THE MUNDER FRAMLINGTON FUNDS TRUST
STATEMENT OF ADDITIONAL INFORMATION
The Munder Framlington Funds Trust (the "Trust") is an open-end management
investment company. Currently, the Trust offers three investment portfolios,
Framlington International Growth Fund, Framlington Emerging Markets Fund, and
Framlington Healthcare Fund (each a "Fund", collectively, the "Funds"). The
Funds' investment advisor is Munder Capital Management (the "Advisor").
Framlington Overseas Investment Management Limited (the "Sub-Advisor") serves as
sub-advisor to the Funds.
This Statement of Additional Information is intended to supplement the
information provided to investors in the Funds' Prospectuses dated January 2,
1997 and has been filed with the Securities and Exchange Commission ("SEC") as
part of the Trust's Registration Statement. This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Funds' Prospectuses dated January 2, 1997. The contents of this Statement of
Additional Information are incorporated by reference in the Prospectuses in
their entirety. A copy of the Prospectus may be obtained through Funds
Distributor, Inc. (the "Distributor"), or by calling (800) 438-5789. This
Statement of Additional Information is dated January 2, 1997.
Shares of the Funds are not deposits or obligations of, or guaranteed or
endorsed by any bank, and are not insured or guaranteed by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency.
Investment in the Funds involves investment risks, including the possible loss
of principal.
TABLE OF CONTENTS
Page
General...............................................................2
Fund Investments......................................................2
Investment Limitations................................................15
Trustees and Officers.................................................18
Investment Advisory, Sub-Advisory and Other Service Arrangements......22
Portfolio Transactions................................................29
Purchase and Redemption Information...................................32
Net Asset Value.......................................................35
Performance Information...............................................36
Taxes.................................................................37
Additional Information Concerning Shares..............................44
Miscellaneous.........................................................46
Registration Statement................................................47
Appendix..............................................................48
Statement of Assets and Liabilities...................................57
Report of Ernst & Young LLP, Independent Auditors.....................60
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No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectuses in connection with the offering made by the Prospectuses and,
if given or made, such information or representations must not be relied upon as
having been authorized by the Funds or the Distributor. The Prospectuses do not
constitute an offering by the Funds or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
GENERAL
The Trust was organized under the laws of the Commonwealth of Massachusetts
on October 30, 1996 and has registered under the Investment Company Act of 1940,
as amended (the "1940 Act"). The Trust's principal office is located at 480
Pierce Street, Birmingham, Michigan 48009 and its telephone number is (800)
438-5789.
As stated in the Prospectuses, the investment advisor of the Funds is
Munder Capital Management (the "Advisor"). The principal partners of the Advisor
are Old MCM, Inc., Munder Group LLC, Woodbridge Capital Management, Inc.
("Woodbridge") and WAM Holdings, Inc. ("WAM"). Mr. Lee P. Munder, the Advisor's
Chief Executive Officer, indirectly owns or controls a majority of the
partnership interests of the Advisor. Capitalized terms used herein and not
otherwise defined have the same meanings as are given to them in the Prospectus.
The sub-advisor is Framlington Overseas Investment Management Limited (the
"Sub-Advisor"). The Sub-Advisor is a subsidiary of Framlington Group plc, a
public limited company incorporated in England and Wales which, through its
subsidiaries, provides a wide range of investment services. Framlington Group
plc is a wholly owned subsidiary of Framlington Holdings Limited which is, in
turn, owned 49% by the Advisor and 51% by Credit Commercial de France S.A., a
French banking corporation listed on the Societe des Bourses Francaises.
FUND INVESTMENTS
The following supplements the information contained in the Prospectuses
concerning the investment objective and policies of the Funds. Each Fund's
investment objective is a non-fundamental policy and may be changed without the
authorization of the holders of a majority of the Fund's outstanding shares.
There can be no assurance that any of the Funds will achieve its investment
objective.
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Borrowing. Each Fund is authorized to borrow money in amounts up to 5% of
the value of its total assets at the time of such borrowings for temporary
purposes, and is authorized to borrow money in excess of the 5% limit as
permitted by the Investment Company Act of 1940, as amended (the "1940 Act") to
meet redemption requests. This borrowing may be unsecured. The 1940 Act requires
each Fund to maintain continuous asset coverage of 300% of the amount borrowed.
If the 300% asset coverage should decline as a result of market fluctuations or
other reasons, a Fund may be required to sell some of its portfolio holdings
within three days to reduce the debt and restore the 300% asset coverage, even
though it may be disadvantageous from an investment standpoint to sell
securities at that time. Borrowing may exaggerate the effect on net asset value
of any increase or decrease in the market value of securities purchased with
borrowed funds. Money borrowed will be subject to interest costs which may or
may not be recovered by an appreciation of the securities purchased. The Funds
may also be required to maintain a minimum average balance in connection with
such borrowing or to pay a commitment or other fees to maintain a line of
credit; either of these requirements would increase the cost of borrowing over
the stated interest rate. The Funds may, in connection with permissible
borrowings, transfer as collateral, securities owned by the Funds.
Additionally, each Fund may borrow funds for temporary or emergency
purposes by selling portfolio securities to financial institutions such as banks
and broker/dealers and agreeing to repurchase them at a mutually specified date
and price ("reverse repurchase agreements"). Reverse repurchase agreements
involve the risk that the market value of the securities sold by a Fund may
decline below the repurchase price. A Fund will pay interest on amounts obtained
pursuant to a reverse repurchase agreement. While reverse repurchase agreements
are outstanding, the Fund will maintain in a segregated account cash, U.S.
Government securities or other liquid portfolio securities of an amount at least
equal to the market value of the securities, plus accrued interest, subject to
the agreement.
Foreign Securities. The Funds may invest in securities of foreign issuers.
Investments in foreign securities may be in the form of American Depositary
Receipts ("ADRs") listed on a domestic securities exchange or included in the
NASDAQ National Market System, or foreign securities listed directly on a
domestic securities exchange or included in the NASDAQ National Market System.
ADRs are receipts typically issued by a United States bank or trust company
evidencing ownership of the underlying foreign securities. Certain such
institutions issuing ADRs may not be sponsored by the issuer. A non-
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sponsored depositary may not provide the same shareholder information that a
sponsored depositary is required to provide under its contractual arrangements
with the issuer.
Income and gains on such securities may be subject to foreign withholding
taxes. Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign companies
comparable to the reports and ratings published about companies in the United
States. Foreign companies are not generally subject to uniform accounting,
auditing and financial reporting standards, and auditing practices and
requirements may not be comparable to those applicable to United States
companies. Foreign markets have substantially less volume than the New York
Stock Exchange and securities of some foreign companies are less liquid and more
volatile than securities of comparable United States companies. Commission rates
in foreign countries, which are generally fixed rather than subject to
negotiation as in the United States, are likely to be higher. In many foreign
countries there is less government supervision and regulation of stock
exchanges, brokers, and listed companies than in the United States.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These risks
include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict the
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interest; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of East European countries expropriated large amounts of
private
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property in the past, in many cases without adequate compensation, and
there can be no assurance that such expropriation will not occur in the future.
In the event of such expropriation, the Fund could lose a substantial portion of
any investments it has made in the affected countries. Further, no accounting
standards exist in Eastern European countries. Finally, even though certain
Eastern European currencies may be convertible into United States dollars, the
conversion rates may be artificial to the actual market values and may be
adverse to Fund shareholders.
The Sub-Advisor endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when a Fund changes
investments from one country to another or when proceeds of the sale of Fund
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent a Fund
from transferring cash out of the country or withhold portions of interest and
dividends at the source. There is the possibility of expropriation,
nationalization or confiscatory taxation, withholding and other foreign taxes on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability or diplomatic
developments that could affect investments in securities of issuers in foreign
nations.
A Fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Changes in foreign currency exchange rates will influence values
within a Fund from the perspective of U.S. investors, and may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The Sub-Advisor will attempt to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places a Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk
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characteristics and other decisions such as changing the emphasis on
investments from one nation to another and from one type of security to another.
Some of these decisions may later prove profitable and others may not. No
assurance can be given that profits, if any, will exceed losses.
Forward Foreign Currency Transactions. In order to protect against a
possible loss on investments resulting from a decline or appreciation in the
value of a particular foreign currency against the U.S. dollar or another
foreign currency, the Funds are authorized to enter into forward foreign
currency exchange contracts. These contracts involve an obligation to purchase
or sell a specified currency at a future date at a price set at the time of the
contract. Forward currency contracts do not eliminate fluctuations in the values
of portfolio securities but rather allow the Funds to establish a rate of
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, the
Funds may enter into a forward foreign currency exchange contract for the amount
of the purchase or sale price to protect against variations, between the date
the security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When the Sub-Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, the Funds may enter into a forward contract to sell,
for a fixed amount, the amount of foreign currency approximating the value of
some or all of the Funds' securities denominated in such foreign currency.
Similarly, when the obligations held by the Funds create a short position in a
foreign currency, the Funds may enter into a forward contract to buy, for a
fixed amount, an amount of foreign currency approximating the short position.
With respect to any forward foreign currency contract, it will not generally be
possible to match precisely the amount covered by that contract and the value of
the securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. In addition, while forward contracts may offer
protection from losses resulting from declines or appreciation in the value of a
particular foreign currency, they also limit potential gains which might result
from changes in the value of such currency. The Funds will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
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A separate account consisting of cash or liquid securities equal to the
amount of the Funds' assets that could be required to consummate forward
contracts will be established with the Trust's Custodian except to the extent
the contracts are otherwise "covered." For the purpose of determining the
adequacy of the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of such securities
declines, additional cash or securities will be placed in the account daily so
that the value of the account will equal the amount of such commitments by the
Funds. A forward contract to sell a foreign currency is "covered" if a Fund owns
the currency (or securities denominated in the currency) underlying the
contract, or holds a forward contract (or call option) permitting the Fund to
buy the same currency at a price no higher than the Funds' price to sell the
currency. A forward contract to buy a foreign currency is "covered" if the Fund
holds a forward contract (or put option) permitting the Fund to sell the same
currency at a price as high as or higher than the Fund's price to buy the
currency.
Futures Contracts and Related Options. The Funds currently expect that they
may purchase and sell futures contracts on securities or securities indices, and
may purchase and sell call and put options on futures contracts. For a detailed
description of futures contracts and related options, see the Appendix to this
Statement of Additional Information.
Investment Company Securities. The Funds may invest in securities issued by
other investment companies. As a shareholder of another investment company, a
Fund would bear its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the expenses the
Fund bears directly in connection with its own operations. The Funds currently
intend to limit their investments in securities issued by other investment
companies so that, as determined immediately after a purchase of such securities
is made: (i) not more than 5% of the value of each Fund's total assets will be
invested in the securities of any one investment company; (ii) not more than 10%
of the value of its total assets will be invested in the aggregate in securities
of investment companies as a group; and (iii) not more than 3% of the
outstanding voting stock of any one investment company will be owned by a Fund.
Lending of Portfolio Securities. To enhance the return on its portfolio,
each Fund may lend securities in its portfolio (subject to a limit of 25% of the
Fund's total assets) to securities firms and financial institutions, provided
that each loan is secured continuously by collateral
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in the form of cash, high quality money market instruments or short-term
U.S. Government securities adjusted daily to have a market value at least equal
to the current market value of the securities loaned. These loans are terminable
at any time, and the Fund will receive any interest or dividends paid on the
loaned securities. In addition, it is anticipated that each Fund may share with
the borrower some of the income received on the collateral for the loan or the
Fund will be paid a premium for the loan. The risk in lending portfolio
securities, as with other extensions of credit, consists of possible delay in
recovery of the securities or possible loss of rights in the collateral should
the borrower fail financially. In determining whether a Fund will lend
securities, the Sub-Advisor will consider all relevant facts and circumstances.
A Fund will only enter into loan arrangements with broker-dealers, banks or
other institutions which the Sub-Advisor has determined are creditworthy under
guidelines established by the Board of Trustees.
Options. Each Fund may write covered call options, buy put options, buy
call options and write secured put options in an amount not exceeding 5% of its
net assets. Such options may relate to particular securities and may or may not
be listed on a national securities exchange and issued by the Options Clearing
Corporation. Options trading is a highly specialized activity which entails
greater than ordinary investment risk. Options on particular securities may be
more volatile than the underlying securities, and therefore, on a percentage
basis, an investment in options may be subject to greater fluctuation than an
investment in the underlying securities themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and a writer the obligation to sell, the underlying security
at the stated exercise price at any time prior to the expiration of the option,
regardless of the market price of the security. The premium paid to the writer
is in consideration for undertaking the obligations under the option contract. A
put option for a particular security gives the purchaser the right to sell the
underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
The writer of an option that wished to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of
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an option. Likewise, an investor who is the holder of an option may
liquidate its position by effecting a "closing sale transaction." The cost of
such a closing purchase plus transaction costs may be greater than the premium
received upon the original option, in which event the Fund will have incurred a
loss in writing the option contract. There is no guarantee that either a closing
purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option, will permit the Fund to write another put option to the
extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If the Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
Each Fund may write options in connection with buy-and-- write
transactions; that is, the Fund may purchase a security and then write a call
option against that security. The exercise price of the call the Fund determines
to write will depend upon the expected price movement of the underlying
security. The exercise price of a call option may be below ("in-the-money"),
equal to ("at-the-money") or above ("out-of- the-money") the current value of
the underlying security at the time the option is written. Buy-and-write
transactions using in-the-money call options may be used when it is expected
that the price of the underlying security will remain flat or decline moderately
during the option period. Buy-and- write transactions using out-of-the-money
call options may be used when it is expected that the premiums received from
writing the call option plus the appreciation in the market price of the
underlying security up to the exercise price will be greater than the
appreciation in the price of the underlying security alone. If the call options
are exercised in such transactions, the Fund's maximum gain will be the premium
received by it for writing the option, adjusted upwards or downwards by the
difference between the Fund's purchase price of the security and the exercise
price. If the options are not exercised and the price of the underlying security
declines, the amount of such decline will be offset in part, or entirely, by the
premium received.
Each Fund will write call options only if they are "covered." In the case
of a call option on a security, the
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option is "covered" if the portfolio owns the security underlying the call
or has an absolute and immediate right to acquire that security without
additional cash consideration (or, if additional cash consideration is required,
cash or cash equivalents in such amount as are held in a segregated account by
its custodian) upon conversion or exchange of other securities held by it. For a
call option on an index, the option is covered if the portfolio maintains with
its Custodian cash or cash equivalents equal to the contract value. A call
option is also covered if the Fund holds a call on the same security or index as
the call written where the exercise price of the call held is (i) equal to or
less than the exercise price of the call written, or (ii) greater than the
exercise price of the call written provided the difference is maintained by the
portfolio in cash or cash equivalents in a segregated account with its
custodian. Each Fund may also write call options that are not covered for
cross-hedging purposes. Each Fund will limit its investment in uncovered put and
call options purchased or written by the Fund to 5% of the Fund's total assets.
Each Fund will write put options only if they are "secured" by cash or cash
equivalents maintained in a segregated account by the Fund's custodian in an
amount not less than the exercise price of the option at all times during the
option period.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price and the Fund's return will be the
premium received from the put option minus the amount by which the market price
of the security is below the exercise price.
Each Fund may purchase put options to hedge against a decline in the value
of its portfolio. By using put options in this way, the Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs. Each Fund may
purchase call options to hedge against an increase in the price of securities
that it anticipates purchasing in the future. The premium paid for the call
option plus any transaction costs will reduce the benefit, if any, realized by
the Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Fund.
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When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised the Fund realizes a
loss equal to the premium paid. If a Fund enters into a closing sale transaction
on an option purchased by it, the Fund will realize a gain if the premium
received by the Fund on the closing transaction is more than the premium paid to
purchase the option, or a loss if it is less. If an option written by a Fund
expires on the stipulated expiration date or if a Fund enters into a closing
purchase transaction, it will realize a gain (or loss if the cost of a closing
purchase transaction exceeds the net premium received when the option is sold)
and the deferred credit related to such option will be eliminated. If an option
written by a Fund is exercised, the proceeds of the sale will be increased by
the net premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the segregated account (in the case of a secured put
option) until the option expires or the optioned security is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline or appreciation in the security during such
period.
There is no assurance that a Fund will be able to close an unlisted option
position. Furthermore, unlisted options are not subject to the protections
afforded purchasers of listed options by the Options Clearing Corporation, which
performs the obligations of its members who fail to do so in connection with the
purchase or sale of options.
In addition, a liquid secondary market for particular options, whether
traded over-the-counter or on a national securities exchange ("Exchange") may be
absent for reasons which include the following: there may be insufficient
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trading interest in certain options; restrictions may be imposed by an
Exchange on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
Currency transactions, including options on currencies and currency
futures, are subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to a Fund if it is unable to deliver
or receive currency or funds in settlement of obligations and could also cause
hedges it has entered into to be rendered useless, resulting in full currency
exposure as well as the incurring of transaction costs. Buyers and sellers of
currency futures are subject to the same risks that apply to the use of futures
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures is relatively new, and the ability to establish and
close out positions on such options is subject to the maintenance of a liquid
market which may not always be available. Currency exchange rates may fluctuate
based on factors extrinsic to that country's economy.
A Fund will not write covered call options against more than 30% of the
value of the equity securities held in its portfolio.
Repurchase Agreements. Each Fund may agree to purchase securities from
financial institutions such as member banks of the Federal Reserve System, any
foreign bank or any domestic or foreign broker/dealer that is recognized as a
reporting government securities dealer, subject to the seller's agreement to
repurchase them at an agreed-upon time and price
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("repurchase agreements"). The Sub-Advisor will review and continuously
monitor the creditworthiness of the seller under a repurchase agreement, and
will require the seller to maintain liquid assets in a segregated account in an
amount that is greater than the repurchase price. Default by, or bankruptcy of,
the seller would, however, expose a Fund to possible loss because of adverse
market action or delays in connection with the disposition of underlying
obligations except with respect to repurchase agreements secured by U.S.
Government securities.
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short- term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by the Trust's
Custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system
or by another authorized securities depositary. Repurchase agreements are
considered to be loans by a Fund under the 1940 Act.
Rights and Warrants. Each Fund may purchase warrants, which are privileges
issued by corporations enabling the owners to subscribe to and purchase a
specified number of shares of the corporation at a specified price during a
specified period of time. Subscription rights normally have a short life span to
expiration. The purchase of warrants involves the risk that a Fund could lose
the purchase value of a warrant if the right to subscribe to additional shares
is not exercised prior to the warrant's expiration. Also, the purchase of
warrants involves the risk that the effective price paid for the warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. Each Fund will not invest more than 5% of its
total assets, taken at market value, in warrants, or more than 2% of its total
assets, taken at market value, in warrants not listed on the New York or
American Stock Exchanges. Warrants acquired by a Fund in units or attached to
other securities are not subject to this restriction.
Stock Index Futures, Options on Stock and Bond Indices and Options on Stock
and Bond Index Futures Contracts. Each Fund may purchase and sell stock index
futures, options on stock and bond indices and options on stock and bond index
futures contracts as a hedge against movements in the equity and bond markets.
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A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of securities is made.
Options on stock and bond indices are similar to options on specific
securities, described above, except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock or
bond index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of that stock or bond index is greater
than, in the case of a call option, or less than, in the case of a put option,
the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike options on specific securities, all settlements of options on
stock or bond indices are in cash, and gain or loss depends on general movements
in the stocks included in the index rather than price movements in particular
stocks.
If the Sub-Advisor expects general stock or bond market prices to rise, it
might purchase a stock index futures contract, or a call option on that index,
as a hedge against an increase in prices of particular securities it ultimately
wants to buy. If in fact the index does rise, the price of the particular
securities intended to be purchased may also increase, but that increase would
be offset in part by the increase in the value of a Fund's futures contract or
index option resulting from the increase in the index. If, on the other hand,
the Sub-Advisor expects general stock or bond market prices to decline, it might
sell a futures contract, or purchase a put option, on the index. If that index
does in fact decline, the value of some or all of the securities in the Fund's
portfolio may also be expected to decline, but that decrease would be offset in
part by the increase in the value of the Fund's position in such futures
contract or put option.
Each Fund may purchase and write call and put options on stock or bond
index futures contracts. A Fund may use such options on futures contracts in
connection with its hedging strategies in lieu of purchasing and selling the
underlying futures or purchasing and writing options directly on the underlying
securities or indices. For example, a Fund may purchase put options or write
call options on stock and bond index futures, rather than selling futures
contracts, in
- 14 -
<PAGE>
anticipation of a decline in general stock or bond market prices or
purchase call options or write put options on stock or bond index futures,
rather than purchasing such futures, to hedge against possible increases in the
price of securities which the Fund intends to purchase.
In connection with transactions in stock or bond index futures, stock or
bond index options and options on stock index or bond futures, a Fund will be
required to deposit as "initial margin" an amount of cash and short-term U.S.
Government securities equal to from 5% to 8% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the value of the option or futures contract. Each
Fund may not at any time commit more than 5% of its total assets to initial
margin deposits on futures contracts, index options and options on futures
contracts.
U.S. Government Obligations. Each Fund may purchase obligations issued or
guaranteed by the U.S. Government and U.S. Government agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as those of the GNMA, are supported by the full faith and
credit of the U.S. Treasury. Others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
U.S. Treasury; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Examples of the types of U.S. Government
obligations that may be acquired by a Fund includes U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, FNMA, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, FHLMC, Federal Intermediate Credit
Banks and Maritime Administration.
INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
section which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous - Shareholder Approvals").
- 15 -
<PAGE>
Each Fund may not:
1. Purchase securities (except U.S. Government
securities) if more than 5% of its total assets will
be invested in the securities of any one issuer,
except that up to 25% of the assets of the Fund may
be invested without regard to this 5% limitation;
2. invest 25% or more of its total assets in securities
issued by one or more issuers conducting their
principal business activities in the same industry
(except that the Healthcare Fund will invest more
than 25% of its total assets in securities of
issuers conducting their principal business
activities in healthcare industries);
3. borrow money or enter into reverse repurchase
agreements except that the Fund may (i) borrow money
or enter into reverse repurchase agreements for
temporary purposes in amounts not exceeding 5% of
its total assets and (ii) borrow money for the
purpose of meeting redemption requets, in amounts
(when aggregated with amounts borrowed under clause
(i)) not exceeding 33 1/3% of its total assets;
4. Pledge, mortgage or hypothecate its assets other
than to secure borrowings permitted by restriction 3
above (collateral arrangements with respect to
margin requirements for options and futures
transactions are not deemed to be pledges or
hypothecations for this purpose);
5. Make loans of securities to other persons in excess
of 25% of the Fund's total assets; provided the Fund
may invest without limitation in short-term debt
obligations (including repurchase agreements) and
publicly distributed debt obligations;
6. Underwrite securities of other issuers, except
insofar as the Fund may be deemed an underwriter
under the Securities Act of 1933, as amended, in
selling portfolio securities;
7. Purchase or sell real estate or any interest
therein, including interests in real estate limited
partnerships, except securities issued by companies
(including real estate investment trusts) that
invest in real estate or interests therein.
8. Purchase securities on margin, or make short sales
of securities, except for the use of short-term
- 16 -
<PAGE>
credit necessary for the clearance of purchases and
sales of portfolio securities, but the Fund may make
margin deposits in connection with transactions in
options, futures and options on futures;
9. Make investments for the purpose of exercising
control or management;
10. Invest in commodities or commodity futures
contracts, provided that this limitation shall not
prohibit the purchase or sale by the Fund of forward
foreign currency exchange contracts, financial
futures contracts and options on financial futures
contracts, foreign currency futures contracts, and
options on securities, foreign currencies and
securities indices, as permitted by the Fund's
Prospectus; or
11. Issue senior securities, except as permitted by the
1940 Act.
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Trustees, provide that each Fund may not:
1. Invest more than 15% of its net assets in illiquid
securities;
2. Own more than 10% (taken at market value at the time
of purchase) of the outstanding voting securities of
any single issuer; or
3. Invest in other investment companies except as
permitted under the 1940 Act.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
the Fund's investments will not constitute a violation of such limitation,
except that any borrowing by the Fund that exceeds the fundamental investment
limitations stated above must be reduced to meet such limitations within the
period required by the 1940 Act (currently three days). Otherwise, the Fund may
continue to hold a security even though it causes the Fund to exceed a
percentage limitation because of fluctuation in the value of the Fund's assets.
- 17 -
<PAGE>
TRUSTEES AND OFFICERS
The trustees and executive officers of the Trust, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Principal Occupation
Name, Address and Age Positions with Trust During Past Five Years
<S> <C> <C>
Charles W. Elliott 1/ Chairman of the Board of Trustees Senior Advisor to the President
3338 Bronson Boulevard - Western Michigan University
Kalamazoo, MI 490008 since July 1995; prior to that
Age: 62 Executive Vice President -
Administration & Chief Financial
Officer, Kellogg Company from
January 1987 through June 1995;
before that Price Waterhouse.
Board of Directors, Steelcase
Financial Corporation.
John Rakolta, Jr. Trustee and Vice Chairman of the Chairman, Walbridge Aldinger
1876 Rathmor Board of Trustees Company
Bloomfield Hills, MI 48304
Age: 47
Thomas B. Bender Trustee Investment Advisor, Financial &
7 Wood Ridge Road Investment Management Group
Glen Arbor, MI 49636 (since April, 1991); Vice
Age: 61 President Institutional Sales,
Kidder, Peabody & Co. (Retired
April, 1991).
David J. Brophy Trustee Professor, University of
1025 Martin Place Michigan; Director, River Place
Ann Arbor, MI 48104 Financial Corp.; Trustee,
Age: 58 Renaissance Assets Trust.
Dr. Joseph E. Champagne Trustee Corporate and Executive
319 Snell Road Consultant since September 1995;
Rochester, MI 48306 prior to that Chancellor, Lamar
Age: 56 University from September 1994
until September 1995; before that
Consultant to Management, Lamar
University; President and Chief
Executive Officer, Crittenton
Corporation, Crittenton
Development Corporation until
August 1993; before that
President, Oakland University of
Rochester, MI, until August 1991;
Member, Board of Directors, Ross
Operating Valve of Troy, MI
Thomas D. Eckert Trustee President and COO, Mid-Atlantic
10726 Falls Pointe Drive Group of Pulte Home Corporation
Great Falls, VA 22066
Age: 47
Jack L. Otto Trustee Retired; Director of Standard
6532 W. Beech Tree Road Federal Bank; Executive Director,
Glen Arbor, MI 49636 McGregor Fund (a private
Age: 69 philanthropic foundation) 1981-
1985; Managing Partner, Detroit
officer of Ernst & Young, until
1981.
- 18 -
<PAGE>
Arthur DeRoy Rodecker Trustee President, Rodecker & Company,
4000 Town Center Investment Brokers, Inc. since
Suite 101 November 1976; President, RAC
Southfield, MI 48075 Advisors, Inc., Registered
Age: 68 Investment Advisor since February
1979; President and Trustee,
Helen L. DeRoy Foundation, a
charitable foundation; Vice
President and Trustee, DeRoy
Testamentary Foundation, a
charitable foundation; Trustee,
Providence Hospital Foundation.
Lee P. Munder President President and CEO of the Advisor;
480 Pierce Street Chief Executive Officer and
Suite 300 President of Old MCM, Inc.;
Birmingham, MI 48009 Director, LPM Investment
Age: 51 Services, Inc. ("LPM").
Terry H. Gardner Vice President, Chief Financial Vice President and Chief
480 Pierce Street Officer and Treasurer Financial Officer of the Advisor
Suite 300 and World Asset Management; Vice
Birmingham, MI 48009 President and Chief Financial
Age: 36 Officer of Old MCM, Inc.
(February 1993 to present); Audit
Manager of Arthur Andersen & Co.
(1991 to February 1993);
Secretary of LPM
Paul Tobias Vice President Executive Vice President and
480 Pierce Street Chief Operating Officer of the
Suite 300 Advisor (since April 1995) and
Birmingham, MI 48009 Executive Vice President of
Age: 45 Comerica, Inc.
Gerald Seizert Vice President Executive Vice President and
480 Pierce Street Chief Investment Officer/Equities
Suite 300 of the Advisor (since April
Birmingham, MI 48009 1995); Managing Director (1991-
Age: 44 1995), Director (1992-1995) and
Vice President (1984-1991) of
Loomis, Sayles and Company, L.P.
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Marketing for the Advisor; Vice
Suite 300 President and Director of Client
Birmingham, MI 48009 Services of Old MCM, Inc. (August
Age: 38 1988 to December 1994).
James C. Robinson Vice President Vice President and Chief
480 Pierce Street Investment Officer/Fixed Income
Suite 300 for the Advisor; Vice President
Birmingham, MI 48009 and Director of Fixed Income of
Age: 35 Old MCM, Inc. (1987-1994).
Leonard J. Barr, II Vice President Vice President and Director of
480 Pierce Street Core Equity Research of the
Suite 300 Advisor; Director and Senior Vice
Birmingham, MI 48009 President of Old MCM, Inc. (since
Age: 52 1988); Director of LPM.
Ann F. Putallaz Vice President Vice President and Director of
480 Pierce Street Fiduciary Services (since January
Suite 300 1995); Director of Client and
Birmingham, MI 48009 Marketing Services of Woodbridge
Age: 51 Capital Management, Inc.
- 19 -
<PAGE>
Richard H. Rose Assistant Treasurer Senior Vice President, First Data
First Data Investor Services Investor Services Group, Inc.
Group, Inc. (since May 6, 1994). Formerly,
One Exchange Place Senior Vice President, The Boston
6th Floor Company Advisors, Inc. since
Boston, MA 02109 November 1989.
Age: 41
Lisa A. Rosen Secretary, Assistant Treasurer General Counsel of the Advisor
480 Pierce Street since May, 1996; Formerly
Suite 300 Counsel, First Data Investor
Birmingham, MI 48009 Services Group, Inc.; Assistant
Age: 29 Vice President and Counsel with
The Boston Company Advisors,
Inc.; Associate with Hutchins,
Wheller & Dittmar.
Teresa M.R. Hamlin Assistant Secretary Counsel, First Data Investor
First Data Investor Services Services Group, Inc.; Formerly
Group, Inc. Paralegal Manager, The boston
One Exchange Place Company Advisors, Inc.
Boston, MA 02109
Age: 33
</TABLE>
1/ Trustee is an "interested person" of the Trust as defined in the 1940
Act.
Trustees of the Trust receive an aggregate fee from the Trust, the Munder
Funds Trust, The Munder Funds, Inc. and St. Clair Funds, Inc. comprised of an
annual retainer fee, and a fee for each Board meeting attended; and are
reimbursed for all out-of-pocket expenses relating to attendance at meetings.
The following table summarizes the compensation paid by The Munder Funds,
Inc. and The Munder Funds Trust to their respective directors/trustees for the
fiscal year ended June 30, 1996. Neither the Trust nor St. Clair Funds, Inc. had
operations during the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Aggregate
Compensation Pension
from Munder Retirement Estimated
Funds Trust and Benefits Accrued Annual Total
Munder Funds, as Part of Benefits from the
Name of Person Position Inc. Fund Expenses upon Retirement Fund Complex
<S> <C> <C> <C> <C>
Charles W. Elliott $14,000 None None $14,000
Chairman
John Rakolta, Jr. $14,000 None None $14,000
Vice Chairman
Thomas B. Bender $14,000 None None $14,000
David J. Brophy $14,000 None None $14,000
Trustee
Dr. Joseph E. Champagne $14,000 None None $14,000
Trustee
Thomas D. Eckert $14,000 None None $14,000
Trustee
Jack L. Otto $14,000 None None $14,000
Trustee
Arthur DeRoy Rodecker $14,000 None None $14,000
Trustee
</TABLE>
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<PAGE>
No officer, director or employee of the Advisor, Sub- Advisor, Comerica,
the Distributor, the Administrator or Transfer Agent currently receives any
compensation from the Trust.
The Trust will not employ Rodecker & Company, Investment Brokers, Inc. to
effect brokerage transactions for the Funds.
Shareholder and Trustee Liability. Under Massachusetts law, shareholders of
a business trust may, under certain circumstances, be held personally liable as
partners for the obligations of the trust. However, that Trust's Declaration of
Trust, as amended, provides that shareholders shall not be subject to any
personal liability in connection with the assets of the Trust for the acts or
obligations of the Trust, and that every note, bond, contract, order or other
undertaking made by the Trust shall contain a provision to the effect that the
shareholders are not personally liable thereunder. The Declaration of Trust, as
amended, provides for indemnification out of the trust property of any
shareholder held personally liable solely by reason of his or her being or
having been a shareholder and not because of his or her acts or omissions or
some other reason. The Declaration of Trust, as amended, also provides that the
Trust shall, upon request, assume the defense of any claim made against any
shareholder for any act or obligation of the Trust, and shall satisfy any
judgment thereon. Thus, the risk of a shareholder's incurring financial loss on
account of shareholder liability is limited to circumstances in which the Trust
itself would be unable to meet its obligations.
The Declaration of Trust, as amended, further provides that all persons
having any claim against the trustees or the Trust shall look solely to the
trust property for payment; that no trustee of the Trust shall be personally
liable for or on account of any contract, debt, tort, claim, damage, judgment or
decree arising out of or connected with the administration or preservation of
the trust property or the conduct of any business of the Trust; and that no
trustee shall be personally liable to any person for any action or failure to
act except by reason of his own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust, as amended, provides that a Trustee is entitled to be
indemnified against all liabilities and expenses reasonably incurred by him in
connection with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of being or having been a
Trustee, and that the trustees will indemnify
- 21 -
<PAGE>
officers, representatives and employees of the Trust to the same extent
that Trustees are entitled to indemnification.
INVESTMENT ADVISORY, SUB-ADVISORY AND OTHER
SERVICE ARRANGEMENTS
Investment Advisor. The Advisor of the Funds is Munder Capital Management,
a Delaware general partnership. The general partners of the Advisor are
Woodbridge, WAM, Old MCM, and Munder Group, LLC. Woodbridge and WAM are
wholly-owned subsidiaries of Comerica Bank -- Ann Arbor, which, in turn is a
wholly-owned subsidiary of Comerica Incorporated, a publicly-held bank holding
company.
Under the terms of the Advisory Agreement, the Advisor furnishes overall
investment management for the Funds, provides research and credit analysis,
oversees the purchase and sales of portfolio securities by the Sub-Advisor,
maintains books and records with respect the Funds' securities transactions and
provides periodic and special reports to the Board of Trustees as requested.
For the advisory services provided and expenses assumed by it, the Advisor
has agreed to a fee from each Fund, computed daily and payable monthly, at an
annual rate of 1.00% of average daily net assets up to $250 million, reduced to
.75% of average daily net assets in excess of $250 million for the International
Growth Fund and the Healthcare Fund, and 1.25% of average daily net assets for
the Emerging Markets Fund.
The Trust's Advisory Agreement, with respect to each Fund, will continue in
effect for a period of two years from its effective date. If not sooner
terminated, the Advisory Agreement will continue in effect for successive one
year periods thereafter, provided that each continuance is specifically approved
annually by (a) the vote of a majority of the Board of Trustees who are not
parties to the Advisory Agreement or interested persons (as defined in the 1940
Act), cast in person at a meeting called for the purpose of voting on approval,
and (b) either (i) with respect to a Fund, the vote of a majority of the
outstanding voting securities of that Fund, or (ii) the vote of a majority of
the Board of Trustees. The Advisory Agreement is terminable by vote of the Board
of Trustees, or with respect to a Fund, by the holders of a majority of the
outstanding voting securities of that Fund, at any time without penalty, on 60
days' written notice to the Advisor. The Advisor may also terminate its advisory
relationship with a Fund without penalty on 90 days' written notice to the
Trust. The Advisory Agreement terminates
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<PAGE>
automatically in the event of its assignment (as defined in the 1940 Act).
The Sub-Advisor of the Funds is Framlington Overseas Investment Management
Limited. The Sub-Advisor is a subsidiary of Framlington Group plc, a public
limited company incorporated in England and Wales which, through its
subsidiaries, provides a wide range of investment services. Framlington Group
plc is a wholly owned subsidiary of Framlington Holdings Limited which is, in
turn, owned 49% by the Advisor and 51% by Credit Commercial de France S.A., a
French banking corporation listed on the Societe des Bourses Francaises.
Under the terms of the sub-advisory agreement with the Sub-Advisor, the
Sub-Advisor provides sub-advisory services to the Funds. Subject to supervision
of the Advisor, the Sub- Advisor is responsible for the management of each
Fund's portfolio, including all decisions regarding purchases and sales of
portfolio securities by the Funds. The Sub-Advisor is also responsible for
arranging the execution of all portfolio management decisions, including the
selection of brokers to execute trades and the negotiation of brokerage
commissions in connection therewith. For its services, the Advisor pays the
Sub-Advisor a monthly fee equal on an annual basis to up to 0.50% of average
daily net assets up to $250 million, reduced to .375% of average daily net
assets in excess of $250 million for the International Growth Fund and the
Healthcare Fund, and up to .625% of average daily net assets for the Emerging
Markets Fund.
The Trust's Sub-Advisory Agreement, with respect to each Fund, will
continue in effect with respect to each Fund for a period of two years from its
effective date. If not sooner terminated, the Sub-Advisory Agreement will
continue in effect for successive one year periods thereafter, provided that
each continuance is specifically approved annually by (a) the vote of a majority
of the Board of Trustees who are not parties to the Sub-Advisory Agreement or
interested persons (as defined in the 1940 Act), cast in person at a meeting
called for the purpose of voting on approval, and (b) either (i) with respect to
a Fund, the vote of a majority of the outstanding voting securities of that
Fund, or (ii) the vote of a majority of the Board of Trustees. The Sub-Advisory
Agreement is terminable by vote of the Board of Trustees, or, with respect to a
Fund, by the holders of a majority of the outstanding voting securities of that
Fund, at any time without penalty, on 60 days' written notice to the
Sub-Advisor, or by the Advisor on 90 days' written notice to the Sub-Advisor.
The Sub-Advisor may also terminate its sub-advisory relationship with a Fund
without penalty on 90 days' written notice to the Trust. The
- 23 -
<PAGE>
Sub-Advisory Agreement terminates automatically in the event of its
assignment (as defined in the 1940 Act).
Distribution Agreement. The Trust has entered into a distribution
agreement, under which the Distributor, as agent, sells shares of each Fund on a
continuous basis. The Distributor has agreed to use appropriate efforts to
solicit orders for the purchase of shares of the Funds, although it is not
obligated to sell any particular amount of shares. The Distributor pays the cost
of printing and distributing prospectuses to persons who are not holders of
shares of a Fund (excluding preparation and printing expenses necessary for the
continued registration of the shares) and of printing and distributing all sales
literature. The Distributor's principal offices are located at 60 State Street,
Boston, Massachusetts 02109.
Distribution Services Arrangements. Distribution Services Arrangements -
Class A, Class B and Class C shares. Each Fund has adopted a Service Plan with
respect to its Class A shares pursuant to which it uses its assets to finance
activities relating to the provision of certain shareholder services. Under the
Service Plans, the Distributor is paid an annual service fee at the rate of
0.25% of the value of average daily net assets of the Class A shares of the
Fund. Each Fund has adopted a Service and Distribution Plan with respect to its
Class B and Class C shares, pursuant to which it uses its assets to finance
activities relating to the distribution of its shares to investors and the
provision of certain shareholder services. Under the Service and Distribution
Plans, the Distributor is paid an annual service fee of 0.25% of the value of
average daily net assets of the Class B and Class C shares of the Fund and an
annual distribution fee at the rate of 0.75% of the value of average daily net
assets of the Class B and Class C shares of the Fund.
Under the terms of the Service Plan and both Service and Distribution Plans
(collectively, the "Plans"), each Plan continues from year to year, provided
such continuance is approved annually by vote of the Board of Trustees,
including a majority of the Board of Trustees who are not interested persons of
the Trust, as applicable, and who have no direct or indirect financial interest
in the operation of that Plan (the "Non-Interested Plan Trustees"). The Plans
may not be amended to increase the amount to be spent for the services provided
by the Distributor without shareholder approval, and all amendments of the Plans
also must be approved by the Trustees in the manner described above. Each Plan
may be terminated at any time, without penalty, by vote of a majority of the
Non- Interested Plan Trustees or, with respect to a Fund, by a vote
- 24 -
<PAGE>
of a majority of the outstanding voting securities of the relevant class of
that Fund (as defined in the 1940 Act) upon not more than 30 days' written
notice to any other party to the Plan. Pursuant to each Plan, the Distributor
will provide the Board of Trustees periodic reports of amounts expended under
the Plan and the purposes for which such expenditures were made.
The Trustees have determined that the Plans will benefit the Trust, each
Fund, and their shareholders by (i) providing an incentive for broker or bank
personnel to provide continuous shareholder servicing after the time of sale;
(ii) retention of existing accounts; (iii) facilitating portfolio management
flexibility through continued cash flow into the Funds; and (iv) maintaining a
competitive sales structure in the mutual fund industry.
With respect to Class B and Class C shares of each Fund, the Distributor
expects to pay sales commissions to dealers authorized to sell the Fund's Class
B and Class C shares at the time of sale. The Distributor will use its own funds
(which may be borrowed) to pay such commissions pending reimbursement pursuant
to the relevant Service and Distribution Plan. In addition, the Advisor may use
its own resources to make payments to the Distributor or dealers authorized to
sell the Fund's shares to support their sales efforts.
Shareholder Servicing Arrangements - Class K shares. As stated in the
Prospectus, Class K shares are sold to investors through institutions which
enter into Shareholder Servicing Agreements with the Trust to provide support
services to their Customers who beneficially own Class K shares in consideration
of each Fund's payment of not more than 0.25% (on an annualized basis) of the
average daily net asset value of the Class K shares beneficially owned by the
Customers.
Services provided by institutions under their service agreements may
include (i) aggregating and processing purchase and redemption requests for
Class K shares from Customers and placing net purchase and redemption orders
with the Distributor; (ii) providing customers with a service that invests the
assets of their accounts in Class K shares pursuant to specific or
pre-authorized instructions; (iii) processing dividend payments on behalf of
Customers; (iv) providing information periodically to Customers showing their
positions in Class K shares; (v) arranging for bank wires; (vi) responding to
Customer inquiries relating to the services performed by the institutions; (vii)
providing subaccounting with respect to Class K shares beneficially owned by
Customers or the information necessary for subaccounting; (viii) if
- 25 -
<PAGE>
required by law, forwarding shareholder communications from the Trust (such
as proxies, shareholder reports, annual and semi-annual financial statements and
dividend distribution and tax notices) to Customers; (ix) forwarding to
Customers proxy statements and proxies containing any proposals regarding the
Trust's arrangements with institutions; and (x) providing such other similar
services the Trust may reasonably request to the extent the institutions are
permitted to do so under applicable statues, rules and regulations.
Pursuant to the Trust's agreements with such institutions, the Board of
Trustees will review, at least quarterly, a written report of the amounts
expended under the Trust's agreements with institutions and the purposes for
which the expenditures were made. In addition, the arrangements with
institutions must be approved annually by a majority of the Board of Trustees
including a majority of the Trustees who are not "interested persons" as defined
in the 1940 Act, and have no direct or indirect financial interest in such
arrangements.
The Board of Trustees has approved the arrangements with the institutions
based on information provided by the service contractors that there is a
reasonable likelihood that the arrangements will benefit each Fund and its
shareholders by affording the Funds greater flexibility in connection with the
servicing of the accounts of the beneficial owners of their shares in an
efficient manner.
Administration Agreement. First Data Investor Services Group, Inc. ("First
Data" or the "Administrator") located at 53 State Street, Boston, Massachusetts
02109 serves as administrator for the Trust pursuant to an administration
agreement (the "Administration Agreement"). First Data has agreed to maintain
office facilities for the Trust; provide accounting and bookkeeping services for
the Funds, including the computation of the Funds' net asset values, net income
and realized capital gains, if any; furnish statistical and research data,
clerical services, and stationery and office supplies; prepare and file various
reports with the appropriate regulatory agencies; and prepare various materials
required by the SEC or any state securities commission having jurisdiction over
the Trust.
The Administration Agreement provides that the Administrator performing
services thereunder shall not be liable under the Agreement except for its
willful misfeasance, bad faith or gross negligence in the performance of its
duties or from the reckless disregard by it of its duties and obligations
thereunder.
- 26 -
<PAGE>
Custodian and Transfer Agency Agreements. Comerica Bank (the "Custodian")
whose principal business address is One Detroit Center, 500 Woodward Avenue,
Detroit, MI 48226, maintains custody of the Funds' assets pursuant to a
custodian agreement (each, a "Custody Agreement") with the Trust. The Custodian
is a wholly owned subsidiary of Comerica Incorporated, a publicly-held bank
holding company. Under the Custody Agreement, the Custodian (i) maintains a
separate account in the name of each Fund, (ii) holds and transfers portfolio
securities on account of the Funds, (iii) accepts receipts and makes
disbursements of money on behalf of the Funds, (iv) collects and receives all
income and other payments and distributions on account of the Funds' securities
and (v) makes periodic reports to the Board of Trustees concerning the Funds'
operations. The Custodian is authorized to select one or more domestic or
foreign banks or trust companies to serve as sub-custodian on behalf of the
Funds. In addition, the Trust and the Custodian have entered into a sub-custody
agreement with Morgan Stanley Trust Company ("Morgan Stanley") relating to the
custody of foreign securities held by the Funds, and Morgan Stanley, in turn,
has entered into additional agreements with financial institutions and
depositories located in foreign countries with respect to the custody of such
securities.
First Data also serves as the transfer and dividend disbursing agent for
the Funds pursuant to a transfer agency agreement (the "Transfer Agency
Agreement") with the Trust, under which First Data (i) issues and redeems shares
of the Funds, (ii) addresses and mails all communications by each Fund to its
record owners, including reports to shareholders, dividend and distribution
notices and proxy materials for its meetings of shareholders, (iii) maintains
shareholder accounts, (iv) responds to correspondence by shareholders of the
Funds and (v) makes periodic reports to the Board of Trustees concerning the
operations of each Fund.
Comerica. As stated in the Funds' Class K shares Prospectus, Class K shares
of each Fund are sold to customers of banks and other institutions. Such banks
and institutions may include Comerica Incorporated (a publicly-held bank holding
company), its affiliates and subsidiaries ("Comerica") and other institutions
that have entered into agreements with the Trust providing for shareholder
services for their customers.
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
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continuously engaged in the issuance of its shares, and prohibit banks
generally from underwriting securities, but such banking laws and regulations do
not prohibit such a holding company or affiliate or banks generally from acting
as investment advisor, 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 customers. The Advisor and the Custodian are subject to such
banking laws and regulations.
The Advisor and the Custodian believe they may perform the services for the
Trust contemplated by their respective agreements with the Trust without
violation of applicable banking laws or regulations. It should be noted,
however, that there have been no cases deciding whether bank and non- bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
future judicial or administrative decisions or interpretations of current and
future statutes and regulations, could prevent these companies from continuing
to perform such service for the Trust.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Trust, the Trust might be required to alter materially
or discontinue its arrangements with such companies and change its method of
operations. It is not anticipated, however, that any change in the Trust's
method of operations would affect the net asset value per share of the Funds or
result in a financial loss to any shareholder of the Funds.
It should be noted that future changes in either Federal or state statutes
and regulations relating to permissible activities of banks and their
subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Comerica and certain other institutions from continuing to perform
certain services for Class K shares of the Funds.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of Comerica and/or other institutions in connection with
the provision of services on behalf of Class K shares of the Funds, the Trust
might be required to alter materially or discontinue its arrangements with the
institutions and change its method of operations with respect to Comerica and
certain other
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institutions. It is not anticipated, however, that any change in the Funds'
method of operations would affect the net asset value per share of the Funds or
result in a financial loss to any holder of Class K shares of the Funds.
Other Information Pertaining to Distribution, Administration, Custodian and
Transfer Agency Agreements. As stated in the Prospectus, the Transfer Agent
receives, as compensation for its services, fees from the Funds based on the
aggregate average daily net assets of the Funds and other investment portfolios
advised by the Advisor. The Administrator and the Custodian each receives a
separate fee for its services. In approving the Administration Agreement and
Transfer Agency Agreement, the Board of Trustees did consider the services that
are to be provided under the respective agreements, the experience and
qualifications of the respective service contractors, the reasonableness of the
fees payable by the Trust in comparison to the charges of competing vendors, the
impact of the fees on the estimated total ordinary operating expense ratio of
the Fund and the fact that neither the Administrator nor the Transfer Agent is
affiliated with the Trust or the Advisor. The Board also considered its
responsibility under federal and state law in approving these agreements.
Comerica Bank provides custodial services to the Funds. As compensation for
its services, Comerica Bank is entitled to receive fees, based on the aggregate
average daily net assets of each Fund and certain other investment portfolios
for which Comerica Bank provides services, computed daily and payable monthly at
an annual rate of 0.03% of the first $100 million of average daily net assets,
plus 0.02% of the next $500 million of net assets, plus 0.01% of all net assets
in excess of $600 million. Comerica Bank also receives certain transaction based
fees.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board Members and the Advisor,
the Sub-Advisor makes decisions with respect to and places orders for all
purchases and sales of portfolio securities for the Funds.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed.
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<PAGE>
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Sub-Advisor
will normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of foreign and domestic securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Sub-Advisor
believes such practice to be in the Funds' interests.
In assessing the terms available for any transaction, the Sub-Advisor shall
consider all factors it deems relevant, including the breadth of the market in
the security, the price of the security, the financial condition and execution
capability of the broker-dealer, and the reasonableness of the commission, if
any, both for the specific transaction and on a continuing basis. In addition,
the Sub-Advisory Agreement authorizes the Sub-Advisor, subject to the prior
approval of the Trust's Board of Trustees, to cause a Fund to pay a
broker-dealer which furnishes brokerage and research services a higher
commission than that which might be charged by another broker-dealer for
effecting the same transaction, provided that the Sub-Advisor determines in good
faith that such commission is reasonable in relation to the value of the
brokerage and research services provided by such broker- dealer, viewed in terms
of either the particular transaction or the overall responsibilities of the
Sub-Advisor to the Fund. Such brokerage and research services might consist of
reports and statistics on specific companies or industries, general summaries of
groups of bonds and their comparative earnings and yields, or broad overviews of
the securities markets and the economy.
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by the Sub-Advisor and does not
reduce the advisory fees payable to the Advisor or Sub-Advisor by a Fund. It is
possible that certain of the supplementary research or other services received
will primarily benefit one or more other investment companies or other accounts
for which investment
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discretion is exercised. Conversely, a Fund may be the primary beneficiary
of the research or services received as a result of portfolio transactions
effected for such other account or investment company.
Portfolio securities will not be purchased from or sold to the Advisor,
Sub-Advisor, the Distributor or any affiliated person (as defined in the 1940
Act) of the foregoing entities except to the extent permitted by SEC exemptive
order or by applicable law.
Investment decisions for the Funds and for other investment accounts
managed by the Advisor and Sub-Advisor are made independently of each other in
the light of differing conditions. However, the same investment decision may be
made for two or more of such accounts. In such cases, simultaneous transactions
are inevitable. Purchases or sales are then averaged as to price and allocated
as to amount in a manner deemed equitable to each such account. While in some
cases this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to the Funds. To the extent permitted by law, the Sub-Advisor may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for other investment companies or accounts in executing
transactions.
The Funds will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which the Advisor,
Sub-Advisor or any affiliated person (as defined in the 1940 Act) thereof is a
member except pursuant to procedures adopted by the Trust's Board of Trustees in
accordance with Rule 10f-3 under the 1940 Act.
Except as noted in the Prospectuses and this Statement of Additional
Information the Funds' service contractors bear all expenses in connection with
the performance of its services and the Funds bear the expenses incurred in its
operations. These expenses include, but are not limited to, fees paid to the
Advisor, Administrator, Custodian and Transfer Agent; fees and expenses of
officers and directors; taxes; interest; legal and auditing fees; brokerage fees
and commissions; certain fees and expenses in registering and qualifying the
Trust and its shares for distribution under Federal and state securities laws;
expenses of preparing prospectuses and statements of additional information and
of printing and distributing prospectuses and statements of additional
information to existing shareholders; the expense of reports to shareholders,
shareholders' meetings and proxy solicitations; fidelity bond and trustees' and
officers' liability insurance premiums; the
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expense of using independent pricing services; and other expenses which are
not assumed by the Administrator. Any general expenses of the Trust that are not
readily identifiable as belonging to a particular investment portfolio of the
Trust are allocated among all investment portfolios of the Trust by or under the
direction of the Board of Trustees in a manner that the Board of Trustees
determine to be fair and equitable. The Advisor, Administrator, Custodian and
Transfer Agent may voluntarily waive all or a portion of their respective fees
from time to time.
PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions are discussed in each Prospectus and such
information is incorporated herein by reference.
Purchases. In addition to the methods of purchasing shares described in the
Prospectuses, the Funds also offer a pre-authorized checking plan by which
investors may accumulate shares of a Fund regularly each month by means of
automatic debits to their checking accounts. There is a $50 minimum on each
automatic debit. Shareholders may choose this option by checking the appropriate
part of the application form or by calling the Funds at (800) 438-5789. Such a
plan is voluntary and may be discontinued by the shareholder at any time or by
the Trust on 30 days' written notice to the shareholder.
Letter of Intent. Purchasers who intend to invest $100,000 or more in Class
A shares of a Fund within 13 months (whether in one lump sum or in installments
the first of which may not be less than 5% of the total intended amount and each
subsequent installment not less than $100, including automatic investment and
payroll deduction plans), and to beneficially hold the total amount of such
shares fully paid for and outstanding simultaneously for at least one full
business day before the expiration of that period, should complete the Letter of
Intent ("LOI") section in the Application. Payment for not less than 5% of the
total intended amount must accompany the executed LOI. Those shares purchased
with the first 5% of the intended amount stated in the LOI will be held as
"escrowed shares" for as long as the LOI remains unfulfilled. Although the
escrowed shares are registered in the investor's name, his full ownership of
them is conditional upon fulfillment of the LOI. No escrowed shares can be
redeemed by the investor for any purpose until the LOI is fulfilled or
terminated. If the LOI is terminated for any reason other than fulfillment, the
Transfer Agent will redeem that portion of the escrowed shares required and
apply the proceeds to pay any adjustment that may be appropriate to the sales
commission on all shares (including the escrowed shares)
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<PAGE>
already purchased under the LOI and apply any unused balance to the
investor's account. The LOI is not a binding obligation to purchase any amount
of shares, but its execution will result in the purchaser paying a lower sales
charge at the appropriate quantity purchase level. A purchase not originally
made pursuant to an LOI may be included under a subsequent LOI executed within
90 days of such purchase. In this case, an adjustment will be made at the end of
13 months from the effective date of the LOI at the net asset value per share
then in effect, unless the investor makes an earlier written request to the
Funds' Distributor upon fulfilling the purchase of shares under the LOI. In
addition, the aggregate value of any shares purchased prior to the 90-day period
referred to above may be applied to purchases under a current LOI in fulfilling
the total intended purchases under the LOI. However, no adjustment of sales
charge previously paid on purchases prior to the 90-day period will be made.
Shares acquired through reinvestment of dividends and capital gain distributions
are considered in connection with an investor's fulfillment of the LOI.
Retirement Plans. Shares of the Funds may be purchased in connection with
various types of tax deferred retirement plans, including individual retirement
accounts ("IRAs"), qualified plans, deferred compensation for public schools and
charitable organizations (403(b) plans) and simplified employee pension IRAs. An
individual or organization considering the establishment of a retirement plan
should consult with an attorney and/or an accountant with respect to the terms
and tax aspects of the plan. A $10.00 annual custodial fee is also charged on
IRAs. This custodial fee is due by December 15 of each year and may be paid by
check or shares liquidated from a shareholder's account.
Redemptions
Systematic Withdrawals. In addition to the methods of redemption described
in the Prospectuses, a systematic withdrawal plan is available in which a
shareholder of a Fund may elect to receive a fixed amount ($50 minimum),
monthly, quarterly, semi-annually, or annually, for accounts with a value of
$2,500 or more. Checks are mailed on or about the 10th of each designated month.
All certified shares must be placed on deposit under the plan and dividends and
capital gain distributions, if any, are automatically reinvested at net asset
value for shareholders participating in the plan. If the checks received by a
shareholder through the systematic withdrawal plan exceed the dividends and
capital appreciation of the shareholder's account, the systematic withdrawal
plan will have the effect of reducing the value of the account. Any gains and/or
losses realized from redemptions through the
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<PAGE>
systematic withdrawal plan are considered a taxable event by the Internal
Revenue Service and must be reported on the shareholders' income tax return.
Shareholders should consult with a tax advisor for information on their specific
financial situations. At the time of initial investment, a shareholder may
request that the check for the systematic withdrawal be sent to an address other
than the address of record. The address to which the payment is mailed may be
changed by submitting a written request, signed by all registered owners, with
their signatures guaranteed. Shareholders may add this option after the account
is already established or change the amount on an existing account by calling
the Funds at (800) 438-5789. The Trust may terminate the plan on 30 days'
written notice to the shareholder.
Redemption proceeds are normally paid in cash; however, each Fund may pay
the redemption price in whole or part by a distribution in kind of securities
from the portfolio of the particular Fund, in lieu of cash, in conformity with
applicable rules of the SEC. If shares are redeemed in kind, the redeeming
shareholder might incur transaction costs in converting the assets into cash.
The Funds are obligated to redeem shares solely in cash up to the lesser of
$250,000 or 1% of its net assets during any 90-day period for any one
shareholder.
Other Information. The Funds reserve the right to suspend or postpone
redemptions during any period when: (i) trading on the New York Stock Exchange
is restricted, as determined by the SEC, or the New York Stock Exchange is
closed for other than customary weekend and holiday closings; (ii) the SEC has
by order permitted such suspension or postponement for the protection of
shareholders; or (iii) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable.
Each Fund may involuntarily redeem an investor's shares if the net asset
value of such shares is less than $500; provided that involuntary redemptions
will not result from fluctuations in the value of an investor's shares. A notice
of redemption, sent by first-class mail to the investor's address of record,
will fix a date not less than 30 days after the mailing date, and shares will be
redeemed at the net asset value at the close of business on that date unless
sufficient additional shares are purchased to bring the aggregate account value
up to $500 or more. A check for the redemption proceeds payable to the investor
will be mailed to the investor at the address of record.
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<PAGE>
Exchanges. In addition to the method of exchanging shares described in the
Prospectuses, a shareholder exchanging at least $1,000 of shares (for which
certificates have been issued) and who has authorized expedited exchanges on the
application form filed with the Transfer Agent may exchange shares by
telephoning the Funds at (800) 438-5789. Telephone exchange instructions must be
received by the Transfer Agent by 4:00 p.m., New York City time. The Trust,
Distributor and Transfer Agent reserve the right at any time to suspend or
terminate the expedited exchange procedure or to impose a fee for this service.
During periods of unusual economic or market changes, shareholders may
experience difficulties or delays in effecting telephone exchanges. Neither the
Trust nor the Transfer Agent will be responsible for any loss, damages, expense
or cost arising out of any telephone exchanges effected upon instructions
believed by them to be genuine. The Transfer Agent has instituted procedures
that it believes are reasonably designed to insure that exchange instructions
communicated by telephone are genuine, and could be liable for losses caused by
unauthorized or fraudulent instructions in the absence of such procedures. The
procedures currently include a recorded verification of the shareholder's name,
social security number and account number, followed by the mailing of a
statement confirming the transaction, which is sent to the address of record.
NET ASSET VALUE
In determining the approximate market value of portfolio investments, the
Trust may employ outside organizations, which may use matrix or formula methods
that take into consideration market indices, matrices, yield curves and other
specific adjustments. This may result in the securities being valued at a price
different from the price that would have been determined had the matrix or
formula methods not been used. All cash, receivables and current payables are
carried on the Trust's books at their face value. Other assets, if any, are
valued at fair value as determined in good faith under the supervision of the
Board of Trustees.
In-Kind Purchases
Payment for shares of a Fund may, in the discretion of the Advisor, be made
in the form of securities that are permissible investments for a Fund as
described in the Prospectus. For further information about this form of payment
please contact the Transfer Agent. In connection with an in- kind securities
payment, a Fund will require, among other things, that the securities be valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that (1) it will
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have good and marketable title to the securities received by it; (2) that
the securities are in proper form for transfer to the Fund; and (3) adequate
information will be provided concerning the basis and other tax matters relating
to the securities.
PERFORMANCE INFORMATION
The Trust, in advertising its "average annual total return" of the Funds,
computes return by determining the average annual compounded rate of return
during specified periods that equates the initial amount invested to the ending
redeemable value of such investment according to the following formula:
P (1 + T)n = ERV
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical
$1,000 payment made at the beginning of
the 1, 5 or 10 year (or other) periods at
the end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000;
and
n = period covered by the computation,
expressed in years.
Each Fund, in advertising its "aggregate total return" computes its returns
by determining the aggregate compounded rates of return during specified periods
that likewise equate the initial amount invested to the ending redeemable value
of such investment. The formula for calculating aggregate total return is as
follows:
(ERV) - 1
-----
Aggregate Total Return = P
The calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the
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hypothetical investment after deduction of all non-recurring charges at the
end of the measuring period. Each Fund's average annual total return and load
adjusted aggregate total return quotations for Class A shares will reflect the
deduction of the maximum sales charge charged in connection with the purchase of
such shares; and the Fund's load adjusted average annual total return and load
adjusted aggregate total return quotations for Class B shares will reflect any
applicable CDSC; provided that Fund may also advertise total return data without
reflecting any applicable CDSC sales charge imposed on the purchase of Class A
shares or Class B shares in accordance with the views of the SEC. Quotations
which do not reflect the sales charge will, of course, be higher than quotations
which do.
The performance of any investment is generally a function of portfolio
quality and maturity, type of investment and operating expenses.
From time to time, in advertisements or in reports to shareholders, each
Fund's total returns may be quoted and compared to those of other mutual funds
with similar investment objectives and to stock or other relevant indices.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the
Prospectus. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
Prospectus is not intended as a substitute for careful tax planning. Potential
investors should consult their tax advisors with specific reference to their own
tax situations.
General. Each Fund will elect to be taxed separately as a regulated
investment company under Subchapter M, of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, a Fund generally is
exempt from Federal income tax on its net investment income and realized capital
gains which it distributes to shareholders, provided that it distributes an
amount equal to the sum of (a) at least 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gain over
net long-term capital loss), if any, for the year and (b) at least 90% of its
net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net
tax-exempt interest income made during the taxable year or,
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under specified circumstances, within twelve months after the close of the
taxable year will satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short Gain
Test"). Interest (including original issue discount and "accrued market
discount") received by the Fund at maturity or on disposition of a security held
for less than three months will not be treated (in contrast to other income
which is attributable to realized market appreciation) as gross income from the
sale or other disposition of securities held for less than three months for this
purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which the
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which the Fund does not hold more than 10%
of the outstanding voting securities of such issuer) and no more than 25% of the
value of the Fund's total assets may be invested in the securities of any one
issuer (other than U.S. Government securities and securities of other regulated
investment companies), or in two or more issuers which the Fund controls and
which are engaged in the same or similar trades or businesses.
Distributions of net investment income received by each Fund from
investments in debt securities and any net realized short-term capital gains
distributed by the Fund will be taxable to shareholders as ordinary income and
will not be eligible for the dividends received deduction for corporations.
Each Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is taxable
to shareholders as long-term capital gain, regardless of the length of time the
shareholder has held the shares, whether
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such gain was recognized by the Fund prior to the date on which a
shareholder acquired shares of the Fund and whether the distribution was paid in
cash or reinvested in shares. In addition, investors should be aware that any
loss realized upon the sale, exchange or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent any
capital gain dividends have been paid with respect to such shares.
In the case of corporate shareholders, distributions of the Funds for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by a Fund for the
year and if certain holding period requirements are met. Generally, a dividend
will be treated as a "qualifying dividend" if it has been received from a
domestic corporation. Capital gains dividends are not eligible for dividends
received deduction for corporations.
Ordinary income of individuals is taxable at a maximum nominal rate of
39.6%, although because of limitations on itemized deductions otherwise
allowable and the phase-out of personal exemptions, the maximum effective
marginal rate of tax for some taxpayers may be higher. An individual's long-
term capital gains are taxable at a maximum rate of 28%. Capital gains and
ordinary income of corporate taxpayers are both taxed at a nominal maximum rate
of 35%.
If for any taxable year a Fund does not qualify as a regulated investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders. In such event,
all distributions (whether or not derived from exempt-interest income) would be
taxable as ordinary income and would be eligible for the dividends received
deduction in the case of corporate shareholders to the extent of the Fund's
current and accumulated earnings and profits.
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by each Fund each year.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
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<PAGE>
The Trust will be required in certain cases to withhold and remit to the
United States Treasury 31% of taxable dividends or 31% of gross proceeds
realized upon sale paid to any shareholder (i) who has provided either an
incorrect tax identification number or no number at all, (ii) who is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of taxable interest or dividend income properly, or (iii) who has failed
to certify to the Trust that he is not subject to backup withholding or that he
is an "exempt recipient."
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment company"
and to be relieved of all or substantially all Federal income taxes, depending
upon the extent of its activities in states and localities in which its offices
are maintained, in which its agents or independent contractors are located or in
which it is otherwise deemed to be conducting business, each Fund may be subject
to the tax laws of such states or localities.
Foreign Income. Income received by Funds from sources within foreign
countries may be subject to withholding and other foreign taxes. The payment of
such taxes will reduce the amount of dividends and distributions paid to the
Funds' shareholders. So long as the Funds qualify as regulated investment
companies, certain distributions requirements are satisfied, and more than 50%
of the value of the Funds' assets at the close of the taxable year consists of
securities of foreign corporations, the Funds may elect, for U.S. Federal income
tax purposes, to treat foreign income taxes paid by the Funds that can be
treated as income taxes under U.S. income tax principles as paid by its
shareholders. The Funds may qualify for and make this election in some, but not
necessarily all, of its taxable years. If the Funds were to make an election, an
amount equal to the foreign income taxes paid by the Funds would be included in
the income of its shareholders and the shareholders would be entitled to credit
their portions of this amount against their U.S. tax due, if any, or to deduct
such portions from their U.S. taxable income, if any. Shortly after any year for
which it makes such an election, the Funds will report to their shareholders, in
writing, the amount per share of such foreign tax that must
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<PAGE>
be included in each shareholder's gross income and the amount which will be
available for deduction or credit. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. Certain limitations are
imposed on the extent to which the credit (but not the deduction) for foreign
taxes may be claimed.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholder's United States tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
paid by the Fund from its foreign source income will be treated as foreign
source income. The Fund's gains and losses from the sale of securities will
generally be treated as derived from United States sources and certain foreign
currency gains and losses likewise will be treated as derived from United States
sources. The limitation on the foreign tax credit is applied separately to
foreign source "passive income", such as the portion of dividends received from
the Fund which qualifies as foreign source income. In addition, only a portion
of the foreign tax credit will be allowed to offset any alternative minimum tax
imposed on corporations and individuals. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Fund.
Taxation of Certain Financial Instruments. Special rules govern the Federal
income tax treatment of financial instruments that may be held by the Funds.
These rules may have a particular impact on the amount of income or gain that a
Fund must distribute to their respective shareholders to comply with the
Distribution Requirement, on the income or gain qualifying under the Income
Requirement and on their ability to comply with the Short-Gain Test, all
described above.
Generally, futures contracts, options on futures contracts and certain
foreign currency contracts held by a Fund (collectively, the "Instruments") at
the close of their taxable year are treated for Federal income tax purposes as
sold for their fair market value on the last business day of such year, a
process known as "marking-to-market." Forty percent of any gain or loss
resulting from such constructive sales will be treated as short-term capital
gain or loss and 60% of such gain or loss will be treated as long-term capital
gain or loss without regard to the period the Fund hold the Instruments ("the
40%-60% rule"). The amount of any capital gain or loss actually realized by a
Fund in a subsequent sale
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or other disposition of those Instruments is adjusted to reflect any
capital gain or loss taken into account by the Fund in a prior year as a result
of the constructive sale of the Instruments. Losses with respect to futures
contracts to sell, related options and certain foreign currency contracts which
are regarded as parts of a "mixed straddle" because their values fluctuate
inversely to the values of specific securities held by a Fund are subject to
certain loss deferral rules which limit the amount of loss currently deductible
on either part of the straddle to the amount thereof which exceeds the
unrecognized gain (if any) with respect to the other part of the straddle, and
to certain wash sales regulations. Under short sales rules, which are also
applicable, the holding period of the securities forming part of the straddle
will (if they have not been held for the long- term holding period) be deemed
not to begin prior to termination of the straddle. With respect to certain
Instruments, deductions for interest and carrying charges may not be allowed.
Notwithstanding the rules described above, with respect to futures contracts
which are part of a "mixed straddle" to sell related options, and certain
foreign currency contracts which are properly identified as such, a Fund may
make an election which will exempt (in whole or in part) those identified
futures contracts, options and foreign currency contracts from the Rules of
Section 1256(g) of the Code including "the 40%-60% rule" and the mark-to-market
on gains and losses being treated for Federal income tax purposes as sold on the
last business day of the Fund's taxable year, but gains and losses will be
subject to such short sales, wash sales and loss deferral rules and the
requirement to capitalize interest and carrying charges. Under Temporary
Regulations, the Fund would be allowed (in lieu of the foregoing) to elect to
either (1) offset gains or losses from portions which are part of a mixed
straddle by separately identifying each mixed straddle to which such treatment
applies, or (2) establish a mixed straddle account for which gains and losses
would be recognized and offset on a periodic basis during the taxable year.
Under either election, "the 40%-60% rule" will apply to the net gain or loss
attributable to the Instruments, but in the case of a mixed straddle account
election, not more than 50% of any net gain may be treated as long-term and no
more than 40% of any net loss may be treated as short-term.
A foreign currency contract must meet the following conditions in order to
be subject to the marking-to-market rules described above: (1) the contract must
require delivery of a foreign currency of a type in which regulated futures
contracts are traded or upon which the settlement value of the contract depends;
(2) the contract must be entered into at arm's length at a price determined by
reference to the price
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in the interbank market; and (3) the contract must be traded in the
interbank market. The Treasury Department has broad authority to issue
regulations under the provisions respecting foreign currency contracts. As of
the date of this Statement of Additional Information, the Treasury Department
has not issued any such regulations. Other foreign currency contracts entered
into by a Fund may result in the creation of one or more straddles for Federal
income tax purposes, in which case certain loss deferral, short sales, and wash
sales rules and the requirement to capitalize interest and carrying charges may
apply.
Some of the non-U.S. dollar denominated investments that a Fund may make,
such as foreign securities, European Deposit Receipts and foreign currency
contracts, may be subject to the provisions of Subpart J of the Code, which
govern the Federal income tax treatment of certain transactions denominated in
terms of a currency other than the U.S. dollar or determined by reference to the
value of one or more currencies other than the U.S dollar. The types of
transactions covered by these provisions include the following: (1) the
acquisition of, or becoming the obligor under, a bond or other debt instrument
(including, to the extent provided in Treasury regulations, preferred stock);
(2) the accruing of certain trade receivables and payables; and (3) the entering
into or acquisition of any forward contract, futures contract, option and
similar financial instrument, if such instrument is not marked to market. The
disposition of a currency other than the U.S. dollar by a U.S. taxpayer is also
treated as a transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and non equity options are
generally not subject to the special currency rules if they are or would be
treated as sold for their fair market value at year-end under the marking-to-
market rules unless an election is made to have such currency rules apply. With
respect to transactions covered by the special rules, foreign currency gain or
loss is calculated separately from any gain or loss on the underlying
transaction and is normally taxable as ordinary gain or loss. A taxpayer may
elect to treat as capital gain or loss foreign currency gain or loss arising
from certain identified forward contracts, futures contracts and options that
are capital assets in the hands of the taxpayer and which are not part of a
straddle. In accordance with Treasury regulations, certain transactions that are
part of a "Section 988 hedging transaction" (as defined in the Code and Treasury
regulations) may be integrated and treated as a single transaction or otherwise
treated consistently for purposes of the Code. "Section 988 hedging
transactions" are not subject to the marking-to-market or loss deferral rules
under the Code. Gain or loss attributable to the foreign currency component of
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transactions engaged in by the Funds which are not subject to the special
currency rules (such as foreign equity investments other than certain preferred
stocks) is treated as capital gain or loss and is not segregated from the gain
or loss on the underlying transaction.
If a Fund invests in certain "passive foreign investment companies"
("PFICs"), it will be subject to Federal income tax (and possibly additional
interest charges) on a portion of any "excess distribution" or gain from the
disposition of such shares even if it distributes such income to its
shareholders. If a Fund elects to treat the PFIC as "qualified electing fund"
("QEF") and the PFIC furnishes certain financial information in the required
form to the Fund, the Fund will instead be required to include in income each
year its allocable share of the ordinary earnings and net capital gains on the
QEF, regardless of whether received, and such amounts will be subject to the
various distribution requirements described above.
Each Fund may be subject to U.S. Federal income tax on a portion of any
"excess distribution" or a gain from the distribution of passive foreign
investment companies.
ADDITIONAL INFORMATION CONCERNING SHARES
The Trust is a Massachusetts business trust. Under the Trust's Declaration
of Trust, the beneficial interest in the Trust may be divided into an unlimited
number of full and fractional transferable shares. The Trust's Declaration of
Trust authorize the Boards of Trustees to classify or reclassify any unissued
shares of the Trust into one or more classes by setting or changing, in any one
or more respects, their respective designations, preferences, conversion or
other rights, voting powers, restrictions, limitations, qualifications and terms
and conditions of redemption. Pursuant to such authority, the Trust's Board of
Trustees has authorized the issuance of an unlimited number of shares of
beneficial interest in the Trust, representing interests in Munder Framlington
International Growth Fund, Munder Framlington Emerging Markets Fund, and Munder
Framlington Healthcare Fund. The shares of each Fund are offered in five
separate classes: Class A, Class B, Class C, Class K and Class Y shares.
At a board meeting on November 7, 1996, the Trustees adopted a plan
pursuant to Rule 18f-3 under the 1940 Act ("Multi-Class Plan") on behalf of each
Fund. The Multi-Class Plan provides that shares of each class of a Fund are
identical, except for one or more expense variables, certain
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related rights, exchange privileges, class designation and sales loads
assessed due to differing distribution methods.
In the event of a liquidation or dissolution of the Trust, shareholders of
a particular Fund would be entitled to receive the assets available for
distribution belonging to such Fund, and a proportionate distribution, based
upon the relative net asset value of the Trust's respective Funds, of any
general assets not belonging to a Fund which are available for distribution.
Shareholders of a Fund are entitled to participate in the net distributable
assets of the particular Fund involved on liquidation, based on the number of
shares of the particular Fund that are held by each shareholder.
Holders of all outstanding shares of a particular Fund will vote together
in the aggregate and not by class on all matters, except that only Class A
shares of a Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Fund's Class A Plan, only Class B shares will be
entitled to vote on matters submitted to a vote of shareholders pertaining to
the Fund's Class B Plan, only Class C shares of the Fund will be entitled to
vote on matters submitted to a vote of shareholders pertaining to the Fund's
Class C Plan, and only Class K shares of the Fund will be entitled to vote on
matters submitted to a vote of shareholders pertaining to the Class K Plan.
Further, shareholders of all of the Funds, as well as those of any other
investment portfolio now or hereafter offered by the Trust, will vote together
in the aggregate and not separately on a Fund-by-Fund basis, except as otherwise
required by law or when permitted by the Boards of Trustees. Rule 18f-2 under
the 1940 Act provides that any matter required to be submitted to the holders of
the outstanding voting securities of an investment company such as the Trust
shall not be deemed to have been effectively acted upon unless approved by the
holders of a majority of the outstanding shares of each Fund affected by the
matter. A Fund is affected by a matter unless it is clear that the interests of
each Fund in the matter are substantially identical or that the matter does not
affect any interest of the Fund. Under the Rule, the approval of an investment
advisory agreement, sub-advisory agreement, or any change in a fundamental
investment policy would be effectively acted upon with respect to a Fund only if
approved by a majority of the outstanding shares of such Fund. However, the Rule
also provides that the ratification of the appointment of independent auditors,
the approval of principal underwriting contracts and the election of trustees
may be effectively acted upon by shareholders of the Trust voting together in
the aggregate without regard to a particular Fund.
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Shares of the Trust have noncumulative voting rights and, accordingly, the
holders of more than 50% of the Trust's outstanding shares may elect all of the
trustees. Shares have no preemptive rights and only such conversion and exchange
rights as the Board may grant in its discretion. When issued for payment as
described in the Prospectus, shares will be fully paid and non-assessable by the
Trust.
Shareholder meetings to elect trustees will not be held unless and until
such time as required by law. At that time, the Trustees then in office will
call a shareholders' meeting to elect Trustees. Except as set forth above, the
Trustees will continue to hold office and may appoint successor trustees.
Meetings of the shareholders of the Trust shall be called by the Trustees upon
the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
The Trust's Declaration of Trust authorizes the Trust's Board of Trustees,
without shareholder approval (unless otherwise required by applicable law), to:
(i) sell and convey the assets belonging to a class of shares to another
management investment company for consideration which may include securities
issued by the purchaser and, in connection therewith, to cause all outstanding
shares of such class to be redeemed at a price which is equal to their net asset
value and which may be paid in cash or by distribution of the securities or
other consideration received from the sale and conveyance; (ii) sell and convert
the assets belonging to one or more classes of shares into money and, in
connection therewith, to cause all outstanding shares of such class to be
redeemed at their net asset value; or (iii) combine the assets belonging to a
class of shares with the assets belonging to one or more other classes of shares
if the Board of Trustees reasonably determines that such combination will not
have a material adverse effect on the shareholders of any class participating in
such combination and, in connection therewith, to cause all outstanding shares
of any such class to be redeemed or converted into shares of another class of
shares at their net asset value. However, the exercise of such authority may be
subject to certain restrictions under the 1940 Act. The Trust's Board of
Trustees may authorize the termination any class of shares after the assets
belonging to such class have been distributed to its shareholders.
MISCELLANEOUS
Counsel. The law firm of Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, DC 20005, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Trust.
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Independent Auditors. Ernst & Young LLP, serves as the Trust's independent
auditors.
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" of a Fund means
the lesser of (a) 67% of the shares of that Fund represented at a meeting at
which the holders of more than 50% of the outstanding shares of that Fund are
present in person or by proxy, or (b) more than 50% of the outstanding shares of
that Fund.
REGISTRATION STATEMENT
This Statement of Additional Information and the Trust's Prospectuses do
not contain all the information included in the Trust's registration statement
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Prospectuses as to the contents of
any contract of other documents referred to are not necessarily complete, and,
in such instance, reference is made to the copy of such contract or other
documents filed as an exhibit to the Trust's registration statement, each such
statement being qualified in all respect by such reference.
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APPENDIX
As stated in the Prospectuses, the Funds may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
I. Index Futures Contracts
General. A bond index assigns relative values of the bonds included in the
index and the index fluctuates with changes in the market values of the bonds
included. The Chicago Board of Trade has designed a futures contract based on
the Bond Buyer Municipal Bond Index. This Index is composed of 40 term revenue
and general obligation bonds and its composition is updated regularly as new
bonds meeting the criteria of the Index are issued and existing bonds mature.
The Index is intended to provide an accurate indicator of trends and changes in
the municipal bond market. Each bond in the Index is independently priced by six
dealer-to-dealer municipal bond brokers daily. The 40 prices then are averaged
and multiplied by a coefficient. The coefficient is used to maintain the
continuity of the Index when its composition changes.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexes,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
A Fund will sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. A Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a Fund
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.
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In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Examples of Stock Index Futures Transactions. The following are examples of
transactions in stock index futures transactions (net of commissions and
premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
-Day Hedge is Placed-
Anticipate buying $62,500 in Buying 1 Index Futures at 125
Equity Securities Value of Futures = $62,500/Contract
-Day Hedge is Placed-
Buy Equity Securities with Sell 1 Index Futures at 130
Actual Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Gain on Futures = $2,500
Price = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 x $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is Lifted-
Anticipate Selling Sell 16 Index Futures at 125
$1,000,000 in Equity Value of Futures = $1,000,000
Securities
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-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value Gain on Futures = $40,000
= $40,000
II. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to- the-market. For example, when a Fund has purchased a futures
contract and the price of the contract has risen in response to a rise in the
underlying instruments, that position will have increased in value and the Fund
will be entitled to receive from the broker a variation margin payment equal to
that increase in value. Conversely, where a Fund has purchased a futures
contract and the price of the futures contract has declined in response to a
decrease in the underlying instruments, the position would be less valuable and
the Fund would be required to make a variation margin payment to the broker. At
any time prior to expiration of the futures contract, the Sub-Advisor may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by a Fund as
hedging devices. One risk arises because of the imperfect correlation between
movements in the price of the futures and movements in the price of the
instruments
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which are the subject of the hedge. The price of the future may move more
than or less than the price of the instruments being hedged. If the price of the
futures moves less than the price of the instruments which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
instruments being hedged has moved in an unfavorable direction, the Fund would
be in a better position than if it had not hedged at all. If the price of the
instruments being hedged has moved in a favorable direction, this advantage will
be partially offset by the loss on the futures. If the price of the futures
moves more than the price of the hedged instruments, the Fund will experience
either a loss or gain on the futures which will not be completely offset by
movements in the price of the instruments which are the subject of the hedge. To
compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, a Fund
may buy or sell futures contracts in a greater dollar amount than the dollar
amount of instruments being hedged if the volatility over a particular time
period of the prices of such instruments has been greater than the volatility
over such time period of the futures, or if otherwise deemed to be appropriate
by the Sub-Advisor. Conversely, a Fund may buy or sell fewer futures contracts
if the volatility over a particular time period of the prices of the instruments
being hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the
Sub-Advisor. It is also possible that, when a Fund had sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of instruments held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Fund
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In instances involving the purchase of futures contracts by a Fund, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Custodian and/or
in a margin account with a broker to collateralize the position and thereby
insure that the use of such futures is unleveraged.
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In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Sub-Advisor may still not result
in a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, a Fund would continue to be required to make daily cash payments of
variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
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futures contract price during a single trading day. Once the daily limit
has been reached in the contract, no trades may be entered into at a price
beyond the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by a Fund is also subject to the Sub-Advisor's
ability to predict correctly movements in the direction of the market. For
example, if a Fund has hedged against the possibility of a decline in the market
adversely affecting securities held by it and securities prices increase
instead, the Fund will lose part or all of the benefit to the increased value of
its securities which it has hedged because it will have offsetting losses in its
futures positions. In addition, in such situations, if the Fund has insufficient
cash, it may have to sell securities to meet daily variation margin
requirements. Such sales of securities may be, but will not necessarily be, at
increased prices which reflect the rising market. The Fund may have to sell
securities at a time when they may be disadvantageous to do so.
IV. Options on Futures Contracts
Each Funds may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of, the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in future contracts (for example,
the existence of
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a liquid secondary market). In addition, the purchase or sale of an option
also entails the risk that changes in the value of the underlying futures
contract will not correspond to changes in the value of the option purchased.
Depending on the pricing of the option compared to either the futures contract
upon which it is based, or upon the price of the securities being hedged, an
option may or may not be less risky than ownership of the futures contract or
such securities. In general, the market prices of options can be expected to be
more volatile than the market prices on underlying futures contract. Compared to
the purchase or sale of futures contracts, however, the purchase of call or put
options on futures contracts may frequently involve less potential risk to a
Fund because the maximum amount at risk is the premium paid for the options
(plus transaction costs). The writing of an option on a futures contract
involves risks similar to those risks relating to the sale of futures contracts.
V. Currency Transactions
The Funds may engage in currency transactions in order to hedge the value
of portfolio holdings denominated in particular currencies against fluctuations
in relative value. Currency transactions include forward currency contracts,
currency futures, options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap as described in
the Statement of Additional Information. A Fund may enter into currency
transactions with counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating form a NRSRO or are
determined to be of equivalent credit quality by the Sub-Advisor.
A Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of a Fund, which will generally arise
in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with
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respect to portfolio security positions denominated or generally quoted in
that currency.
A Fund will not enter into a transaction to hedge currency exposure to an
extent greater after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
A Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, a Fund may also engage proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging entails entering into a commitment or option to sell a currency whose
changes in value are generally considered to be correlated to a currency or
currencies in which some or all of the Fund's portfolio securities are or are
expected to be denominated, in exchange for U.S. dollars. The amount of the
commitment or option would not exceed the value of the Fund's securities
denominated in correlated currencies. For example, if the Sub-Advisor considers
that the Austrian schilling is correlated to the German deutschemark (the
"D-mark"), the Fund holds securities denominated in schillings and the
Sub-Advisor believes that the value of the schillings will decline against the
U.S. dollar, the Sub-Advisor may enter into a commitment or option to sell
D-marks and buy dollars. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to a Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, there is the risk that the perceived correlation between various
currencies may not be present or may not be present during the particular time
that the Fund is engaging in proxy hedging. If a Fund enters into a currency
hedging transaction, the Fund will comply with the asset segregation
requirements. Under such requirements, the Fund will segregate liquid, high
grade assets with the custodian to the extent the Fund's obligations are not
otherwise "covered" through ownership of the underlying currency.
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Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
VI. Other Matters
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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The Munder Framlington Funds Trust
STATEMENTS OF ASSETS AND LIABILITIES
December 18, 1996
<TABLE>
<CAPTION>
Framlington Framlington
International Emerging Framlington
Growth Markets Healthcare
Fund Fund Fund
<S> <C> <C> <C>
ASSETS:
Cash $33,330 $33,330 $33,340
Deferred organizational 24,999 24,999 25,002
costs (Note 1)
Total Assets 58,329 58,329 58,342
LIABILITIES:
Accrued organizational 24,999 24,999 25,002
costs (Note 1)
NET ASSETS $33,330 $33,330 $33,340
------- ------- -------
SHARES OF BENEFICIAL
INTEREST OUTSTANDING 3,333 3,333 3,334
CLASS Y SHARES:
Net Asset Value,
offering and redemption
price per share of
beneficial interest
outstanding: $ 10.00 $ 10.00 $ 10.00
------- ------- -------
(See Notes to statements
of assets and liabilities)
</TABLE>
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The Munder Framlington Funds Trust
NOTES TO STATEMENTS OF ASSETS AND LIABILITIES
December 18, 1996
1. The Munder Framlington Funds Trust (the "Trust") was organized as a
Massachusetts business trust on October 30, 1996, and is registered under the
Investment Company Act of 1940, as amended, as an open-end management investment
company. The Trust offers three funds: Framlington International Growth Fund,
Framlington Emerging Markets Fund and Framlington Healthcare Fund (individually,
a "Fund", collectively the "Funds"). The investment objective of the Funds is to
provide shareholders with long-term capital appreciation. The preparation of
financial statements in accordance with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts and disclosures in the financial statements. Actual results could differ
from those estimates. The Trust has had no operations other than organizational
matters and the issuance and sale of initial shares of each of the Funds to
Funds Distributor, Inc. ("FDI").
Costs incurred by the Trust and the Funds in connection with their
organization will be deferred and amortized on a straight line basis over a
period not to exceed sixty months from the date upon which each Fund commences
its investment operations. If any of the initial shares are redeemed during the
amortization period by any holder thereof, the redemption proceeds will be
reduced by a pro rata portion of the then unamortized organization costs.
Expenses: General expenses of the Trust are allocated to the respective
Fund based upon relative net assets. Operating expenses directly attributable to
a Fund are charged to that Fund's operations.
2. AGREEMENTS AND TRANSACTIONS WITH AFFILIATES
The Trust has entered into an Investment Advisory Agreement with Munder
Capital Management, Inc. (the "Advisor"). For the investment advisory services
provided and expenses assumed with regard to the Framlington International
Growth Fund and Framlington Healthcare Fund, the Advisor has agreed to a fee,
computed daily and payable monthly, at an annual rate of 1.00% of each Fund's
average daily net assets up to $250 million, reduced to 0.75% of each Fund's
average daily net assets in excess of $250 million. For the investment advisory
services provided and expenses assumed with regard to the Framlington Emerging
Markets Fund, the Advisor has agreed to a fee,
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<PAGE>
computed daily and payable monthly, at an annual rate of 1.25% of the
Fund's average daily net assets.
Pursuant to a sub-advisory agreement with the Advisor, Framlington Overseas
Investment Management Limited (the "Sub- Advisor") provides sub-advisory
services to the Funds. For its services with regard to the International Growth
Fund and the Healthcare Fund, the Advisor pays the Sub-Advisor a monthly fee on
an annual basis up to 0.50% of each Fund's average daily net assets up to $250
million, reduced to 0.375% of each Fund's average daily net assets in excess of
$250 million. For its services with regard to the Emerging Markets Fund, the
Advisor pays the Sub-Advisor a monthly fee equal on an annual basis up to 0.625%
of the Fund's average daily net assets. The Sub-Advisor is a subsidiary of
Framlington Group plc, which is a wholly owned subsidiary of Framlington
Holdings Limited which is, in turn, owned 49% by the Advisor and 51% by Credit
Commercial de France S.A.
FDI serves as the distributor of each Fund. First Data Investor Services
Group, Inc. ("First Data"), a wholly-owned subsidiary of First Data Corporation,
serves as the administrator and transfer agent of each Fund.
Comerica Bank (the "Custodian"), provides custodial services to the Funds.
As compensation for its services, the Custodian is entitled to receive fees,
based on the aggregate average daily net assets of the Funds and certain other
investment portfolios that are advised by Munder, for which the custodian
provides services, computed daily and payable monthly at an annual rate of 0.03%
of the first $100 million of average daily net assets, 0.02% of the next $500
million of net assets and 0.01% of net assets in excess of $600 million. The
Custodian also receives certain transaction based fees.
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Report of Ernst & Young LLP, Independent Auditors
To the Board of Trustees of
The Munder Framlington Funds Trust
We have audited the accompanying statements of assets and liabilities of
The Munder Framlington Funds Trust (the "Trust")(comprising, respectively, the
Framlington International Growth Fund, Framlington Emerging Markets Fund, and
Framlington Healthcare Fund (collectively, the "Funds"), as of December 18,
1996. These statements of assets and liabilities are the responsibility of the
Trust's management. Our responsibility is to express an opinion on these
statements of assets and liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of assets and liabilities is
free of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the statements of assets and
liabilities. An audit includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statements of assets and liabilities referred to above
present fairly, in all material respects, the financial position of each of the
respective Funds constituting the Munder Framlington Funds Trust at December 18,
1996 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Boston, Massachusetts
December 18, 1996
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