Calculated on an accrual basis, the unreserved ending accrued balance of the BSF
on September 30, 1993 was $303.4 million. The pay-in to the BSF for fiscal year
1993-94 was $460.2 million.
The Michigan Constitution limits State general obligation debt to (i)
short-term debt for State operating purposes, (ii) short and long-term debt for
the purpose of making loans to school districts, and (iii) long-term debt for
voter-approved purposes.
Short-term debt for operating purposes is limited to an amount not in
excess of 15 percent of undedicated revenues received during the preceding
fiscal year. Under
10
<PAGE> 87
the Michigan Constitution as implemented by statutory provisions, such debt must
be authorized by the State Administration Board and issued only to meet
obligations incurred pursuant to appropriation and must be repaid during the
fiscal year in which incurred. Such debt does not require voter approval.
There are a number of state agencies, instrumentalities and political
subdivisions that issue municipal obligations, some of which may be conduit
obligations payable from payments from private borrowers. These entities are
subject to various economic risks and uncertainties, and the credit quality of
the securities issued by them may vary considerably from obligations backed by
the full faith and credit of the State.
The State of Michigan is a party to various legal proceedings seeking
damages or injunctive or other relief. In addition to routine litigation,
certain of these proceedings could, if unfavorably resolved from the point of
view of the State, substantially affect State programs or finances. These
lawsuits involve programs generally in the areas of corrections, highway
maintenance, social services, tax collection, commerce and budgetary reductions
to school districts and governmental units and court funding. The ultimate
disposition of those proceeds is not determinable.
On March 15, 1994, the electors of the State voted to amend the State
Constitution to increase the State sales tax from 4% to 6% and to place a yearly
cap on property value assessment increases. The State will levy a property tax
to finance education, and a higher real estate transfer tax will be imposed on
the sale of real property. While the ultimate nature, extent and impact of the
constitutional amendment, the accompanying legislation and other tax and revenue
measures which are still to be adopted cannot currently be predicted, such
measures may impact Michigan Municipal Obligations and the security therefor.
The reform measures will shift significant portions of the cost of local
school operations from local school districts to the State and will raise
additional State revenues to fund these additional State expenses. These
additional revenues will be included within the State's constitutional revenue
limitations and may impact the State's ability to raise additional revenues in
the future.
The principal sectors of Michigan's economy are manufacturing of durable
goods (including automobiles and components and office equipment), tourism and
agriculture. The State's economy continues to be dependent upon manufacturing,
particularly the automobile industry.
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<PAGE> 88
Layoffs and plant closings in the automotive industry may adversely affect
the State and there can be no assurance that Michigan's overall trend in recent
years of improved fiscal and economic conditions will continue. Moody's raised
its rating on State of Michigan general obligation bonds from "A" to "A1" in
April 1986. S&P raised its rating on the State's general obligation bonds from
"A+" to "AA" in April 1986. Although S&P placed the State's general obligation
bonds on its "CreditWatch" with negative implications in January 1991, it
subsequently reaffirmed its "AA" rating in July 1991. To the extent that the
portfolio of the Michigan Tax-Free Bond Fund is comprised of revenue or general
obligations of local governments or authorities, rather than general obligations
of the State of Michigan itself, ratings on such Michigan obligations may be
different from those given to the State of Michigan and their value may be
independently affected by economic matters not directly impacting the State as a
whole.
Municipal Notes. The Michigan Tax-Free Bond Fund may invest in municipal
notes. Municipal notes include, but are not limited to, tax anticipation notes
("TANs"), bond anticipation notes ("BANs"), revenue anticipation notes ("RANs")
and construction loan notes. Notes sold as interim financing in anticipation of
collection of taxes, a bond sale or receipt of other revenues are usually
general obligations of the issuer.
TANs. An uncertainty in a municipal issuer's capacity to raise taxes as a
result of such things as a decline in its tax base or a rise in delinquencies
could adversely affect the issuer's ability to meet its obligations on
outstanding TANs. Furthermore, some municipal issuers mix various tax proceeds
into a general fund that is used to meet obligations other than those of the
outstanding TANs. Use of such a general fund to meet various obligations could
affect the likelihood of making payments on TANs.
BANs. The ability of a municipal issuer to meet its obligations on its
BANs is primarily dependent on the issuer's adequate access to the longer term
municipal bond market and the likelihood that the proceeds of such bond sales
will be used to pay the principal of, and interest on, BANs.
RANs. A decline in the receipt of certain revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer's
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal of, and
interest on, RANs.
The values of outstanding municipal securities will vary as a result of
changing market evaluations of the ability of their issuers to meet the interest
and principal payments (i.e., credit risk). Such values will also change in
response to changes in the interest rates payable on new issues of municipal
securities (i.e., market risk). Should such interest rates rise, the values of
outstanding securities, including those held in the Fund's portfolio, will
decline and (if purchased at par value) they would sell at a
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<PAGE> 89
discount. If interest rates fall, the values of outstanding securities will
generally increase and (if purchased at par value) they would sell at a premium.
Changes in the value of municipal securities held in the Fund's portfolio
arising from these or other factors will cause changes in the net asset value
per share of the Fund.
MANAGEMENT
Directors and Officers. The directors and executive officers of the
Company, and their principal occupations during the past five years, are listed
below. None of the directors is deemed to be an "interested person" of the
Company for purposes of the Act.
Valerie T. Ambrose, (Age 48), Director -- 602 Michigan Avenue,
Holland, Michigan 49423. Corporate Director, Holland Community Hospital.
William K. Anderson, (Age 55), Director -- Hope College, Holland,
Michigan 49423. Vice President for Business and Finance and Treasurer of
Hope College.
Timothy C. Morawski, (Age 49), Director -- 625 Hastings Avenue,
Holland, Michigan 49423. General Manager, Board of Public Works of the City
of Holland, Michigan.
Michael R. Mucciolo, (Age 55), Director -- 545 East 32nd Street,
Holland, Michigan 49423. Senior Vice President and Chief Financial Officer,
Beverage America.
David G. Lee, (Age 43), President and Chief Executive Officer -- 680
East Swedesford Road, Wayne, PA 19087. Senior Vice President of the
Administrator and Distributor since 1993. Vice President of the
Administrator and Distributor (1991-1993). President, GW Sierra Trust Funds
before 1991.
Stephen G. Meyer, (Age 30), Controller, Treasurer and Chief Financial
Officer -- 680 East Swedesford Road, Wayne, PA 19087. Vice President and
Controller -- Fund Resources, a division of SEI Corporation since March
1995. Director -- Internal Audit and Risk Management -- SEI Corporation
(1992-1995). Senior Associate with Coopers & Lybrand LLP (1990-1992).
Kathryn L. Stanton, (Age 37), Vice President and Assistant
Secretary -- 680 East Swedesford Road, Wayne, PA 19087. Vice President and
Assistant Secretary of SEI Corporation, since 1994. Associate with Morgan,
Lewis & Bockius (1989-1994).
Sandra K. Orlow, (Age 42), Vice President and Assistant
Secretary -- 680 East Swedesford Road, Wayne, PA 19087. Vice President and
Assistant Secretary of SEI Corporation, since 1983.
Robert B. Carroll, (Age 36), Vice President and Assistant
Secretary -- 680 East Swedesford Road, Wayne, PA 19087. Vice President and
Assistant Secretary
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<PAGE> 90
of SEI Corporation since 1994. Attorney with the Securities and Exchange
Commission, Division of Investment Management (1990-1994).
Kevin P. Robins, (Age 34), Vice President and Assistant
Secretary -- 680 East Swedesford Road, Wayne, PA 19087. Senior Vice
President, General Counsel and Secretary of SEI Corporation since 1994.
Vice President and Assistant Secretary of SEI Corporation (1992-1994).
Associate with Morgan, Lewis & Bockius (1988-1992).
Todd Cipperman, (Age 30), Vice President and Secretary -- 680 East
Swedesford Road, Wayne, PA 19087. Vice President and Assistant Secretary of
SEI Corporation since 1995. Associate with Dewey Ballantine (1994-1995).
Associate with Winston & Strawn (1991-1994).
Joseph M. Lydon, (Age 36), Vice President and Assistant
Secretary -- 680 East Swedesford Road, Wayne, PA 19087. Director of
Business Administration -- Fund Resources, a division of SEI Corporation
since 1995. Vice President of Fund Group, Vice President of the
Advisor -- Dreman Value Management, LP and President of Dreman Financial
Services, Inc. (1989-1995).
Michael T. Zelinsky, (Age 37), Assistant Secretary -- 680 East
Swedesford Road, Wayne, PA 19087. From October, 1995 to present, employee
of SEI Corporation.
Cristine Trecroci, (Age 25), Assistant Secretary -- 680 East
Swedesford Road, Wayne, PA 19087. From March, 1994 to present, employee of
SEI Corporation.
Amy Reese, (Age 30), Assistant Secretary -- 680 East Swedesford Road,
Wayne, PA 19087. From September, 1995 to present, employee of SEI
Corporation.
As required by law, for as long as the Company has a Distribution Plan, the
selection and nomination of directors who are not "interested persons" of the
Company will be made by such disinterested directors. See "Rule 12b-1
Distribution Plan" in this SAI.
Directors of the Company who are not affiliated with the Distributor, the
Adviser or the Sub-Adviser receive from the Company an annual fee of $1,000 and
a fee for each Board of Directors and Board committee meeting attended of $250.
Directors who are affiliated with the Distributor, the Adviser or the
Sub-Adviser do not receive compensation from the Company but all directors are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
The following table sets forth certain information regarding the
compensation of the Funds' directors. No executive officer or person affiliated
with the Funds received compensation from the Funds for the fiscal year ended
November 30, 1995 in excess of $60,000.
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<PAGE> 91
COMPENSATION TABLE
<TABLE>
<CAPTION>
PENSION TOTAL
OR COMPENSATION
RETIREMENT FROM THE
BENEFITS ESTIMATED COMPANY
AGGREGATE ACCRUED ANNUAL AND COMPANY
COMPENSATION AS PART BENEFITS COMPLEX
NAME OF PERSON FROM THE OF FUND UPON PAID TO
POSITION COMPANY EXPENSES RETIREMENT DIRECTORS
- --------------------------------- ------------ --------- ---------- ------------
<S> <C> <C> <C> <C>
Michael R. Mucciolo.............. $2,750 0 N/A $2,750
Director
Valerie T. Ambrose............... 2,500 0 N/A 2,500
Director
William K. Anderson.............. 2,750 0 N/A 2,750
Director
Timothy C. Morawski.............. 2,500 0 N/A 2,500
Director
</TABLE>
As of the date of this SAI, directors and officers of the Company as a
group beneficially owned less than 1% of the outstanding shares of the Company.
The Adviser. FMB-Trust acts as Adviser and First Michigan Bank Corporation
acts as Sub-Adviser to each of the Funds. The Advisory Agreement provides that
the Adviser shall furnish to the Funds investment guidance and policy direction
in connection with the daily portfolio management of each Fund. Pursuant to the
Advisory Agreement, the Adviser furnishes to the Board of Directors periodic
reports on the investment strategy and performance of each Fund.
The Adviser has agreed to provide to the Funds, among other things, money
market security and fixed-income research, and analysis and statistical and
economic data and information concerning interest rate and security market
trends, portfolio composition and credit conditions.
Pursuant to the Sub-Advisory Agreement and subject to the supervision of
the Adviser, the Sub-Adviser monitors approved lists of broker-dealers,
repurchase dealers and commercial paper issuers, obtains and analyzes
performance and market pricing information, and performs such other services as
delegated to it by the Adviser from time to time.
The Advisory Agreement and the Sub-Advisory Agreement will continue in
effect for more than two years provided the continuance is approved annually (i)
by the holders of a majority of the respective Fund's outstanding voting
securities (as defined in the Act) or by the Company's Board of Directors and
(ii) by a majority of the directors of the Company who are not parties to the
Advisory Agreement or "interested persons" (as defined in the Act) of any such
party. The Advisory Agreement and the Sub-Advisory Agreement may be terminated
on 60 days' written notice by the Company or the Sub-Adviser as the case may be,
and will terminate automatically if assigned.
Prior to the reorganization of the investment advisory operations of the
Adviser, FMB Financial Advisory Services, Inc. served as investment adviser to
each of the
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<PAGE> 92
Funds. For the fiscal years ended November 30, 1993, 1994 and 1995, the Adviser
(or its predecessor) was entitled to (and waived) fees as follows: $259,009
($259,009), $273,307 ($20,717) and $396,490 ($0), respectively, for the Money
Market Fund; $102,407 ($102,407), $154,951 ($154,951) and $168,511 ($147,376),
respectively, for the Michigan Tax-Free Bond Fund; $486,324 ($290,205), $553,698
($24,878) and $549,684 ($0), respectively, for the Intermediate Government
Income Fund; and $427,107 ($13,428), $445,283 ($0) and $532,024 ($0),
respectively, for the Diversified Equity Fund.
First National Bank of Chicago serves as custodian for each of the Funds.
See "Custodian." The Company serves as its own transfer agent.
Administrator and Distributor. The Company has retained SEI Financial
Management Corporation (the "Administrator") as administrator on behalf of each
of its Funds. Under the Administration Agreement with the Company, the
Administrator furnishes the Company certain administrative services, other than
investment advisory services, necessary for each Fund's operations, including
all regulatory reporting, accounting services and all necessary office
facilities, together with those ordinary clerical and bookkeeping services that
are not being furnished by the Adviser. For the fiscal year ended November 30,
1993, the Company's prior administrator, Furman Selz LLC ("Furman Selz"), waived
$5,611 of its fees of $111,004 with respect to the Money Market Fund, $5,918 of
its fees of $162,108 with respect to the Intermediate Government Income Fund,
$1,038 of its fees of $27,929 with respect to the Michigan Tax-Free Bond Fund
and $1,374 of its fees of $64,066 with respect to the Diversified Equity Fund.
During the fiscal years ended November 30, 1994, and November 30, 1995,
respectively, Furman Selz earned fees of $117,136 and $169,923 for the Money
Market Fund, $184,566 and $183,228 for the Intermediate Government Income Fund,
$42,368 and $45,958 for the Michigan Tax-Free Bond Fund and $68,292 and $79,824
for the Diversified Equity Fund.
The Company has entered into a Distribution Agreement with SEI Financial
Services Company (the "Distributor"), which acts as Distributor on behalf of
each of the Funds. Each of the Administrator and the Distributor is a
wholly-owned subsidiary of SEI Corporation ("SEI"), a leading provider of
investment services to banks, institutional investors, investment advisers and
insurance companies.
RULE 12b-1 DISTRIBUTION PLAN
As described in the Prospectus, the Company has adopted, for the Consumer
Service Class of each of the Funds, a Distribution Plan under Section 12(b) of
the Act and Rule 12b-1 thereunder (the "Rule"). The Distribution Plan was
adopted by the Board of Directors, including a majority of the directors who
were not "interested persons" (as defined in the Act) of the Company and who had
no direct or indirect financial interest in the operation of the Plan or in any
agreement related to the Plan (the "Qualified Directors").
Under the Distribution Plan, each Fund may, with respect to its Consumer
Service Class, reimburse the Distributor monthly (subject to a limit of 0.35%
per
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<PAGE> 93
annum of the average daily net assets of each Fund's Consumer Service Class,
except in the case of the Money Market Fund in which case the limit shall be
0.25% per annum of the daily net assets of the Fund's Consumer Service Class)
for costs and expenses of the Distributor in connection with the distribution of
Fund shares of the Consumer Service Class. These costs and expenses include: (i)
advertising by radio, television, newspapers, magazines, brochures, sales
literature, direct mail or any other form of advertising, (ii) expenses of sales
employees or agents of the Distributor, including salary, commissions, travel
and related expenses, (iii) payments to broker-dealers and financial
institutions for services in connection with the distribution of shares,
including promotional incentives and fees calculated with reference to the
average daily net asset value of shares held by shareholders who have a
brokerage or other service relationship with the broker-dealer or other
institution receiving such fees, (iv) costs of printing prospectuses and other
materials to be given or sent to prospective investors and (v) such other
similar services as the Board of Directors determines to be reasonably
calculated to result in the sale of shares of the Funds. The actual fee payable
to the Distributor shall, within such limit, be determined from time to time by
mutual agreement between the Company and the Distributor. The Distributor may
enter into selling agreements with one or more selling agents under which such
agents may receive compensation for distribution-related services from the
Distributor, including, but not limited to, commissions or other payments to
such agents based on the average daily net assets of Fund shares attributable to
them. The Distributor may retain any portion of the total distribution fee
payable under the Plan to compensate it for the distribution-related services
provided by it or to reimburse it for other distribution-related expenses.
The Distribution Plan will continue in effect from year to year if such
continuance is approved by (a) either the vote of a majority of the directors,
or the vote of a majority of the outstanding voting securities of the Company,
and (b) the Qualified Directors. Agreements related to the Distribution Plan
also must be approved by such vote of the directors and the Qualified Directors.
Such agreements will terminate automatically if assigned, and may be terminated
at any time, without payment of any penalty, by a vote of a majority of the
outstanding voting securities of the proper Fund. The Distribution Plan may not
be amended to increase materially the amounts payable thereunder by any Fund
without the approval of a majority of the outstanding voting securities of the
Fund, and no material amendment to the Distribution Plan may be made except by a
majority of both the directors of the Company and the Qualified Directors.
CALCULATION OF YIELD AND TOTAL RETURN
As noted in the Prospectus, the Funds may advertise certain total return
information computed in the manner described in the Prospectus. As and to the
extent required by the SEC, an average annual compound rate of return ("T") will
be computed by using the value at the end of a specified period ("ERV") of a
hypothetical initial investment ("P") over a period of years ("n") according to
n
the following formula: P(1+T) = ERV. In addition, as indicated in the
Prospectus, the
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<PAGE> 94
Funds may also, at times, calculate total return based on net asset value per
share (rather than the public offering price), in which case the figures would
not reflect the effect of any sales loads that would have been paid by an
investor, or based on the assumption that a sales load other than the maximum
loads (reflecting a Volume Discount) was assessed, provided that total return
data derived pursuant to the calculation described above also are presented.
As indicated in the Prospectus, the Funds may advertise certain yield
information.
Current yield for the Money Market Fund will be calculated based on the net
changes, exclusive of capital changes, over a seven-day period, in the value of
a hypothetical pre-existing account having a balance of one share at the
beginning of the period, subtracting a hypothetical charge reflecting deductions
from shareholder accounts, and dividing the difference by the value of the
account at the beginning of the base period to obtain the base period return,
and then multiplying the base period return by (365/7) with the resulting yield
figure carried to at least the nearest hundredth of one percent.
Effective yield for the Money Market Fund is calculated by determining the
net changes, exclusive of capital changes, in the value of a hypothetical
pre-existing account having a balance of one share at the beginning of the
period, subtracting a hypothetical charge reflecting deductions from shareholder
accounts, and dividing the difference by the value of the account at the
beginning of the base period to obtain the base period return, and then
compounding the base period return by adding one, raising the sum to a power
equal to 365 divided by seven, and subtracting one from the result. Yield for
the Intermediate Government Income Fund and the Michigan Tax-Free Bond Fund will
be calculated based on a 30-day (or one month) period, computed by dividing the
net investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
6
formula: YIELD = 2[((a-b)/(c)+1) -1], where a = dividends and interest earned
during the period: b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the period that were
entitled to receive dividends; and d = the maximum offering price per share on
the last day of the period. The net investment income of each of such Funds
includes actual interest income, plus or minus amortized purchase discount
(which may include original issue discount) or premium, less accrued expenses.
Realized and unrealized gains and losses on portfolio securities are not
included in such Funds' net investment income for this purpose. For purposes of
sales literature, such Funds' yield also may be calculated on the basis of the
net asset value per share rather than the public offering price, provided that
the yield data derived pursuant to the calculation described above also are
presented.
For the seven-day period ending November 30, 1995 the Money Market Fund's
yield and effective yield were 5.05% and 5.18%, respectively. For the 30-day
period ended November 30, 1995, the Intermediate Government Income Fund's yield
and effective yield were 5.90% and 6.07%, respectively.
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<PAGE> 95
The tax-equivalent yield and the tax-equivalent effective yield for the
Michigan Tax-Free Bond Fund are computed by dividing that portion of the yield
or effective yield, respectively of the Fund which is tax-exempt by one minus a
stated income tax rate and adding the product to that portion, if any, of the
yield or effective yield of the Fund that is not tax-exempt.
For the 30-day period ended November 30, 1995, the Fund's tax-exempt yield
and tax-equivalent effective yield were 4.59% and 7.95%, respectively.
The total return for the Diversified Equity Fund will be calculated by
subtracting (i) the public offering price (which includes the maximum sales
load) of one share at the beginning of the period, from (ii) the net asset value
of all shares an investor would own at the end of the period for the share held
at the beginning of the period (assuming reinvestment of all dividends and
capital gain distributions), and dividing by (iii) the public offering price per
share at the beginning of the period. The resulting percentage indicates the
positive or negative rate of return that an investor would have earned from
reinvested dividends and capital gain distributions and changes in share price
during the period. The Diversified Equity Fund may also, at times, calculate
total return based on net asset value per share (rather than the public offering
price), in which case the figures would not reflect the effect of any sales
loads that would have been paid by an investor, or by assuming that a sales load
other than the maximum sales load is assessed, provided that total return data
derived pursuant to the calculation described above are also presented.
For the fiscal year ended November 30, 1995 and for the period December 2,
1991 through November 30, 1995, the average annual total returns for the
Diversified Equity Fund were as follows:
<TABLE>
<CAPTION>
DECEMBER 2, 1991
YEAR ENDED THROUGH
NOVEMBER 30, 1995 NOVEMBER 30, 1995
----------------- -----------------
<S> <C> <C>
Institutional Class............. 28.54 10.79
Consumer Service Class.......... 23.36 9.62
</TABLE>
The yield or total return for each Fund will fluctuate from time to time,
unlike bank deposits or other investments that pay a fixed yield for a stated
period of time, and does not provide a basis for determining future yield or
total return since it is based on historical data. Yield and total return are
functions of portfolio quality, composition, maturity and market conditions as
well as the expenses allocated to the Fund.
In addition, investors should recognize that changes in the net asset
values of shares of a Fund will affect the yield of such Funds for any specified
period, and such changes should be considered together with the Fund's yield in
ascertaining the Fund's total return to shareholders for the period. Yield and
total return information for the Funds may be useful in reviewing the
performance of the Fund and for providing a basis for comparison with investment
alternatives. The yield or total return of a Fund, however, may not be
comparable to the yields from investment alternatives because of
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<PAGE> 96
differences in the foregoing variables and differences in the methods used to
value portfolio securities, compute expenses and calculate yield or total
return.
From time to time, the Company may quote the Funds' performance in
advertising and other types of literature as compared to the performance of the
S&P Index, the Dow Jones Industrial Average or any other commonly quoted index
of common stock prices. The S&P Index and the Dow Jones Industrial Average are
unmanaged indices of selected common stock prices. The Funds' performance also
may be compared to those of other mutual funds having similar objectives. This
comparative performance could be expressed as a ranking prepared by Lipper
Analytical Services, Inc., an independent service which monitors the performance
of mutual funds, or, with respect to the Money Market Fund, as a comparison with
other money market funds rated by Donoghue's Money Fund Report, a reporting
service on mutual funds.
The Fund's comparative performance for such purposes may be calculated by
relating net asset value per share at the beginning of a stated period to the
net asset value of the investment, assuming reinvestment of all gains,
distributions and dividends paid, at the end of the period. Any such comparisons
may be useful to the investors who wish to compare a Fund's past performance
with that of its competitors. Of course, past performance cannot be a guarantee
of future results.
The Company also may discuss in advertising and other types of literature
that a Fund has been assigned a rating by a nationally recognized statistical
rating organization ("NRSRO"), such as Standard & Poor's Corporation. Such
rating would assess the creditworthiness of the investments held by the Fund.
The assigned rating would not be a recommendation to purchase, sell or hold the
Fund's shares since the rating would not comment on the market price of the
Fund's shares or the suitability of the Fund for a particular investor. In
addition, the assigned rating would be subject to change, suspension or
withdrawal as a result of changes in, or unavailability of, information relating
to the Fund or its investments. The Company may compare a Fund's performance
with other investments which are assigned ratings by NRSROs. Any such
comparisons may be useful to investors who wish to compare the Fund's past
performance with other rated investments.
DETERMINATION OF NET ASSET VALUE
Net asset value per share for each Fund is determined by the Administrator
of the Fund's assets on each day the New York Stock Exchange is open for
trading.
As indicated under "Fund Share Valuation" in the Prospectus, the Money
Market Fund uses the amortized cost method to determine the value of its
portfolio securities pursuant to Rule 2a-7 under the Act. The amortized cost
method involves valuing a security at its cost and amortizing any discount or
premium over the period until maturity, regardless of the impact of fluctuating
interest rates on the market value of the security. While this method provides
certainty in valuation, it may result in periods during which the value, as
determined by amortized cost, is higher or lower than the price that the Fund
would receive if the security were sold. During these periods the
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<PAGE> 97
yield to a shareholder may differ somewhat from that which could be obtained
from a similar fund that uses a method of valuation based upon market prices.
Thus, during periods of declining interest rates, if the use of the amortized
cost method resulted in a lower value of the Money Market Fund's portfolio on a
particular day, a prospective investor in either Fund would be able to obtain a
somewhat higher yield than would result from investment in a fund using solely
market values, and existing shareholders of the Fund would receive
correspondingly less income. The converse would apply during periods of rising
interest rates.
Rule 2a-7 provides that in order to value its portfolios using the
amortized cost method, the Money Market Fund must maintain a dollar-weighted
average portfolio maturity of 90 days or less, purchase securities having
remaining maturities (as defined in Rule 2a-7) of thirteen months or less and
invest only in Eligible Securities determined by the Board of Directors to
present minimal credit risks. The maturity of an instrument is generally deemed
to be the period remaining until the date when the principal amount thereof is
due or the date on which the instrument is to be redeemed. However, Rule 2a-7
provides that the maturity of an instrument may be deemed shorter in the case of
certain instruments, including certain variable and floating rate instruments
subject to demand features. Pursuant to the Rule, the Board is required to
establish procedures designed to stabilize, to the extent reasonably possible,
the Fund's price per share as computed for the purpose of sales and redemptions
at $1.00. Such procedures include review of the Fund's portfolio holdings by the
Board of Directors, at such intervals as it may deem appropriate, to determine
whether the Fund's net asset value calculated by using available market
quotations deviates from $1.00 per share based on amortized cost. The extent of
any deviation will be examined by the Board of Directors. If such deviation
exceeds 1/2 of 1%, the Board will promptly consider what action, if any, will be
initiated. In the event the Board determines that a deviation exists that may
result in material dilution or other unfair results to investors or existing
shareholders, the Board will take such corrective action as it regards as
necessary and appropriate, including the sale of portfolio instruments prior to
maturity to realize capital gains or losses or to shorten average portfolio
maturity, withholding dividends or establishing a net asset value per share by
using available market quotations.
Securities of the Intermediate Government Income Fund, the Michigan
Tax-Free Bond Fund and the Diversified Equity Fund for which market quotations
are readily available are valued at latest sale prices. In the absence of any
sale of such securities on the valuation date, the valuations are based on
latest quoted bid prices. Futures contracts, options listed on a national
exchange and other over-the-counter securities are valued at the last sale price
on the exchange on which they are traded at the close of the exchange, or, in
the absence of any sale on the valuation date, at latest quoted bid prices.
Options not listed on a national exchange are valued at latest quoted bid
prices. Debt securities maturing in 60 days or less are valued at amortized
cost. Notwithstanding the above, the Funds may determine the market value of
individual portfolio securities by using prices provided by one or more
professional independent pricing services to determine reliable market
quotations for securities held by a Fund. Prices provided by an independent
pricing service may be determined without exclusive reliance on bid or last sale
prices and may take into account appropriate factors such as
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<PAGE> 98
institutional-size trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics and other market
data. All other securities and other assets of the Funds for which current
market quotations are not readily available are valued at fair value as
determined in good faith by the Company's Board of Directors and in accordance
with procedures adopted by the Board of Directors.
With respect to options contracts, the premium received is recorded as an
asset and equivalent liability, and thereafter the liability is adjusted to the
market value of the option determined in accordance with the preceding
paragraph. The premium paid for an option purchased by a Fund is recorded as an
asset and subsequently adjusted to market value.
PORTFOLIO TRANSACTIONS
Total brokerage commissions paid by the Diversified Equity Fund for the
fiscal years ended November 30, 1993, 1994 and 1995 amounted to $64,257, $78,477
and $42,177, respectively.
The Company has no obligation to deal with any broker/dealer or group of
dealers in the execution of transactions in portfolio securities. Subject to
policies established by the Company's Board of Directors, the Adviser is
responsible for each Fund's portfolio decisions and the placing of portfolio
transactions. In placing orders, it is the policy of the Company to obtain the
best results taking into account the broker/dealer's general execution and
operational facilities, the type of transaction involved and other factors.
While the Adviser generally seeks reasonably competitive spreads or commissions,
the Funds will not necessarily be paying the lowest spread or commission
available.
The Adviser may, in circumstances in which two or more broker/dealers are
in a position to offer comparable results for a Fund portfolio transaction, give
preference to a broker/dealer that has provided statistical or other research
services to the Adviser. By allocating transactions in this manner, the Adviser
is able to supplement its research and analysis with the views and information
of securities firms. Information so received may be in addition to, and not in
lieu of, the services required to be performed by the Adviser under the Advisory
Agreements, and the expenses of the Adviser will not necessarily be reduced as a
result of the receipt of this supplemental research information. Furthermore,
research services furnished by broker/dealers through which the Adviser places
securities transactions for a Fund may be used by the Adviser in servicing its
other accounts, and not all of these services may be used by the Adviser in
connection with advising the Funds. In so allocating portfolio transactions, the
Adviser may, in compliance with Section 28(e) of the Securities Exchange Act of
1934, cause the Company to pay an amount of commission that exceeds the amount
of commission that another broker/dealer would have charged for effecting the
same transaction.
Except in the case of equity securities purchased by the Diversified Equity
Fund, purchases and sales of portfolio securities usually will be principal
transactions. Portfolio securities normally will be purchased or sold from or to
dealers serving as market makers for the securities at a net price. Each of the
Funds also may purchase
22
<PAGE> 99
portfolio securities in underwritten offerings and may purchase securities
directly from the issuer. Generally, Michigan Municipal Obligations, taxable
money market securities and other debt obligations are traded on a net basis and
do not involve brokerage commissions. The costs associated with executing a
Fund's portfolio securities transactions will consist primarily of dealer
spreads and underwriting commissions. Under the Act, persons affiliated with the
Company are prohibited from dealing with the Company as a principal in the
purchase and sale of securities unless an exemptive order allowing such
transactions is obtained from the SEC or an exemption is otherwise available.
Any of the Funds may purchase obligations from underwriting syndicates of which
the Distributor (or its affiliate) is a member under certain conditions in
accordance with the provisions of a rule adopted under the Act and in compliance
with procedures adopted by the Board of Directors.
Purchases and sales of equity securities for the Diversified Equity Fund
typically are effected through brokers who charge a negotiated commission for
their services. Orders may be directed to any broker including, to the extent
and in the manner permitted by applicable law, the Distributor or its
affiliates. In the over-the-counter market, securities are generally traded on a
"net" basis with dealers acting as principal for their own accounts without a
stated commission, although the price of the security usually includes a profit
to the dealer. In underwritten offerings, securities are purchased at a fixed
price that includes an amount of compensation to the underwriter, generally
referred to as the underwriter's concession or discount.
In placing orders for portfolio securities of the Diversified Equity Fund,
the Adviser is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Adviser will seek
to execute each transaction at a price and commission, if any, that provide the
most favorable total cost or proceeds reasonably attainable in the
circumstances. While the Adviser will generally seek reasonably competitive
spreads or commissions, the Diversified Equity Fund will not necessarily be
paying the lowest spread or commission available. Commission rates are
established pursuant to negotiations with the broker based on the quality and
quantity of execution services provided by the broker in the light of generally
prevailing rates. The allocation of orders among brokers and the commission
rates paid are reviewed periodically by the Board of Directors.
Portfolio Turnover. Because the portfolio of the Money Market Fund
consists of securities with relatively short-term maturities, this Fund can
expect to experience high portfolio turnover. A high portfolio turnover rate
should not adversely affect the Money Market Fund, however, because the
portfolio securities will in most cases be held to maturity and will not be
resold. Also, it is not anticipated that this Fund will incur brokerage
commissions in connection with any of its portfolio transactions. Since
securities with maturities of less than one year are excluded from required
portfolio turnover rate calculations, the Money Market Fund is expected to
report a portfolio turnover rate approximating zero.
For the fiscal years ended November 30, 1993, 1994 and 1995 the portfolio
turnover rate for the Michigan Tax-Free Bond Fund was 13%, 22% and 35%,
respectively, the Intermediate Government Income Fund was 17%, 20% and 27%,
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<PAGE> 100
respectively, and the Diversified Equity Fund was 22%, 49% and 20%,
respectively. The portfolio turnover rate will not be a limiting factor when the
Adviser deems portfolio changes appropriate.
FEDERAL INCOME TAXES
The Prospectus describes generally the tax treatment of dividends and
distributions made by the Company. This section of the Statement of Additional
Information includes additional information concerning federal income taxes.
Qualification by a Fund as a "regulated investment company" under the
Internal Revenue Code (the "Code") requires, among other things, that (a) at
least 90% of a Fund's annual gross income be derived from interest, payments
with respect to securities loans, dividends and gains from the sale or other
disposition of securities or options thereon; (b) the Fund derives less than 30%
of its gross income from gains from the sale or other disposition of securities
or options thereon held for less than three months; and (c) the Fund diversifies
its holdings so that, at the end of each quarter of the taxable year, (i) at
least 50% of the market value of the Fund's assets is represented by cash,
government securities, securities of other regulated investment companies and
other securities (except that such other securities must be limited in respect
of any one issuer to an amount not greater than 5% of the Fund's assets and 10%
of the outstanding voting securities of such issuer), and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than U.S. Government securities and the securities of other regulated
investment companies), or of two or more issuers which the taxpayer controls and
which are determined to be engaged in the same or similar trades or businesses
or related trades or businesses. As a regulated investment company, a Fund will
not be subject to federal income tax on its net investment income and net
capital gains distributed to its shareholders, provided that it distributes to
its stockholders at least 90% of its net investment income and tax-exempt income
earned in each year.
Under the Code, a non-deductible excise tax of 4% is imposed on the excess
of a regulated investment company's "required distribution" for the calendar
year ending within the regulated investment company's taxable year over the
"distributed amount" for such calendar year. The term "required distribution"
means the sum of (i) 98% of ordinary income (generally net investment income)
for the calendar year, (ii) 98% of capital gain net income (both long term and
short term) for the one year period ending on October 31 (as though the one year
period ending on October 31 were the regulated investment company's taxable
year), and (iii) the sum of any untaxed, undistributed net investment income and
capital gain net income of the regulated investment company for prior periods.
The term "distributed amount" generally means the sum of (i) amounts actually
distributed by the regulated investment company from its current year's ordinary
income and capital gain net income and (ii) any amount on which the regulated
investment company pays income tax for the year. This excise tax will not apply
to tax-exempt income of the Michigan Tax-Free Bond Fund. For this purpose, any
income or gain retained by a Fund that is subject to tax will be considered to
have been distributed by year-end. In addition, dividends and distributions
declared payable
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<PAGE> 101
as of a date in October, November or December of any calendar year are deemed
under the Code to have been received by the shareholders on December 31 of that
calendar year if the dividend is actually paid in the following January. Such
dividends will, accordingly, be subject to income tax for the year in which the
record date falls. Each Fund intends to distribute substantially all of its net
investment income and net capital gains and, thus, expects not to be subject to
the excise tax.
Income received by the Diversified Equity Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. The Diversified Equity Fund intends to elect, if
it is eligible to do so under the Code, to "pass-through" to its shareholders
the amount of foreign taxes it has paid during the taxable year. If such an
election is made by the Fund, each shareholder of the Fund would be required to
include in gross income the taxable dividends received by him and the amount of
his pro rata share of those foreign taxes paid by the Fund. Each shareholder
would be entitled either to deduct (as an itemized deduction) his pro rata share
of the foreign taxes in computing his taxable income or to use it (subject to
limitations) as a foreign tax credit against his U.S. Federal income tax
liability. No deduction for foreign taxes may be claimed by a shareholder who
does not itemize deductions. Each shareholder will be notified within 60 days
after the close of the Diversified Equity Fund's taxable year whether the
foreign taxes paid by the Fund will "pass-through" for that year. Because not
more than 50% of the value of the total assets of the other Funds is expected to
consist of securities of foreign issuers, these Funds will not be eligible to
elect to "pass-through" foreign tax credits to shareholders.
A capital gains distribution will be a return of invested capital to the
extent the net asset value of an investor's shares is thereby reduced below his
or her cost, even though the distribution will be taxable to the shareholder. A
redemption of shares by a shareholder under these circumstances could result in
a capital loss for federal tax purposes.
It is anticipated that a portion of the dividends paid by the Diversified
Equity Fund will qualify for the dividends-received deduction available to
corporations. The Fund is required to notify shareholders of the amount of
dividends which will qualify for the deduction within 60 days of the close of
the Fund's taxable year. The dividends paid by the other Funds are not expected
to qualify.
If a shareholder exchanges or otherwise disposes of shares of a Fund within
90 days of having acquired such shares, and if, as a result of having acquired
those shares, the shareholder subsequently pays a reduced sales load for shares
of a Fund, the sales load previously incurred acquiring the Fund's shares shall
not be taken into account (to the extent such previous sales loads do not exceed
the reduction in sales loads) for the purpose of determining the amount of gain
or loss on the exchange, but will be treated as having been incurred in the
acquisition of such other shares.
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<PAGE> 102
Any loss realized on a redemption or exchange of shares of a Fund will be
disallowed to the extent shares are reacquired within the 61-day period
beginning 30 days before and ending 30 days after the day the shares are
disposed.
If an option written by a Fund lapses or is terminated through a closing
transaction, such as a repurchase by the Fund of the option from its holder, the
Fund will realize a short-term capital gain or loss, depending on whether the
premium income is greater or less than the amount paid by the Fund in the
closing transaction. If securities are sold by a Fund pursuant to the exercise
of a call option written by it, such Fund will add the premium received to the
sale price of the securities delivered in determining the amount of gain or loss
on the sale. If securities are purchased by a Fund pursuant to the exercise of a
put option written by it, such Fund will subtract the premium received from its
cost basis in the securities purchased. The requirement that each Fund derive
less than 30% of its gross income from gains from the sale of securities held
for less than three months may limit the Fund's ability to write options.
The amount of any realized gain or loss on closing out a forward contract
will generally result in a realized capital gain or loss for tax purposes. Under
Code Section 1256, certain forward foreign currency contracts held by a Fund at
the end of a fiscal year will be required to be "marked to market" for federal
income tax purposes, that is, deemed to have been sold at market value. Any gain
or loss recognized with respect to forward currency contracts is considered to
be 60% long term capital gain or loss and 40% short term capital gain or loss,
without regard to the holding period of the contract. Code Section 988 also
applies to forward foreign currency contracts. Under Section 988, each foreign
currency gain or loss is generally computed separately and treated as ordinary
income or loss. In the case of overlap between Section 1256 and 988, special
provisions determine the character and timing of any income, gain or loss. The
Funds will attempt to monitor Section 988 transactions to avoid an adverse tax
impact.
If a Fund purchases shares in certain foreign investment entities, called
"passive foreign investment companies" ("PFIC"), the Fund may be subject to U.S.
federal income tax on a portion of any "excess distribution" or gain from the
disposition of such shares even if such income is distributed as a taxable
dividend by the Fund to its shareholders. Additional charges in the nature of
interest may be imposed on either the Fund or its shareholders in respect of
deferred taxes arising from such distributions or gains. If the Fund were to
invest in a PFIC and elected to treat the PFIC as a "qualified electing fund"
under the Code, in lieu of the foregoing requirements, the Fund might be
required to include in income each year a portion of the ordinary earnings and
net capital gains of the qualified electing fund, even if not distributed to the
Fund, and such amounts would be subject to the 90% and calendar year
distribution requirements described above.
Shareholders will be notified annually by the Company as to the Federal tax
status of distributions made by the Fund(s) in which they invest. Depending on
the residence of the shareholder for tax purposes, distributions also may be
subject to state and local taxes. Special tax treatment, including a penalty on
certain pre-retirement distributions, is accorded to accounts maintained as
IRAs. Shareholders should consult their
26
<PAGE> 103
own tax advisors as to the Federal, state and local tax consequences of
ownership of shares of the Funds in their particular circumstances.
The Funds are required in certain circumstances to withhold 31% of taxable
dividends and certain other payments, including redemption payments, paid to
certain non-corporate shareholders who do not furnish their correct taxpayer
identification number (in the case of individuals, their social security number)
and certain certifications, or who are otherwise subject to backup withholding.
Foreign Shareholders. Under the Code, distributions of net investment
income by a Fund to a nonresident alien individual, nonresident alien fiduciary
a trust or estate, foreign corporation, or foreign partnership (a "foreign
shareholder") will be subject to U.S. withholding tax (at a rate of 30% or a
lower treaty rate). Withholding will not apply if a dividend paid by a Fund to a
foreign shareholder is "effectively connected" with a U.S. trade or business, in
which case the reporting and withholding requirements applicable to U.S.
citizens or domestic corporations will apply. Distributions of net long-term
capital gains are not subject to tax withholding, but in the case of a foreign
shareholder who is a nonresident alien individual, such distributions ordinarily
will be subject to U.S. income tax at a rate of 30% if the individual is
physically present in the U.S. for more than 182 days during the taxable year.
Investors should be aware that the investments to be made by the Funds may
involve sophisticated tax rules (such as the original issue discount, marked to
market and real estate mortgage investment conduit ("REMIC") rules) that would
result in income or gain recognition by the Funds without corresponding current
cash receipts. Although the Funds will seek to avoid significant noncash income,
such noncash income could be recognized by the Funds, in which case a Fund may
distribute cash derived from other sources in order to meet the minimum
distribution requirements described above.
SPECIAL TAX CONSIDERATIONS FOR THE MICHIGAN TAX-FREE BOND FUND.
Federal -- The portion of total dividends paid by the Michigan Tax-Free
Bond Fund with respect to any taxable year that qualifies for exclusion from
gross income ("exempt-interest dividends") will be the same for all shareholders
receiving dividends during such year. In order for the Michigan Tax-Free Bond
Fund to pay exempt-interest dividends during any taxable year, at the close of
each fiscal quarter at least 50% of the aggregate value of Michigan Tax-Free
Bond Fund assets must consist of securities exempt from taxation under Section
103 of the Code. Not later than 60 days after the close of its taxable year, the
Michigan Tax-Free Bond Fund will notify each shareholder of the portion of the
dividends paid with respect to such taxable year which constitutes
exempt-interest dividends. The aggregate amount of dividends so designated
cannot exceed the excess of the amount of interest excludable from gross income
received by such Fund during the taxable year over any amounts disallowed as
deductions under Sections 265 and 171(a)(2) of the Code. Distributions of
capital gains and market discount earned on tax-exempt obligations will not
qualify as tax-exempt income. Deductions for interest expense incurred (or
deemed incurred) to
27
<PAGE> 104
acquire or carry shares of the Michigan Tax-Free Bond Fund may be subject to
limitations that reduce or eliminate such deductions.
Under the Omnibus Budget Reconciliation Act of 1993, all or a portion of
the Fund's gain from the sale or redemption of tax-exempt obligations acquired
after April 30, 1993 attributable to market discount will be treated as ordinary
income rather than capital gain. This provision may increase the amount of
ordinary income dividends received by shareholders.
Shares of the Michigan Tax-Free Bond Fund generally would not be suitable
for tax exempt institutions or tax deferred retirement plans (e.g., plans
qualified under Section 401 of the Code, Keogh-type plans and individual
retirement accounts). Such retirement plans would not gain any benefit from the
tax exempt nature of the Fund's dividends because such dividends ultimately
would be taxable to beneficiaries when distributed to them. In addition, the
Fund may not be an appropriate investment for entities which are "substantial
users" of facilities financed by industrial development bonds or "related
persons" thereof. "Substantial users" is defined under the U.S. Treasury
Regulations to include non-exempt persons who regularly use a part of such
facilities in their trade or businesses and whose gross revenues derived with
respect to the facilities financed by the issuance of bonds are more than 5% of
the total revenues derived by all users of such facilities, or who occupy more
than 5% of the usable area of such facilities or for whom such facilities or a
part thereof were specifically constructed, reconstructed or acquired. "Related
Persons" include certain related natural persons, affiliated corporations, a
partnership and its partners and an S corporation and its shareholders.
In addition, any loss realized by a shareholder upon the sale or redemption
of shares of a Fund held less than six months is disallowed to the extent of any
exempt-interest dividends received by the shareholder.
Michigan -- If at the close of each quarter of its taxable year, the
Michigan Tax-Free Bond Fund qualifies to pay exempt-interest dividends, that
portion of such exempt-interest dividends attributable to interest on federally
tax-exempt obligations of the State of Michigan and its political subdivisions
will be exempt from Michigan income tax (hereinafter referred to as
"Michigan-exempt dividends"). The Michigan Tax-Free Bond Fund intends to satisfy
the above requirements by investing (under normal market conditions)
substantially all of its assets in municipal securities of the State of
Michigan, its cities, municipalities and other political authorities.
Not later than 60 days after the close of its taxable year, the Michigan
Tax-Free Bond Fund will notify each shareholder of the portion of the dividends
paid which constitutes Michigan-exempt dividends with respect to such taxable
year. The total amount of Michigan-exempt dividends paid by the Michigan
Tax-Free Bond Fund to all of its shareholders with respect to any taxable year
cannot exceed the amount of interest received by the Fund during such year on
Michigan municipal securities and other obligations the interest on which is tax
exempt, less any expenses or expenditures (including any expenditures
attributable to the acquisition of securities of other
28
<PAGE> 105
investment companies). Dividends paid by the Michigan Tax-Free Bond Fund in
excess of this limitation will not qualify for tax exempt treatment.
The Michigan Tax-Free Bond Fund may derive taxable income on temporary
investments and realize capital gains or losses from its portfolio transactions,
including the sale of securities. Such income will not qualify for tax exempt
treatment and will be taxable to shareholders as described, whether such
distributions are made in cash or in additional shares of the Fund. Any
distribution of net long term capital gains will be taxable to shareholders as
long term capital gains. In addition, a sale of shares in the Fund (including a
redemption of such shares or an exchange of shares between Funds) may be a
taxable event and may result in a taxable gain or loss to the shareholder. A
loss realized by a shareholder on the redemption, sale, or exchange of shares of
the Fund with respect to which Michigan-exempt dividends have been paid will be
disallowed to the extent of the Michigan-exempt dividends received if such
shares have been held by the shareholder for six months or less.
Other States -- The treatment for state, local and municipal tax purposes
of distributions of exempt-interest dividends from the Michigan Tax-Free Bond
Fund will vary according to the laws of state and local taxing authorities. In
some instances, a state or city may exempt from tax the portion of the
distribution from the Fund that represents interest received on obligations of
that state or its political subdivisions.
CAPITAL STOCK
Each Fund is comprised of two classes of stock -- the "Institutional Class"
and the "Consumer Service Class." When certain matters affect one class but not
another, the shareholders would vote as a class regarding such matters. Subject
to the foregoing, on any matter submitted to a vote of shareholders, all shares
then entitled to vote will be voted separately by Fund or portfolio unless
otherwise required by the Act, in which case all shares will be voted in the
aggregate. For example, a change in a Fund's fundamental investment policies
would be voted upon only by shareholders of the Fund involved. Additionally,
approval of the Advisory Agreements is a matter to be determined separately by
each Fund. Approval by the shareholders of one Fund is effective as to that Fund
whether or not sufficient votes are received from the shareholders of the other
Funds to approve the proposal as to those Funds. As used in the Prospectus and
in this Statement of Additional Information, the term "majority," when referring
to approvals to be obtained from shareholders of a Fund or class means the vote
of the lesser of (i) 67% of the shares of the Fund or class represented at a
meeting if the holders of more than 50% of the outstanding shares of the Fund or
class are present in person or by proxy, or (ii) more than 50% of the
outstanding shares of the Fund or class. The term "majority," when referring to
the approvals to be obtained from shareholders of the Company as a whole means
the vote of the lesser of (i) 67% of the Company's shares represented at a
meeting if the holders of more than 50% of the Company's outstanding shares are
present in person or by proxy, or (ii) more than 50% of the Company's
outstanding shares. Shareholders are entitled to one vote for each full share
held and fractional votes for fractional shares held.
29
<PAGE> 106
The Company may dispense with annual meetings of shareholders in any year
in which it is not required to elect directors under the Act. However, the
Company undertakes to hold a special meeting of its shareholders for the purpose
of voting on the question of removal of a director or directors if requested in
writing by the holders of at least 10% of the Company's outstanding voting
securities, and to assist in communicating with other shareholders as required
by Section 16(c) of the Act.
Each share of a Fund represents an equal proportional interest in that Fund
with each other share and is entitled to such dividends and distributions out of
the income earned on the assets belonging to that Fund as are declared in the
discretion of the Directors. In the event of the liquidation or dissolution of
the Company, shareholders of a Fund are entitled to receive the assets
attributable to that Fund that are available for distribution, and a
distribution of any general assets not attributable to a particular Fund that
are available for distribution in such manner and on such basis as the Directors
in their sole discretion may determine.
Shareholders are not entitled to any preemptive rights. All shares, when
issued, will be fully paid and non-assessable by the Company.
PRINCIPAL SHAREHOLDERS
At February 14, 1996, to the knowledge of management, the following persons
owned of record or beneficially 5% or more of a class of equity shares of the
Funds:
<TABLE>
<S> <C>
MONEY MARKET FUND (INSTITUTIONAL CLASS)
FM CO. 99.97%
Attn: Trust Operations
101 East Main St.
Zeeland, MI 49464-1735
INTERMEDIATE GOVERNMENT INCOME FUND (INSTITUTIONAL CLASS)
FM CO. 99.99%
Attn: Trust Operations
101 East Main St.
Zeeland, MI 49464-1735
INTERMEDIATE GOVERNMENT INCOME FUND (CONSUMER CLASS)
MUSKEGON GENERAL HOSPITAL 8.25%
Attn: Mr. Walt Dabrowski
1700 Oak Avenue
Muskegon, MI 49442-2407
NATIONAL FINANCIAL SERVICES CO. for 18.31%
The Exclusive Benefit of Our Customers
Attn: Mutual Funds
200 Liberty Street
One World Financial Center
New York, NY 10281-0095
</TABLE>
30
<PAGE> 107
<TABLE>
<S> <C>
MICHIGAN TAX-FREE BOND FUND (CONSUMER CLASS)
NATIONAL FINANCIAL SERVICES CO. for 27.44%
The Exclusive Benefit of Our Customers
Attn: Mutual Funds
200 Liberty Street
1 World Financial Center
New York, NY 10281-1003
MICHIGAN TAX-FREE BOND FUND (INSTITUTIONAL CLASS)
FM CO. 99.68%
Attn: Trust Operations
101 East Main St.
Zeeland, MI 49464-1735
DIVERSIFIED EQUITY FUND CONSUMER CLASS)
FM CO. 99.90%
Attn: Trust Operations
101 East Main St.
Zeeland, MI 49464-1735
DIVERSIFIED EQUITY FUND (INSTITUTIONAL CLASS)
NATIONAL FINANCIAL SERVICES CO. INC. 16.96%
For the Exclusive use of Our Customers
Attn: Mutual Funds
200 Liberty Street
1 World Financial Center
New York, NY 10281-1003
</TABLE>
OTHER MATTERS
The Company's Registration Statement, including the Prospectus, the SAI and
the exhibits filed therewith, may be examined at the office of the Commission in
Washington, D.C. Statements contained in the Prospectus or the SAI as to the
contents of any contract or other document referred to herein or in the
Prospectus are not necessarily complete, and, in each instance, reference is
made to the copy of such contract or other document filed as an exhibit to the
Registration Statement, each such statement being qualified in all respects by
such reference.
CUSTODIAN
The First National Bank of Chicago has been retained to act as Custodian
for the Funds. The Custodian, among other things, maintains a custody account or
accounts in the name of each Fund; receives and delivers all assets for each
Fund upon purchase and upon sale or maturity; collects and receives all income
and other payments and distributions on account of the assets of each Fund and
pays all expenses of each Fund. For its services as Custodian, First National
Bank of Chicago receives an asset-based fee and transaction charges.
31
<PAGE> 108
EXPERTS
Price Waterhouse LLP has been selected as the independent accountants for
the Company. Price Waterhouse LLP provides audit services, tax return
preparation and assistance and consultation in connection with review of certain
Securities and Exchange Commission filings. Price Waterhouse LLP's address is 30
South Seventeenth Street, Philadelphia, PA 19103.
FINANCIAL STATEMENTS
The Company's financial statements and financial highlights, which have
been audited by Price Waterhouse LLP, are included in this SAI in reliance on
the report of Price Waterhouse LLP, independent accountants, given on the
authority of that firm as experts in auditing and accounting.
32
<PAGE> 109
FMB FUNDS, INC.
FMB MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YIELD TO
CREDIT MATURITY
RATINGS* ON DATE OF MATURITY PRINCIPAL VALUE
(UNAUDITED) PURCHASE DATE AMOUNT (NOTE 2a)
- -------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C>
COMMERCIAL PAPER -- 74.3%
AGRICULTURE -- 4.6%
A1+/P1 Cargill Inc.......................... 5.68% 02/06/96 $ 4,900,000 $ 4,848,931
------------
AUTOMOTIVE -- 4.9%
A1/P1 Ford Motor Credit Corporation........ 5.76 01/26/96 5,200,000 5,154,055
------------
BANKING -- 9.4%
A1+/P1 State Street Boston
Corporation........................ 5.74 01/08/96 4,800,000 4,771,323
A1+/P1 Norwest Corporation.................. 5.80 01/23/96 5,100,000 5,057,052
------------
9,828,375
------------
BEVERAGES -- 7.6%
A1+/P1 Coca Cola Company.................... 5.78 12/12/95 4,900,000 4,891,496
A1/P1 PepsiCo Inc. ........................ 5.76 01/19/96 3,110,000 3,085,998
------------
7,977,494
------------
BROKERAGE -- 4.7%
A1+/P1 Merrill Lynch & Co. ................. 5.80 01/03/96 5,000,000 4,973,783
------------
CHEMICALS -- 4.7%
A1/P1 E.I. Dupont de Nemours and Company... 5.73 12/06/95 4,900,000 4,896,155
------------
ELECTRONICS -- 4.6%
A1+/P1 General Electric Capital
Corporation........................ 5.80 12/14/95 4,800,000 4,790,085
------------
FINANCIAL SERVICES -- 19.4%
A1/P1 Beneficial Corporation............... 5.79 12/22/95 5,100,000 5,083,013
A1+/P1 Ciesco............................... 5.76 12/18/95 5,100,000 5,086,321
A1/P1 Commercial Credit Corporation........ 5.73 01/12/96 5,100,000 5,066,382
A1/P1 CXC Incorporated..................... 5.77 12/04/95 5,100,000 5,097,582
------------
20,333,298
------------
MACHINERY -- 4.8%
A1/P1 John Deere Capital Corporation ...... 5.68 01/16/96 5,100,000 5,063,507
------------
TELECOMMUNICATIONS -- 4.9%
A1+/P1 AT&T Corporation..................... 5.75 12/08/95 5,100,000 5,094,377
------------
TOBACCO -- 4.7%
A1/P1 Philip Morris Companies, Inc. ....... 5.73 12/20/95 4,900,000 4,885,389
------------
TOTAL COMMERCIAL PAPER............... 77,845,449
------------
CERTIFICATE OF DEPOSIT -- 4.8%
First Tennessee Bank.......................... 5.84 12/29/95 5,000,000 5,000,000
------------
</TABLE>
See accompanying notes to financial statements.
33
<PAGE> 110
FMB FUNDS, INC.
FMB MONEY MARKET FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
YIELD TO
MATURITY
ON DATE OF MATURITY PRINCIPAL VALUE
PURCHASE DATE AMOUNT (NOTE 2a)
---------- -------- ----------- ------------
<S> <C> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 9.5%
Notes:
Federal Home Loan Mortgage
Corporation** (2 year CMT -- 99 basis
points)................................... 4.55% 07/15/96 $ 5,000,000 $ 5,000,000
Student Loan Mortgage Association**......... 5.76 03/14/96 5,000,000 5,000,000
------------
TOTAL U.S. GOVERNMENT AGENCY
OBLIGATIONS................................. 10,000,000
------------
TOTAL INVESTMENTS 88.6%
(COST $92,845,449)+......................... 92,845,449
REPURCHASE AGREEMENT -- 11.7%
First Union Bank, dated 11/30/95, 5.89%....... 5.97 12/01/95 12,256,000 12,256,000
------------
(Proceeds at maturity $12,258,005)
collateralized by:
$12,497,493 U.S. Treasury Bill, 5/9/1996
TOTAL INVESTMENTS AND REPURCHASE AGREEMENT --
100.3% (COST $105,101,449).................. 105,101,449
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.3%)............................ (364,563)
------------
NET ASSETS -- 100%............................ $104,736,886
===========
</TABLE>
See accompanying notes to financial statements.
34
<PAGE> 111
FMB FUNDS, INC.
FMB INTERMEDIATE GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2a)
----------- ------------ ------------
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES -- 20.3%
FEDERAL HOME LOAN MORTGAGE
CORPORATION -- 10.4%
Pool#M90035, 8.50%, 2/1/96.............. $ 80,967 $ 80,967 $ 83,194
Pool#M90040, 8.50%, 3/1/96.............. 291,035 291,035 299,039
Pool#M90042, 8.00%, 4/1/96.............. 215,747 215,747 221,614
Pool#N90047, 9.00%, 10/1/97............. 144,262 144,262 149,042
1183-E Pac CMO, 7.34%, 1/15/99.......... 1,000,000 1,016,001 1,027,160
Pool#214693, 9.00%, 12/1/01............. 204,986 204,986 213,954
1132-G Pac CMO, 8.00%, 1/15/05.......... 42,846 42,846 42,849
1204-G Pac CMO, 7.00%, 11/15/05......... 937,197 937,934 945,313
1311-E Pac CMO, 7.50%, 8/15/16.......... 945,487 945,487 945,392
FHG 23-HE Pac CMO, 5.50%, 8/25/16....... 1,000,000 967,732 976,340
1290-F Pac CMO, 7.50%, 11/15/17......... 1,000,000 1,014,786 1,019,040
1199-D Pac CMO, 7.15%, 7/15/18.......... 2,000,000 2,013,369 2,032,700
1502-PE Pac CMO, 6.25%, 1/15/19......... 4,060,000 4,063,510 3,995,243
98-E Pac CMO, 8.25%, 11/15/20........... 652,093 652,093 662,259
---------- ----------
12,590,755 12,613,139
---------- ----------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 9.9%
1991-119-J CMO, 8.50%, 4/25/96.......... 98,980 98,980 98,988
Pool#50372, 9.50%, 10/1/97.............. 195,316 195,316 202,275
Pool#50360, 9.00%, 11/1/97.............. 50,666 50,666 52,297
Pool#50375, 9.50%, 11/1/97.............. 172,692 172,692 178,845
Pool#50469, 8.00%, 7/1/98............... 191,459 191,459 196,724
Pool#50498, 8.50%, 10/1/98.............. 51,090 51,090 52,654
Pool#50509, 8.50%, 11/1/98.............. 114,127 114,127 117,623
1991-160-VC AD CMO, 7.75%, 10/25/00..... 1,000,000 1,004,472 1,021,960
1992-113-G Pac CMO, 7.50%,
7/25/02............................... 1,231,948 1,262,172 1,291,192
1992-9-E Pac CMO, 7.00%, 1/25/04........ 389,162 389,162 388,259
1991-36-E Pac CMO, 8.25%, 1/25/05....... 594,279 594,400 597,935
1991-149-E Pac CMO, 7.50%,
3/25/05............................... 574,734 574,734 575,500
1992-78-G Pac CMO, 7.50%,
12/25/05.............................. 1,500,000 1,507,530 1,525,425
1991-173-PG Pac CMO, 6.95%, 5/25/17..... 1,181,000 1,179,603 1,182,464
1990-39-G CMO, 8.50%, 11/25/17.......... 626,726 628,659 633,376
1993-56-PN Pac CMO, 6.35%,
7/25/18............................... 1,000,000 1,013,625 1,005,160
1992-150-G Pac CMO, 6.75%,
9/25/18............................... 1,000,000 996,762 1,001,320
</TABLE>
See accompanying notes to financial statements.
35
<PAGE> 112
FMB FUNDS, INC.
FMB INTERMEDIATE GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2a)
----------- ------------ ------------
<S> <C> <C> <C>
MORTGAGE-BACKED SECURITIES -- (CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION --
(CONTINUED)
1992-79-G Pac CMO, 7.00%,
10/25/18............................... $2,000,000 $ 2,004,562 $ 2,011,240
------------ ------------
12,030,011 12,133,237
------------ ------------
TOTAL MORTGAGE-BACKED SECURITIES........... 24,620,766 24,746,376
------------ ------------
U.S. GOVERNMENT AGENCY OBLIGATIONS -- 39.0%
FEDERAL HOME LOAN BANK -- 4.2%
8.25%, 9/25/96........................... 1,000,000 1,007,522 1,022,020
6.46%, 2/1/00............................ 1,000,000 1,000,000 1,015,160
6.125%, 9/20/00.......................... 2,000,000 2,000,000 2,032,540
5.75%, 3/30/01........................... 1,000,000 1,000,000 1,002,520
------------ ------------
5,007,522 5,072,240
------------ ------------
FEDERAL HOME LOAN MORTGAGE
CORPORATION -- 12.1%
8.13%, 9/30/96........................... 1,000,000 1,009,305 1,022,050
6.60%, 11/12/99.......................... 1,000,000 1,000,000 1,030,300
6.55%, 1/4/00............................ 1,000,000 1,000,000 1,029,090
6.78%, 3/28/01........................... 2,000,000 2,000,000 2,005,360
7.14%, 7/31/02........................... 1,500,000 1,500,000 1,544,550
6.80%, 9/18/02........................... 1,000,000 1,000,000 1,010,130
6.55%, 4/2/03............................ 1,000,000 1,003,152 1,007,390
8.34%, 3/14/05........................... 2,000,000 2,000,000 2,098,960
6.83%, 6/15/05........................... 2,000,000 2,000,000 2,050,580
7.00%, 7/6/05............................ 2,000,000 2,000,000 2,046,040
------------ ------------
14,512,457 14,844,450
------------ ------------
FEDERAL NATIONAL MORTGAGE
ASSOCIATION -- 20.4%
7.60%, 1/10/97........................... 1,000,000 1,007,766 1,023,060
6.81%, 4/23/99........................... 2,000,000 2,000,000 2,042,160
7.64%, 5/6/99............................ 2,000,000 2,001,848 2,013,660
7.24%, 9/2/99............................ 2,000,000 2,000,000 2,045,420
7.36%, 9/29/99........................... 2,000,000 1,975,031 2,067,420
7.65%, 10/20/99.......................... 2,000,000 1,995,953 2,085,300
6.33%, 11/3/00........................... 3,000,000 3,000,000 3,030,030
6.69%, 1/19/00........................... 1,000,000 1,000,000 1,016,430
7.55%, 4/22/02........................... 2,000,000 2,044,036 2,171,200
7.00%, 8/12/02........................... 1,000,000 1,001,898 1,010,650
6.93%, 8/23/02........................... 1,000,000 999,748 1,010,530
</TABLE>
See accompanying notes to financial statements.
36
<PAGE> 113
FMB FUNDS, INC.
FMB INTERMEDIATE GOVERNMENT INCOME FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT COST (NOTE 2a)
----------- ------------ ------------
<S> <C> <C> <C>
U.S. GOVERNMENT AGENCY OBLIGATIONS --
(CONTINUED)
FEDERAL NATIONAL MORTGAGE ASSOCIATION --
(CONTINUED)
6.95%, 9/10/02.......................... $ 3,000,000 $ 3,019,294 $ 3,026,340
6.72%, 2/25/03.......................... 2,400,000 2,400,000 2,438,040
------------
24,445,574 24,980,240
------------ ------------
TENNESSEE VALLEY AUTHORITY -- 2.3%
8.25%, 11/15/96......................... 1,800,000 1,822,394 1,845,000
6.00%, 1/15/97.......................... 1,000,000 1,000,000 1,005,000
------------ ------------
2,822,394 2,850,000
------------ ------------
TOTAL U.S. GOVERNMENT AGENCY OBLIGATIONS.. 46,787,947 47,746,930
------------ ------------
U.S. TREASURY NOTES -- 30.3%
7.63%, 4/30/96.......................... 1,000,000 1,004,544 1,008,740
6.875%, 3/31/97......................... 3,000,000 3,002,030 3,057,030
8.50%, 5/15/97.......................... 2,000,000 2,038,435 2,086,160
8.50%, 7/15/97.......................... 1,000,000 1,022,901 1,047,430
7.375%, 11/15/97........................ 5,000,000 4,973,107 5,181,650
7.875%, 1/15/98......................... 3,000,000 3,024,739 3,147,930
7.875%, 4/15/98......................... 1,000,000 1,024,530 1,054,770
9.00%, 5/15/98.......................... 5,000,000 5,138,668 5,409,750
8.25%, 7/15/98.......................... 4,000,000 4,096,483 4,273,840
6.375%, 1/15/99......................... 2,000,000 1,957,040 2,052,300
6.875%, 8/31/99......................... 2,000,000 1,983,065 2,091,800
7.875%, 11/15/99........................ 1,000,000 1,025,269 1,082,990
8.00%, 5/15/01.......................... 2,000,000 2,089,888 2,225,860
7.875%, 8/15/01......................... 2,000,000 2,082,069 2,220,380
7.50%, 11/15/01......................... 1,000,000 1,033,620 1,095,060
------------ ------------
TOTAL U.S. TREASURY NOTES................. 35,496,388 37,035,690
------------ ------------
TOTAL INVESTMENTS -- 89.6%................ 106,905,101+ 109,528,996
------------ ------------
REPURCHASE AGREEMENT -- 9.7%
First Union Bank, 5.89%, due 12/1/95...... 11,899,000 11,899,000 11,899,000
------------ ------------
(Proceeds at maturity $11,900,920)
collateralized by:
$12,133,608 U.S. Treasury Bill 10/17/96
TOTAL INVESTMENTS AND REPURCHASE
AGREEMENT -- 99.3%...................... $118,804,101 121,427,996
============
OTHER ASSETS LESS LIABILITIES -- 0.7%..... 828,062
------------
NET ASSETS -- 100%........................ $122,256,058
============
</TABLE>
See accompanying notes to financial statements.
37
<PAGE> 114
FMB FUNDS, INC.
FMB MICHIGAN TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2a)
- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL OBLIGATIONS -- 96.5%
Aaa/AAA Ann Arbor Water Supply System (MBIA)
7.375%, 2/1/2003.................. $ 710,000 $ 790,361 $ 824,487
A1/AA Ann Arbor Sewer Disposal Revenue
Series XII, 6.95%, 7/1/2001***.... 335,000 355,226 378,550
A/A+ Battle Creek Building Authority
8.00%, 4/1/2000................... 400,000 447,970 454,000
Baa/BBB Bay City UTGO 5.40%, 1/1/1997....... 150,000 153,000 151,619
Baa1/BBB+ Bay County West Side Regional Sewer
Disposal System, 6.40%,
5/1/1996***....................... 150,000 153,207 154,206
Aaa/AAA Chelsea School District, (FGIC)
5.50%, 5/1/2008................... 500,000 497,109 518,125
A1/AA Clio Area School District, 7.20%,
5/1/1997***....................... 200,000 205,680 208,470
Aaa/AAA Dearborn EDC Oakwood Hospital
Revenue Bonds (MBIA) 6.55%,
8/15/2001***...................... 250,000 268,416 281,250
A1/AA Dearborn City School District UTGO,
5.25%, 5/1/2006................... 500,000 490,763 516,875
Aaa/AAA Detroit City School District UTGO
(MBIA) 7.10%, 5/1/2001***......... 250,000 257,487 286,250
Aaa/AAA Detroit Sewer Disposal (MBIA)
7.125%, 7/1/1999***............... 500,000 536,667 555,625
Aaa/AAA Detroit Sewer Disposal Revenue
(FGIC) 5.50%, 7/1/1996............ 200,000 200,413 202,070
Aaa/AAA Farmington Hills HFA, Botsford
Hospital (MBIA) Series A 6.70%,
2/15/2001......................... 225,000 230,813 248,344
Aaa/AAA Forest Hills Public Schools 5.00%,
5/1/2006.......................... 500,000 497,985 500,625
A1/AA Gaylord Schools 6.60%,
5/1/2002***....................... 500,000 545,518 565,625
Aaa/AAA Grand Rapids DDA 6.60%, 6/1/2008.... 545,000 546,899 607,675
Aa/AAA Grand Rapids & Kent County Joint
Building Authority 7.10%,
10/1/1998***...................... 240,000 255,577 259,200
A1/AA- Grand Rapids Sanitation Sewer System
6.875%, 1/1/2000***............... 500,000 540,077 545,000
Aaa/AAA Grand Rapids Water Supply 6.625%,
1/1/2001***....................... 500,000 532,986 545,625
Aaa/AAA Grandville Public Schools District
(FGIC) 6.00%, 5/1/2005............ 310,000 299,919 338,288
Aaa/AAA Greenville Public Schools 6.50%,
5/1/2003.......................... 315,000 348,025 355,950
</TABLE>
See accompanying notes to financial statements.
38
<PAGE> 115
FMB FUNDS, INC.
FMB MICHIGAN TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2a)
- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL OBLIGATIONS --
(CONTINUED)
Aaa/AAA Harrison Community Schools (AMBAC)
5.80%, 5/1/2005................... $ 500,000 $ 500,000 $ 536,250
NR/AA- Holland Electric Revenue Bonds
Refunding 6.50%, 7/1/1999***...... 400,000 413,105 430,000
Aaa/AAA Hudsonville Public Schools (FGIC)
5.00%, 5/1/2002................... 500,000 500,000 515,625
Aaa/AAA Kalamazoo HFA Borges Medical (FGIC)
6.25%, 7/1/1999***................ 500,000 520,353 523,750
Aa/AAA Kent County Building Authority
6.00%, 12/1/2002***............... 500,000 505,653 520,625
Kent County HFA Michigan
Hospital Revenue Bonds:
A/A Blodgett Memorial Medical
Center, Series A 6.875%,
7/1/1999***................... 165,000 166,490 177,581
Aaa/AAA Blodgett Memorial Medical Center
Refunded (MBIA) Series A
5.75%, 7/1/2009............... 500,000 482,114 505,000
A/A Mary Free Bed Hospital Series A
Refunded 6.50%, 4/1/2005...... 200,000 199,165 212,250
Aaa/AAA Pine Rest Christian Hospital
Refunded (FGIC) 6.50%,
11/1/2003***.................. 500,000 526,780 536,875
A1/AA+ Lansing Building Authority 7.15%,
6/1/2002***....................... 525,000 554,395 593,250
A1/AA+ Lansing Tax Increment Finance
Authority, 5.20%, 10/1/1998....... 200,000 200,000 205,750
Aaa/AAA Lenawee County Building 6.00%,
5/1/2004***....................... 350,000 351,096 363,563
A1/NR Macomb County Southeast Waste Water
Disposal System UTGO, 6.50%,
11/1/1999***...................... 200,000 203,179 206,002
A1/AA Mattawan School District 6.40%,
5/1/2004***....................... 500,000 520,271 540,000
Aaa/AAA Michigan Higher Education Student
Loan Series XX-I (AMBAC) 5.70%,
4/1/2002.......................... 500,000 500,000 523,125
Aaa/AAA Michigan Public Power Agency
Campbell Project (AMBAC) 6.40%,
1/1/1999***....................... 235,000 238,302 245,575
Aaa/AAA Michigan State Building Authority
Revenue Bond, Adult General
Hospital (AMBAC) 7.375%,
12/1/1996***...................... 250,000 259,375 263,785
</TABLE>
See accompanying notes to financial statements.
39
<PAGE> 116
FMB FUNDS, INC.
FMB MICHIGAN TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2a)
- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL OBLIGATIONS --
(CONTINUED)
Aaa/AAA Michigan State Building Authority
Revenue Bond 6.75%,
10/1/2000***...................... $ 500,000 $ 545,521 $ 560,000
Aaa/AAA Michigan State Building Authority
Revenue Bond Series II (AMBAC)
6.75%, 10/1/2003***............... 500,000 512,849 553,750
A1/AA Michigan State Environmental
Protection Program UTGO 6.25%,
11/1/2002***...................... 1,000,000 1,058,592 1,115,000
NR/A+ Michigan State HDA Rental Housing
Revenue 5.80%, 4/1/2000........... 150,000 150,000 157,687
Aaa/AA Michigan State HDA Walled Lake Villa
Project Revenue Bonds (FSA) 5.85%,
4/15/2007......................... 420,000 420,000 442,050
Michigan State HFA Revenue
Bonds:
A/A Holland Community Hospital
4.50%, 1/1/2000............... 555,000 552,863 556,388
NR/A- Refunded Central Michigan
Community Hospital Series A
5.75%, 10/1/2002.............. 300,000 297,667 311,625
Aa/AA Refunded Detroit Center Group A
6.375%, 8/15/2005***.......... 500,000 504,474 523,125
NR/AA Refunded Otsego Memorial
Hospital Gaylord (National
Bank Detroit) 6.00%,
1/1/2009...................... 660,000 657,006 683,100
Aaa/AAA Refunded Sparrow Obligated Group
(MBIA) 6.30%, 11/15/2003...... 615,000 620,527 676,500
Aaa/AAA Refunded St. John Hospital
Series A (AMBAC) 5.75%,
5/15/2004..................... 200,000 198,162 214,000
NR/BBB+ Series A 4.75%, 7/1/1998........ 200,000 200,000 199,750
Aaa/AAA Michigan State South Central Power
Agency Supply System Revenue Bonds
Prerefunded (AMBAC) 7.25%,
11/1/1996***...................... 200,000 206,003 210,216
NR/NR Michigan Strategic Fund 5.20%,
9/1/2004.......................... 400,000 400,000 409,500
Aaa/AAA Northern University Revenue Bond
(AMBAC) 5.50%, 12/1/2009.......... 435,000 401,736 437,719
A1/AA Novi CSD UTGO 5.35%, 5/1/2002....... 275,000 274,294 286,000
A1/AA Oakland County LTGO 6.25%,
11/1/1999***...................... 500,000 514,010 527,500
</TABLE>
See accompanying notes to financial statements.
40
<PAGE> 117
FMB FUNDS, INC.
FMB MICHIGAN TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2a)
- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL OBLIGATIONS --
(CONTINUED)
A1/AA Oakland County Segment I&II 6.50%,
11/1/2005......................... $ 500,000 $ 535,045 $ 535,625
Aa/NR Oakland County EDC 6.375%,
11/1/2004***...................... 500,000 500,000 570,000
A1/AA- Ottawa County Refunding Bond Series
A 6.80%, 8/1/2001***.............. 500,000 533,705 545,000
NR/NR Oxford Area CSD UTGO 6.70%,
5/1/1996***....................... 340,000 352,182 354,161
A1/AA Paw Paw Public Schools 6.50%,
5/1/2007***....................... 500,000 559,449 565,625
A1/AA Plymouth-Canton CSD UTGO 6.35%,
5/1/2001***....................... 300,000 323,877 329,250
NR/AA Rochester CSD UTGO 6.50%,
5/1/2002***....................... 150,000 150,693 166,500
A1/AA- Rochester Hills LTGO 6.25%,
8/1/1998***....................... 200,000 205,030 212,250
A1/AA- Rochester Hills UTGO Prerefunded
6.60%, 11/1/1998***............... 465,000 486,935 504,525
A1/AA Rockford Public Schools 5.60%,
5/1/2005.......................... 500,000 499,467 528,750
A1/NR Saginaw County Tittabawasse Water
System Extension 2 6.50%,
7/1/1997***....................... 145,000 146,471 146,718
A1/NR Saginaw Water Revenue Bonds
Refunding 6.00%, 7/1/2000***...... 865,000 885,280 905,006
NR/AAA St. Joseph HFA, Hospital Revenue
Mercy Memorial Medical Center
7.30%, 10/1/1996***............... 155,000 158,836 162,473
A1/AA Saranac CSD UTGO 5.70%, 5/1/2007.... 230,000 228,216 237,762
A1/NR Thornapple-Kellogg CSD UTGO 7.00%,
5/1/1997***....................... 200,000 210,083 211,750
NR/AA Troy Downtown Development 6.10%,
11/1/2010......................... 400,000 400,000 425,500
A1/AA Utica Community Schools UTGO 5.70%,
5/1/2006.......................... 500,000 494,868 530,000
University of Michigan Revenue
Bonds:
Aa/AA Refunding Series A 5.70%,
12/1/2004..................... 250,000 248,371 269,063
Aa1/AA+ Series B 5.80%, 4/1/2010........ 500,000 499,401 526,875
A1/AA Walled Lake Consolidated School
District Series I UTGO 6.50%,
5/1/1999***....................... 200,000 205,328 215,250
</TABLE>
See accompanying notes to financial statements.
41
<PAGE> 118
FMB FUNDS, INC.
FMB MICHIGAN TAX-FREE BOND FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
CREDIT PRINCIPAL VALUE
RATINGS* AMOUNT COST (NOTE 2a)
- ---------- --------- ----------- -----------
<S> <C> <C> <C> <C>
MUNICIPAL OBLIGATIONS --
(CONTINUED)
NR/AA- Warren LTGO 5.00%, 6/1/2007......... $ 405,000 $ 381,705 $ 400,950
A1/NR Warren School District Prere-
funded 6.70%, 5/1/2001***......... 500,000 520,551 562,500
----------- -----------
TOTAL MUNICIPAL OBLIGATIONS......... 30,833,573 32,166,308
----------- -----------
FLOATING RATE DEMAND NOTES -- 1.6%**
NR/MIG1 Calhoun County EDC 3.75%,
12/1/1995......................... 430,000 430,000 430,000
A/A City of Farmington Hills EDC
Refunding Bonds 3.90%,
12/1/1995......................... 90,000 90,000 90,000
----------- -----------
TOTAL FLOATING RATE DEMAND NOTES.... 520,000 520,000
----------- -----------
TAX FREE MONEY MARKET FUND -- 0.1%
Dreyfus Michigan Municipal Money
Market Fund....................... 46,714 46,714 46,714
----------- -----------
TOTAL INVESTMENTS -- 98.2%.......... $31,400,287+ 32,733,022
===========
OTHER ASSETS LESS
LIABILITIES -- 1.8%............... 586,270
-----------
NET ASSETS -- 100.0%................ $33,319,292
===========
</TABLE>
See accompanying notes to financial statements.
42
<PAGE> 119
FMB FUNDS, INC.
FMB DIVERSIFIED EQUITY FUND
PORTFOLIO OF INVESTMENTS -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2a)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- 91.8%
ADVERTISING -- 0.5%
8,000 Interpublic Group of Companies............... $ 264,470 $ 307,000
---------- ----------
AUTOMOTIVE -- 1.5%
10,000 Ford Motor Company........................... 246,963 282,500
15,000 Genuine Parts, Inc. ......................... 555,230 605,625
---------- ----------
802,193 888,125
---------- ----------
BANKING -- 4.4%
13,000 Bank One Corp. .............................. 439,915 495,625
16,000 Citicorp..................................... 682,850 1,132,000
30,000 Norwest Corporation.......................... 762,125 990,000
---------- ----------
1,884,890 2,617,625
---------- ----------
BEVERAGES -- 1.9%
20,000 PepsiCo Inc. ................................ 784,366 1,105,000
---------- ----------
CHEMICALS -- 2.2%
23,000 Morton International, Inc. .................. 709,650 796,375
13,000 Norsk Hydro A.S., ADR........................ 439,722 528,125
---------- ----------
1,149,372 1,324,500
---------- ----------
COMMERCIAL SERVICES -- 1.1%
16,000 Olsten Corp. ................................ 541,400 640,000
---------- ----------
ELECTRONIC PRODUCTS -- 9.4%
27,000 AMP, Inc. ................................... 842,805 1,083,375
5,000 Duracell International Inc. ................. 222,350 265,000
22,600 General Electric Co. ........................ 987,274 1,519,850
25,937 Molex, Inc. ................................. 584,739 868,890
19,800 Motorola, Inc. .............................. 704,200 1,212,750
14,000 Solectron Corp.(a)........................... 372,860 595,000
---------- ----------
3,714,228 5,544,865
---------- ----------
ENERGY -- 9.1%
14,000 Chevron Corporation.......................... 627,168 691,250
21,000 Enron Corporation............................ 638,555 787,500
10,000 Exxon Corporation............................ 644,013 773,750
13,000 Mobil Corporation............................ 906,668 1,356,875
11,000 Royal Dutch Petroleum ADR.................... 975,496 1,412,125
11,000 Sonat, Inc. ................................. 326,600 354,750
---------- ----------
4,118,500 5,376,250
---------- ----------
ENTERTAINMENT -- 4.3%
10,000 Capital Cities/ABC, Inc. .................... 527,910 1,236,250
18,000 Carnival Corp. .............................. 426,150 468,000
13,500 The Walt Disney Co. ......................... 588,236 811,688
---------- ----------
1,542,296 2,515,938
---------- ----------
</TABLE>
See accompanying notes to financial statements.
43
<PAGE> 120
FMB FUNDS, INC.
FMB DIVERSIFIED EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2a)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
FINANCIAL SERVICES -- 2.5%
6,000 Federal National Mortgage Association........ $ 526,705 $ 657,000
20,000 MBNA Corporation............................. 296,533 807,500
---------- ----------
823,238 1,464,500
---------- ----------
FOOD AND KINDRED PRODUCTS -- 6.3%
17,500 CPC International, Inc. ..................... 777,351 1,203,125
9,750 Heinz (H.J.) Co. ............................ 243,025 310,781
15,700 Hershey Foods Corp. ......................... 746,154 969,475
24,000 Sara Lee Corp. .............................. 593,275 774,000
15,000 Sysco Corp. ................................. 400,315 459,375
---------- ----------
2,760,120 3,716,756
---------- ----------
HEALTH CARE -- 4.0%
21,000 Abbott Laboratories.......................... 643,784 853,125
13,000 Johnson & Johnson............................ 627,247 1,126,125
6,000 Merck & Co., Inc. ........................... 303,855 371,250
---------- ----------
1,574,886 2,350,500
---------- ----------
HOUSEHOLD PRODUCTS -- 3.3%
16,500 Proctor & Gamble Co. ........................ 803,459 1,425,188
20,000 Rubbermaid, Inc. ............................ 638,328 550,000
---------- ----------
1,441,787 1,975,188
---------- ----------
INSURANCE -- 2.1%
12,000 AMBAC, Inc. ................................. 506,600 529,500
8,250 American International Group................. 478,278 740,438
---------- ----------
984,878 1,269,938
---------- ----------
MACHINERY -- 1.3%
13,000 Caterpillar Inc. ............................ 691,510 797,875
---------- ----------
MISCELLANEOUS MANUFACTURING -- 1.5%
8,000 Eastman Kodak Co. ........................... 473,405 544,000
7,000 Stanley Works................................ 297,045 354,375
---------- ----------
770,450 898,375
---------- ----------
MULTI-INDUSTRY -- 1.6%
12,500 TRW, Inc. ................................... 798,218 935,938
---------- ----------
OIL & GAS EXPLORATION -- 0.5%
14,000 Enron Oil & Gas Co. ......................... 311,635 294,000
---------- ----------
PERSONAL CARE -- 2.4%
15,600 International Flavors and Fragrances......... 613,196 797,550
12,000 Gillette Company............................. 439,205 622,500
---------- ----------
1,052,401 1,420,050
---------- ----------
PHARMACEUTICALS -- 4.5%
24,000 Pfizer, Inc. ................................ 897,181 1,392,000
</TABLE>
See accompanying notes to financial statements.
44
<PAGE> 121
FMB FUNDS, INC.
FMB DIVERSIFIED EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
VALUE
SHARES COST (NOTE 2a)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
22,000 Schering-Plough.............................. $ 744,725 $ 1,262,250
---------- ----------
1,641,906 2,654,250
---------- ----------
POLLUTION CONTROL -- 1.3%
26,000 WMX Technologies, Inc. ...................... 885,072 767,000
---------- ----------
PUBLISHING/PRINTING -- 1.6%
24,500 RR Donnelley & Sons Company.................. 679,049 940,188
---------- ----------
RESTAURANTS -- 1.9%
25,000 McDonald's Corporation....................... 611,076 1,115,625
---------- ----------
RETAIL-DEPARTMENT STORES -- 1.8%
11,000 Albertson's Inc. ............................ 355,380 338,250
9,700 Dayton-Hudson Corp. ......................... 711,775 704,463
---------- ----------
1,067,155 1,042,713
---------- ----------
RETAIL-DRUG STORES -- 1.5%
30,400 Walgreen Company............................. 578,220 885,400
---------- ----------
RETAIL-SPECIALTY LINE -- 2.4%
19,000 Autozone(a).................................. 532,975 553,375
13,000 Home Depot, Inc. ............................ 562,790 576,875
6,000 Kohls Corp.(a)............................... 286,690 324,000
---------- ----------
1,382,455 1,454,250
---------- ----------
SOFTWARE/COMPUTER SERVICES -- 7.3%
16,600 Automatic Data Processing.................... 821,023 1,321,775
14,000 Microsoft Corp.(a)........................... 591,460 1,219,750
21,000 Oracle Systems Corporation(a)................ 469,475 952,875
18,000 Raytheon Co. ................................ 607,755 801,000
---------- ----------
2,489,713 4,295,400
---------- ----------
TELECOMMUNICATIONS -- 8.4%
29,000 Alltel Corporation........................... 691,426 855,500
6,000 Ameritech Corporation/Del.................... 267,645 330,000
20,200 AT&T Corp. .................................. 935,326 1,333,200
31,300 MCI Communications Corp. .................... 555,893 837,271
15,000 SBC Communications, Inc. .................... 601,500 810,000
16,800 U.S. West Communications Group .............. 371,888 525,000
16,800 U.S. West Media Group(a)..................... 253,932 302,400
---------- ----------
3,677,610 4,993,371
---------- ----------
TOYS -- 1.2%
26,000 Mattel Inc................................... 545,660 728,000
---------- ----------
</TABLE>
See accompanying notes to financial statements.
45
<PAGE> 122
FMB FUNDS, INC.
FMB DIVERSIFIED EQUITY FUND
PORTFOLIO OF INVESTMENTS (CONTINUED) -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
SHARES/
PRINCIPAL VALUE
AMOUNT COST (NOTE 2a)
- ---------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCKS -- (CONTINUED)
TOTAL INVESTMENTS -- 91.8%................... $39,568,754+ $54,318,620
---------- ----------
REPURCHASE AGREEMENT -- 8.3%
$4,922,000 First Union Bank, 5.89%, 12/01/95............ 4,922,000 4,922,000
----------- -----------
(Proceeds at maturity $4,922,805)
collateralized by:
$5,018,901 U.S. Treasury Bill, 5/09/1996
TOTAL INVESTMENTS AND REPURCHASE
AGREEMENT -- 100.1%........................ $44,490,754 59,240,620
==========
LIABILITIES IN EXCESS OF OTHER
ASSETS -- (0.1%)........................... (82,045)
----------
NET ASSETS -- 100.0%......................... $59,158,575
===========
</TABLE>
See accompanying notes to financial statements.
46
<PAGE> 123
FMB FUNDS, INC.
FOOTNOTES TO PORTFOLIOS
*Credit Ratings given by Moody's Investors Services, Inc. & Standard and
Poor's Corporation (unaudited)
MOODY'S STANDARD & POOR'S
- ------------------ -----------------
Short Term Ratings
P1 A1 Instrument of the highest quality.
Long Term Ratings
Aaa AAA Instrument judged to be of the best
quality and carrying the smallest amount
of investment risk.
Aa AA Instrument judged to be of high quality by
all standards.
A A Instrument judged to be adequate by all
standards.
Baa BBB Instrument judged to be of moderate
quality by all standards.
NR NR Not Rated. In the opinion of the
Investment Adviser, instrument judged to
be of comparable investment quality to
rated securities which may be purchased by
the Funds.
Items which possess the strongest investment attributes of their category
are given that letter rating followed by a number. The Standard & Poor's
ratings may be modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Government issues have assumed rating of Aaa/AAA.
** Floating Rate Demand Notes. The maturity date shown is the next interest
reset date and rate shown is rate in effect at November 30, 1995.
*** Maturity date shown is the next callable date.
+ The cost of securities for Federal income tax purposes is substantially the
same as that shown.
(a) Non-income producing security.
See accompanying notes to financial statements.
47
<PAGE> 124
FMB FUNDS, INC.
FOOTNOTES TO PORTFOLIOS (CONTINUED)
INVESTMENT PERCENTAGES SHOWN ARE CALCULATED AS A PERCENTAGE OF NET ASSETS.
ABBREVIATIONS USED IN THE PORTFOLIOS:
<TABLE>
<S> <C>
AD Accretion Directed
ADR American Depository Receipt
AMBAC American Municipal Bond Assurance Corporation
CMO Collateralized Mortgage Obligation
CMT Constant Maturity Treasury
CSD Community School District
DDA Downtown Development Authority
EDC Economic Development Corporation
FGIC Financial Guaranty Insurance Corporation
FSA Financial Security Assurance
HDA Housing Development Authority
HFA Hospital Finance Authority
IDA Industrial Development Authority
LTGO Limited Tax General Obligation
MBIA Municipal Bond Insurance Association
Pac Planned Amortized Class
UTGO Unlimited Tax General Obligation
</TABLE>
See accompanying notes to financial statements.
48
<PAGE> 125
FMB FUNDS, INC.
STATEMENT OF ASSETS AND LIABILITIES -- NOVEMBER 30, 1995
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET FUND INCOME FUND BOND FUND EQUITY FUND
------------ ------------ ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
Investments in securities at value
(identified cost: $92,845,449;
$106,905,101; $31,400,287; and $39,568,754;
respectively).............................. $ 92,845,449 $109,528,996 $32,733,022 $54,318,620
Repurchase Agreements, at value (identified
cost: $12,256,000; $11,899,000; $0 and
$4,922,000; respectively).................. 12,256,000 11,899,000 -- 4,922,000
Cash......................................... 852 111 223 300
Dividends and interest receivable............ 116,700 1,516,733 433,622 116,713
Receivable for investment sold............... -- -- 250,000 --
Receivable for Fund shares sold.............. -- 3,278 485 1,359
Unamortized organizational cost.............. 6,605 6,605 6,605 6,605
------------ ------------ ----------- -----------
Total Assets............................. 105,225,606 122,954,723 33,423,957 59,365,597
------------ ------------ ----------- -----------
LIABILITIES:
Dividends payable............................ 362,113 564,069 84,893 --
Payable for Fund shares redeemed............. 84,547 10,375 -- 1,589
Advisory fee payable......................... 29,768 45,150 4,110 47,916
Administrative services fee payable.......... 12,756 15,050 4,110 7,187
Fund accounting fees payable................. 2,500 2,500 2,500 2,500
Shareholder servicing fee payable............ 1,371 518 487 865
Payable for securities purchased............. -- -- -- 92,490
Accrued expenses............................. 5,665 61,003 8,565 54,475
------------ ------------ ----------- -----------
Total Liabilities........................ 498,720 698,665 104,665 207,022
------------ ------------ ----------- -----------
NET ASSETS:.................................. $104,726,886 $122,256,058 $33,319,092 $59,158,575
------------ ------------ ----------- -----------
COMPOSITION OF NET ASSETS:
Shares of capital stock outstanding (par
value of $.001 per share); 10 billion
shares authorized.......................... 104,725 11,941 3,089 4,057
Additional paid-in capital................... 104,620,016 121,421,613 32,098,785 44,535,886
Accumulated undistributed (distributions in
excess of) net investment income........... 90,145 -- -- 99,463
Accumulated net realized losses on investment
transactions............................... (88,000) (1,801,391) (115,317) (230,697)
Unrealized appreciation on investments....... -- 2,623,895 1,332,735 14,749,866
------------ ------------ ----------- -----------
$104,726,886 $122,256,058 $33,319,292 $59,158,575
============ ============ =========== ===========
NET ASSETS:
INSTITUTIONAL CLASS:
Shares of capital stock outstanding........ 87,195,506 11,198,087 1,919,291 3,656,968
============ ============ =========== ===========
Net asset value, maximum offering price and
redemption price per share outstanding... $1.00 $10.24 $10.79 $14.58
============ ============ =========== ===========
CONSUMER SERVICE CLASS:
Shares of capital stock outstanding........ 17,529,236 743,337 1,169,923 399,960
------------ ------------ ----------- -----------
Net asset value and redemption price per
share outstanding........................ $1.00 $10.24 $10.79 $14.58
============ ============ =========== ===========
Maximum offering price per share
($1.00/$1.00, $10.24/.97, $10.79/.97 and
$14.58/.96, respectively)................ $1.00 $10.56 $11.12 $15.19
============ ============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
49
<PAGE> 126
FMB FUNDS, INC.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1995
<TABLE>
<CAPTION>
FMB FMB
FMB INTERMEDIATE MICHIGAN FMB
MONEY GOVERNMENT TAX-FREE DIVERSIFIED
MARKET FUND INCOME FUND BOND FUND EQUITY FUND
----------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
NET INVESTMENT INCOME:
INCOME:
Dividends....................... -- -- -- $ 1,025,266
Interest........................ $ 6,688,746 $ 8,395,968 $1,627,470 255,195
----------- ----------- ---------- -----------
6,688,746 8,395,968 1,627,470 1,280,461
----------- ----------- ---------- -----------
EXPENSES:
Advisory........................ 396,490 549,684 168,511 532,024
Administrative services......... 169,923 183,228 45,958 79,804
Shareholder services............ 40,500 38,000 28,500 42,000
Audit........................... 30,750 41,800 11,500 27,000
Fund accounting................. 30,200 55,000 50,500 37,500
Legal........................... 20,000 22,400 3,521 11,000
Reports to shareholders......... 13,800 11,000 12,000 16,500
Custodian....................... 13,000 10,300 12,500 14,500
Registration.................... 9,500 11,987 9,300 10,500
Insurance....................... 7,346 7,620 1,775 3,103
Amortization of organization
expenses...................... 6,625 6,625 6,625 6,625
Directors....................... 3,250 3,250 3,250 3,250
Miscellaneous................... 9,002 13,000 7,000 9,393
----------- ----------- ---------- -----------
Total expenses before waivers/
reimbursements................ 750,386 953,894 360,940 793,199
Less: Expenses waived by
Adviser....................... -- -- (147,376) --
----------- ----------- ---------- -----------
Net expenses...................... 750,386 953,894 213,564 793,199
----------- ----------- ---------- -----------
Net investment income............. 5,938,360 7,442,074 1,413,906 487,262
----------- ----------- ---------- -----------
Realized and unrealized gain
(loss) on investments:
Net realized gain (loss) on
investment transactions....... (88,000) (1,371,748) (12,047) 538,806
Change in unrealized
appreciation on investments... -- 8,393,069 2,368,037 12,412,467
----------- ----------- ---------- -----------
Net realized and unrealized gain
(loss) on investments........... (88,000) 7,021,321 2,355,990 12,951,273
----------- ----------- ---------- -----------
Increase in net assets resulting
from operations................. $ 5,850,360 $14,463,395 $3,769,896 $13,438,535
========== ============ ========== ============
</TABLE>
See accompanying notes to financial statements.
50
<PAGE> 127
FMB FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
FMB MONEY FMB INTERMEDIATE
MARKET FUND GOVERNMENT INCOME FUND
------------------------------ ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Increase (Decrease) In Net Assets:
Operations:
Net investment income..................... $ 5,938,360 $ 2,791,214 $ 7,442,074 $ 6,975,894
Net realized loss on investment
transactions............................ (88,000) -- (1,371,748) (429,677)
Change in unrealized appreciation
(depreciation) on investments........... -- -- 8,393,069 (9,700,213)
------------- ------------- ------------ ------------
Net increase (decrease) in net assets
resulting from operations................. 5,850,360 2,791,214 14,463,395 (3,153,996)
------------- ------------- ------------ ------------
Dividends from net investment income:
Institutional Class..................... (5,293,269) (2,692,245) (6,916,568) (6,369,040)
Consumer Service Class.................. (554,946) (98,969) (525,506) (606,854)
------------- ------------- ------------ ------------
(5,848,215) (2,791,214) (7,442,074) (6,975,894)
------------- ------------- ------------ ------------
Capital Share Transactions:
Proceeds from sale of shares:
Institutional Class..................... 269,856,183 194,419,964 35,701,843 42,282,533
Consumer Service Class.................. 32,067,014 9,129,509 336,892 1,774,179
------------- ------------- ------------ ------------
301,923,197 203,549,473 36,038,735 44,056,712
------------- ------------- ------------ ------------
Net asset value of shares issued in
reinvestment of dividends:
Institutional Class................... 143,737 406,142 744 3,536
Consumer Service Class................ 544,025 96,793 430,705 479,805
------------- ------------- ------------ ------------
687,762 502,935 431,449 483,341
------------- ------------- ------------ ------------
Cost of shares redeemed:
Institutional Class..................... (286,105,170) (156,972,964) (43,009,557) (23,384,736)
Consumer Service Class.................. (22,236,404) (3,556,407) (3,393,284) (2,550,788)
------------- ------------- ------------ ------------
(308,341,574) (160,529,371) (46,402,841) (25,935,524)
------------- ------------- ------------ ------------
Increase (decrease) in net assets derived
from capital share transactions........... (5,730,615) 43,523,037 (9,932,657) 18,604,529
------------- ------------- ------------ ------------
Net increase (decrease) in net assets...... (5,728,470) 43,523,037 (2,911,336) 8,474,639
Net Assets:
Beginning of period....................... 110,455,356 66,932,319 125,167,394 116,692,755
------------- ------------- ------------ ------------
End of period............................. $ 104,726,886 $ 110,455,356 $122,256,058 $125,167,394
============= ============= ============ ============
Undistributed (distributions in excess of)
net investment income..................... $90,145 -- -- ($100,533)
====== =======
</TABLE>
See accompanying notes to financial statements.
51
<PAGE> 128
FMB FUNDS, INC.
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FMB MICHIGAN FMB DIVERSIFIED
TAX-FREE BOND FUND EQUITY FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Increase In Net Assets:
Operations:
Net investment income......................... $ 1,413,906 $ 1,266,937 $ 487,262 $ 293,792
Net realized gain (loss) on investment
transactions................................ (12,047) (102,663) 538,806 488,363
Change in unrealized appreciation
(depreciation) on investments............... 2,368,037 (1,612,544) 12,412,467 (180,192)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets resulting
from operations............................... 3,769,896 (448,270) 13,438,535 601,963
----------- ----------- ------------ ------------
Dividends from net investment income:
Institutional Class......................... (813,846) (624,462) (406,415) (286,212)
Consumer Service Class...................... (600,060) (642,475) (44,078) (38,615)
----------- ----------- ------------ ------------
(1,413,906) (1,266,937) (450,493) (324,827)
----------- ----------- ------------ ------------
Distributions from realized capital gains:
Institutional Class......................... -- (15,918) -- --
Consumer Service Class...................... -- (19,997) -- --
----------- ----------- ------------ ------------
-- (35,915) -- --
----------- ----------- ------------ ------------
Capital Share Transactions:
Proceeds from sale of shares:
Institutional Class......................... 7,803,836 7,761,135 11,272,214 11,563,862
Consumer Service Class...................... 1,786,833 3,947,524 810,929 988,695
----------- ----------- ------------ ------------
9,590,669 11,708,659 12,083,143 12,552,557
----------- ----------- ------------ ------------
Net asset value of shares issued in
reinvestment of dividends and capital gains:
Institutional Class....................... 1,786 1,300 393 148
Consumer Service Class.................... 508,352 535,770 43,375 38,252
----------- ----------- ------------ ------------
510,138 537,070 43,768 38,400
----------- ----------- ------------ ------------
Cost of shares redeemed:
Institutional Class......................... (3,941,630) (3,166,280) (11,896,251) (8,566,229)
Consumer Service Class...................... (2,940,354) (6,133,525) (1,273,831) (1,700,725)
----------- ----------- ------------ ------------
(6,881,984) (9,299,805) (13,170,082) (10,266,954)
----------- ----------- ------------ ------------
Net increase (decrease) in net assets derived
from capital share
transactions.................................. 3,218,823 2,945,924 (1,043,171) 2,324,003
----------- ----------- ------------ ------------
Net increase in net assets..................... 5,574,813 1,194,802 11,944,871 2,601,139
Net Assets:
Beginning of period........................... 27,744,479 26,549,677 47,213,704 44,612,565
----------- ----------- ------------ ------------
End of period................................. $33,319,292 $27,744,479 $ 59,158,575 $ 47,213,704
=========== =========== ============== ==============
Undistributed net investment income............ -- -- $99,463 $62,694
====== ======
</TABLE>
See accompanying notes to financial statements.
52
<PAGE> 129
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS -- NOVEMBER 30, 1995
1. DESCRIPTION -- FMB Funds, Inc. (the "Corporation") is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company, established as a Maryland corporation on September 20, 1991. The
Corporation currently consists of four separate investment portfolios: FMB Money
Market Fund, FMB Intermediate Government Income Fund, FMB Michigan Tax-Free Bond
Fund, and FMB Diversified Equity Fund (collectively, the "Funds"), each with two
classes of shares known as the Institutional Class and the Consumer Service
Class. These Funds commenced operations on December 2, 1991 and prior to that
date had no operations other than organization matters and the sale to Furman
Selz LLC, formerly known as Furman Selz Incorporated ("Furman Selz"), the Funds'
Administrator, of 10,000, 1,000, 1,000 and 1,000 shares, respectively, of each
of the Institutional Class Shares and the Consumer Service Class Shares of the
FMB Money Market Fund, FMB Intermediate Government Income Fund, FMB Michigan
Tax-Free Bond Fund, and FMB Diversified Equity Fund, on November 26, 1991.
Each class of shares bears the same voting, dividend, liquidation and other
rights and conditions, except that the Consumer Service Class Shares may bear a
distribution charge not borne by the Institutional Class, and can bear different
shareholder servicing, legal and printing expenses. In addition, the Consumer
Service Class Shares are subject to a sales load. During the fiscal year ended
November 30, 1995, the Consumer Service Class Shares paid no distribution
charges and there were no other expenses different from the Institutional Class
Shares.
2. SIGNIFICANT ACCOUNTING POLICIES -- The following is a summary of the
significant accounting policies followed by the Funds:
a. Security Valuation The FMB Money Market Fund uses the amortized cost
method for valuing securities, which approximates market value. This method
involves valuing the security at cost and then amortizing any discount or
premium to par at maturity. There is no assurance that the FMB Money Market
Fund will be able to maintain a stable net asset value of $1.00 per share.
Securities of the FMB Intermediate Government Income Fund, the FMB Michigan
Tax-Free Bond Fund and the FMB Diversified Equity Fund for which market
quotations are readily available are valued at the price quoted on the
security's primary exchange as of the close of regular trading on the New
York Stock Exchange. In the absence of market quotations, investments are
valued at the latest quoted bid price. Fixed income securities may be
valued on the basis of bids provided by an independent pricing service.
Prices provided by an independent pricing service may be determined without
exclusive reliance on quoted prices and may take into account appropriate
factors such as institutional-size trading in similar groups of securities,
yield, quality, coupon rate, maturity, type of issue, trading
characteristics and other market data. Short-term securities which mature
in 60 days or less are valued at amortized cost, if their term to maturity
at purchase
53
<PAGE> 130
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
was 60 days or less or by amortizing to par at maturity their value on the
61st day prior to maturity, if their original term to maturity at purchase
exceeded 60 days. Any other securities and other assets of the Funds for
which current market quotations are not readily available are valued at
fair value as determined in good faith by the Corporation's Board of
Directors and in accordance with procedures adopted by the Board of
Directors.
b. Investment Transactions Transactions are recorded on the trade date.
Identified cost of investments sold is used for both financial statement
and Federal income tax purposes. Interest income, including the
amortization of discount or premium, is recorded as earned. Dividends are
recorded on the ex-dividend date.
c. Federal Income Taxes Each Fund's policy is to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of
1986, as amended. By so qualifying, the Funds will not be subject to
Federal income taxes to the extent that they distribute taxable and
tax-exempt income for their fiscal year. The Funds also intend to meet the
distribution requirements to avoid the payment of an excise tax.
d. Dividends To Shareholders The FMB Money Market Fund, FMB Intermediate
Government Income Fund and FMB Michigan Tax-Free Bond Fund each declares
dividends of substantially all of its net investment income daily and pays
those dividends monthly. The FMB Diversified Equity Fund declares and pays
as a dividend substantially all of its net investment income quarterly.
Each Fund will distribute, at least annually, substantially all net capital
gains, if any, earned by such Fund. Dividends and distributions are
recorded on the ex-dividend date.
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with Federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent
in nature. To the extent these differences are permanent in nature, such
amounts are reclassified within the capital accounts based on their Federal
tax-basis treatment; temporary differences do not require reclassification.
Dividends and distributions which exceed net investment income and net
realized gains for financial reporting purposes but not for tax purposes
are reported as dividends in excess of net investment income or
distributions in excess of net realized capital gains. To the extent
dividends and distributions exceed net investment income and net realized
capital gains for tax purposes, they are reported as distributions of
paid-in capital.
e. Organization Expenses Costs incurred in connection with the organization
and initial registration of the Corporation have been deferred and are
being amortized over a sixty month period, beginning with each Fund's
commencement of operations.
54
<PAGE> 131
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
f. Determination of Net Asset Value and Allocation of Expenses Expenses
directly attributable to a Fund are charged to that Fund; other expenses
are allocated proportionately among each Fund within the Corporation in
relation to the net assets of each Fund, equally among the Funds, or in
relation to the number of shareholder accounts. In calculating net asset
value per share of each class, investment income, realized and unrealized
gains and losses and expenses other than class specific expenses are
allocated daily to each class of shares based upon the proportion of net
assets attributable to each class at the beginning of each day.
3. ADVISER -- FMB-Trust, formerly FMB-Financial Group, a wholly-owned
subsidiary of First Michigan Bank Corporation, is the Funds' Adviser. First
Michigan Bank Corporation is the Funds' Sub-Adviser. The Sub-Adviser is paid by
the Adviser.
Pursuant to the Advisory Contracts, the Adviser manages the investments of the
Funds and continuously reviews, supervises and administers the Funds'
investments. The Adviser is responsible for placing orders for the purchase and
sale of investment securities directly with brokers and dealers selected at its
discretion. The terms of the Advisory Contracts provide for annual fees at the
following percentages of average daily net assets.
For the FMB Money Market Fund:
0.35% of first $500 million in average net assets;
0.30% of next $500 million in average net assets; and
0.25% of average net assets over $1 billion.
For the FMB Intermediate Government Income Fund, FMB Michigan Tax-Free Bond
Fund, and FMB Diversified Equity Fund, 0.45%, 0.55%, and 1.00%, of average daily
net assets, respectively.
Certain of the states in which shares of the Funds are qualified for sale impose
limitations on the expenses of the Funds. If, in any fiscal year, the total
expenses of a Fund (excluding taxes, interest, distribution expenses, brokerage
commissions, certain portfolio transaction expenses, other expenditures which
are capitalized in accordance with generally accepted accounting principles and
extraordinary expenses, but including the advisory and administrative services
fees) exceed the expense limitations applicable to that Fund imposed by the
securities regulations of any state, the Adviser will pay or reimburse the Funds
for expenses to meet these limitations to the extent of advisory fees earned for
the fiscal year. In the most restrictive state, aggregate annual expenses shall
not exceed two and one-half percent (2 1/2%) of the first $30 million of average
net assets, two percent (2%) of the next $70 million of average net assets and
one and one-half percent (1 1/2%) of the remaining average net assets of the
Fund. For the year ended November 30, 1995, no reimbursement of expenses was
required to meet these limitations.
55
<PAGE> 132
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
4. ADMINISTRATOR -- During the fiscal year ended November 30, 1995, pursuant to
Administrative Services Contracts, Furman Selz provided management and
administrative services necessary for the operations of the Funds, furnished
office space and facilities required to conduct the business of the Funds and
paid the compensation of the Corporation's officers affiliated with Furman Selz.
The terms of the Administrative Services Contracts provided for annual fees of
0.15% of average daily net assets of each Fund.
5. OTHER TRANSACTIONS WITH AFFILIATES -- During the fiscal year ended November
30, 1995, Furman Selz was the transfer agent for the Funds. Under a Service
Agreement, Furman Selz provided personnel and facilities to perform shareholder
servicing and transfer agency related services. Furman Selz received a per
account fee and reimbursement for out of pocket expenses in connection with
shareholder servicing. For the year ended November 30, 1995, Furman Selz
received per account shareholder servicing fees of $11,421, $6,773, $6,315, and
$10,083, respectively, from the FMB Money Market Fund, FMB Intermediate
Government Income Fund, FMB Michigan Tax-Free Bond Fund, and FMB Diversified
Equity Fund, respectively.
Furman Selz also provided fund accounting services to the Funds. The Funds each
paid $2,500 per month to Furman Selz for performing fund accounting. Furman Selz
was also reimbursed for out of pocket expenses relating to fund accounting.
During the fiscal year ended November 30, 1995, the Funds were distributed by
Macatawa Distributor, Inc. (the "Distributor"), which is a wholly-owned
subsidiary of Furman Selz. Under a Distribution Plan adopted by the Funds under
Rule 12b-1 of the Investment Company Act of 1940, each Fund is permitted, with
respect to the Consumer Service Class, to reimburse the Distributor monthly for
costs and expenses in connection with the distribution of shares. This
reimbursement is limited to 0.35% of the average daily net assets of the
Consumer Service Class for the FMB Intermediate Government Income Fund, FMB
Michigan Tax-Free Bond Fund and FMB Diversified Equity Fund. In the case of the
FMB Money Market Fund, the limit is 0.25% of the average daily net assets of the
Consumer Service Class. For the year ended November 30, 1995, no distribution
expenses were incurred or reimbursed by the Funds to the Distributor.
6. REPURCHASE AGREEMENTS -- The Funds may enter into repurchase agreements with
government securities dealers recognized by the Federal Reserve Board, with
member banks of the Federal Reserve System or with such other brokers or dealers
that meet the credit guidelines established by the Board of Directors. The
Funds' policy is to receive and maintain securities as collateral whose market
value, including accrued interest, will be at least equal to the dollar amount
invested by that Fund in each agreement, and the Fund will make payment on the
repurchase agreement only upon physical delivery or upon evidence of book entry
transfer to the account of the
56
<PAGE> 133
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
custodian of such securities as collateral. To the extent that any repurchase
agreement transaction exceeds one business day, the value of the collateral is
marked-to-market on a daily basis to ensure the adequacy of the collateral. If
the seller defaults and the value of the collateral declines or if bankruptcy
proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Funds may be delayed or limited.
7. CONCENTRATION OF CREDIT RISK -- The FMB Michigan Tax-Free Bond Fund invests
substantially all of its assets in a varied portfolio of debt obligations issued
by the State of Michigan and its authorities and agencies. The issuers'
abilities to meet their obligations may be affected by economic or political
developments in the State of Michigan.
8. SECURITY TRANSACTIONS -- The cost of securities purchased and proceeds from
securities sold (excluding short-term securities) for the year ended November
30, 1995 were as follows:
<TABLE>
<CAPTION>
U.S. GOVERNMENT
COMMON STOCKS AND BONDS OBLIGATIONS
-------------------------- --------------------------
COST OF PROCEEDS FROM COST OF PROCEEDS FROM
SECURITIES SECURITIES SECURITIES SECURITIES
PURCHASED SOLD PURCHASED SOLD
---------- ------------- ---------- -------------
<S> <C> <C> <C> <C>
FMB Intermediate
Government Income Fund....... -- -- $32,204,078 $51,041,651
FMB Michigan Tax-Free Bond
Fund......................... $12,800,962 $10,044,932 -- --
FMB Diversified Equity Fund.... 9,574,093 11,384,127 -- --
</TABLE>
Unrealized appreciation and depreciation at November 30, 1995 based on cost of
securities for Federal income tax purposes is as follows:
<TABLE>
<CAPTION>
GROSS GROSS NET
UNREALIZED UNREALIZED UNREALIZED
APPRECIATION DEPRECIATION APPRECIATION
------------ ------------ --------------
<S> <C> <C> <C>
FMB Intermediate Government Income
Fund................................ $2,701,625 $ 77,730 $2,623,895
FMB Michigan Tax-Free
Bond Fund........................... 1,334,366 1,631 1,332,735
FMB Diversified Equity Fund........... 14,998,343 248,477 14,749,866
</TABLE>
9. FEDERAL INCOME TAX STATUS -- At November 30, 1995, the FMB Money Market Fund
had capital loss carryforwards of $88,000 available through the year 2003 to
offset future realized capital gains.
57
<PAGE> 134
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
At November 30, 1995, FMB Intermediate Government Income Fund had capital loss
carryforwards of $1,796,589 available through the year 2003 to offset future
realized capital gains. To reflect reclassifications arising from permanent
book/tax differences for the year ended November 30, 1995, distributions in
excess of net investment income was credited $100,533 and additional paid-in
capital was charged $100,533.
Capital losses incurred after October 31, 1995 within the fiscal year ended
November 30, 1995 are deemed to arise on the first business day of the following
fiscal year. The FMB Intermediate Government Income Fund incurred and will elect
to defer post October capital losses of $4,836.
At November 30, 1995, the FMB Michigan Tax-Free Bond Fund had capital loss
carryforwards of $114,710, available through the year 2003 to offset realized
capital gains.
During the fiscal year ended November 30, 1995, the FMB Diversified Equity Fund
utilized $538,807 of capital loss carryforwards. The Fund has remaining capital
loss carryforwards of $230,696 available through the year 2003 to offset future
realized capital gains.
58
<PAGE> 135
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
10. CAPITAL SHARE TRANSACTIONS -- The Corporation is authorized to issue 10
billion shares of capital stock with a par value of $.001. Transactions in
shares of the Funds for the years ended November 30, 1994 and November 30, 1995
were as follows:
<TABLE>
<CAPTION>
FMB MONEY FMB INTERMEDIATE
MARKET FUND GOVERNMENT INCOME FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INSTITUTIONAL CLASS
Shares sold.................. 269,856,183 194,419,964 3,546,780 4,156,835
Shares issued in reinvestment
of dividends from net
investment income.......... 143,737 406,142 66 347
------------ ------------ ------------ ------------
269,999,920 194,826,106 3,546,846 4,157,182
Shares redeemed.............. (286,105,170) (156,972,964) (4,297,423) (2,321,846)
------------ ------------ ------------ ------------
Net increase (decrease) in
shares..................... (16,105,250) 37,853,142 (750,577) 1,835,336
============= ============= =========== ===========
CONSUMER SERVICE CLASS
Shares sold.................. 32,067,014 9,129,509 33,551 173,721
Shares issued in reinvestment
of dividends from net
investment income.......... 544,025 96,793 43,087 47,859
------------ ------------ ------------ ------------
32,611,039 9,226,302 76,638 221,580
Shares redeemed.............. (22,236,403) (3,556,407) (339,113) (254,854)
------------ ------------ ------------ ------------
Net increase (decrease) in
shares..................... 10,374,636 5,669,895 (262,475) (33,274)
============= ============= =========== ===========
</TABLE>
59
<PAGE> 136
FMB FUNDS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED) -- NOVEMBER 30, 1995
10. CAPITAL SHARE TRANSACTIONS -- (CONTINUED)
<TABLE>
<CAPTION>
FMB MICHIGAN TAX-FREE FMB DIVERSIFIED
BOND FUND EQUITY FUND
---------------------------- ----------------------------
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1995 1994 1995 1994
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
INSTITUTIONAL CLASS
Shares sold.................... 742,385 751,102 878,764 1,009,176
Shares issued in reinvestment
of dividends from net
investment income............ 172 126 31 13
------------ ------------ ------------ ------------
742,557 751,228 878,795 1,009,189
Shares redeemed................ (377,678) (306,890) (914,223) (744,382)
------------ ------------ ------------ ------------
Net increase in shares......... 364,879 444,338 (35,428) 264,807
=========== =========== =========== ===========
CONSUMER SERVICE CLASS
Shares sold.................... 173,587 378,579 62,281 86,281
Shares issued in reinvestment
of dividends from net
investment income and
realized capital gains....... 48,416 51,640 3,387 3,366
------------ ------------ ------------ ------------
222,003 430,219 65,668 89,647
Shares redeemed................ (280,866) (593,492) (101,728) (148,968)
------------ ------------ ------------ ------------
Net decrease in shares......... (58,863) (163,273) (36,060) (59,321)
=========== =========== =========== ===========
</TABLE>
60
<PAGE> 137
FMB FUNDS, INC.
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
FMB MONEY MARKET FUND
---------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993 NOVEMBER 30, 1992*
------------------------ ------------------------ ------------------------ ------------------------
FOR A SHARE CONSUMER CONSUMER CONSUMER CONSUMER
OUTSTANDING INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
THROUGHOUT EACH PERIOD CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
- ---------------------- ------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Period.............. $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
------- ------ ------- ------ -------- ------ -------- ------
Income from Investment
Operations:
Net investment
income............ 0.051 0.051 0.035 0.035 0.029 0.029 0.036 0.035
------- ------ ------- ------ -------- ------ -------- ------
Less dividends from
net investment
income.............. (0.051) (0.051) (0.035) (0.035) (0.029) (0.029) (0.036) (0.035)
------- ------ ------- ------ -------- ------ -------- ------
Net Asset Value, End
of Period........... $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000 $1.000
======= ====== ======= ====== ======== ====== ======== ======
Total Return (not
reflecting sales
load)............... 5.28% 5.28% 3.51% 3.51% 2.97% 2.97% 3.78% 3.67%
Ratios/Supplemental
Data:
Net Assets, End of
Period (000's).... $87,238 $17,489 $103,301 $7,154 $65,448 $1,485 $58,596 $208
Ratios of Net
Expenses to
Average Net
Assets............ 0.65% 0.65% 0.68% 0.68% 0.32% 0.32% 0.27% 0.39%
Ratios of Expenses
before
effect of
waivers........... 0.65% 0.65% 0.70% 0.70% 0.68% 0.68% 0.91% 1.03%
Ratios of Net
Investment Income
to Average Net
Assets............ 5.16% 5.16% 3.46% 3.46% 2.91% 2.91% 3.59% 3.46%
</TABLE>
- ---------------
* Fund Commenced Operations on December 2, 1991.
61
<PAGE> 138
FMB FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB INTERMEDIATE GOVERNMENT INCOME FUND
---------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993 NOVEMBER 30, 1992*
------------------------ ------------------------ ------------------------ ------------------------
FOR A SHARE CONSUMER CONSUMER CONSUMER CONSUMER
OUTSTANDING INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
THROUGHOUT EACH PERIOD CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
- ---------------------- ------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Period.............. $9.66 $9.66 $10.46 $10.46 $10.10 $10.10 $10.00 $10.00
------- ------ ------- ------ ------- ------ ------- ------
Income from Investment
Operations:
Net investment
income............ 0.61 0.61 0.57 0.57 0.59 0.59 0.60 0.58
Net gain (loss) on
securities (both
realized and
unrealized)....... 0.58 0.58 (0.80) (0.80) 0.36 0.36 0.10 0.10
------- ------ ------- ------ ------- ------ ------- ------
Total from
Investment
Operations........ 1.19 1.19 (0.23) (0.23) 0.95 0.95 0.70 0.68
------- ------ ------- ------ ------- ------ ------- ------
Less Distributions:
Dividends from net
investment
income............ (0.61) (0.61) (0.57) (0.57) (0.59) (0.59) (0.60) (0.58)
------- ------ ------- ------ ------- ------ ------- ------
Net Asset Value, End
of Period........... $10.24 $10.24 $9.66 $9.66 $10.46 $10.46 $10.10 $10.10
======== ====== ======== ====== ======== ====== ======= ======
Total Return (not
reflecting sales
load)............... 12.64% 12.64% (2.23%) (2.23%) 9.60% 9.60% 7.10% 6.95%
Ratios/Supplemental
Data:
Net Assets, End of
Period (000's).... $114,646 $7,610 $115,449 $9,718 $105,820 $10,872 $81,371 $5,440
Ratios of Net
Expenses to
Average Net
Assets............ 0.78% 0.78% 0.83% 0.83% 0.50% 0.50% 0.43% 0.61%
Ratios of Expenses
before effect of
waivers........... 0.78% 0.78% 0.85% 0.85% 0.78% 0.78% 0.90% 1.08%
Ratios of Net
Investment Income
to Average Net
Assets............ 6.09% 6.09% 6.45% 6.45% 5.66% 5.66% 5.85% 5.67%
Portfolio Turnover
Rate.............. 27% 27% 20% 20% 17% 17% 29% 29%
</TABLE>
- ---------------
* Fund Commenced Operations on December 2, 1991.
62
<PAGE> 139
FMB FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB MICHIGAN TAX-FREE BOND FUND
---------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993 NOVEMBER 30, 1992*
------------------------ ------------------------ ------------------------ ------------------------
FOR A SHARE CONSUMER CONSUMER CONSUMER CONSUMER
OUTSTANDING INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
THROUGHOUT EACH PERIOD CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
- ---------------------- ------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Period.............. $9.97 $9.97 $10.61 $10.61 $10.24 $10.24 $10.00 $10.00
-------- ------ -------- ------ -------- ------ -------- ------
Income from Investment
Operations:
Net investment
income............ 0.49 0.49 0.47 0.47 0.49 0.49 0.48 0.46
Net gain (loss) on
securities (both
realized and
unrealized)....... 0.82 0.82 (0.63) (0.63) 0.37 0.37 0.24 0.24
-------- ------ -------- ------ -------- ------ -------- ------
Total from
Investment
Operations........ 1.31 1.31 (0.16) (0.16) 0.86 0.86 0.72 0.70
-------- ------ -------- ------ -------- ------ -------- ------
Less Distributions:
Dividends from net
investment
income............ (0.49) (0.49) (0.47) (0.47) (0.49) (0.49) (0.48) (0.46)
Realized capital
gains............. -- -- (0.01) (0.01) -- -- -- --
-------- ------ -------- ------ -------- ------ -------- ------
Net Asset Value, End
of Period........... $10.79 $10.79 $9.97 $9.97 $10.61 $10.61 $10.24 $10.24
======== ====== ======== ====== ======== ====== ======== ======
Total Return (not
reflecting sales
load)............... 13.21% 13.21% (1.49%) (1.49%) 8.53% 8.53% 7.29% 7.17%
Ratios/Supplemental
Data:
Net Assets, End of
Period (000's).... $20,700 $12,619 $15,495 $12,249 $11,779 $14,771 $6,043 $4,572
Ratios of Net
Expenses to
Average Net
Assets............ 0.70% 0.70% 0.51% 0.51% 0.35% 0.35% 0.29% 0.46%
Ratios of Expenses
before effect
of waivers/
reimbursements.... 1.18% 1.18% 1.19% 1.19% 1.38% 1.38% 2.55% 2.72%
Ratios of Net
Investment Income
to Average Net
Assets............ 4.62% 4.62% 4.50% 4.50% 4.59% 4.59% 4.68% 4.50%
Portfolio Turnover
Rate.............. 35% 35% 22% 22% 13% 13% 30% 30%
</TABLE>
- ---------------
* Fund Commenced Operations on December 2, 1991.
63
<PAGE> 140
FMB FUNDS, INC.
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<CAPTION>
FMB DIVERSIFIED EQUITY FUND
---------------------------------------------------------------------------------------------------------
YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
NOVEMBER 30, 1995 NOVEMBER 30, 1994 NOVEMBER 30, 1993 NOVEMBER 30, 1992*
------------------------ ------------------------ ------------------------ ------------------------
FOR A SHARE CONSUMER CONSUMER CONSUMER CONSUMER
OUTSTANDING INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE INSTITUTIONAL SERVICE
THROUGHOUT EACH PERIOD CLASS CLASS CLASS CLASS CLASS CLASS CLASS CLASS
- ---------------------- ------------- -------- ------------- -------- ------------- -------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE
Net Asset Value,
Beginning of
Period.............. $11.44 $11.44 $11.37 $11.37 $11.61 $11.61 $10.00 $10.00
-------- ------ -------- ------ -------- ------ -------- ------
Income from Investment
Operations:
Net investment
income............ 0.12 0.12 0.07 0.07 0.09 0.09 0.12 0.10
Net gain (loss) on
securities (both
realized and
unrealized)....... 3.13 3.13 0.08 0.08 (0.25) (0.25) 1.60 1.60
-------- ------ -------- ------ -------- ------ -------- ------
Total from
Investment
Operations........ 3.25 3.25 0.15 0.15 (0.16) (0.16) 1.72 1.70
-------- ------ -------- ------ -------- ------ -------- ------
Less Distributions:
Dividends from net
investment
income............ (0.11) (0.11 ) (0.08) (0.08) (.08) (.08) (0.11) (0.09)
-------- ------ -------- ------ -------- ------ -------- ------
Net Asset Value, End
of Period........... $14.58 $14.58 $11.44 $11.44 $11.37 $11.37 $11.61 $11.61
======== ====== ======== ====== ======== ====== ======== ======
Total Return (not
reflecting sales
load)............... 28.54% 28.54% 1.34% 1.34% (1.40%) (1.40%) 17.31% 17.16%
Ratios/Supplemental
Data:
Net Assets, End of
Period (000's)..... $53,325 $5,833 $42,229 $4,985 $38,979 $5,634 $29,596 $3,377
Ratios of Net
Expenses to
Average Net
Assets............ 1.50% 1.50% 1.61% 1.61% 1.50% 1.50% 1.42% 1.64%
Ratios of Expenses
before effect of
waivers/
reimbursements:... 1.50% 1.50% 1.61% 1.61% 1.53% 1.53% 2.05% 2.29%
Ratios of Net
Investment Income
to Average Net
Assets............ 0.92% 0.92% 0.69% 0.69% 0.82% 0.82% 1.12% 0.97%
Portfolio Turnover
Rate.............. 20% 20% 49% 49% 22% 22% 5% 5%
</TABLE>
- ---------------
* Fund Commenced Operations on December 2, 1991.
64
<PAGE> 141
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of
FMB Funds, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of FMB Money Market Fund, FMB
Intermediate Government Income Fund, FMB Michigan Tax-Free Bond Fund and FMB
Diversified Equity Fund, separately managed portfolios of FMB Funds, Inc. (the
"Corporation"), at November 30, 1995, the results of each of their operations
for the year then ended, the changes in each of their net assets for each of the
two years in the period then ended and the financial highlights for each of the
periods presented, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Corporation's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these financial statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1995 by correspondence with the custodian and brokers, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
1177 Avenue of Americas
New York, New York 10036
January 18, 1996
65
<PAGE> 142
APPENDIX
The following is a description of the ratings assigned by Moody's and S&P
to corporate and municipal bonds, corporate and municipal commercial paper and
municipal notes.
CORPORATE AND MUNICIPAL BONDS
Moody's: The four highest ratings for corporate and municipal bonds are
"Aaa," "Aa," "A" and "Baa." Bonds rated "Aaa" are judged to be of the "best
quality" and carry the smallest amount of investment risk. Bonds rated "Aa" are
of "high quality by all standards," but margins of protection or other elements
make long-term risks appear somewhat greater than "Aaa" rated bonds. Bonds rated
"A" possess many favorable investment attributes and are considered to be upper
medium grade obligations. Bonds rated "Baa" are considered to be medium grade
obligations; 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 have
speculative characteristics as well. Moody's applies numerical modifiers: 1, 2
and 3 in each rating category from "Aa" through "Baa" in its rating system. The
modifier 1 indicates that the security ranks in the higher end of its category;
the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that
the issue ranks in the lower end.
S&P: The four highest ratings for corporate and municipal bonds are "AAA,"
"AA," "A" and "BBB." Bonds rated "AAA" have the highest ratings assigned by S&P
and have an extremely strong capacity to pay interest and repay principal. Bonds
rated "AA" have a "very strong capacity to pay interest and repay principal" and
differ "from the highest rated issued only in small degree." Bonds rated "A"
have a "strong capacity" to pay interest and repay principal, but are "somewhat
more susceptible" to adverse effects of changes in economic conditions or other
circumstances than bonds in higher rated categories. Bonds rated "BBB" are
regarded as having an "adequate capacity" to pay interest and repay principal,
but changes in economic conditions or other circumstances are more likely to
lead to a "weakened capacity" to make such repayments. The ratings from "AA" to
"BBB" may be modified by the addition of a plus or minus sign to show relative
standing within the category.
CORPORATE AND MUNICIPAL COMMERCIAL PAPER
Moody's: The highest rating for corporate and municipal commercial paper is
"P-1" (Prime-1). Issuers rated "P-1" have a "superior capacity for repayment of
short-term promissory obligations." Issuers rated "P-2" (Prime-2) "have a strong
capacity for repayment of short-term promissory obligations," but earnings
trends, while sound, will be subject to more variation. S&P: The "A-1" rating
for corporate and municipal commercial paper indicates that the "degree of
safety regarding timely payment is either overwhelming or very strong."
Commercial paper with "overwhelming safety characteristics" will be rated
"A-1+." Commercial paper with a strong capacity for timely payments on issues
will be rated "A-2."
A-1
<PAGE> 143
MUNICIPAL NOTES
Moody's: The highest ratings for state and municipal short-term obligations
are "MIG 1," "MIG 2," and "MIG 3" (or "VMIG 1," "VMIG 2" and "VMIG 3" in the
case of an issue having a variable rate demand feature). Notes rated "MIG 1" or
"VMIG 1" are judged to be of the "best quality." Notes rated "MIG 2" or "VMIG 2"
are of "high quality," with margins of protections "ample although not as large
as in the preceding group." Notes rated "MIG 3" or "VMIG 3" are of "favorable
quality," with all security elements accounted for, but lacking the strength of
the preceding grades. S&P: The "SP-1" rating reflects a "very strong or strong
capacity to pay principal and interest." Notes issued with "overwhelming safety
characteristics" will be rated "SP-1+." The "SP-2" rating reflects a
"satisfactory capacity" to pay principal and interest.
A-2
