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Munder Balanced Fund Munder Framlington Healthcare Fund
Munder Equity Selection Fund Munder Framlington International Growth Fund
Munder Growth Opportunities Fund Munder Bond Fund
Munder Index 500 Fund Munder Intermediate Bond Fund
Munder Growth & Income Fund Munder International Bond Fund
Munder International Equity Fund Munder Short Term Treasury Fund
Munder Micro-Cap Equity Fund Munder U.S. Government Income Fund
Munder Multi-Season Growth Fund Munder Michigan Tax-Free Bond Fund
Munder Real Estate Equity Investment Fund (formerly Munder Michigan Triple Tax-Free Bond Fund)
Munder Small-Cap Value Fund Munder Tax-Free Bond Fund
Munder Small Company Growth Fund Munder Tax-Free Intermediate Bond Fund
Munder Value Fund Munder Cash Investment Fund
Munder NetNet Fund Munder Money Market Fund
Munder Framlington Emerging Markets Fund Munder Tax-Free Money Market Fund
Munder Framlington Global Financial Services Fund Munder U.S. Treasury Money Market Fund
</TABLE>
(collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information, which has been filed with the
Securities and Exchange Commission (the "SEC"), provides supplementary
information pertaining to all classes of shares representing interests in each
of the investment portfolios listed above. The Munder Funds, Inc. (the
"Company") currently offers a selection of fifteen investment portfolios, eleven
of which are described in this Statement of Additional Information; The Munder
Funds Trust (the "Trust") currently offers a selection of fifteen investment
portfolios, fourteen of which are described in this Statement of Additional
Information; and The Munder Framlington Funds Trust ("Framlington") currently
offers a selection of four investment portfolios, each of which is described in
this Statement of Additional Information. This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Company's, the Trust's, and Framlington's Prospectuses dated October 27, 1998.
A copy of each Prospectus may be obtained through Funds Distributor, Inc. (the
"Distributor"), or by calling (800) 438-5789. This Statement of Additional
Information is dated October 27, 1998.
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. An
investment in the Funds involves investment risks, including the possible loss
of principal.
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TABLE OF CONTENTS
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General................................................................. 3
Fund Investments........................................................ 4
Risk Factors and Special Considerations -- Index 500 Fund............... 20
Risk Factors and Special Considerations -- Michigan Tax-Free Bond Fund
and Tax-Free Intermediate Bond Fund..................................... 21
Investment Limitations.................................................. 24
Trustees, Directors and Officers........................................ 29
Investment Advisory and Other Service Arrangements...................... 33
Portfolio Transactions.................................................. 48
Additional Purchase and Redemption Information.......................... 51
Net Asset Value......................................................... 53
Performance Information................................................. 54
Taxes................................................................... 62
Additional Information Concerning Shares................................ 69
Miscellaneous........................................................... 70
Registration Statement.................................................. 91
Financial Statements.................................................... 91
Appendix A.............................................................. A-1
Appendix B.............................................................. B-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
each Prospectus in connection with the offering made by each Prospectus 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.
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GENERAL
The following Funds are described in this Statement of Additional Information:
The Munder Funds Trust
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Munder Balanced Fund ("Balanced Fund")
Munder Growth & Income Fund ("Growth & Income Fund")
Munder Index 500 Fund ("Index 500 Fund")
Munder International Equity Fund ("International Equity Fund")
Munder Small Company Growth Fund ("Small Company Growth Fund")
Munder Bond Fund ("Bond Fund")
Munder Intermediate Bond Fund ("Intermediate Bond Fund")
Munder U.S. Government Income Fund ("U.S. Income Fund")
Munder Michigan Tax-Free Bond Fund ("Michigan Bond Fund")
Munder Tax-Free Bond Fund ("Tax-Free Bond Fund")
Munder Tax-Free Intermediate Bond Fund ("Tax-Free Intermediate Bond Fund")
Munder Cash Investment Fund ("Cash Investment Fund")
Munder Tax-Free Money Market Fund ("Tax-Free Money Market Fund")
Munder U.S. Treasury Money Market Fund ("U.S. Treasury Money Market Fund")
The Munder Funds, Inc.
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Munder Equity Selection Fund ("Equity Selection Fund")
Munder Growth Opportunities Fund ("Growth Opportunities Fund")
Munder Micro-Cap Equity Fund ("Micro-Cap Fund")
Munder Multi-Season Growth Fund ("Multi-Season Fund")
Munder NetNet Fund ("NetNet Fund")
Munder Real Estate Equity Investment Fund ("Real Estate Fund")
Munder Small-Cap Value Fund ("Small-Cap Value Fund")
Munder Value Fund ("Value Fund")
Munder International Bond Fund ("International Bond Fund")
Munder Short Term Treasury Fund ("Short Term Treasury Fund")
Munder Money Market Fund ("Money Market Fund")
The Munder Framlington Funds Trust
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Munder Framlington Emerging Markets Fund ("Emerging Markets Fund")
Munder Framlington Global Financial Services Fund ("Global Financial Services
Fund")
Munder Framlington Healthcare Fund ("Healthcare Fund")
Munder Framlington International Growth Fund ("International Growth Fund")
The Trust was organized on August 30, 1989 under the name "PDB Fund," which
was changed in November 1989 to "Opportunity Funds," in February 1990 to
"Ambassador Funds" and in June 1995 to "The Munder Funds Trust." The Tax-Free
Intermediate Bond Fund originally commenced operations on February 9, 1987 as a
separate portfolio of the St. Clair Tax-Free Fund, Inc. On November 20, 1992,
the St. Clair Tax-Free Intermediate Bond Fund was reorganized as the Ambassador
Tax-Free Intermediate Bond Fund. The Company was organized as a Maryland
corporation on November 18, 1992. Framlington was organized as a Massachusetts
business trust on October 30, 1996.
As stated in each Prospectus, the investment advisor of each Fund is Munder
Capital Management (the "Advisor"). The principal partners of the Advisor are
Old MCM, Inc. ("MCM"), Munder Group LLC, WAM Holdings, Inc. ("WAM") and WAM
Holdings II, Inc. ("WAM II"). MCM was founded in April 1985 as a Delaware
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corporation and was a registered investment advisor. WAM and WAM II are
indirect, wholly-owned subsidiaries of Comerica Incorporated which owns or
controls approximately 88% of the partnership interests in the Advisor.
Framlington Overseas Investment Management Limited (the "Sub-Advisor")
serves as sub-advisor for the Framlington Funds. The Sub-Advisor is a
subsidiary of Framlington Group Limited, incorporated in England and Wales
which, through its subsidiaries, provides a wide range of investment services.
Framlington Group Limited 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.
Capitalized terms used in this Statement of Additional Information and not
otherwise defined have the same meanings as are given to them in each
Prospectus.
FUND INVESTMENTS
The following supplements the information contained in each Prospectus
concerning the investment objectives and policies of the Funds. With the
exception of the investment objectives of Multi-Season Fund, Real Estate Fund
and Money Market Fund, 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. The Tax-Free Bond Fund and Tax-Free Money
Market Fund each have a fundamental policy to invest at least 80% of its
respective assets in municipal obligations bearing tax-exempt interest; all
other investment policies, other than those specifically designated as
fundamental, are non-fundamental policies and may be changed without the
authorization of the holders of a majority of a Fund's outstanding shares.
There can be no assurance that a Fund will achieve its objective. A description
of applicable credit ratings is set forth in Appendix A to this Statement of
Additional Information. For purposes of this Statement of Additional
Information, the Equity Selection Fund, Global Financial Services Fund, Growth &
Income Fund, Growth Opportunities Fund, Index 500 Fund, International Equity
Fund, Micro-Cap Fund, Multi-Season Fund, NetNet Fund, Real Estate Fund, Small-
Cap Value Fund, Small Company Growth Fund, Value Fund, International Growth
Fund, Emerging Markets Fund and Healthcare Fund are referred to as the "Equity
Funds"; the Bond Fund, Intermediate Bond Fund and U.S. Income Fund are referred
to as the "Bond Funds"; the Michigan Bond Fund, Tax-Free Bond Fund and Tax-Free
Intermediate Bond Fund are referred to as the "Tax-Free Bond Funds" and Cash
Investment Fund, Money Market Fund, Tax-Free Money Fund and U.S. Treasury Money
Market Fund are referred to as the "Money Market Funds."
BORROWING. Each of the Funds 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 are 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 the Funds 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, the Funds may be required to sell some of their
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. Borrowed funds are subject to
interest costs that may or may not be offset by amounts earned on the borrowed
funds. A Fund may also be required to maintain minimum average balances 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. Each Fund may, in connection with
permissible borrowings, transfer as collateral securities owned by the Fund.
FOREIGN SECURITIES. Each Equity Fund (except Global Financial Services
Fund, Real Estate Fund, International Equity Fund, International Growth Fund,
Emerging Markets Fund and Healthcare Fund), each Bond Fund, each Tax-Free Bond
Fund, the Balanced Fund, the Cash Investment Fund and the Money Market Fund may
invest up to 25% of its assets in foreign securities. Under normal market
conditions, the International Equity Fund, International Bond Fund and
International Growth Fund will each invest at least 65% of its assets in
securities of issuers located in at least three countries other than the United
States. The Global Financial Services Fund will invest at least 65% of its
assets in securities of issuers located in at least three countries, one of
which may be the United States. The Emerging Markets Fund will invest at least
65% of its assets in emerging market countries. There is no limit on the
Healthcare Fund's investments in foreign securities. The Multi-Season Fund and
NetNet
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Fund typically will only purchase foreign securities which are represented by
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
institutions issuing ADRs may not be sponsored by the issuer. A non-sponsored
depositary may not provide the same shareholder information that a sponsored
depositary is required to provide under its contractual arrangements with the
issuer.
The International Bond Fund will primarily invest in foreign debt
obligations denominated in foreign currencies, including the European Currency
Unit ("ECU"), which are issued by foreign governments and governmental agencies,
instrumentalities or political subdivisions; debt securities issued or
guaranteed by supranational organizations (as defined below); corporate debt
securities; bank or bank holding company debt securities and other debt
securities including those convertible into foreign stock. For the purposes of
the 65% minimum with respect to the International Bond Fund's designation as an
international bond fund, the securities described in this paragraph are
considered "international bonds."
Income and gains on foreign 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. Such concerns are particularly heightened
for emerging markets and Eastern European countries.
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 a
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 Eastern European countries expropriated large amounts
of private 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 a Fund.
The Advisor (Sub-Advisor with respect to the Framlington Funds) 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 the 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 the Fund from transferring cash out of the country
or
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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.
Foreign securities markets have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
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 Advisor (Sub-Advisor with respect to the
Framlington Fund), 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 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 Equity Funds (excluding the Real Estate Fund), the
Balanced Fund, the Bond Funds and the International Bond Fund are authorized to
enter into forward foreign currency exchange contracts ("forward currency
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 a Fund to establish a rate of currency
exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, a
Fund may enter into a forward 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 Advisor (Sub-Advisor with respect to the Framlington Funds)
anticipates that a particular foreign currency may decline substantially
relative to the U.S. dollar or other leading currencies, in order to reduce
risk, a Fund may enter into a forward contract to sell, for a fixed amount, the
amount of foreign currency approximating the value of some or all of the Fund's
securities denominated in such foreign currency. Similarly, when the
obligations held by a Fund create a short position in a foreign currency, the
Fund 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
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
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currency, they also limit potential gains which might result from changes in the
value of such currency. A Fund will also incur costs in connection with forward
currency contracts and conversions of foreign currencies and U.S. dollars.
Cash or liquid securities equal to the amount of a Fund's assets that could
be required to consummate forward contracts will be designated on the records of
the Fund or the Funds' sub-custodian except to the extent the contracts are
otherwise "covered." For the purpose of determining the adequacy of the
designated securities, the designated 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 designated daily so that the value of the designated
securities will equal the amount of such commitments by the Fund. 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 Fund's price to sell the currency. A forward
contract to buy a foreign currency is "covered" if a 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 Equity Funds, the Balanced
Fund, the Bond Funds, the Tax-Free Bond Funds and the International Bond Fund
may purchase and sell futures contracts on interest-bearing 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 Appendix B to this Statement of Additional Information.
ILLIQUID SECURITIES. The Equity Funds, Balanced Fund, Tax-Free Bond Funds,
International Bond Fund and the Bond Funds may invest up to 15%, and each of the
Money Market Funds may invest up to 10%, of the value of its net assets
(determined at time of acquisition) in securities that are illiquid. Illiquid
securities would generally include securities for which there is a limited
trading market, repurchase agreements and time deposits with notice/termination
dates in excess of seven days, and certain securities that are subject to
trading restrictions because they are not registered under the Securities Act of
1933, as amended (the "Act"). If, after the time of acquisition, events cause
this limit to be exceeded, the Fund will take steps to reduce the aggregate
amount of illiquid securities as soon as reasonably practicable in accordance
with the policies of the SEC.
Each Fund (except U.S. Treasury Money Market Fund and Short Term Treasury
Fund) may invest in commercial obligations issued in reliance on the "private
placement" exemption from registration afforded by Section 4(2) of the Act
("Section 4(2) paper"). A Fund may also purchase securities that are not
registered under the Act, but which can be sold to qualified institutional
buyers in accordance with Rule 144A under the Act, ("Rule 144A securities").
Section 4(2) paper is restricted as to disposition under the Federal securities
laws, and generally is sold to institutional investors who agree that they are
purchasing the paper for investment and not with a view to public distribution.
Any resale by the purchaser must be in an exempt transaction. Section 4(2)
paper normally is resold to other institutional investors through or with the
assistance of the issuer or investment dealers which make a market in the
Section 4(2) paper, thus providing liquidity. Rule 144A securities generally
must be sold only to other qualified institutional buyers. If a particular
investment in Section 4(2) paper or Rule 144A securities is not determined to be
liquid, that investment will be included within the Fund's limitation on
investment in illiquid securities. The Advisor will determine the liquidity of
such investments pursuant to guidelines established by the Boards of
Directors/Trustees. It is possible that unregistered securities purchased by
the Fund in reliance upon Rule 144A could have the effect of increasing the
level of the Fund's illiquidity to the extent that qualified institutional
buyers become, for a period, uninterested in purchasing these securities.
INTEREST RATE SWAP TRANSACTIONS. Each of the Bond Funds and the
International Bond Fund may enter into interest rate swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Funds than if the Funds had invested directly in an instrument that yielded
that desired return. Interest rate swap transactions involve the exchange by a
Fund with another party of its commitments to pay or receive interest, such as
an exchange of fixed rate payments for floating rate payments. Typically, the
parties with which the Funds will enter into interest rate swap transactions
will be brokers, dealers or other financial institutions known as
"counterparties." Certain Federal income tax requirements may, however, limit
the Funds' ability to engage in
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certain interest rate transactions. Gains from transaction in interest rate
swaps distributed to shareholders of the Funds will be taxable as ordinary
income or, in certain circumstances, as long-term capital gains to the
shareholders.
Each of the Funds' obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). Each of the Funds' obligations under a swap
agreement will be accrued daily (offset against any amounts owed to the Fund).
Accrued but unpaid net amounts owed to a swap counterparty will be covered by
earmarking cash, U.S. Government securities or other high-grade liquid
securities on the books of the Fund or the Fund's sub-custodian, to avoid any
potential leveraging of a Fund's portfolio.
The Funds will not enter into any interest rate swap transaction unless the
credit quality of the unsecured senior debt or the claims-paying ability of the
other party to the transaction is rated in one of the highest four rating
categories by at least one nationally-recognized statistical rating organization
("NRSRO") or is believed by the Advisor to be equivalent to that rating. If the
other party to a transaction defaults, the Funds will have contractual remedies
pursuant to the agreements related to the transactions.
The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Advisor is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of each of the Funds would be lower than it would have
been if interest rate swaps were not used. The swaps market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and as agents utilizing standardized
swap documentation. As a result, the swaps market has become relatively liquid
in comparison with other similar instruments traded in the interbank market.
The swaps market is a relatively new market and is largely unregulated. It is
possible that developments in the swaps market, including potential government
regulation, could adversely affect the Funds' ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
INVESTMENT COMPANY SECURITIES. Each of the Funds (other than the Short
Term Treasury Fund) 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 each Fund
bears directly in connection with its own operations. Each Fund currently
intends to limit its 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 the 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 the
Fund.
LENDING OF PORTFOLIO SECURITIES. To enhance the return on its portfolio,
each of the Funds may lend securities in its portfolio (subject to a limit of
25% of each Fund's, other than the Money Market Fund's, total assets; and
33 1/3% of the Money Market Fund's total assets) to securities firms and
financial institutions, provided that each loan is secured continuously by
collateral 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 Funds will receive any interest or dividends
paid on the loaned securities. In addition, it is anticipated that a 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 the Funds will lend
securities, the Advisor (Sub-Advisor with respect to the Framlington Funds) will
consider all relevant facts and circumstances. The Funds will only enter into
loan arrangements with broker-dealers, banks or other institutions which the
Advisor (Sub-Advisor with respect to the Framlington Funds) has determined are
creditworthy under guidelines established by the Boards of Directors/Trustees.
LOWER-RATED DEBT SECURITIES. It is expected that each Fund (other than the
Money Market Funds, Index 500 Fund and Growth & Income Fund) will invest not
more than 5% of its total assets in securities that are rated
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below investment grade by Standard & Poor's Rating Service, a division of
McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investors Service, Inc.
("Moody's"), or in comparable unrated securities. The Growth & Income Fund may
invest up to 20% of the value of its total assets in such securities. The Money
Market Funds and the Index 500 Fund may not invest in such securities. Such
securities are also known as junk bonds. The yields on lower-rated debt and
comparable unrated securities generally are higher than the yields available on
higher-rated securities. However, investments in lower-rated debt and comparable
unrated securities generally involve greater volatility of price and risk of
loss of income and principal, including the possibility of default by or
bankruptcy of the issuers of such securities. Lower-rated debt and comparable
unrated securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in each Fund's portfolio, with a commensurate
effect on the value of each of the Fund's shares. Therefore, an investment in
the Funds should not be considered as a complete investment program and may not
be appropriate for all investors.
While the market values of lower-rated debt and comparable unrated
securities tend to react more to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower-rated debt securities and
comparable unrated securities generally present a higher degree of credit risk.
Issuers of lower-rated debt and comparable unrated securities often are highly
leveraged and may not have more traditional methods of financing available to
them so that their ability to service their debt obligations during an economic
downturn or during sustained periods of rising interest rates may be impaired.
The risk of loss due to default by such issuers is significantly greater because
lower-rated debt and comparable unrated securities generally are unsecured and
frequently are subordinated to the prior payment of senior indebtedness. The
Funds may incur additional expenses to the extent that they are required to seek
recovery upon a default in the payment of principal or interest on their
portfolio holdings. The existence of limited markets for lower-rated debt and
comparable unrated securities may diminish each of the Fund's ability to (a)
obtain accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (b) sell the securities at fair value either
to meet redemption requests or to respond to changes in the economy or in
financial markets.
Lower-rated debt securities and comparable unrated securities may have call
or buy-back features that permit their issuers to call or repurchase the
securities from their holders. If an issuer exercises these rights during
periods of declining interest rates, the Funds may have to replace the security
with a lower yielding security, thus resulting in a decreased return to the
Funds. A description of applicable credit ratings is set forth in Appendix A of
this Statement of Additional Information.
MONEY MARKET INSTRUMENTS. As described in the Prospectuses, each of the
Funds (except the Short Term Treasury Fund) may invest from time to time in
"money market instruments," a term that includes, among other things, bank
obligations, commercial paper, variable amount master demand notes and corporate
bonds with remaining maturities of 397 days or less.
Bank obligations include bankers' acceptances, negotiable certificates of
deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in obligations of foreign
banks or foreign branches of U.S. banks only where the Advisor (Sub-Advisor with
respect to the Framlington Funds) deems the instrument to present minimal credit
risks, such investments may nevertheless entail risks that are different from
those of investments in domestic obligations of U.S. banks due to differences in
political, regulatory and economic systems and conditions. All investments in
bank obligations are limited to the obligations of financial institutions having
more than $1 billion in total assets at the time of purchase.
Investments by a Fund in commercial paper will consist of issues rated at
the time of purchase A-1 and/or P-1 by S&P or Moody's. In addition, the Funds
may acquire unrated commercial paper and corporate bonds that
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are determined by the Advisor (Sub-Advisor with respect to the Framlington
Funds) at the time of purchase to be of comparable quality to rated instruments
that may be acquired by such Fund as previously described.
The Funds may also purchase variable amount master demand notes which are
unsecured instruments that permit the indebtedness thereunder to vary and
provide for periodic adjustments in the interest rate. Although the notes are
not normally traded and there may be no secondary market in the notes, a Fund
may demand payment of the principal of the instrument at any time. The notes
are not typically rated by credit rating agencies, but issuers of variable
amount master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, a Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Funds invest in
variable amount master notes only when the Advisor (Sub-Advisor with respect to
the Framlington Funds) deems the investment to involve minimal credit risk.
MORTGAGE-RELATED SECURITIES. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue. Mortgage-
related securities guaranteed by the Government National Mortgage Association
("GNMA") include GNMA Mortgage Pass-Through Certificates (also known as "Ginnie
Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the U.S. Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Banks
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal at any time after default on an underlying mortgage, but in no
event later than one year after it becomes payable.
MUNICIPAL OBLIGATIONS. Opinions relating to the validity of municipal
obligations and to the exemption of interest thereon from regular Federal income
tax are rendered by bond counsel or counsel to the respective issuers at the
time of issuance. Neither the Trust nor the Advisor will review the proceedings
relating to the issuance of municipal obligations or the bases for such
opinions.
An issuer's obligations under its municipal obligations are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the
payment of interest on and principal of its municipal obligations may be
materially adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of
1986 interest on certain private activity bonds must be included in an
investor's Federal alternative minimum taxable income, and corporate investors
must include all tax-exempt interest in their Federal alternative minimum
taxable income. The Trust cannot predict what legislation, if any, may be
proposed in Congress in the future as regards the Federal income tax status of
interest on municipal obligations in general, or which proposals, if
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any, might be enacted. Such proposals, if enacted, might materially adversely
affect the availability of municipal obligations for investment by the Tax-Free
Bond Funds and the Tax-Free Money Market Fund and the liquidity and value of
such Funds. In such an event the Board of Trustees would reevaluate the Fund's
investment objective and policies and consider changes in its structure or
possible dissolution.
The Cash Investment Fund and the Money Market Fund each may, when deemed
appropriate by the Advisor in light of the Fund's investment objective, invest
in high quality municipal obligations issued by state and local governmental
issuers, the interest on which may be taxable or tax-exempt for Federal income
tax purposes, provided that such obligations carry yields that are competitive
with those of other types of money market instruments of comparable quality.
The Cash Investment Fund and the Money Market Fund each do not expect to invest
more than 5% of its net assets in such municipal obligations during the current
fiscal year.
NON-DOMESTIC BANK OBLIGATIONS. Non-domestic bank obligations include
Eurodollar Certificates of Deposit ("ECDs"), which are U.S. dollar-denominated
certificates of deposit issued by offices of foreign and domestic banks located
outside the United States; Eurodollar Time Deposits ("ETDs"), which are U.S.
dollar-denominated deposits in a foreign branch of a U.S. bank or a foreign
bank; Canadian Time Deposits ("CTDs"), which are essentially the same as ETDs
except they are issued by Canadian offices of major Canadian banks; Schedule Bs,
which are obligations issued by Canadian branches of foreign or domestic banks;
Yankee Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers' Acceptances ("Yankee BAs"), which are
U.S. dollar denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the United States.
OPTIONS. Each of the Equity Funds, Balanced Fund, Bond Funds,
International Bond Fund and Tax-Free Bond Funds (other than Tax-Free
Intermediate Bond Fund) may write covered call options, buy put options, buy
call options and write secured put options. 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. For risks associated with options on foreign currencies,
see Appendix B to this Statement of Additional Information.
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer of the option 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, and the writer of the option the obligation to buy,
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 wishes 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 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 the transaction. 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 Funds 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 Funds 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 a 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.
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The Funds may write options in connection with buy-and-write transactions;
that is, the Funds may purchase a security and then write a call option against
that security. The exercise price of the call the Funds determine 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 maximum gain to the relevant Fund 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.
In the case of a call option on a security, the option is "covered" if a
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or liquid securities in such
amount as are earmarked on the books of the Fund or the Fund's sub-custodian)
upon conversion or exchange of other securities held by it. For a call option
on an index, the option is covered if a Fund maintains with its sub-custodian
cash or liquid securities equal to the contract value. A call option is also
covered if a 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 in cash or liquid securities is
earmarked on the books of the Fund or the Fund's sub-custodian. A Fund will
limit its investment in uncovered call options purchased or written by the Fund
to 33 1/3% of the Fund's total assets. A Fund will write put options only if
they are "secured" by cash or liquid securities earmarked on the books of the
Fund or the Fund's sub-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 relevant 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.
The Funds may purchase put options to hedge against a decline in the value
of their portfolios. By using put options in this way, a 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. The Funds may
purchase call options to hedge against an increase in the price of securities
that they anticipate purchasing in the future. The premium paid for the call
option plus any transaction costs will reduce the benefit, if any, realized by a
Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Fund.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When the 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 the Fund expires unexercised the Fund
realizes a loss equal to the premium paid. If the 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 the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit
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related to such option will be eliminated. If an option written by the 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 earmarked securities (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
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading volume; or one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options that had been issued by the
Options Clearing Corporation as a result of trades on that Exchange would
continue to be exercisable in accordance with their terms.
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 the issuing country's economy.
REAL ESTATE SECURITIES. The Real Estate Fund may invest without limit in
shares of real estate investment trusts ("REITs"). The Equity Funds and the
Balanced Fund may also invest in REITs. REITs pool investors' funds for
investment primarily in income producing real estate or real estate loans or
interests. A REIT is not taxed on income distributed to shareholders if it
complies with several requirements relating to its organization, ownership,
assets, and income and a requirement that it distribute to its shareholders at
least 95% of it taxable income (other than net capital gains) for each taxable
year. REITs can generally be classified as Equity REITs, Mortgage REITs and
Hybrid REITs. Equity REITs, which invest the majority of their assets directly
in real property, derive their income primarily from rents. Equity REITs can
also realize capital gains by selling properties that have appreciated in value.
Mortgage REITs, which invest the majority of their assets in real estate
mortgages, derive their income primarily from interest payments. Hybrid REITs
combine the characteristics of both Equity REITs and Mortgage REITs. The Funds
will not invest in real estate directly, but only in securities issued by real
estate companies. However, the Funds may be subject to risks similar to those
associated with the direct ownership of real estate (in addition to securities
markets risks) because of its policy of concentration in the securities of
companies in the real estate industry. These include declines in the value of
real estate, risks related to general and local economic
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conditions, dependency on management skill, heavy cash flow dependency, possible
lack of availability of mortgage funds, overbuilding, extended vacancies of
properties, increased competition, increases in property taxes and operating
expenses, changes in zoning laws, losses due to costs resulting from the clean-
up of environmental problems, liability to third parties for damages resulting
from environmental problems, casualty or condemnation losses, limitations on
rents, changes in neighborhood values, the appeal of properties to tenants and
changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in the
value of the underlying property owned by the trusts, while Mortgage REITs may
be affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the beneficial tax treatment available
to REITs under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"), or to maintain their exemptions from registration under the 1940
Act. The above factors may also adversely affect a borrower's or a lessee's
ability to meet its obligations to the REIT. In the event of a default by a
borrower or lessee, the REIT may experience delays in enforcing its rights as a
mortgagee or lessor and may incur substantial costs associated with protecting
investments.
REPURCHASE AGREEMENTS. Each of the Funds 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 the securities at an agreed-upon time and price ("repurchase
agreements"). The Short Term Treasury Fund will only invest in repurchase
agreements fully collateralized by U.S. Treasury securities. The Advisor (Sub-
Advisor with respect to the Framlington Funds) will review and continuously
monitor the creditworthiness of the seller under a repurchase agreement, and
will require the seller to maintain collateral 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. With respect to
the Money Market Funds, the securities held subject to a repurchase agreement
may have stated maturities exceeding thirteen months, provided the repurchase
agreement itself matures in 397 days or less.
The repurchase price under repurchase agreements 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, as applicable, by
the Trust's, Framlington's or the Company'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.
REVERSE REPURCHASE AGREEMENTS. Each Fund (except the Tax-Free Money Market
Fund, Tax-Free Bond Funds and Short Term Treasury 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, a Fund will maintain cash, U.S.
Government securities or other liquid securities designated on the books of the
Fund or the Fund's sub-custodian in an amount at least equal to the market value
of the securities, plus accrued interest, subject to the agreement.
RIGHTS AND WARRANTS. As stated in their Prospectuses, the Equity Funds and
the Balanced 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
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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.
SHORT SALES. The Global Financial Services Fund may make short sales of
securities. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline. When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may also sell securities that it owns or has the right to
acquire at no additional cost but does not intend to deliver to the buyer, a
practice known as selling short "against-the-box." The Fund may have to pay a
fee to borrow particular securities and is often obligated to pay over any
payments received on such borrowed securities. The Fund's obligation to replace
the borrowed security will be secured by collateral deposited with the broker-
dealers, usually cash, U.S. Government securities or other highly liquid
securities similar to those borrowed. The Fund will also be required to deposit
similar collateral with its custodian or sub-custodian to the extent necessary
so that the value of both collateral deposits in the aggregate is at all times
equal to as least 100% of the current market value of the security sold short.
Depending on arrangements made with the broker-dealer from which it borrowed the
security regarding payment over any received by the Fund on such security, the
Fund may not received any payments (including interest) on its collateral
deposited with such broker-dealer. The Fund will incur transaction costs,
including interest expenses, in connection with opening, maintaining, and
closing short sales.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain is limited to the price at which it sold the security short; its
potential loss is theoretically unlimited.
STAND-BY COMMITMENTS. The Balanced Fund, Cash Investment Fund, Money
Market Fund, the Tax-Free Bond Funds and Tax-Free Money Market Fund may each
enter into stand-by commitments with respect to municipal obligations held by
it. Under a stand-by commitment, a dealer agrees to purchase at the Fund's
option a specified municipal obligation at its amortized cost value to the Fund
plus accrued interest, if any. Stand-by commitments may be exercisable by a
Fund at any time before the maturity of the underlying municipal obligations and
may be sold, transferred or assigned only with the instruments involved.
The Trust expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for municipal obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by a Fund will not exceed 1/2
of 1% of the value of such Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The Funds intend to enter into stand-by commitments only with dealers,
banks and broker/dealers which, in the Advisor's opinion, present minimal credit
risks. The Tax-Free Bond Funds and the Tax-Free Money Market Fund will acquire
stand-by commitments solely to facilitate portfolio liquidity and do not intend
to exercise their rights thereunder for trading purposes. The acquisition of a
stand-by commitment will not affect the valuation of the underlying municipal
obligation. The actual stand-by commitment will be valued at zero in
determining net asset value. Accordingly, where a Fund pays directly or
indirectly for a stand-by commitment, its cost will be reflected as an
unrealized loss for the period during which the commitment is held by such Fund
and will be reflected in realized gain or loss when the commitment is exercised
or expires.
STOCK INDEX FUTURES, OPTIONS ON STOCK AND BOND INDICES AND OPTIONS ON STOCK
AND BOND INDEX FUTURES CONTRACTS. The Equity Funds, the Balanced Fund, the Bond
Funds and the Tax-Free Bond Funds (other than the Tax-Free Intermediate Bond
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. The Tax-Free Intermediate Bond Fund
may purchase and sell bond index futures contracts.
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The International Bond Fund may purchase and sell options on bond index futures
contracts as a hedge against movements in the bond markets.
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 Advisor (Sub-Advisor with respect to the Framlington Funds) 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 the futures contract or index option resulting from the increase in
the index. If, on the other hand, the Advisor or Sub-Advisor, as the case may
be, 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 Funds' 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.
The Equity Funds, the Balanced Fund, the Bond Funds and the Tax-Free Bond
Funds (other than Tax-Free Intermediate Bond Fund) may purchase and write call
and put options on stock index futures contracts and each such Fund and the
International Bond Fund may purchase and write call and put options on bond
index futures contracts. Each such 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, such Funds may purchase put
options or write call options on stock and bond index futures (only bond index
futures in the case of the International Bond Fund), rather than selling futures
contracts, in 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 such Funds intend to purchase.
In connection with transactions in stock or bond index futures, stock or
bond index options and options on stock or bond index futures, the Funds will be
required to deposit as "initial margin" an amount of cash or short-term U.S.
Government securities equal to between 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. No Fund may 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.
STRIPPED SECURITIES. Certain Funds may acquire U.S. Government obligations
and their unmatured interest coupons that have been separated ("stripped") by
their holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The
underlying U.S. Treasury bonds and notes
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themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax and securities purposes.
The Company, the Trust and Framlington are not aware of any binding legislative,
judicial or administrative authority on this issue.
Only instruments which are stripped by the issuing agency will be
considered U.S. Government obligations. Securities such as CATS and TIGRs which
are stripped by their holder do not qualify as U.S. Government obligations.
Within the past several years the U.S. Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments on
U.S. Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the U.S. Treasury
Department is known as "STRIPS" or "Separate Trading of Registered Interest and
Principal of Securities." Under the STRIPS program, a Fund is able to have its
beneficial ownership of zero coupon securities recorded directly in the book-
entry record-keeping system in lieu of having to hold certificates or other
evidences of ownership of the underlying U.S. Treasury securities.
In addition, the Bond Fund, Intermediate Bond Fund, International Bond Fund
and U.S. Government Income Fund may invest in stripped mortgage-backed
securities ("SMBS"), which represent beneficial ownership interests in the
principal distributions and/or the interest distributions on mortgage assets.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. One
type of SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In the most common case, one
class of SMBS will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). SMBS may be issued by FNMA or FHLMC.
The original principal amount, if any, of each SMBS class represents the
amount payable to the holder thereof over the life of such SMBS class from
principal distributions of the underlying mortgage assets, which will be zero in
the case of an IO class. Interest distributions allocable to a class of SMBS,
if any, consist of interest at a specified rate on its principal amount, if any,
or its notional principal amount in the case of an IO class. The notional
principal amount is used solely for purposes of the determination of interest
distributions and certain other rights of holders of such IO class and does not
represent an interest in principal distributions of the mortgage assets.
Yields on SMBS will be extremely sensitive to the prepayment experience on
the underlying mortgage loans, and there are other associated risks. For IO
classes of SMBS and SMBS that were purchased at prices exceeding their principal
amounts there is a risk that a Fund may not fully recover its initial
investment.
The determination of whether a particular government-issued IO or PO backed
by fixed-rate mortgages is liquid may be made under guidelines and standards
established by the Boards of Directors/Trustees. Such securities may be deemed
liquid if they can be disposed of promptly in the ordinary course of business at
a value reasonably close to that used in the calculation of a Fund's net asset
value per share.
SUPRANATIONAL BANK OBLIGATIONS. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade between nations (e.g., The World
Bank). Obligations of supranational banks may be supported by appropriated but
unpaid commitments of their member countries and there is no assurance these
commitments will be undertaken or met in the future.
U.S. GOVERNMENT OBLIGATIONS. The Funds may purchase obligations issued or
guaranteed by the U.S. Government and, except in the case of the U.S. Treasury
Money Market Fund, U.S. Government agencies and instrumentalities. Obligations
of certain agencies and instrumentalities of the U.S. Government, such as those
of
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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 the
Funds include U.S. Treasury Bills, U.S. Treasury Notes and U.S. 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, GNMA, General Services Administration, Student Loan
Marketing Association, Central Bank for Cooperatives, FHLMC, Federal
Intermediate Credit Banks and Maritime Administration.
VARIABLE AND FLOATING RATE INSTRUMENTS. Debt instruments may be structured
to have variable or floating interest rates. Variable and floating rate
obligations purchased by a Fund may have stated maturities in excess of a Fund's
maturity limitation if the Fund can demand payment of the principal of the
instrument at least once during such period on not more than thirty days' notice
(this demand feature is not required if the instrument is guaranteed by the U.S.
Government or an agency thereof). These instruments may include variable amount
master demand notes that permit the indebtedness to vary in addition to
providing for periodic adjustments in the interest rates. The Advisor or Sub-
Advisor, as the case may be, will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instrument is subject to a demand feature, will continuously monitor their
financial ability to meet payment on demand. Where necessary to ensure that a
variable or floating rate instrument is equivalent to the quality standards
applicable to a Fund, the issuer's obligation to pay the principal of the
instrument will be backed by an unconditional bank letter or line of credit,
guarantee or commitment to lend. The Money Market Funds will invest in variable
and floating rate instruments only when the Advisor deems the investment to
involve minimal credit risk.
In determining average weighted portfolio maturity of the Funds, an
instrument will usually be deemed to have a maturity equal to the longer of the
period remaining until the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Variable rate U.S. Government obligations held by the Funds, however, will be
deemed to have maturities equal to the period remaining until the next interest
rate adjustment.
The absence of an active secondary market for certain variable and floating
rate notes could make it difficult to dispose of the instruments, and a Fund
could suffer a loss if the issuer defaulted or during periods that a Fund is not
entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject to
the Fund's limitation on illiquid investments when the Fund may not demand
payment of the principal amount within seven days absent a reliable trading
market.
GUARANTEED INVESTMENT CONTRACTS. The Bond Funds, International Bond Fund,
Cash Investment Fund and Money Market Fund may make limited investments in
guaranteed investment contracts ("GICs") issued by U.S. insurance companies.
Pursuant to such contracts, a Fund makes cash contributions to a deposit fund of
the insurance company's general account. The insurance company then credits to
the Fund on a monthly basis interest which is based on an index (in most cases
this index is expected to be the Salomon Brothers CD Index), but is guaranteed
not to be less than a certain minimum rate. A GIC is normally a general
obligation of the issuing insurance company and not funded by a separate
account. The purchase price paid for a GIC becomes part of the general assets
of the insurance company, and the contract is paid from the company's general
assets. A Fund will only purchase GICs from insurance companies which, at the
time of purchase, have assets of $1 billion or more and meet quality and credit
standards established by the Advisor pursuant to guidelines approved by the
Board of Directors/Trustees. Generally, GICs are not assignable or transferable
without the permission of the issuing insurance companies, and an active
secondary market in GICs does not currently exist. Therefore, GICs will
normally be considered illiquid investments, and will be acquired subject to the
Fund's limitation on illiquid investments.
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WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS (DELAYED-DELIVERY
TRANSACTIONS). When-issued purchases and forward commitments (delayed-delivery
transactions) are commitments by a Fund to purchase or sell particular
securities with payment and delivery to occur at a future date (perhaps one or
two months later). These transactions permit the Fund to lock-in a price or
yield on a security, regardless of future changes in interest rates.
When a Fund agrees to purchase securities on a when-issued or forward
commitment basis, the Fund will earmark cash or liquid portfolio securities
equal to the amount of the commitment. Normally, the Fund will earmark
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to earmark additional assets in order to
ensure that the value of the account remains equal to the amount of the Fund's
commitments. It may be expected that the market value of the Fund's net assets
will fluctuate to a greater degree when it earmarks portfolio securities to
cover such purchase commitments than when it earmarks cash. Because a Fund's
liquidity and ability to manage its portfolio might be affected when it earmarks
cash or portfolio securities to cover such purchase commitments, the Advisor
(Sub-Advisor with respect to the Framlington Funds) expects that its commitments
to purchase when-issued securities and forward commitments will not exceed 25%
of the value of a Fund's total assets absent unusual market conditions.
A Fund will purchase securities on a when-issued or forward commitment
basis only with the intention of completing the transaction and actually
purchasing the securities. If deemed advisable as a matter of investment
strategy, however, a Fund may dispose of or renegotiate a commitment after it is
entered into, and may sell securities it has committed to purchase before those
securities are delivered to the Fund on the settlement date. In these cases the
Fund may realize a taxable capital gain or loss.
When a Fund engages in when-issued and forward commitment transactions, it
relies on the other party to consummate the trade. Failure of such party to do
so may result in the Fund's incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
a Fund starting on the day the Fund agrees to purchase the securities. The Fund
does not earn interest on the securities it has committed to purchase until they
are paid for and delivered on the settlement date.
YIELDS AND RATINGS. The yields on certain obligations, including the money
market instruments in which each Fund may invest (such as commercial paper and
bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of S&P, Moody's, Duff
& Phelps Credit Rating Co., Thomson Bank Watch, Inc., and other NRSROs represent
their respective opinions as to the quality of the obligations they undertake to
rate. Ratings, however, are general and are not absolute standards of quality.
Consequently, obligations with the same rating, maturity and interest rate may
have different market prices.
With respect to each of the Money Market Funds, securities (other than U.S.
Government securities) must be rated (generally, by at least two NRSROs) within
the two highest rating categories assigned to short-term debt securities. In
addition, each of Cash Investment Fund and Money Market Fund will not invest
more than 5% of its total assets in securities rated in the second highest
rating category by such NRSROs and will not invest more than 1% of its total
assets in such securities of any one issuer. Each of Cash Investment Fund,
Money Market Fund and Tax-Free Money Market Fund intends to limit investments in
the securities of any single issuer (other than securities issued or guaranteed
by the U.S. Government, its agencies or instrumentalities) to not more than 5%
of the Fund's total assets at the time of purchase, provided that the Fund may
invest up to 25% of its total assets in the securities of any one issuer rated
in the highest rating category by an NRSRO for a period of up to three business
days. Unrated and certain single rated securities (other than U.S. Government
securities) may be purchased by the Money Market Funds, but are subject to a
determination by the Advisor, in accordance with procedures established by the
Board of Directors/Trustees, that the unrated and single rated securities are of
comparable quality to the appropriate rated securities.
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OTHER. Subsequent to its purchase by a Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors/Trustees or the Advisor (Sub-
Advisor with respect to the Framlington Funds), pursuant to guidelines
established by the Boards, will consider such an event in determining whether
the Fund involved should continue to hold the security in accordance with the
interests of the Fund and applicable regulations of the SEC.
RISK FACTORS AND SPECIAL CONSIDERATIONS -- INDEX 500 FUND
Traditional methods of fund investment management typically involve
relatively frequent changes in a portfolio of securities on the basis of
economic, financial and market analysis. Index funds such as the Index 500 Fund
are not managed in this manner. Instead, with the aid of a computer program,
the Advisor purchases and sells securities for the Fund in an attempt to produce
investment results that substantially duplicate the performance of the common
stocks included in the S&P 500 Composite Stock Price Index ("S&P 500"), taking
into account redemptions, sales of additional Fund shares, and other adjustments
as described below.
The Fund does not expect to hold at any particular time all of the stocks
included in the S&P 500. The Advisor believes, however, that through the
application of capitalization weighing and sector balancing techniques it will
be able to construct and maintain the Fund's investment portfolio so that it
reasonably tracks the performance of the S&P 500. The Advisor will compare the
industry sector diversification of the stocks the Fund would acquire solely on
the basis of their weighted capitalizations with the industry sector
diversification of all issuers included in the S&P 500. This comparison is made
because the Advisor believes that, unless the Fund holds all stocks included in
the S&P 500, the selection of stocks for purchase by the Fund solely on the
basis of their weighted market capitalizations would tend to place heavier
concentration in certain industry sectors that are dominated by the larger
corporations, such as communications, automobile, oil and energy. As a result,
events disproportionately affecting such industries could affect the performance
of the Fund differently than the performance of the S&P 500. Conversely, if
smaller companies were not purchased by the Fund, the representation of
industries included in the S&P 500 that are not dominated by the most heavily
market-capitalized companies would be reduced or eliminated.
For these reasons, the Advisor will identify the sectors which are (or,
except for sector balancing, would be) most underrepresented in the Fund's
portfolio and will purchase balancing securities in these sectors until the
portfolio's sector weightings closely match those of the S&P 500. This process
continues until the portfolio is fully invested (except for cash holdings).
Redemptions of a substantial number of shares of the Fund could reduce the
number of issuers represented in the Fund's investment portfolio, which could,
in turn, adversely affect the accuracy with which the Fund tracks the
performance of the S&P 500.
If an issuer drops in ranking, or is eliminated entirely from the S&P 500,
the Advisor may be required to sell some or all of the common stock of such
issuer then held by the Fund. Sales of portfolio securities may be made at
times when, if the Advisor were not required to effect purchases and sales of
portfolio securities in accordance with the S&P 500, such securities might not
be sold. Such sales may result in lower prices for such securities than may
have been realized or in losses that may not have been incurred if the Advisor
were not required to effect the purchases and sales. The failure of an issuer
to declare or pay dividends, the institution against an issuer of potentially
materially adverse legal proceedings, the existence or threat of defaults
materially and adversely affecting an issuer's future declaration and payment of
dividends, or the existence of other materially adverse credit factors will not
necessarily be the basis for the disposition of portfolio securities, unless
such event causes the issuer to be eliminated entirely from the S&P 500.
However, although the Advisor does not intend to screen securities for
investment by the Fund by traditional methods of financial and market analysis,
the Advisor will monitor the Fund's investment with a view towards removing
stocks of companies which exhibit extreme financial distress or which may impair
for any reason the Fund's ability to achieve its investment objective.
The Fund will invest primarily in the common stocks that constitute the S&P
500 in accordance with their relative capitalization and sector weightings as
described above. It is possible, however, that the Fund will from
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time to time receive, as part of a "spin-off" or other corporate reorganization
of an issuer included in the S&P 500, securities that are themselves outside the
S&P 500. Such securities will be disposed of by the Fund in due course
consistent with the Fund's investment objective.
In addition, the Index 500 Fund may invest in Standard & Poor's Depository
Receipts ("SPDRs"). SPDRs are securities that represent ownership in the SPDR
Trust, a long-term unit investment trust which is intended to provide investment
results that generally correspond to the price and yield performance of the S&P
500. SPDR holders are paid a "Dividend Equivalent Amount" that corresponds to
the amount of cash dividends accruing to the securities in the SPDR Trust, net
of certain fees and expenses charged to the Trust. Because of these fees and
expenses, the dividend yield for SPDRs may be less than that of the S&P 500.
SPDRs are traded on the American Stock Exchange.
The Fund may also purchase put and call options on the S&P 500 and S&P 100
stock indices, which are traded on national securities exchanges. In addition,
the Fund may enter into transactions involving futures contracts (and futures
options) on these two stock indices and may purchase securities of other
investment companies that are structured to seek a similar correlation to the
S&P 500. These transactions are effected in an effort to have fuller exposure
to price movements in the S&P 500 pending investment of purchase orders or while
maintaining liquidity to meet potential shareholder redemptions. Transactions
in option and stock index futures contracts may be desirable to hedge against a
price movement in the S&P 500 at times when the Fund is not fully invested in
stocks that are included in the S&P 500. For example, by purchasing a futures
contract, the Fund may be able to reduce the potential that cash inflows will
disrupt its ability to track the S&P 500, since the futures contracts may serve
as a temporary substitute for stocks which may then be purchased in an orderly
fashion. Similarly, because futures contracts only require a small initial
margin deposit, the Fund may be able, as an effective matter, to be fully
invested in the S&P 500 while keeping a cash reserve to meet potential
redemptions. See Appendix B to this Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS -- MICHIGAN BOND FUND AND
TAX-FREE INTERMEDIATE BOND FUND
The information set forth below is derived in substantial part from the
official statements prepared in connection with the issuance of Michigan
municipal bonds and similar obligations and other sources that are generally
available to investors. The information is provided as general information
intended to give a recent historical description and is not intended to indicate
future or continuing trends in the financial or other positions of the State of
Michigan (the "State"). The Company has not independently verified this
information.
The State's Constitution limits the amount of total State revenues raised
from taxes and other sources. State revenues (excluding federal aid and
revenues for payment of principal and interest on general obligation bonds) in
any fiscal year are limited to a specified percentage of State personal income
in the prior calendar year or average of the prior three calendar years,
whichever is greater. The percentage is based upon the ratio of the 1978-79
fiscal year revenues to total 1977 State personal income. If any fiscal year
revenues exceed the revenue limitation by 1%, the entire amount exceeding the
limitation must be rebated in the following fiscal year's personal income tax or
single business tax. Annual excesses of less than 1% may be transferred into
the State's Budget Stabilization Fund. The State may raise taxes in excess of
the limit in emergency situations.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for
State operating purposes, short and long-term debt for the purpose of making
loans to school districts and long-term debt for voter approved purposes. The
State's Constitution also directs or restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the special revenue funds. General
Fund revenues are obtained approximately 55% from the payment of State taxes and
45% from federal and non-tax revenue sources. Tax revenues credited to the
General Fund include the personal income tax, the single business tax and
approximately 15% of the sales tax collections.
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Expenditures are not permitted by the State Constitution to exceed
available revenues. The State Constitution requires that the Governor, with the
approval of the appropriating committees of the State House and Senate, reduce
expenditures whenever it appears that the actual revenues will be less than the
originally projected revenues upon which the budget was based.
In 1994, a ballot proposal ("Proposal A") to implement extensive property
tax and school finance reform measures was subject to voter approval and in fact
approved on March 15, 1994. Under Proposal A as approved, effective May 1,
1994, the State sales and use tax increased from 4% to 6%, the State income tax
decreased from 4.6% to 4.4%, the cigarette tax increased from $.25 to $.75 per
pack, and an additional tax of 16% of the wholesale price is imposed on certain
other tobacco products. As of January 1, 1995, a 0.75% real estate transfer tax
also became effective. In 1994, a State education property tax of 6 mills was
imposed on all real property and personal property currently subject to the
general property tax. In addition, all school boards can now, with voter
approval, levy up to the lesser of 18 mills or the number of mills levied in
1993 for school operating purposes, on non-homestead property. Proposal A
contained additional provisions regarding the ability of local school districts
to levy taxes as well as a limit on assessment increases for each parcel of
property, beginning in 1995 to the lesser of 5% or the rate of inflation. When
property is subsequently sold, its assessed value is adjusted equal to 50% of
true cash value. Under Proposal A, much of the additional revenue generated by
these taxes is dedicated to the State School Aid Fund.
Proposal A shifts significant portions of the cost of local school
operations from local school districts to the State and raises additional State
revenues to fund these additional State expenses. These additional revenues
will be included within the State's constitutional revenue limitations and may
impact the State's ability to raise additional revenues in the future.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State programs or finances. These lawsuits involve
programs generally in the areas of corrections, highway maintenance, social
services, tax collection, commerce and budgetary reductions to school districts
and governmental units and court funding. Although no opinion is expressed with
respect to the ultimate disposition and consequences of any litigation in
combination with any State Revenue loss, the implementation of any tax reduction
proposal or the failure of the State to realize any budget assumption, the
Attorney General of the State has indicated in a recent official statement
prepared in connection with issuance of general obligation bonds of the State
that, except as listed below, such ultimate dispositions and consequences of any
single proceeding or all legal proceedings should not themselves have a material
adverse effect on the security for such bonds.
On August 22, 1994, the Ingham Circuit and probate courts, together with
the 55th District Court, filed suits in the Court of Claims and Ingham County
Circuit Court against the State of Michigan and Ingham County for declaratory
and injunctive relief, and for damages, due to the alleged failure of the State
Court Administrative Office to properly calculate Ingham County's reimbursement
under the court funding statute. These cases have been dismissed by stipulation
of the parties because the plaintiffs are raising the same claims as members of
a class action captioned as 10th Judicial Circuit, et al v State of Michigan, et
al. Plaintiffs assert that the amount in controversy exceeds $5 million dollars.
The case is currently pending final class certification.
In an order dated June 10, 1997 and a decision rendered July 31, 1997, the
Michigan Supreme Court decided, in the consolidated cases of Durant v State of
Michigan and Schmidt v State of Michigan, that the special education, special
education transportation, bilingual education, driver training and school lunch
programs provided by local school districts are state mandated programs within
the meaning of Michigan Constitution, Article 9, (S) 29 (part of the so-called
Headlee Amendment) and, therefore, the state is obligated to fund these programs
at levels established by the Headlee Amendment. In fashioning a remedy in this
case of first impression under the Headlee Amendment, the Court concluded that,
in future cases, the correct remedy will typically be limited to a declaratory
judgment. However, due to the protracted nature of the Durant and Schmidt
litigation, the Court ruled that money damages, without interest, shall be paid
to the 84 plaintiff school districts for the full amount of the underfunding for
the state mandated programs
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during the 1991-92, 1992-93, and 1993-94 school years. On November 19, 1997, the
Governor signed legislation providing approximately $212 million to the 84
plaintiff school districts to cover the underfunding for those three years. That
payment was made to the 84 plaintiff school districts on April 15, 1998 from the
State's Budget Stabilization Fund. The board of education of each plaintiff
school district is to determine the appropriate distribution of the award
between taxpayer relief and/or use by the district for other public purposes.
The Court has affirmed the award to plaintiffs of their costs including attorney
fees. Approximately 400 other school districts have asserted similar claims. In
companion legislation signed by the Governor on November 19, 1997, the State
will pay each "non-Durant" school district for its underfunded state mandated
program costs for those same three years, if the district agreed, by March 2,
1998, to waive any claim against the State of the same nature as the claims made
by the 84 Durant plaintiffs through September 30, 1997. All "non-Durant" school
districts submitted the statutory waiver by March 2, 1998. It is estimated that
the aggregate payments to the "non-Durant" school districts will, over time,
total $632 million. Those payments, commencing in fiscal year 1998-1999, will be
paid out of the Budget Stabilization Fund and the General Fund, half in annual
payments over 10 years and half in annual payments over 15 years.
On May 14, 1998, more than 100 Michigan school districts and individuals
filed suit in the Michigan Court of Appeals, asserting that the current version
of the state school aid act violates the Headlee Amendment, in much the same
manner as prior versions of the act were ruled unconstitutional by the Michigan
Supreme Court in Durant v State Board of Education, 456 Mich 175 (1977). Durant,
et al. v State, et al. ("Durant II"). The Durant II plaintiffs are claiming
damages of approximately $347 million for the 1997-1998 school year for the
State's alleged underfunding of special education services, special education
transportation, and school lunch programs. The Durant II plaintiffs are also
requesting a declaratory judgment that the current version of the state school
aid act will not provide proper funding levels for future school years. They
also seek attorney fees and costs of the litigation.
The principal sectors of Michigan's diversified economy are the
manufacturing of durable goods (including automobiles and components and office
equipment), tourism and agriculture. The health of the State's economy, and in
particular its durable goods manufacturing industries, is susceptible to a long-
term increase in the cost of energy and energy related products. As reflected in
historical employment figures, the State's economy has lessened its dependence
upon durable goods manufacturing. In 1960, employment in such industry accounted
for 33% of the State's work force. By 1997, this figure had fallen to 14.5%.
Although manufacturing (including auto-related manufacturing) continues to be an
important part of the State's economy, approximately 66% of the civilian labor
force is currently engaged in service related employment.
On October 1, 1997, the State created the Year 2000 Project Office to
provide guidance, coordinate oversight for application software, manage Year
2000 funds, provide monitoring support, quality assurance and other matters. The
State has undertaken an inventory and assessment of all applications and
classified the software, has appropriated funds to carry out the project and
informed State agencies of the need to develop contingent plans for mission-
critical systems. The State's goal is to have all critical applications operable
by December 31, 1998, and all other applications operable by September 30, 1999.
Although the State is currently on schedule to meet its objectives for Year
2000 compliance, the State has not yet achieved Year 2000 compliance. Although
the State has expressed its belief that it will continue to meet the objectives
and time frames set forth above for the Year 2000 Project, there can be no
assurance that such completion will be done in a timely manner or that any other
organization or governmental agency with which the State electronically
interacts, including State vendors and the federal government, will be Year 2000
compliant. In the event of any such occurrences, the State may face material
adverse consequences with respect to its revenues and operations.
As of the date of this Statement of Additional Information, the State's
general obligation bonds have been rated "AA+" by Standard & Poor's Ratings
Service, a division of The McGraw-Hill Companies, Inc. ("S&P"), "Aa1" by Moody's
Investors Service, Inc. ("Moody's"), and "AA+" by Fitch ICBA ("Fitch"). In
January, 1998, the State received an upgrade from S&P from its prior rating of
"AA". In March, 1998, the State received an upgrade from Moody's from its prior
rating of "Aa2". In April, 1998, the State received an upgrade from Fitch from
its prior rating of "AA". Such ratings are in each case based upon certain
information and materials concerning the Bonds and the State furnished by the
State to such rating agencies. Any explanation of the significance of such
ratings may be obtained only from the rating agencies furnishing the same. There
is no assurance that such ratings will prevail for any
23
<PAGE>
given period of time or that they will not be revised downward or withdrawn
entirely by any or all of such rating agencies if, in the judgment of any or all
of them, circumstances so warrant. Any such downward revision or withdrawal of
such ratings, or any or all of them, may have an adverse effect on the market
price of the Bonds. To the extent that the portfolio of Michigan municipal bonds
is comprised of revenue of general obligations of local governments or
authorities, rather than general obligations of the State of Michigan itself,
ratings on such Michigan obligations will be different from those given to the
State of Michigan and their value may be independently affected by economic
matters not directly impacting the State.
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 such Fund's outstanding shares (as defined under
"Miscellaneous Shareholder Approvals").
No Fund of the Trust may:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
or certificates of deposit for any such securities) if more than 5% of
the value of the Fund's total assets (taken at current value) would be
invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Fund or
the Trust, except that (a) with respect to each Fund, other than the
Michigan Bond Fund and the Tax-Free Intermediate Bond Fund, up to 25%
of the value of the Fund's total assets (taken at current value) may
be invested without regard to these limitations and (b) with respect
to the Michigan Bond Fund and the Tax-Free Intermediate Bond Fund, up
to 50% of the value of the Fund's total assets may be invested without
regard to these limitations so long as no more than 25% of the value
of the Fund's total assets are invested in the securities of any one
issuer. For purposes of this limitation, a security is considered to
be issued by the entity (or entities) whose assets and revenues back
the security. A guarantee of a security is not deemed to be a
security issued by the guarantor when the value of all securities
issued and guaranteed by the guarantor, and owned by the Fund, does
not exceed 10% of the value of the Fund's total assets;
2. Borrow money or issue senior securities except that each Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing
and then in amounts not in excess of one-third of the value of the
Fund's total assets at the time of such borrowing. No Fund will
purchase securities while its aggregate borrowings (including reverse
repurchase agreements and borrowing from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Fund's investment practices are not
deemed to be pledged for purposes of this limitation;
3. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to (i) instruments that are issued (as defined
in investment limitation 1 above) or guaranteed by the United States,
any state, territory or possession of the United States, the District
of Columbia or any of their authorities, agencies, instrumentalities
or political subdivisions, (ii) with respect to the Money Market Funds
only, instruments issued by domestic branches of U.S. banks and (iii)
repurchase agreements secured by the instruments described in clauses
(i) and, with respect to the Money Market Funds, (ii); (b) wholly-
owned finance companies will be considered to be in the industries of
their parents if their activities are primarily related to financing
the activities of the parents; and (c) utilities will be divided
according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a
separate industry;
24
<PAGE>
4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate;
5. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act;
6. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, as amended, except to the extent that the
purchase of obligations directly from the issuer thereof, or the
disposition of securities, in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting;
7. Write or sell put options, call options, straddles, spreads, or any
combination thereof except for transactions in options on securities,
securities indices, futures contracts, options on futures contracts
and transactions in securities on a when-issued or forward commitment
basis, and except that each Equity and Bond Fund may enter into
forward currency contracts in accordance with its investment
objectives and policies. Notwithstanding the above, the Tax-Free
Intermediate Bond Fund may not write or purchase options, including
puts, calls, straddles, spreads, or any combination thereof;
8. Purchase securities of companies for the purpose of exercising
control;
9. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation
shall not apply to a Fund's transactions in futures contracts and
related options, a Fund's sale of securities short against the box or
a Fund's transactions in securities on a when-issued or forward
commitment basis, and (b) a Fund may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities;
10. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Fund may, to the
extent appropriate to its investment policies, purchase publicly
traded securities of companies engaging in whole or in part in such
activities, may enter into futures contracts and related options, and
may engage in transactions in securities on a when-issued or forward
commitment basis, and except that each Equity Fund and Bond Fund may
enter into forward currency contracts in accordance with its
investment objectives and policies; or
11. Make loans, except that each Fund may purchase and hold debt
instruments (whether such instruments are part of a public offering or
privately negotiated), may enter into repurchase agreements and may
lend portfolio securities in accordance with its investment objective
and policies.
In addition, the Tax-Free Intermediate Bond Fund may not:
1. Purchase or retain securities of any issuer if the officers or
Trustees of the Trust or its Advisor own beneficially more than one-
half of 1% of the securities of such issuer together own beneficially
more than 5% of such securities;
2. Invest more than 10% of its total assets in the securities of issuers
which together with any predecessors have a record of less than three
years continuous operation; or
3. Participate on a joint or joint and several basis in any securities
trading account.
No Fund of Framlington may:
25
<PAGE>
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 and the Global
Financial Services Fund will invest more than 25% of its total assets
in securities of issuers conducting their principal business
activities in the financial services industry);
3. Borrow money or enter into reverse repurchase agreement 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 requests, 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 investment limitation 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 that the Global Financial Services Fund may make short sales
of securities), except for the use of short-term 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 of 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 of Framlington
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;
26
<PAGE>
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.
No Fund of the Company may:
1. Invest more than 25% of its total assets in any one industry (i)
provided that securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities are not considered to represent
industries; (ii) except that the Real Estate Fund will invest more
than 25% of its assets in securities of issuers in the real estate
industry; (iii) except that the NetNet Fund will invest more than 25%
of its assets in securities of companies engaged in the research,
design, development, manufacturing or distribution of products,
processes or services for use with the Internet or Intranet related
businesses; and (iv) provided that with respect to the Equity
Selection Fund, utilities will be divided according to their services,
for example, gas, gas transmission, electric and gas, electric and
telephone will each be considered a separate industry;
2. (For each Fund except the International Bond Fund) with respect to 75%
of the Fund's assets, invest more than 5% of the Fund's assets (taken
at a market value at the time of purchase) in the outstanding
securities of any single issuer or own more than 10% of the
outstanding voting securities of any one issuer, in each case other
than securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities;
3. (For each Fund except Short Term Treasury Fund) borrow money or issue
senior securities (as defined in the 1940 Act) except that the Funds
may borrow (i) for temporary purposes in amounts not exceeding 5% of
its total assets and (ii) to meet redemption requests, 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 investment limitation 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 a Fund's
total assets and 33 1/3% of the Money Market Fund's total assets;
provided the Funds 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 a Fund may
be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities;
7. (For each Fund except the Real Estate Fund) 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. The Real Estate Fund may not buy or sell real estate;
however, this prohibition does not apply to the purchase or sale of
(i) securities which are secured by real estate, (ii) securities
representing interests in real estate, (iii) securities of companies
operating in the real estate industry including real estate investment
trusts, and (iv) the holding and sale of real estate acquired as a
result of the ownership of securities;
8. Purchase securities on margin, or make short sales of securities,
except for the use of short-term credit necessary for the clearance of
purchases and sales of portfolio securities, but the Funds (with the
exception of the Money Market Fund and Short Term Treasury 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;
or
27
<PAGE>
10. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by the Growth
Opportunities, Multi-Season, NetNet, Real Estate, Value and
International Bond Funds of forward currency contracts, financial
futures contracts and options on financial futures contracts, and
options on securities and on securities, foreign currencies and on
securities indices, as permitted by each Fund's prospectus.
In addition, the Short Term Treasury Fund may not:
1. 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 exceeding 5% of its total
assets and (ii) borrow money for the purpose of meeting redemption
requests, in amounts (when aggregated with amounts borrowed under
clause (i)) not exceeding 33 1/3% of its total assets;
2. Pledge, mortgage or hypothecate its assets other than to secure
borrowings permitted by investment limitation 1 above; or
3. Issue any senior securities (as such term is defined in Section 18(f)
of the 1940 Act) except to the extent the activities permitted by
other enumerated investment limitations for the Company above may be
deemed to give rise to a senior security.
Additional investment restrictions adopted by each Fund of the Company,
which may be changed by the Board of Directors, provide that a Fund may not:
1. Invest more than 15% of its net assets (10% of net assets for the
Money Market Fund) (taken at market value at the time of purchase) in
securities which cannot be readily resold because of legal or
contractual restrictions and (in the case of International Bond Fund
and Short Term Treasury Fund only) which are not otherwise marketable;
2. (For each Fund except the International Bond Fund and Short Term
Treasury Fund) own more than 10% (taken at market value at the time of
purchase) of the outstanding voting securities of any single
issuer;
3. (For each Fund except Short Term Treasury Fund) purchase or sell
interests in oil, gas or other mineral exploration or development
plans or leases); or
4. Invest in other investment companies except as permitted under the
1940 Act.
In addition, the International Bond Fund may not with respect to 50% of the
Fund's assets, invest more than 5% of the Fund's assets (taken at a market value
at the time of purchase) in the outstanding securities of any single issuer or
own more than 10% of the outstanding voting securities of any one issuer, in
each case other than securities issued or guaranteed by the U.S. Government, its
agencies or instrumentalities, at the close of each quarter of its taxable
year.
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
a Fund's investments will not constitute a violation of such limitation, except
that any borrowing by a 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, a 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.
28
<PAGE>
TRUSTEES, DIRECTORS AND OFFICERS
The trustees, directors and executive officers of the Trust, Framlington
and the Company, and their business addresses, ages, and principal occupations
during the past five years, are:
<TABLE>
<CAPTION>
Positions with Trust, Company and Principal Occupation
Name, Address and Age Framlington+ During Past Five Years
- --------------------- ------------ ----------------------
<S> <C> <C>
Charles W. Elliott Trustee/Director and Chairman of Senior Advisor to the President,
1024 Essex Circle the Board of Trustees and Directors Western Michigan University (since
Kalamazoo, MI 49008 July 1995); Executive Vice President,
Age: 66 Administration & Chief Financial
Officer, Kellogg Company (January 1987
through June 1995). Board of
Directors, Steelcase Financial
Corporation; Board of Directors,
Enesco Group.
John Rakolta, Jr. Trustee/Director and Vice Chairman Chairman and Chief Executive Officer,
1876 Rathmor of the Boards of Trustees and Walbridge Aldinger Company
Bloomfield Hills, MI 48304 Directors (construction company).
Age: 51
Thomas B. Bender Trustee/Director Partner, Financial &
7 Wood Ridge Road Investment Management Group.
Glen Arbor, MI 49636
Age: 65
David J. Brophy Trustee/Director Professor, University of Michigan.
1025 Martin Place Director, River Place Financial
Ann Arbor, MI 48104 Corporation.
Age: 62
Dr. Joseph E. Champagne Trustee/Director Dean, University Center, Macomb
319 East Snell Road College (since September 1997);
Rochester, MI 48306 Corporate and Executive Consultant
Age: 60 (since September 1995); Chancellor,
Lamar University (September 1994 to
September 1995); Consultant to
Management; President and Chief
Executive Officer, Crittenton
Corporation (holding company for
healthcare facilities) and Crittenton
Development Corporation
(August 1991 to August 1993). Chairman
of Board of Directors, Ross Operating
Valve of Troy, Michigan.
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Thomas D. Eckert Trustee/Director President and Chief Executive Officer,
10726 Falls Pointe Drive Capital Automotive REIT (real estate
Great Falls, VA 22066 investment trust specializing in
Age: 51 retail automotive properties) (since
November 1997); President and Chief
Operating Officer, Mid-Atlantic Group
of Pulte Home Corporation (developer
of residential land and construction
of housing units) (1983 to 1997).
Lee P. Munder* Trustee/Director and President Chairman of the Advisor (since
1029 N. Ocean Blvd. February 1998); Chief Executive
Palm Beach, FL 33480 Officer of the Advisor (1995 to
Age: 53 1998) Chief Executive Officer,
World Asset Management (since
January 1995); Chief Executive
Officer, MCM (predecessor of Advisor)
(since 1985); Director, LPM Investment
Services, Inc. ("LPM"); Director,
Capital Automotive REIT.
Terry H. Gardner Vice President, Vice President and Chief Financial
480 Pierce Street Chief Financial Officer Officer of the Advisor (since 1993),
Suite 300 and Treasurer Vice President and Chief Financial
Birmingham, MI 48009 Officer, MCM (since 1993); Secretary,
Age: 38 LPM.
Paul Tobias Vice President Chief Executive Officer of the Advisor
480 Pierce Street (since February 1998); Chief Operating
Suite 300 Officer of the Advisor (since April
Birmingham, MI 48009 1995); Executive Vice President of the
Age: 47 Advisor (April 1995 to February 1998);
Executive Vice President, Comerica,
Inc. (since 1995).
Gerald Seizert Vice President Chief Executive Officer of the Advisor
480 Pierce Street (since February 1998); Chief
Suite 300 Investment Officer/Equities of the
Birmingham, MI 48009 Advisor (since April 1995); Executive
Age: 46 Vice President of the Advisor (April
1995 to February 1998); Managing
Director (1991 to 1995), Director
(1992 to 1995), and Vice President
(1984 to 1991) of Loomis, Sayles and
Company, L.P.
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Marketing of the Advisor (since January
Suite 300 1995); Vice President and Director of
Birmingham, MI 48009 Client Services, MCM (August 1988 to
Age: 40 December 1994).
</TABLE>
30
<PAGE>
<TABLE>
<S> <C> <C>
James C. Robinson Vice President Vice President and Chief Investment
480 Pierce Street Officer/Fixed Income of the Advisor;
Suite 300 Vice President and Director of Fixed
Birmingham, MI 48009 Income, MCM (1987 to 1994).
Age: 37
Leonard J. Barr Vice President Vice President and Director of Core
480 Pierce Street Equity Research of the Advisor (since
Suite 300 January 1995); Director and Senior
Birmingham, MI 48009 Vice President, MCM (since 1988);
Age: 54 Director of LPM.
Ann F. Putallaz Vice President Vice President and Director of
480 Pierce Street Fiduciary Services of the Advisor
Suite 300 (since January 1995); Director of
Birmingham, MI 48009 Client and Marketing Services of
Age: 53 Woodbridge (June 1992 to December 1994).
Lisa A. Rosen Secretary, Assistant Treasurer General Counsel of the Advisor (since
480 Pierce Street May 1996); Counsel, First Data
Suite 300 Investor Services Group, Inc. (June 1994 to
Birmingham, MI 48009 May 1996); Assistant Vice President
Age: 31 and Counsel, The Boston Company
Advisors, Inc. (July 1993 to May 1994);
Associate with Hutchins, Wheeler &
Dittmar (law firm) (September 1991 to
June 1993).
Therese Hogan Assistant Secretary Director, State Regulation Department,
53 State Street First Data Investor Services Group
Boston, MA 02109 (since June 1994); Senior Legal
Age: 36 Assistant, Palmer & Dodge (law firm)
(October 1993 to June 1994); Blue Sky
Paralegal, Robinson & Cole (law firm)
(February 1984 to October 1993).
</TABLE>
+ Individual holds same position with St. Clair Funds, Inc., ("St. Clair") a
registered investment company.
* Trustee/Director is an "Interested person" of the Trust, Framlington and
the Company as defined in the 1940 Act.
Trustees who are not interested persons of the Trust and Framlington and
Directors who are not interested persons of the Company receive an aggregate fee
from the Trust, Framlington the Company and St. Clair for service on those
organizations' respective Boards, comprised of an annual retainer fee of $30,000
and a fee of $2,500 for each Board meeting attended; and are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
31
<PAGE>
The following table summarizes the compensation paid by the Trust,
Framlington, the Company and St. Clair to their respective Trustees/Directors
for the year ended June 30, 1998.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Charles W. Elliot John Rakolta, Jr. Thomas B. David J. Dr. Joseph E. Thomas D.
Chairman, Vice Chairman, Bender Brophy Champagne Eckert
Trustee and Trustee and Trustee and Trustee and Trustee and Trustee and
Director Director Director Director Director Director
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from the Company $5,785 $5,785 $5,785 $5,276 $5,785 $5,785
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from the Trust $22,997 $22,997 $22,997 $21,096 $22,997 $22,997
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from Framlington $398 $398 $398 $360 $398 $398
- -------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from St. Clair $319 $319 $319 $268 $319 $319
- -------------------------------------------------------------------------------------------------------------------------------
Pension Retirement
Benefits Accrued as Part of
Fund Expenses None None None None None None
- -------------------------------------------------------------------------------------------------------------------------------
Estimated Annual Benefits
upon Retirement None None None None None None
- -------------------------------------------------------------------------------------------------------------------------------
Total from the Fund
Complex $29,500 $29,500 $29,500 $27,000 $29,500 $29,500
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
No officer, director or employee of the Advisor, Sub-Advisor, Comerica
Incorporated ("Comerica"), the Sub-Custodian, the Distributor, the Administrator
or the Transfer Agent currently receives any compensation from the Trust,
Framlington or the Company. As of September 30, 1998, the Trustees and officers
of the Trust, as a group, owned less than 1% of all classes of outstanding
shares of the Funds of the Trust, the Trustees and officers of Framlington, as a
group, owned less than 1% of all classes of outstanding shares of the Funds of
Framlington except the Emerging Markets Fund in which Trustees and officers, as
a group, owned 1.05% of Class Y shares of the Fund, and the Directors and
officers of the Company, as a group, owned less than 1% of all classes of
outstanding shares of the Funds of the Company except Micro-Cap Fund, Money
Market Fund and the NetNet Fund in which the Directors and officers, as a group,
owned 2.22%, 1.70% and 2.40% of Class Y shares of those Funds,
respectively.
Lee P. Munder and Terry H. Gardner are administrators of a pension plan for
employees of Munder Capital Management, which as of September 30, 1998, owned
9,560 Class Y shares of the Emerging Markets Fund, 20,147 Class Y shares of the
International Growth Fund, 49,974 Class Y shares of the Multi-Season Growth
Fund, 5,447 Class Y shares of the Micro-Cap Fund, 19,427 Class Y shares of the
Small-Cap Value Fund, 42,686 Class Y shares of the International Bond Fund,
35,659 Class Y shares of the Value Fund, 21,683 Class Y shares of the Real
Estate Fund, 43,774 Class Y shares of the Bond Fund, 12,550 Class Y shares of
the International Equity Fund, 12,201 Class Y shares of the Small Company Growth
Fund, which represented less than 1% of the outstanding Class Y Shares of those
Funds. As of the same date, the pension plan owned 9,017 Class Y shares of the
Healthcare Fund and 11,896 Class Y shares of the NetNet Fund, which represented
2.0% and 4.7%, respectively of the outstanding Class Y shares of those
Funds.
As of September 30, 1998, the Advisor and its affiliates, through common
ownership, owned beneficially 11,493 Class Y shares of the Multi-Season
Growth Fund, 47,586 Class Y shares of the NetNet Fund and 2,154,030
Class Y shares of the Money Market Fund which represented less than 1%, 18.64%
and 2.51% of the outstanding Class Y shares of those Funds, respectively.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
for the obligations of the trust. However, the Trust's and Framlington's
Declaration of Trust, as amended, each provide that shareholders shall not be
subject to any personal
32
<PAGE>
liability in connection with the assets of the Trust or Framlington for the acts
or obligations of the Trust or Framlington, and that every note, bond, contract,
order or other undertaking made by the Trust or Framlington shall contain a
provision to the effect that the shareholders are not personally liable
thereunder. Each 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. Each Declaration of Trust, as
amended, also provides that the Trust and Framlington shall, upon request,
assume the defense of any claim made against any shareholder for any act or
obligation of the Trust or Framlington, 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 or
Framlington itself would be unable to meet its obligations.
Each Declaration of Trust, as amended, further provides that all persons
having any claim against the Trustees, the Trust or Framlington shall look
solely to the trust property for payment; that no Trustee of the Trust or
Framlington 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 or Framlington; 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, each 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 officers, representatives and employees of the Trust
and Framlington to the same extent that Trustees are entitled to
indemnification.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
INVESTMENT ADVISOR AND SUB-ADVISOR. The Advisor of each Fund is Munder
Capital Management, a Delaware general partnership. The Advisor replaced
Woodbridge Capital Management, Inc. ("Woodbridge") as investment advisor to the
investment portfolios of the Trust and replaced Munder Capital Management, Inc.
as the investment advisor to the investment portfolios of the Company on January
31, 1995, upon the closing agreement (the "Joint Venture Agreement") among MCM,
Comerica, Woodbridge and WAM, pursuant to which MCM contributed its investment
advisory business and Comerica contributed the investment advisor business of
its indirect subsidiaries, Woodbridge and World Asset Management, to the
Advisor. The general partners of the Advisor are WAM, WAM II, MCM and Munder
Group LLC. WAM and WAM II 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.
The Funds have entered into new Investment Advisory Agreements (the
"Advisory Agreements"), dated July 2, 1998, with the Advisor pursuant to terms
of an Exemptive Order (the "Order") granted by the SEC. Under the terms of the
Order, the Advisory Agreements must be approved by the shareholders within one
hundred and fifty (150) days but no later than November 30, 1998. The Funds
will call a special meeting of the shareholders to approve the Advisory
Agreements. Until shareholder approval is obtained, the fees paid to the
Advisor will be paid into an escrow account. If the Advisory Agreements are not
approved by the shareholders, the Board of Directors/Trustees will consider
appropriate action.
Under the terms of the Advisory Agreements, the Advisor furnishes
continuing investment supervision to the Funds and is responsible for the
management of the Funds' portfolios. The responsibility for making decisions to
buy, sell or hold a particular security rests with the Advisor, subject to
review by the Trust's and the Company's Boards of Directors/Trustees. Under the
terms of the Advisory Agreement between the Advisor and Framlington, the Advisor
furnishes overall investment management for the Framlington Funds, provides
research and credit analysis, oversees the purchase and sale of portfolio
securities by the Sub-Advisor, maintains books and records with respect to the
Funds' securities transactions and provides periodic and special reports to the
Board of Trustees as requested.
33
<PAGE>
Once the Advisory Agreements are approved by shareholders, they will
continue in effect for a period of two years from their effective dates. If not
sooner terminated, each 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 Boards of
Directors/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 such approval, and (b) either (i) the vote of a majority of
the outstanding voting securities of the affected Fund, or (ii) the vote of a
majority of the Boards of Directors/Trustees. Each Advisory Agreement is
terminable with respect to a Fund by vote of the Boards of Directors/Trustees,
or by the holders of a majority of the outstanding voting securities of the
Fund, at any time without penalty, on 60 days' written notice to the Advisor.
The Advisor may also terminate its advisory relationship with respect to a Fund
without penalty on 90 days' written notice to the Trust, Framlington or the
Company, as applicable. Each Advisory Agreement terminates automatically in the
event of its assignment (as defined in the 1940 Act).
The Sub-Advisor is a subsidiary of Framlington Group Limited, which is
incorporated in England and Wales and, through its subsidiaries, provides a wide
range of investment services. Framlington Group Limited 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.
The Framlington Funds have entered into a new Sub-Advisory Agreement, dated
July 2, 1998, with the Advisor and the Sub-Advisor pursuant to terms of an
Exemptive Order (the "Order") granted by the SEC. Under the terms of the Order,
the Sub-Advisory Agreement must be approved by the shareholders within one
hundred and fifty (150) days but no later than November 30, 1998. The Funds
will call a special meeting of the shareholders to approve the Sub-Advisory
Agreement. Until shareholder approval is obtained, the fees paid to the Sub-
Advisor will be paid into an escrow account. If the Sub-Advisory Agreement is
not approved by the shareholders, the Board of Trustees will consider
appropriate action. Under the terms of the Sub-Advisory Agreements, the Sub-
Advisor provides sub-advisory services to the Framlington Funds. Subject to the
supervision of the Advisor, the Sub-Advisor is responsible for the management of
each Fund's portfolio, including decisions regarding purchases and sales of
portfolio securities by the Framlington Funds. The Sub-Advisor is also
responsible for arranging the execution of portfolio management decisions,
including the selection of brokers to execute trades and the negotiation of
related brokerage commissions.
The 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 Framlington. The Sub-Advisory Agreement
terminates automatically in the event of its assignment (as defined in the 1940
Act).
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 the
rates set forth below:
1.25% of average daily net assets
. Emerging Markets Fund**
1.00% of the first $500 million of average daily net assets and .75%
of net assets in excess of $500 million
. Multi-Season Fund*
34
<PAGE>
1.00% of the first $250 million of average daily net assets and .75%
of net assets in excess of $250 million
. International Growth Fund**
. Healthcare Fund**
1.00% of average daily net assets
. Micro-Cap Fund**
. NetNet Fund**
.75% of average daily net assets
. Equity Selection Fund
. Global Financial Services Fund
. Growth & Income Fund
. Growth Opportunities Fund
. International Equity Fund
. Small-Cap Value Fund
. Small Company Growth Fund
.74% of average daily net assets
. Real Estate Fund
. Value Fund
.65% of average daily net assets
. Balanced Fund
.50% of average daily net assets
. Bond Fund
. Intermediate Bond Fund
. International Bond Fund
. U.S. Income Fund
. Michigan Bond Fund
. Tax-Free Bond Fund
. Tax-Free Intermediate Bond Fund
.40% of average daily net assets
. Money Market Fund
.35% of average daily net assets
. Cash Investment Fund
. Tax-Free Money Market Fund
. U.S. Treasury Money Market Fund
.25% of average daily net assets
. Short Term Treasury Fund**
.20% of the first $250 million of average daily net assets;
0.12% of the next $250 million of net assets and .07% of net
assets in excess of $500 million
. Index 500 Fund*
_________________________________
* The Advisor expects to receive, after waivers, an advisory fee at the annual
rate of .75% of average daily net assets of Multi-Season Fund and .07% of
average daily net assets of the Index 500 Fund during the current fiscal
year.
35
<PAGE>
** The Advisor expects to voluntarily reimburse expenses during the current
fiscal year with respect to the Micro-Cap Fund, the NetNet Fund, Short Term
Treasury Fund, Growth Opportunities Fund, International Growth Fund, Emerging
Markets Fund, Healthcare Fund and Global Financial Services Fund.
The Advisor may discontinue such fee waivers and/or expense reimbursements
at any time, in its sole discretion.
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, up to .625% of average daily net assets for the
Emerging Markets Fund and .375% of average daily net assets for the Global
Financial Services Fund.
For the fiscal year ended June 30, 1998 (and for the period from
commencement of operations through June 30, 1998 for the Global Financial
Services Fund and Growth Opportunities Fund), the Advisor received fees after
waivers, if any, of $524,133 for the Balanced Fund, $1,900,685 for the Growth &
Income Fund, $884,003 for the Index 500 Fund, $1,628,425 for the International
Equity Fund, $3,045,349 for the Small Company Growth Fund, $1,116,093 for the
Bond Fund, $2,770,357 for the Intermediate Bond Fund, $1,386,132 for the U.S.
Income Fund, $261,589 for the Michigan Bond Fund, $1,017,292 for the Tax-Free
Bond Fund, $1,542,255 for the Tax-Free Intermediate Bond Fund, $3,750,786 for
the Cash Investment Fund, $1,075,987 for the Tax-Free Money Market Fund,
$470,094 for the U.S. Treasury Money Market Fund, $6,169,411 for the Multi-
Season Fund, $612,857 for the Real Estate Fund, $454,600 for the Money Market
Fund, $1,066,142 for the Value Fund, $516,840 for the International Growth Fund,
$554,427 for the Emerging Markets Fund, $143,897 for the Healthcare Fund,
$304,989 for the Micro-Cap Equity Fund, $1,028,013 for the Small-Cap Value Fund,
$135,827 for the Short Term Treasury Fund, $253,258 for the International Bond
Fund, $62,684 for NetNet Fund, $302 for the Global Financial Services Fund and
$193 for the Growth Opportunities Fund.
For the fiscal year ended June 30, 1997 (and for the period from
commencement of operations through June 30, 1997 for the International Growth,
Emerging Markets, Healthcare, Micro-Cap, Small-Cap Value, Short Term Treasury
and International Bond Funds), the Advisor received fees after waivers, if any,
of $445,259 for the Balanced Fund, $1,650,704 for the Growth & Income Fund,
$249,764 for the Index 500 Fund, $1,720,496 for the International Equity Fund,
$1,884,242 for the Small Company Growth Fund, $751,954 for the Bond Fund,
$2,554,647 for the Intermediate Bond Fund, $1,175,733 for the U.S. Income Fund,
$132,451 for the Michigan Bond Fund, $1,006,688 for the Tax-Free Bond Fund,
$1,584,769 for the Tax-Free Intermediate Bond Fund, $3,454,159 for the Cash
Investment Fund, $879,155 for the Tax-Free Money Market Fund, $1,101,183 for the
U.S. Treasury Money Market Fund, $3,189,742 for the Multi-Season Fund, $259,015
for the Real Estate Fund, $599,286 for the Money Market Fund, $401,505 for the
Value Fund, $71,843 for the International Growth Fund, $25,210 for the Emerging
Markets Fund, $11,440 for the Healthcare Fund, $6,479 for the Micro-Cap Equity
Fund, $20,442 for the Small-Cap Value Fund, $51,885 for the Short Term Treasury
Fund and $143,476 for the International Bond Fund.
For the fiscal year ended June 30, 1996 (and for the period from
commencement of operations through June 30, 1996 for the Value Fund) the Advisor
received fees after waivers, if any, of $2,275,469 for the Multi-Season Fund,
$114,330 for the Real Estate Fund, $1,025,924 for the Money Market Fund and
$189,909 for the Value Fund.
For the fiscal year ended June 30, 1998 (and for the period from
commencement of operations through June 30, 1998 for the Growth Opportunities
Fund), the Advisor voluntarily waived advisory fees and/or reimbursed expenses
in the amounts of $421,846 for the Index 500 Fund, $75,264 for the Micro-Cap
Equity Fund, $1,214,795 for the Multi-Season Growth Fund, $110,473 for the
Emerging Markets Fund, $112,541 for the Healthcare Fund, $105,456 for the
International Growth Fund, $62,711 for the Short Term Treasury Fund, $33,890 for
the NetNet Fund and $2 for the Growth Opportunities Fund.
For the fiscal year ended June 30, 1997 the Advisor voluntarily waived
advisory fees and/or reimbursed expenses in the amounts of $1,063,248 for the
Multi-Season Fund, $10,143 for the Real Estate Fund, $17,688 for the Value Fund,
$360,721 for the Index 500 Fund and $51,815 for the Michigan Bond Fund.
36
<PAGE>
For the fiscal year ended June 30, 1996, the Advisor voluntarily reimbursed
expenses in the following amounts: $34,671 for the Real Estate Fund, $70,016 for
the Value Fund and $21,376 for the Index 500 Fund.
DISTRIBUTION AGREEMENTS. The Trust, Framlington and the Company have
entered into distribution agreements, 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 each
Fund, 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 the Funds (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 - CLASS A, CLASS B AND CLASS C SHARES.
Each Fund has adopted a Service and Distribution 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 and
Distribution Plans for Class A Shares, the Distributor is paid an annual service
fee at the rate of up to 0.25% of the value of average daily net assets of the
Class A Shares of each Fund. Each Fund has also adopted Service and
Distribution Plans 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 provision of certain shareholder services. Under
the Service and Distribution Plans for Class B and Class C Shares, the
Distributor is paid an annual service fee of up to 0.25% of the value of average
daily net assets of the Class B and Class C Shares of each Fund and an annual
distribution fee at the rate of up to 0.75% of the value of average daily net
assets of the Class B and Class C Shares of each Fund.
Under the terms of the Service and Distribution Plans (collectively, the
"Plans"), each Plan continues from year to year, provided such continuance is
approved annually by vote of the Boards of Directors/Trustees, including a
majority of the Directors/Trustees who are not interested persons of the Trust,
Framlington or the Company, as applicable, and who have no direct or indirect
financial interest in the operation of that Plan (the "Non-Interested Plan
Directors"). 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 Directors/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 Directors or by a vote
of a majority of the outstanding voting securities (as defined in the 1940 Act)
of the relevant class of the respective Fund on not more than 30 days' written
notice to any other party to the Plan. Pursuant to each Plan, the Distributor
will provide the Boards of Directors/Trustees periodic reports of amounts
expended under the Plan and the purpose for which such expenditures were made.
The Directors/Trustees have determined that the Plans will benefit the
Trust, Framlington, the Company and their respective shareholders by (i)
providing an incentive for broker or bank personnel to provide continuous
shareholder servicing after the time of sale; (ii) retaining 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 a 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 by the
relevant Plan. In addition, the Advisor may use its own resources to make
payments to the Distributor or dealers authorized to sell the Funds' shares to
support their sales efforts.
37
<PAGE>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS A SERVICE PLANS.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
6/30/98 6/30/97 6/30/96
--------------------------------------------
<S> <C> <C> <C>
Funds of the Trust
Balanced Fund $ 1,274 $ 981 $ 136.95
Bond Fund $ 2,735 $ 2,203 $ 29.40
Cash Investment Fund $269,773 $ 0 $ 0
Growth & Income Fund $ 14,520 $ 5,324 $ 268.00
Index 500 Fund $140,154 $48,763 $23,640.4
Intermediate Bond Fund $ 17,654 $13,919 $ 345.66
International Equity Fund $ 15,618 $13,505 $1,946.82
Michigan Bond Fund $ 2,067 $ 1,206 $ 23.32
Small Company Growth Fund $ 59,251 $17,843 $1,158.43
</TABLE>
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
6/30/98 6/30/97 6/30/96
----------------------------------------------------------------
<S> <C> <C> <C>
Tax-Free Bond Fund $ 7,966 $ 1,206 $ 23.32
Tax-Free Intermediate Bond Fund $ 17,556 $ 14,678 $ 85.26
Tax-Free Money Market Fund $154,996 $ 0 $ 0
U.S. Income Fund $ 6,581 $ 0 $ 0
U.S. Treasury Money Market Fund $ 18,269
Funds of the Company
Growth Opportunities Fund $ 0+ N/A N/A
International Bond Fund $ 400 $ 39* N/A
Micro-Cap Fund $ 2,066 $ 79* N/A
Money Market Fund $ 31,560 $ 1,198* N/A
Multi-Season Fund $ 55,691 $ 30,811 $1,945.49
NetNet Fund $ 14,387 N/A N/A
Real Estate Fund $ 6,769 $ 1,559 $ 179.10
Short Term Treasury Fund++ $ 11 $ 0 $ 0
Small-Cap Value Fund $ 10,714 $ 558* N/A
Value Fund $ 10,919 $ 2,347 $ 41.77
Funds of Framlington
Emerging Markets Fund $ 1,804 $ 285 N/A
Global Financial Services Fund $ 0+ N/A N/A
Healthcare Fund $ 7,066 $ 241 N/A
International Growth Fund $ 3,287 $ 759 N/A
</TABLE>
____________________________________
* Figures reflect period from commencement of operations through
June 30, 1997.
+ Figures reflect period from commencement of operations through
June 30, 1998.
++ As of June 2, 1998, Class A Shares of Short Term Treasury Fund
were closed to all investments.
38
<PAGE>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1998.
<TABLE>
<CAPTION>
DISTRIBUTION AND SERVICER FEES CDSCs
-------------------------------------------------
<S> <C> <C>
Funds of the Trust
Balanced Fund $ 3,890 $ 1,004
Bond Fund $ 6,329 $ 245
Growth & Income Fund $ 10,447 $ 2,013
Index 500 Fund $421,479 $51,363
Intermediate Bond Fund $ 5,683 $ 1,556
International Equity Fund $ 11,221 $ 2,246
Michigan Bond Fund $ 4,234 $ 27
Small Company Growth Fund $107,506 $ 6,931
Tax-Free Bond Fund $ 3,552 $ 50
Tax-Free Intermediate Bond Fund $ 3,575 $ 0
U.S. Income Fund $ 12,408 $ 1
Funds of the Company
Growth Opportunities Fund+ $ 0 $ 0
International Bond Fund $ 401 $ 0
Micro-Cap Fund $ 81,387 $18,345
Money Market Fund $ 7,386 $ 2,888
Multi-Season Fund $942,437 $57,921
NetNet Fund+ $ 1,359 $ 0
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION AND SERVICER FEES CDSCs
-------------------------------------------------
<S> <C> <C>
Real Estate Fund $63,758 $ 6,409
Short Term Treasury Fund++ $ 1,848 $ 92
Small-Cap Value Fund $15,054 $ 590
Value Fund $15,819 $ 129
Funds of Framlington
Emerging Markets Fund $ 4,169 $ 1,670
Global Financial Services Fund $ 0 $ 0
Healthcare Fund $42,842 $ 7,566
International Growth Fund $ 2,170 $ 190
</TABLE>
_____________________________________
+ Figures reflect period from commencement of operations through June 30, 1998.
++ As of June 2, 1998, Class B Shares of Short Term Treasury Fund were closed to
all investments.
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997.
<TABLE>
<CAPTION>
DISTRIBUTION AND SERVICER FEES CDSC's
---------------------------------------------------
<S> <C> <C>
Funds of the Trust
Balanced Fund $ 1,249 $ 0.00
Bond Fund $ 5,482 $ 447.26
Growth & Income Fund $ 3,519 $ 535.41
Index 500 Fund $153,426 $ 0.00
</TABLE>
39
<PAGE>
<TABLE>
<S> <C> <C>
Intermediate Bond Fund $ 2,627 $ 0.00
International Equity Fund $ 10,398 $ 318.86
Michigan Bond Fund $ 2,779 $ 0.00
Small Company Growth Fund $ 21,679 $ 930.13
Tax-Free Bond Fund $ 566 $ 0.00
Tax-Free Intermediate Bond Fund $ 1,782 $ 0.00
Funds of the Company
International Bond Fund* $ 11 $ 0.00
Micro-Cap Fund* $ 513 $ 0.00
Money Market Fund $ 1,925 $ 711.20
Multi-Season Fund $ 27,446 $ 0.00
Real Estate Fund $731,958 $26,020.64
Short Term Treasury Fund* $ 116 $ 0.00
Small-Cap Value Fund* $ 648 $ 0.00
U.S. Income Fund $ 13,452 $ 0.00
Value Fund $ 2,689 $ 0.00
Funds of Framlington
Emerging Markets Fund* $ 95 $ 0.00
Healthcare Fund* $ 1,240 $ 0.00
International Growth Fund* $ 175 $ 0.00
</TABLE>
____________________________________
* Figures reflect period from commencement of operations through June 30, 1997.
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996.
<TABLE>
<CAPTION>
DISTRIBUTION SERVICER
FEES FEES CDSC's
-------------------------------------------------------------
<S> <C> <C> <C>
Funds of the Trust
Balanced Fund $ 400.45 $ 133.48 $ 199.11
Bond Fund $ 590.01 $ 196.67 $ 861.49
Growth & Income Fund $ 1,147.15 $ 382.37 $ 300.00
Index 500 Fund $ 15,750.66 $ 4,500.20 $ 1,207.75
Intermediate Bond Fund $ 206.34 $ 68.79 $ 0.00
International Equity Fund $ 3,131.06 $ 1,043.68 $ 1,008.01
Michigan Bond Fund $ 1,923.70 $ 641.24 $ 405.63
Small Company Growth Fund $ 2,247.94 $ 749.31 $ 100.00
Tax-Free Bond Fund $ 131.90 $ 43.96 $ 979.34
Tax-Free Intermediate Bond Fund $ 298.44 $ 99.48 $ 0.53
U.S. Income Fund $ 3,656.37 $ 1,218.79 $ 199.27
Funds of the Company
Money Market Fund $ 1,496.13 $ 498.72 $ 0.00
Multi-Season Fund $454,197.35 $151,399.12 $155,014.33
Real Estate Fund $ 12,014.27 $ 4,004.75 $ 4,278.33
Value Fund $ 424.07 $ 141.36 $ 181.56
</TABLE>
40
<PAGE>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS C SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1998*.
<TABLE>
<CAPTION>
DISTRIBUTION AND SERVICER FEES CDSC's
------------------------------------------------
<S> <C> <C>
Funds of the Trust
Balanced Fund $ 880 $ 29
Bond Fund $ 1,545 $ 862
Growth & Income Fund $ 7,781 $ 67
Index 500* N/A N/A
Intermediate Bond Fund $ 1,584 $ 7,747
International Equity Fund $ 23,594 $11,988
Michigan Bond Fund $ 747 $ 0
Small Company Growth Fund $ 51,322 $13,088
Tax-Free Bond Fund $ 396 $ 0
U.S. Income Fund $ 268 $ 35
Funds of the Company
Growth Opportunities Fund+ $ 0 $ 0
International Bond Fund $ 2 $ 0
Micro-Cap Fund $ 42,988 $24,200
Money Market Fund $ 13,170 $ 3
Multi-Season Fund $112,333 $ 556
NetNet Fund* N/A N/A
Real Estate Fund $ 10,810 $ 261
Short Term Treasury Fund $ 159 $ 10
Small-Cap Value Fund $ 9,109 $ 159
Value Fund $ 8,593 $ 23
Funds of Framlington
Emerging Markets Fund $ 448 $ 0
Global Financial Services Fund+ $ 0 $ 0
Healthcare Fund $ 20,953 $ 474
International Growth Fund $ 1,303 $ 142
</TABLE>
___________________________________
* As of June 30, 1998, the NetNet Fund and Index 500 Fund had not commenced
selling Class C shares. As of June 2, 1998, Class C Shares of Short Term
Treasury were closed to all investments.
+ Figures reflect period from commencement of operations through June 30, 1998.
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS C SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1997.*
<TABLE>
<CAPTION>
DISTRIBUTION AND SERVICER FEES CDSC's
------------------------------------------------
<S> <C> <C>
Funds of the Trust
Balanced Fund $ 337 $ 0.00
Bond Fund $ 787 $ 0.00
Growth & Income Fund $ 2,683 $ 0.00
Intermediate Bond Fund $ 1,136 $ 0.00
International Equity Fund $18,452 $ 0.00
Michigan Bond Fund $ 568 $ 0.00
Small Company Growth Fund $13,938 $212.00
U.S. Income Fund $ 93 $ 0.00
</TABLE>
41
<PAGE>
<TABLE>
<S> <C> <C>
Funds of the Company
Micro-Cap Fund** $ 48 $ 0.00
Money Market Fund $ 5,932 $ 0.00
Multi-Season Fund $73,808 $391.84
Real Estate Fund $ 1,829 $ 2.38
Small-Cap Value Fund** $ 223 $ 0.00
Value Fund $ 4,397 $ 0.00
Funds of Framlington
Emerging Markets Fund** $ 49 $ 0.00
Healthcare Fund** $ 125 $ 0.00
International Growth Fund** $ 63 $ 0.00
</TABLE>
___________________________________
* As of June 30, 1997, the following funds had not commenced selling Class C
Shares: Tax-Free Bond Fund, Tax-Free Intermediate Bond Fund, International
Bond Fund and Short Term Treasury Fund.
** Figures reflect period from commencement of operations through June 30, 1997.
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS C SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996.*
<TABLE>
<CAPTION>
DISTRIBUTION
FEES AND SERVICER FEES CDSC's
------------------------------------------------
<S> <C> <C>
Funds of the Trust
Balanced Fund $ 4.9 $100.01
Bond Fund $ 123.26 $ 0.00
Growth & Income Fund $ 119.64 $ 0.00
Intermediate Bond Fund $ 98.38 $ 0.00
International Equity Fund $ 4,780.52 $293.87
Small Company Growth Fund $ 228.27 $149.87
Funds of the Company
Multi-Season Fund $42,836.64 $798.25
Real Estate Fund $ 17.76 $ 7.50
Value Fund $ 1,141.17 $ 0.00
</TABLE>
______________________________________
* As of June 30, 1996, the following funds had not commenced selling Class C
Shares: Index 500 Fund, US Government Income Fund, Michigan Bond Fund, Tax-
Free Bond Fund, Tax-Free Intermediate Bond Fund and Money Market Fund.
42
<PAGE>
The following amounts were paid by each Fund under its Class B Service and
Distribution Plans during the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Printing and Interest
Mailing of Carrying or
Prospectuses to other
other than Current Compensation to Compensation to Compensation to Financing
Advertising Shareholders Underwriters Dealers Sales Personnel Charges
----------- ------------------ --------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $0 $0 $0 $ 323 $0 $ 912
Bond Fund $0 $0 $0 $ 598 $0 $ 794
Growth & Income Fund $0 $0 $0 $ 828 $0 $ 2,449
Index 500 Fund $0 $0 $0 $ 35,654 $0 $106,375
Intermediate Bond Fund $0 $0 $0 $ 813 $0 $ 360
International Equity Fund $0 $0 $0 $ 1906 $0 $ 1,557
Michigan Bond Fund $0 $0 $0 $ 726 $0 $ 408
Small Company Growth Fund $0 $0 $0 $ 4,710 $0 $ 27,734
Tax-Free Bond Fund $0 $0 $0 $ 145 $0 $ 949
Tax-Free Intermediate
Bond Fund $0 $0 $0 $ 426 $0 $ 974
U.S. Income Fund $0 $0 $0 $ 1008 $0 $ 230
Funds of the Company
Growth Opportunities
Fund* $0 $0 $0 $ 0 $0 $ 0
International Bond Fund $0 $0 $0 $ 2 $0 $ 135
Micro-Cap Fund $0 $0 $0 $ 382 $0 $ 30,137
Money Market Fund $0 $0 $0 $ 1,799 $0 $ (1,159)
Multi-Season Fund $0 $0 $0 $193,254 $0 $(10,010)
NetNet Fund* $0 $0 $0 $ 8 $0 $ 3,816
Real Estate Fund $0 $0 $0 $ 6,948 $0 $ 13,242
Short Term Treasury Fund+ $0 $0 $0 $ 95 $0 $ 87
Small-Cap Value Fund $0 $0 $0 $ 253 $0 $ 4,651
Value Fund $0 $0 $0 $ 1,213 $0 $ 2,553
Funds of Framlington
Emerging Markets Fund $0 $0 $0 $ 13 $0 $ 1,767
Global Financial
Services Fund* $0 $0 $0 $ 0 $0 $ 0
Healthcare Fund $0 $0 $0 $ 288 $0 $ 15,946
International Growth Fund $0 $0 $0 $ 44 $0 $ 825
</TABLE>
_________________________________________
* Figures reflect period from commencement of operations through June 30, 1998.
+ As of June 2, 1998, Class B Shares of Short Term Treasury Fund were closed to
all investments.
43
<PAGE>
The following amounts were paid by each Fund under its Class C Service and
Distribution Plans during the fiscal year ended June 30, 1998.
<TABLE>
<CAPTION>
Printing and
Mailing of Interest
Prospectuses to Carrying or
other than other
Current Compensation to Compensation to Compensation to Financing
Advertising Shareholders Underwriters Dealers Sales Personnel Charges
----------- ---------------- --------------- --------------- --------------- ----------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $0 $0 $0 $ 262 $0 $ (6)
Bond Fund $0 $0 $0 $ 35 $0 $ 3
Growth & Income Fund $0 $0 $0 $ 1,659 $0 $ (113)
Index 500 Fund $0 $0 $0 N/A $0 N/A
Intermediate Bond Fund $0 $0 $0 $ 493 $0 $ 2,970
International Equity Fund $0 $0 $0 $16,331 $0 $ (775)
Michigan Bond Fund $0 $0 $0 $ 360 $0 $ 7
Small Company Growth Fund $0 $0 $0 $ 8,224 $0 $ 1,177
Tax-Free Bond Fund $0 $0 $0 $ 253 $0 $ (9)
Tax-Free Intermediate $0 $0 $0 $ 0 $0 $ 3
Bond Fund
U.S. Income Fund $0 $0 $0 $ 6 $0 $ 28
Funds of the Company
Growth Opportunities Fund* $0 $0 $0 $ 0 $0 $ 0
International Bond Fund $0 $0 $0 $ 0 $0 $ 0
Micro-Cap Fund $0 $0 $0 $ 349 $0 $ 2,659
Money Market Fund $0 $0 $0 $11,654 $0 $ (142)
Multi-Season Fund $0 $0 $0 $69,188 $0 $(3,527)
NetNet Fund** N/A N/A N/A N/A N/A N/A
Real Estate Equity $0 $0 $0 $ 1,391 $0 $ 388
Investment Fund
Short Term Treasury Fund $0 $0 $0 $ 17 $0 $ 0
Small-Cap Value Fund $0 $0 $0 $ 208 $0 $ 599
Value Fund $0 $0 $0 $ 4,297 $0 $ 58
Funds of Framlington
Emerging Markets Fund $0 $0 $0 $ 20 $0 $ 66
Global Financial Services $0 $0 $0 $ 0 $0 $ 0
Fund*
Healthcare Fund $0 $0 $0 $ 74 $0 $ 786
International Growth Fund $0 $0 $0 $ 51 $0 $ 47
</TABLE>
_________________________________________
* Figures reflect period from commencement of operations through June 30,
1998.
** As of June 30, 1998, the fund had not commenced selling Class C Shares.
+ As of June 2, 1998, Class C Shares of Short Term Treasury Fund were closed
to all investments.
SHAREHOLDER SERVICING ARRANGEMENTS - CLASS K SHARES. As stated in each
Fund's Prospectus, Class K Shares are sold to investors through institutions
which enter into Shareholder Servicing Agreements with the Trust,
44
<PAGE>
Framlington or the Company to provide support services to their Customers who
beneficially own Class K Shares in consideration of the Funds' payment of not
more than 0.25% (on an annualized basis) of the average daily net assets 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 required by
law, forwarding shareholder communications from the Trust, Framlington or the
Company (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, Framlington's or the Company's arrangements with
institutions; and (x) providing such other similar services as the Trust,
Framlington or the Company may reasonably request to the extent the institutions
are permitted to do so under applicable statutes, rules and regulations.
Pursuant to the Trust's, Framlington's and the Company's agreements with
such institutions, the Boards of Directors/Trustees will review, at least
quarterly, a written report of the amounts expended under Trust's, Framlington's
and the Company'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 Boards of Directors/Trustees, including a
majority of the Directors/Trustees who are not "interested persons" as defined
in the 1940 Act, and have no direct or indirect financial interest in such
arrangements.
The Boards of Directors/Trustees have approved the arrangements with
institutions based on information provided by the service contractors that there
is a reasonable likelihood that the arrangements will benefit the Funds and
their 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. State Street Bank and Trust Company ("State
Street"), whose principal business address is 225 Franklin Street, Boston,
Massachusetts, 02110, serves as administrator for the Trust, Framlington and the
Company pursuant to administration agreements (each, an "Administration
Agreement"). State Street has agreed to maintain office facilities for the
Trust, Framlington and the Company; oversee the computation of each Fund's net
asset value, 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. State Street may enter into an
agreement with one or more third parties pursuant to which such third parties
will provide administrative services on behalf of the Funds.
Each Administration Agreement provides that the Administrator performing
services thereunder shall not be liable under the Agreement except for its bad
faith, negligence or willful misconduct in the performance of its duties and
obligations thereunder.
For the period November 1, 1997 through June 30, 1998, administration fees
of State Street accrued were: $27,469 for Balanced Fund, $86,722 for Bond Fund,
$374,880 for Cash Investment Fund, $85,474 for Growth & Income Fund, $235,148
for Index 500 Fund, $193,688 for Intermediate Bond Fund, $70,559 for
International Equity Fund, $18,511 for Michigan Bond Fund, $142,877 for Small
Company Growth Fund, $68,797 for Tax-Free Bond Fund, $104,833 for Tax-Free
Intermediate Bond Fund, $106,996 for Tax-Free Money Market Fund, $95,641 for
U.S. Income Fund, $32,072 for U.S. Treasury Money Market Fund, $16,884 for
International Bond Fund, $13,505 for Micro-Cap Fund, $36,373 for Money Market
Fund, $240,139 for Multi-Season Fund, $2,614 for NetNet Fund, $30,617 for Real
Estate Fund, $18,052 for Short Term Treasury Fund, $51,728 for Small Cap Value
Fund, $54,313 for Value Fund, $13 for Growth Opportunities Fund, $19,511 for
International Growth Fund, $16,445 for Emerging Markets Fund, $5,819 for
Healthcare Fund, and $15 for Global Financial Services Fund.
45
<PAGE>
Prior to November 1, 1997, First Data Investor Services Group, Inc.
("Investor Services Group") located at 53 State Street, Boston, Massachusetts
02109 served as administrator to the Funds.
For the period July 1, 1997 through October 31, 1997, administration fees
to Investor Services Group accrued were: $14,689 for Balanced Fund, $29,146 for
Bond Fund, $184,587 for Cash Investment Fund, $47,089 for Growth & Income Fund,
$109,244 for Index 500 Fund, $95,635 for Intermediate Bond Fund, $42,940 for
International Equity Fund, $8,786 for Michigan Bond Fund, $68,964 for Small
Company Growth Fund, $37,599 for Tax-Free Bond Fund, $56,420 for Tax-Free
Intermediate Bond Fund, $53,524 for Tax-Free Money Market Fund, $49,187 for U.S.
Income Fund, $39,194 for U.S. Treasury Money Market Fund, $9,604 for
International Bond Fund, $2,199 for Micro-Cap Fund, $23,555 for Money Market
Fund, $104,045 for Multi-Season Fund, $631 for NetNet Fund, $12,483 for Real
Estate Fund, $10,358 for Short Term Treasury Fund, $19,515 for Small Cap Value
Fund, $20,603 for Value Fund, $6,740 for International Growth Fund, $6,740 for
Emerging Markets Fund, and $6,740 for Healthcare Fund.
For the fiscal year ended June 30, 1997, the administration fees of
Investor Services Group accrued were: Balanced Fund - $77,364; Growth & Income
Fund - $248,644; Index 500 Fund - $405,016; International Equity Fund -
$259,162; Small Company Growth Fund - $283,755; Bond Fund - $169,932;
Intermediate Bond Fund - $577,425; U.S. Income Fund - $265,637; Michigan Bond
Fund - $41,620; Tax-Free Bond Fund - $227,508; Tax-Free Intermediate Bond Fund -
$358,214; Cash Investment Fund - $1,115,110; Tax-Free Money Market Fund -
$283,803; $480,310-Multi-Season Fund; $39,493-Real Estate Fund, $169,405-Money
Market Fund, $61,224-Value Fund and U.S. Treasury Money Market Fund - $355,592,
respectively.
For the period from commencement of operations through June 30, 1997,
administration fees of Investor Services Group accrued were $9,644 - Emerging
Markets Fund; $9,644 - Healthcare Fund, $9,644 - International Growth Fund,
$730 - Micro-Cap Fund; $14,220 - Small-Cap Value Fund; $32,343 - International
Bond Fund and $23,349 - Short Term Treasury Fund.
For the fiscal year ended June 30, 1996, administration fees of Investor
Services Group accrued were: $62,095 - Balanced Fund, $202,655 - Growth & Income
Fund, $188,416 - Index 500 Fund, $201,299 - International Equity Fund, $194,176
- - Small Company Growth Fund, $190,967 - Bond Fund, $587,790 - Intermediate Bond
Fund, $216,970 - U.S. Income Fund, $31,899 - Michigan Bond Fund, $245,271 - Tax-
Free Bond Fund, $400,485 - Tax-Free Intermediate Bond Fund, $1,183,419 - Cash
Investment Fund, $378,955 - U.S. Treasury Money Market Fund, $285,214 - Tax-Free
Money Market Fund, $345,388 - Multi-Season Fund, $19,120 - Real Estate Fund and
$292,172 - Money Market Fund.
For the period from commencement of operations through June 30, 1996,
administration fees of Investor Services Group accrued were $29,705 - Value
Fund.
CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Comerica Bank
(the "Custodian"), whose principal business address is One Detroit Center, 500
Woodward Avenue, Detroit, MI 48226, is the custodian of each Fund pursuant to
custodian agreements with respectively the Trust, Framlington and the Company.
The Custodian receives no compensation for such services. State Street serves as
the sub-custodian to the Funds pursuant to sub-custodian agreements (each, a
"Sub-Custodian Contract") among the Custodian, State Street and respectively the
Company, the Trust and Framlington. State Street is also the sub-custodian with
respect to the custody of foreign securities held by the Funds. State Street has
in turn entered into additional agreements with financial institutions and
depositaries located in foreign countries with respect to the custody of such
securities. Under the Sub-Custodian Contracts, State Street (i) maintains a
separate account in the name of each Fund, (ii) holds and transfers portfolio
securities on account of each Fund, (iii) accepts receipts and makes
disbursements of money on behalf of each Fund, (iv) collects and receives all
income and other payments and distributions on account of each Fund's securities
and (v) makes periodic reports to the Boards of Directors/Trustees concerning
the Funds' operations.
Prior to November 1, 1997, the Custodian was compensated for its services
as custodian. For the period July 1, 1997 to October 31, 1997 the Custodian
earned $317,499.
46
<PAGE>
Investor Services Group serves as the transfer and dividend disbursing
agent for the Funds pursuant to transfer agency agreements with the Trust,
Framlington and the Company, respectively, under which Investor Services Group
(i) issues and redeems shares of each Fund, (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 Boards Directors/Trustees concerning the operations of each Fund.
COMERICA. As stated in the Funds' Class K Shares Prospectus, Class K
Shares of the Funds 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 Company, the Trust and
Framlington 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
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, Framlington and the Company contemplated by their respective agreements
with each of them without violation of applicable banking laws and 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 certain services for the Funds.
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, Framlington or the Company, the Trust,
Framlington or the Company might be required to alter materially or discontinue
the arrangements with the institutions and change the method of operations. 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 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,
Framlington or the Company might be required to alter materially or discontinue
the arrangements with the institutions and change the method of operations with
respect to Comerica and certain other 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.
47
<PAGE>
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Boards of Directors/Trustees, the
Advisor or the Sub-Advisor, as the case may be, 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.
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 Advisor or
the Sub-Advisor, as the case may be, 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 Advisor or Sub-
Advisor, as the case may be, believes such practice to be in the Funds'
interests.
Since the Money Market Funds will invest only in short-term debt
instruments, their annual portfolio turnover rates will be relatively high, but
brokerage commissions are normally not paid on money market instruments, and
portfolio turnover is not expected to have a material effect on the net
investment income of a Money Market Fund. The portfolio turnover rate of a Fund
is calculated by dividing the lesser of a Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were thirteen months or less for the Money
Market Funds or one year or less for the Equity and Bond Funds) by the monthly
average value of the securities held by the Fund during the year. The Funds may
engage in short-term trading to achieve their investment objectives. Portfolio
turnover may vary greatly from year to year as well as within a particular year.
Each Fund's portfolio turnover rate is included in the prospectuses under
the section entitled "Financial Highlights." For the fiscal year ended June 30,
1998, the portfolio turnover rate for the Bond Fund and the Intermediate Bond
Fund was 222% and 194%, respectively. The portfolio turnover of the Bond Fund
and the Intermediate Bond Fund was affected by fluctuating interest rate
conditions which at times required increased dispositions and acquisitions of
securities to maintain each Fund's maturity structure.
In its Advisory Agreements, the Advisor (and, in the case of the
Framlington Funds, the Sub-Advisor pursuant to the Sub-Advisory Agreement)
agrees to select broker-dealers in accordance with guidelines established
by the Boards of Directors/Trustees from time to time and in accordance with
applicable law. In assessing the terms available for any transaction, the
Advisor or Sub-Advisor, as the case may be, 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 Advisory and Sub-
Advisory Agreements authorize the Advisor or Sub-Advisor, as the case may be,
subject to the prior approval of the Boards of Directors/Trustees, to cause the
Funds 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 Advisor or Sub-Advisor, as the
case may be, 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 Advisor or Sub-Advisor to the Funds. Such
brokerage and research
48
<PAGE>
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 Advisor or Sub-Advisor, as
the case may be, and does not reduce the advisory fees payable to the Advisor or
Sub-Advisor by the Funds. It is possible that certain of the supplementary
research or other services received will primarily benefit one or more other
investment companies or other accounts for which investment discretion is
exercised. Conversely, 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.
The table below shows information on brokerage commissions paid by the
Funds. For the fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
% of Brokerage
$ Amount Brokerage Commission Representing $ Amount of Transactions
Commission Research Services Involving Research Services
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $73,143 6.55% $4,793
Growth & Income Fund $431,055 11.01% $47,460
Index 500 Fund $41,022 0.00% $0
International Equity Fund $135,364 0.00% $0
Small Company Growth Fund $1,860,600 1.68% $31,342
Micro-Cap Fund $599,304 1.26% $7,561
Multi-Season Fund $566,155 9.80% $55,508
NetNet Fund $86,894 0.00% $0
Real Estate Fund $102,670 0.00% $0
Small Cap Value Fund $437,217 3.27% $14,300
Value Fund $557,514 3.27% $18,204
Growth Opportunities Fund* $2,152 0.00% $0
International Growth Fund $252,419 6.84% $17,273
Emerging Markets Fund $430,410 1.46% $6,274
Healthcare Fund $20,464 5.97% $1,221
Global Financial Services Fund* $3,342 0.00% $0
</TABLE>
- -------------------------
*For the period from commencement of operations through June 30, 1998
The table below shows information on brokerage commissions paid by the
Funds. For the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
% of Brokerage
$ Amount Brokerage Commission Representing $ Amount of Transactions
Commission Research Services Involving Research Services
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $57,518 30.47% $17,526
Growth & Income Fund $386,237 21.02% $81,184
Index 500 Fund $71,050 0.00% $0
International Equity Fund $101,527 0.00% $0
Small Company Growth Fund $852,094 3.72% $ 31,719
Micro-Cap Fund* $8,813 3.85% $339
Multi-Season Fund $366,341 31.40% $115,038
Real Estate Fund $3,649 2.96% $108
Small Cap Value Fund* $67,889 7.81% $5,304
Value Fund* $83,242 11.04% $9,192
International Growth Fund* $232,163 28.39% $65,918
Emerging Markets Fund* $87,174 1.09% $946
Healthcare Fund* $36,584 1.29% $472
Short Term Treasury Fund* $2,012 11.28% $227
- -----------------------
</TABLE>
*For the period from commencement of operations through June 30, 1997
The table below shows information on brokerage commissions paid by the
Funds. For the fiscal year ended June 30, 1996:
<TABLE>
<CAPTION>
% of Brokerage
$ Amount Brokerage Commission Representing $ Amount of Transactions
Commission Research Services Involving Research Services
---------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $76,077 15.80% $12,018
Growth & Income Fund $219,149 4.76% $10,424
Index 500 Fund $41,173 0.00% $0
International Equity Fund $86,687 0.00% $0
Small Company Growth Fund $660,104 2.81% $18,557
Multi-Season Fund $474,404 16.23% $76,975
Real Estate Fund $55,919 4.59% $2,568
Value Fund* $126,743 0.00% $0
- -----------------------
</TABLE>
*For the period from commencement of operations through June 30, 1996
49
<PAGE>
Portfolio securities will not be purchased from or sold to the Advisor,
Sub-Advisor, 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 each Fund and for other investment accounts
managed by the Advisor or 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 a Fund. To the extent permitted by law, the Advisor or Sub-
Advisor, as the case may be, may aggregate the securities to be sold or
purchased for a Fund with those to be sold or purchased for other investment
companies or accounts in executing transactions.
A Fund 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 or Framlington Board
of Trustees or the Company's Board of Directors in accordance with Rule 10f-3
under the 1940 Act.
The Trust, the Company and Framlington are required to identify the
securities of their regular brokers or dealers (as defined in Rule 10b-1 under
the 1940) Act or their parent companies held by them as of the close of their
most recent fiscal year and state the value of such holdings. As of June 30,
1998, the Balanced Fund held securities of BankAmerica Corp valued at $1,011,319
Chase Manhattan valued at $951,300; Bond Fund held securities of Merrill Lynch
valued at $420,970; Cash Investment Fund held securities of Bank of Nova Scotia
valued at $50,000,000, Canadian Imperial Bank of Commerce valued at $50,000,000,
First Chicago valued at $49,293,000, Sanwa Bank valued at $24,925,000; Growth &
Income Fund held securities of Bank One Corp valued at $4,771,969; Index 500
Fund held securities of Bank of New York valued at $2,051,237, BankAmerica Corp
valued at $5,310,028, Bank One Corp valued at $3,523,164, Chase Manhattan valued
at $5,795,984, Citicorp valued at $6,059,550, First Chicago valued at
$2,289,272, J.P. Morgan & Co., Inc. valued at $1,874,000, Lehman Brothers
Holdings, Inc. valued at $829,919, Merrill Lynch valued at $2,868,975, Morgan
Stanley, Dean Witter, Discover & Co. valued at $4,933,245, Norwest valued at
$2,545,237, Wachovia Bank valued at $1,566,208; Intermediate Bond Fund held
securities of BankAmerica Corp valued at $5,897,000, Bank One Corp valued at
$6,197,000; International Equity Fund held securities of, ABN AMRO Holdings
valued at $1,221,094, Bank of Tokyo valued at $2,260,445; Money Market Fund held
securities of Bank of Nova Scotia valued at $4,000,000, Canadian Imperial Bank
of Commerce valued at $3,000,000, Sanwa Bank valued at $3,985,433; Multi-Season
Growth Fund held securities of BankAmerica Corp valued at $7,167,830, Chase
Manhattan valued at $17,685,875; NetNet Fund held securities of Ameritrade
Holding Corporation valued at $618,300 Charles Schwab & Co. Inc. valued at
$487,500; Small Cap Value Fund held securities of McDonald & Co. valued at
$3,871,875; Value Fund held securities of Paine Webber Group, Inc. valued at
$4,360,387 and Global Financial Services Fund held securities of BankAmerica
Corp valued at $26,000.
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 their services and the Funds bear the expenses incurred in
their operations. These expenses include, but are not limited to, fees paid to
the Advisor, Sub-Advisor, Administrator, Custodian, Sub-Custodian and Transfer
Agent; fees and expenses of officers and Boards of Directors/Trustees; taxes;
interest; legal and auditing fees; brokerage fees and commissions; certain fees
and expenses in registering and qualifying the Fund 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 directors' and officers' liability
insurance premiums; and the expense of using independent pricing services. Any
general expenses of the Trust, Framlington or the Company that are not readily
identifiable as belonging to a particular investment portfolio of the Trust,
Framlington or the Company are allocated among all investment portfolios of the
Trust, Framlington or the Company by or under the direction of the Boards of
Directors/Trustees in a manner that the Boards determine to be
50
<PAGE>
fair and equitable. The Advisor, Sub-Advisor, Administrator, Custodian, Sub-
Custodian and Transfer Agent may voluntarily waive all or a portion of their
respective fees from time to time.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
PURCHASES. As described in the Prospectuses, shares of the Funds may be
purchased in a number of different ways. Such alternative sales arrangements
permit an investor to choose the method of purchasing shares that is most
beneficial depending on the amount of the purchase, the length of time the
investor expects to hold shares and other relevant circumstances. An investor
may place orders directly through the Transfer Agent or the Distributor or
through arrangements with his/her authorized broker.
RETIREMENT PLANS. Shares of any 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. As described in the Fund's Prospectuses, shares of the Funds
may be redeemed in a number of different ways:
. By Mail
. By Telephone
. Automatic Withdrawal Plan
The redemption price for Fund shares is the net asset value next determined
after receipt of the redemption request in proper order. The redemption
proceeds will be reduced by the amount of any applicable contingent deferred
sales charge ("CDSC").
CONTINGENT DEFERRED SALES CHARGE - CLASS B SHARES. Class B Shares redeemed
within six years of purchase are subject to a CDSC. The CDSC is based on the
original net asset value at the time of investment or the net asset value at the
time of redemption, whichever is lower.
The CDSC Schedule for Class B Shares of the Trust Funds purchased before
June 27, 1995 is set forth below. The Prospectuses describe the CDSC Schedule
for Class B Shares of Funds of the Trust, the Company and Framlington purchased
after June 27, 1995.
CLASS B SHARES OF THE TRUST FUNDS
PURCHASED ON OR BEFORE JUNE 27, 1995
<TABLE>
<CAPTION>
REDEMPTION DURING CDSC
- --------------------------------------------------------------------------------
<S> <C>
1st Year Since Purchase.............................................. 4.00%
2nd Year Since Purchase.............................................. 4.00%
3rd Year Since Purchase.............................................. 3.00%
4th Year Since Purchase.............................................. 3.00%
5th Year Since Purchase.............................................. 2.00%
6th Year Since Purchase.............................................. 1.00%
</TABLE>
CDSC WAIVERS - CLASS B SHARES OF THE TRUST FUNDS PURCHASED ON OR BEFORE
JUNE 27, 1995. The CDSC will be waived with respect to Class B Shares of the
Trust Funds purchased on or before June 27, 1995 in the following circumstances:
51
<PAGE>
(1) total or partial redemptions made within one year following the death
or disability of a shareholder or registered joint owner;
(2) minimum required distributions made in connection with an IRA or other
retirement plan following attainment of age 59 1/2; and
(3) redemptions pursuant to a Fund's right to liquidate a shareholder's
account involuntarily.
CDSC WAIVERS - CLASS B SHARES OF THE COMPANY FUNDS PURCHASED ON OR BEFORE
JUNE 27, 1995. The CDSC will be waived on the following types of redemptions
with respect to Class B Shares of the Company Funds purchased on or before June
27, 1995:
(1) redemptions by investors who have invested a lump sum amount of $1
million or more in the Fund;
(2) redemptions by the officers, directors, and employees of the Advisor
or the Distributor and such persons' immediate families;
(3) dealers or brokers who have a sales agreement with the Distributor,
for their own accounts, or for retirement plans for their employees or
sold to registered representatives or full time employees (and their
families) that certify to the Distributor at the time of purchase that
such purchase is for their own account (or for the benefit of their
families);
(4) involuntary redemptions effected pursuant to the Fund's right to
liquidate shareholder accounts having an aggregate net asset value of
less than $250; and
(5) redemptions the proceeds of which are reinvested in the Fund within 90
days of the redemption.
CONTINGENT DEFERRED SALES CHARGE - CLASS A AND CLASS C SHARES. The
Prospectuses describe the CDSC for Class A or C Shares of the Funds of the
Trust, the Company and Framlington purchased after June 27, 1995.
Class A Shares of the Trust Funds purchased on or before June 27, 1995
without a sales charge by reason of a purchase of $500,000 or more are subject
to a CDSC of 1.00% of the lower of the original purchase price or the net asset
value at the time of redemption if such shares are redeemed within two years of
the date of purchase. Class A Shares of the Trust Funds purchased on or before
June 27, 1995 that are redeemed will not be subject to the CDSC to the extent
that the value of such shares represents: (1) reinvestment of dividends or other
distributions; (2) Class A Shares redeemed more than two years after their
purchase; (3) a minimum required distribution made in connection with IRA or
other retirement plans following attainment of age 59 1/2; or (4) total or
partial redemptions made within one year following the death or disability of a
shareholder or registered joint owner.
No CDSC is imposed to the extent that the current net asset value of the
shares redeemed does not exceed (a) the current net asset value of shares
purchased through reinvestment of dividends or capital gain distributions plus
(b) the current net asset value of shares purchased more than one year prior to
the redemption, plus (c) increases in the net asset value of the shareholder's
shares above the purchase payments made during the preceding one year.
The holding period of Class A or Class C Shares of a Fund acquired through
an exchange of the corresponding class of shares of the Munder Money Market Fund
(which are available only by exchange of Class A or Class C Shares of the Fund,
as the case may be) and the Company Funds, the Framlington Funds and the non-
money market funds of the Trust will be calculated from the date that the Class
A or Class C Shares of the Fund were initially purchased.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing all
Class A Shares on which a front-end sales charge has been assessed; then of
shares acquired pursuant to the reinvestment of dividends and distributions; and
then of amounts representing the cost of shares purchased one year or more prior
to the redemption.
OTHER REDEMPTION INFORMATION. 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
52
<PAGE>
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.
The Funds reserve the right to suspend or postpone redemptions during any
period when: (i) trading on the New York Stock Exchange (the "NYSE") is
restricted by applicable rules and regulations of the SEC; (ii) the NYSE is
closed for other than customary weekend and holiday closings; (iii) the SEC has
by order permitted such suspension or postponement for the protection of the
shareholders; or (iv) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable.
The Funds may involuntarily redeem an investor's shares if the net asset
value of such shares is less than $250; 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 $250 or more. A check for the redemption proceeds payable to the
investor will be mailed to the investor at the address of record.
EXCHANGES. In addition to the method of exchanging shares described in the
Funds' Prospectuses, a shareholder exchanging at least $1,000 of shares (for
which certificates have not 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., Eastern time.
The Funds, 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 Funds 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
MONEY MARKET FUNDS. The value of the portfolio securities of the Money
Market Funds is calculated using the amortized cost method of valuation. Under
this method the market value of an instrument is approximated by amortizing the
difference between the acquisition cost and value at maturity of the instrument
on a straight-line basis over the remaining life of the instrument. The effect
of changes in the market value of a security as a result of fluctuating interest
rates is not taken into account. The market value of debt securities usually
reflects yields generally available on securities of similar quality. When such
yields decline, market values can be expected to increase, and when yields
increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Fund would receive if the security were sold prior to maturity. The Boards of
Directors/Trustees have established procedures reasonably designed, taking into
account current market conditions and the Funds' investment objectives, for the
purpose of maintaining a stable net asset value of $1.00 per share for each
Money Market Fund for purposes of sales and redemptions. These procedures
include a review by the Boards of Directors/Trustees, at such intervals as they
deem appropriate, of the extent of any deviation of net asset value per share,
based on available market quotations, from the $1.00 amortized cost per share.
Should that deviation exceed 1/2 of 1% for a Fund, the Boards of
Directors/Trustees will promptly consider whether any and, if any, what action
should be initiated. If the Board believes that the extent of any deviation
from a Money Market Fund's $1.00 amortized cost price per share may result in
material dilution of other unfair results to new or existing investors, it will
take such steps as it considers appropriate to eliminate or reduce any such
dilution or unfair results
53
<PAGE>
to the extent reasonably practicable. Such action may include redeeming shares
in kind, selling portfolio securities prior to maturity, reducing or withholding
dividends, shortening the average portfolio maturity, reducing the number of
outstanding shares without monetary consideration, and utilizing a net asset
value per share as determined by using available market quotations.
Pursuant to Rule 2a-7 under the 1940 Act, each of the Money Market Funds
will maintain a dollar-weighted average portfolio maturity appropriate to its
objective of maintaining a stable net asset value per share, provided that such
Funds will not purchase any security with a remaining maturity (within the
meaning of Rule 2a-7 under the 1940 Act) greater than 397 days (securities
subject to repurchase agreements, variable and floating rate securities, and
certain other securities may bear longer maturities), nor maintain a dollar-
weighted average portfolio maturity which exceeds 90 days. In addition, the
Funds may acquire only U.S. dollar denominated obligations that present minimal
credit risks and that are "First Tier Securities" at the time of investment.
First Tier Securities are those that are rated in the highest rating category by
at least two nationally recognized security rating organizations NRSROs or by
one if it is the only NRSRO rating such obligation or, if unrated, determined to
be of comparable quality. A security is deemed to be rated if the issuer has
any security outstanding of comparable priority and security which has received
a short-term rating by an NRSRO. The Advisor will determine that an obligation
presents minimal credit risks or that unrated investments are of comparable
quality, in accordance with guidelines established by the Board of
Directors/Trustees. There can be no assurance that a constant net asset value
will be maintained for each Money Market Fund.
ALL FUNDS. In determining the approximate market value of portfolio
investments, the Trust, Framlington or the Company 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, Framlington's or the Company'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 members.
IN-KIND PURCHASES
With the exception of the Real Estate Fund, payment for shares may, in the
discretion of the Advisor, be made in the form of securities that are
permissible investments for the Funds as described in the Prospectuses.
Shares of the Real Estate Fund will not be issued for consideration other than
cash. 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 (a) meet the investment
objectives and policies of the Fund; (b) are acquired for investment and not for
resale; (c) are liquid securities that are not restricted as to transfer either
by law or liquidity of markets; (d) have a value that is readily ascertainable
by a listing on a nationally recognized securities exchange; and (e) are valued
on the day of purchase in accordance with the pricing methods used by the Fund
and that the Fund receive satisfactory assurances that (i) it will have good and
marketable title to the securities received by it; (ii) that the securities are
in proper form for transfer to the Fund; and (iii) adequate information will be
provided concerning the basis and other tax matters relating to the securities.
PERFORMANCE INFORMATION
YIELD OF THE MONEY MARKET FUNDS
The Money Market Funds' current and effective yields are computed using
standardized methods required by the SEC. The annualized yield is computed by:
(a) determining the net change in the value of a hypothetical account having a
balance of one share at the beginning of a seven-calendar day period; (b)
dividing the net change by the value of the account at the beginning of the
period to obtain the base period return; and (c) annualizing the results (i.e.,
multiplying the base period return by 365/7). The net change in the value of
the account reflects the value of additional shares purchased with dividends
declared and all dividends declared on both the original share and such
additional shares, but does not include realized gains and losses or unrealized
appreciation and depreciation. Compound effective yields are computed by adding
1 to the base period return (calculated as
54
<PAGE>
described above), raising the sum to a power equal to 365/7 and subtracting 1.
Based on the foregoing computations, the table below shows the annualized yields
for all share classes of the Cash Investment, Money Market, Tax-Free Money
Market and U.S. Treasury Money Market Funds for the seven-day period ended June
30, 1998.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class K Class Y
- ------------------------------------------------------------------------------------------------------------------------------
Effective Effective Effective Effective Effective
Yield Yield Yield Yield Yield Yield Yield Yield Yield Yield
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Investment 4.87% 4.98% N/A N/A N/A N/A 4.97% 5.09% 5.12% 5.24%
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Money Market 4.74% 4.84% 3.99% 4.06% 3.92% 3.99% N/A N/A 4.99% 5.10%
Fund
- -----------------------------------------------------------------------------------------------------------------------------
Tax-Free Money 2.73% 2.77% N/A N/A N/A N/A 2.83% 2.87% 2.98% 3.02%
Market Fund
- -----------------------------------------------------------------------------------------------------------------------------
U.S. Treasury 4.67% 4.77% N/A N/A N/A N/A 4.77% 4.88% 4.93% 5.04%
Money Market
Fund
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
In addition, a standardized "tax-equivalent yield" may be quoted for the
Tax-Free Money Market Fund, which is computed by: (a) dividing the portion of
the Fund's yield (as calculated above) that is exempt from Federal income tax by
1 minus a stated Federal income tax rate; and (b) adding the figure resulting
from (a) above to that portion, if any, of the yield that is not exempt from
Federal income tax. For the seven-day period ended June 30, 1998, the tax-
equivalent yield for Class A, Class K and Class Y Shares of the Tax-Free Money
Market Fund was 3.97% (Class A), 4.11% (Class K) and 4.33% (Class Y) calculated
for all share classes based on a stated tax rate of 31%. The fees which may be
imposed by institutions on their Customers are not reflected in the calculations
of yields for the Funds.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yields of each Fund will fluctuate, they cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to each Fund's investment
policies including the types of investments made, lengths of maturities of the
portfolio securities, and whether there are any special account charges which
may reduce the effective yield.
PERFORMANCE OF THE NON-MONEY MARKET FUNDS
YIELD. The Bond Funds', International Bond Fund's and Short Term Treasury
Fund's 30-day (or one month) standard yield described in the applicable
Prospectus is calculated for each Fund in accordance with the method prescribed
by the SEC for mutual funds:
YIELD = 2 [(a-b + 1)/6/ - 1]
---
cd
Where:
a =dividends and interest earned by a Fund during the period;
b =expenses accrued for the period (net of reimbursements and waivers);
c =average daily number of shares outstanding during the period entitled to
receive dividends;
d =maximum offering price per share on the last day of the period.
For the purpose of determining interest earned on debt obligations
purchased by a Fund at a discount or premium (variable "a" in the formula), each
Fund computes the yield to maturity of such instrument based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of each month, or, with respect to obligations
purchased during the month, the purchase price (plus actual accrued interest).
Such yield is then divided by 360 and the quotient is multiplied by the market
value of the obligation
55
<PAGE>
(including actual accrued interest) in order to determine the interest income on
the obligation for each day of the subsequent month that the obligation is in
the portfolio. It is assumed in the above calculation that each month contains
30 days. The maturity of a debt obligation with a call provision is deemed to be
the next call date on which the obligation reasonably may be expected to be
called or, if none, the maturity date. For the purpose of computing yield on
equity securities held by a Fund, dividend income is recognized by accruing
1/360 of the stated dividend rate of the security for each day that the security
is held by the Fund.
Interest earned on tax-exempt obligations that are issued without original
issue discount and have a current market discount is calculated by using the
coupon rate of interest instead of the yield to maturity. In the case of tax-
exempt obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have the discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market value of such debt obligations. Expenses
accrued for the period (variable "b" in the formula) include all recurring fees
charged by a Fund to all shareholder accounts in proportion to the length of the
base period and the Fund's mean (or median) account size. Undeclared earned
income will be subtracted from the offering price per share (variable "d" in the
formula). A Fund's maximum offering price per share for purposes of the formula
includes the maximum sales charge imposed -- currently 5.50% of the per share
offering price for Class A Shares of the Equity Funds (with the exception of the
Index 500 Fund, currently 2.50% of the per share offering price for Class A) and
the Balanced Fund and 4.00% of the per share offering price for Class A Shares
of the Bond Fund, International Bond Fund, Short Term Treasury Fund and Tax-Free
Bond Funds. The tax-equivalent yield for each Tax-Free Bond Fund below is based
on a stated federal tax rate of 31% and, with respect to Michigan Bond Fund, a
Michigan state tax rate of 4%.
CLASS A SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class A Shares of
the following Funds for the 30-day period ended June 30, 1998 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------------------ ----------------------------
<S> <C> <C>
Bond Fund 5.22% N/A
Intermediate Bond Fund 5.00% N/A
U.S. Income Fund 5.36% N/A
International Bond Fund 5.13% N/A
Michigan Bond Fund 3.91% 5.98%
Tax-Free Bond Fund 3.85% 5.63%
Tax-Free Intermediate Bond Fund 3.70% 5.45%
</TABLE>
CLASS B SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class B Shares of
the following Funds for the 30-day period ended June 30, 1998 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
--------------------------- ----------------------------
<S> <C> <C>
Bond Fund 4.68% N/A
Intermediate Bond Fund 4.46% N/A
U.S. Income Fund 4.83% N/A
International Bond Fund 2.51% N/A
Michigan Bond Fund 3.32% 5.08%
Tax-Free Bond Fund 3.26% 4.77%
Tax-Free Intermediate Bond Fund 3.10% 4.56%
</TABLE>
56
<PAGE>
CLASS C SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class C Shares of
the following Funds for the 30-day period ended June 30, 1998 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
--------------------------- ---------------------------
<S> <C> <C>
Bond Fund 4.68% N/A
Intermediate Bond Fund 4.46% N/A
U.S. Income Fund 4.83% N/A
International Bond Fund 2.50% N/A
Michigan Bond Fund 3.32% 5.08%
Tax-Free Bond Fund 3.26% 4.77%
</TABLE>
CLASS K SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class K Shares of
the following Funds for the 30-day period ended June 30, 1998 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 5.44% N/A
Intermediate Bond Fund 5.21% N/A
U.S. Income Fund 5.59% N/A
International Bond Fund+ 3.27% N/A
Short Term Treasury Fund 4.82% N/A
Michigan Bond Fund 4.07% 7.37%
Tax-Free Bond Fund 4.02% 5.88%
Tax-Free Intermediate Bond Fund 3.86% 5.68%
</TABLE>
+As of June 15, 1998, Class K Shares of Short Term Treasury Fund were renamed
the Michigan Municipal Shares.
CLASS Y SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class Y Shares of
the following Funds for the 30-day period ended June 30, 1998 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 5.69% N/A
Intermediate Bond Fund 5.47% N/A
U.S. Income Fund 5.84% N/A
International Bond Fund 3.52% N/A
Short Term Treasury Fund 5.07% N/A
Michigan Bond Fund 4.33% 6.62%
Tax-Free Bond Fund 4.27% 6.25%
Tax-Free Intermediate Bond Fund 4.11% 6.05%
</TABLE>
TOTAL RETURN. Each Fund that advertises its "average annual total return"
computes such 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:
P = hypothetical initial payment of $1,000;
T = average annual total return;
n = period covered by the computation, expressed in years; and
57
<PAGE>
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).
Each Fund that advertises its "aggregate total return" computes such
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 hypothetical
investment after deduction of all non-recurring charges at the end of the
measuring period. The Funds' 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 currently 5.50% of the per share offering price for Class A Shares of
the Equity Funds (with the exception of the Index 500 Fund, currently 2.50% of
the per share offering price for Class A) and the Balanced Fund and 4.00% of the
per share offering price for Class A Shares of the Bond Fund, International Bond
Fund and Tax-Free Bond Funds; and the Funds' load adjusted average annual total
return and load adjusted aggregate total return quotations for Class B Shares
will reflect any applicable CDSC; provided that the Funds 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.
Based on the foregoing calculation, set forth below are the average annual
total return figures for the Class A, B, C, K and Y Shares of each of the
following Funds for the 12 month and 5 year periods ended June 30, 1998 and
since commencement of operations.
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund--Inception Date 6/30/98* 6/30/98* 6/30/98* 6/30/98** 6/30/98** 6/30/98**
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund
Class A-4/30/93 15.93% 11.44% 11.49% 9.53% 10.17% 10.29%
Class B-6/21/94 15.11% N/A 14.45% 10.11% N/A 14.12%
Class C-1/24/96 15.00% N/A 14.09% 14.00% N/A N/A
Class K-4/16/93 15.86% 11.45% 11.18% N/A N/A N/A
Class Y-4/13/93 16.23% 11.69% 11.33% N/A N/A N/A
Growth & Income Fund
Class A-8/8/94 23.03% N/A 22.00% 16.23% N/A 20.24%
Class B-8/9/94 22.09% N/A 21.13% 17.09% N/A 20.69%
Class C-12/5/95 22.05% N/A 21.18% 21.05% N/A N/A
Class K-7/5/94 23.00% N/A 21.75% N/A N/A N/A
Class Y-7/5/94 23.32% N/A 22.03% N/A N/A N/A
Index 500 Fund
Class A-12/9/92 29.61% 22.49% 21.05% 26.35% 21.87% 20.49%
Class B-10/31/95 29.17% N/A 29.94% 26.17% N/A 29.45%
Class C N/A N/A N/A N/A N/A N/A
Class K12/7/92 29.42% 22.39% 20.96% N/A N/A N/A
Class Y-12/1/91 29.76% 22.68% 20.80% N/A N/A N/A
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund--Inception Date 6/30/98* 6/30/98* 6/30/98* 6/30/98** 6/30/98** 6/30/98**
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Equity Fund
Class A-11/30/92 4.30% 10.70% 11.09% (1.46)% 9.46% 9.96%
Class B-3/9/94 3.54% N/A 7.43% (1.23)% N/A 7.06%
Class C-9/29/95 3.50% N/A 9.95% 2.50% N/A N/A
Class K-11/23/92 4.24% 10.71% 11.32% N/A N/A N/A
Class Y-12/1/91 4.48% 10.96% 10.52% N/A N/A N/A
International Growth Fund
Class A-2/20/97 5.60% N/A 13.42% (0.21)% N/A 8.78%
Class B-3/19/97 4.88% N/A 15.64% (0.12)% N/A 12.65%
Class C-2/13/97 5.50% N/A 13.23% 4.05% N/A N/A
Class K-1/10/97 5.60% N/A 14.11% N/A N/A N/A
Class Y-12/31/96 5.86% N/A 13.04% N/A N/A N/A
Emerging Markets Fund
Class A-1/14/97 (28.34)% N/A (6.17)% (32.27)% N/A (9.72)%
Class B-2/25/97 (28.90)% N/A (13.23)% (32.27)% N/A (15.75)%
Class C-3/3/97 (28.88)% N/A (12.34)% (29.57)% N/A N/A
Class K-1/10/97 (28.34)% N/A (5.35)% N/A N/A N/A
Class Y-12/31/96 (28.12)% N/A (4.66)% N/A N/A N/A
Healthcare Fund
Class A-2/14/97 8.54% N/A 3.33% 2.60% N/A 0.85%
Class B-1/31/97 7.83% N/A 4.33% 2.83% N/A 1.53%
Class C-1/13/97 7.73% N/A 8.38% 6.73% N/A N/A
Class K-4/1/97 8.45% N/A 19.54% N/A N/A N/A
Class Y-12/31/96 8.72% N/A 11.93% N/A N/A N/A
Micro-Cap Fund
Class A-12/26/96 38.01% N/A 45.76% 30.38% N/A 40.42%
Class B-2/24/97 36.87% N/A 41.16% 31.87% N/A 38.52%
Class C-3/31/97 36.95% N/A 54.86% 35.95% N/A N/A
Class K-12/31/96 37.90% N/A 45.10% N/A N/A N/A
Class Y-12/26/96 38.19% N/A 46.03% N/A N/A N/A
Small-Cap Fund
Class A-1/10/97 24.36% N/A 25.06% 17.52% N/A 29.93%
Class B-2/11/97 23.58% N/A 26.51% 18.58% N/A 23.85%
Class C-1/13/97 23.60% N/A 29.37% 22.60% N/A N/A
Class K-12/31/96 24.53% N/A 30.63% N/A N/A N/A
Class Y-12/26/96 24.84% N/A 31.25% N/A N/A N/A
NetNet Fund
Class A-8/19/96 87.23% N/A 61.84% 76.99% N/A 57.03%
Class B-6/1/98 N/A N/A 20.91% N/A N/A 15.91%
Class C N/A N/A N/A N/A N/A N/A
Class Y-6/1/98 N/A N/A 20.97% N/A N/A N/A
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund -- Inception Date 6/30/98* 6/30/98* 6/30/98* 6/30/98** 6/30/98** 6/30/98**
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
International Bond Fund
Class A-10/17/96 0.86% N/A 0.01% (3.19)% N/A (2.38)%
Class B-6/9/97 0.26% N/A 0.05% (4.66)% N/A (3.65)%
Class C-6/3/98 N/A N/A (1.83)% N/A N/A (0.84)%
Class K-3/25/97 0.80% N/A 3.03% N/A N/A N/A
Class Y-10/2/96 1.12% N/A 0.13% N/A N/A N/A
Multi-Season Fund
Class A-8/4/93 25.02% N/A 19.69% 18.14% N/A 18.32%
Class B-4/29/93 24.12% 18.43% 18.13% 19.12% 18.23% 18.03%
Class C-9/20/93 24.09% N/A 19.32% 23.09% N/A N/A
Class K-6/23/95 25.05% N/A 25.87% N/A N/A N/A
Class Y-8/16/93 25.28% N/A 20.09% N/A N/A N/A
Real Estate Fund
Class A-9/30/94 8.93% N/A 16.28% 2.92% N/A 14.55%
Class B-10/3/94 8.12% N/A 15.45% 3.12% N/A 14.91%
Class C-1/5/96 8.17% N/A 18.39% 7.17% N/A N/A
Class K-10/3/96 8.92% N/A 18.34% N/A N/A N/A
Class Y-10/3/94 9.24% N/A 16.61% N/A N/A N/A
Small Company Growth Fund
Class A-11/23/92 12.41% 18.86% 17.83% 6.22% 17.52% 16.64%
Class B-4/28/94 11.51% N/A 20.42% 6.96% N/A 20.15%
Class C-9/26/95 11.50% N/A 22.22% 10.59% N/A N/A
Class K-11/23/92 12.36% 18.86% 17.83% N/A N/A N/A
Class Y-12/1/91 12.57% 19.11% 18.97% N/A N/A N/A
Value Fund
Class A-9/14/95 25.53% N/A 25.54% 18.65% N/A 23.04%
Class B-9/19/95 24.93% N/A 24.74% 19.93% N/A 24.01%
Class C-2/9/96 24.78% N/A 24.74% 23.78% N/A N/A
Class K-11/30/95 25.84% N/A 25.95% N/A N/A N/A
Class Y-8/18/95 26.12% N/A 26.86% N/A N/A N/A
Bond Fund
Class A-12/9/92 10.45% 6.04% 7.03% 6.02% 5.17% 6.25%
Class B-3/13/96 9.75% N/A 6.89% 4.75% N/A 5.68%
Class C-3/25/96 9.84% N/A 6.79% 8.84% N/A N/A
Class K-11/23/92 10.57% 6.03% 6.98% N/A N/A N/A
Class Y-12/1/91 10.72% 6.27% 6.75% N/A N/A N/A
Intermediate Bond Fund
Class A-11/24/92 7.84% 4.98% 5.63% 3.51% 4.12% 4.86%
Class B-10/25/94 6.94% N/A 6.53% 1.94% N/A 5.83%
Class C-4/19/96 6.69% N/A 5.84% 5.69% N/A N/A
Class K-11/20/92 7.73% 4.97% 5.61% N/A N/A N/A
Class Y-12/1/91 7.99% 5.19% 6.17% N/A N/A N/A
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund -- Inception Date 6/30/98* 6/30/98* 6/30/98* 6/30/98** 6/30/98** 6/30/98**
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
US Government Income Fund
Class A-7/28/94 9.71% N/A 8.06% 5.32% N/A 6.94%
Class B-9/6/95 8.89% N/A 6.40% 3.89% N/A 5.44%
Class C-8/12/96 8.82% N/A 7.26% 7.82% N/A N/A
Class K-7/5/94 9.70% N/A 7.99% N/A N/A N/A
Class Y-7/5/94 9.97% N/A 8.26% N/A N/A N/A
Short Term Treasury Fund
Michigan Municipal 2.50% N/A 2.41% N/A N/A N/A
Shares+-4/2/97
Class Y-1/29/97 5.81% N/A 5.74% N/A N/A N/A
Michigan Bond Fund
Class A-2/15/94 9.01% N/A 5.15% 4.67% N/A 4.18%
Class B-7/5/94 8.23% N/A 6.58% 3.23% N/A 5.95%
Class C-10/4/96 8.24% N/A 6.79% 7.24% N/A N/A
Class K-1/3/94 9.02% N/A 4.90% N/A N/A N/A
Class Y-1/3/94 9.17% N/A 5.15% N/A N/A N/A
Tax-Free Bond Fund
Class A-10/9/95 8.54% N/A 6.41% 4.17% N/A 4.82%
Class B-12/6/94 7.65% N/A 7.52% 2.65% N/A 6.82%
Class C-7/7/98 N/A N/A N/A N/A N/A N/A
Class K-7/5/94 8.43% N/A 7.15% N/A N/A N/A
Class Y-7/21/94 8.70% N/A 7.31% N/A N/A N/A
Tax-Free Intermediate
Bond Fund
Class A-11/30/92 5.44% 4.27% 4.67% 1.26% 3.43% 3.92%
Class B-5/16/96 4.68% N/A 4.38% (0.32)% N/A 3.03%
Class C-7/8/98 N/A N/A N/A N/A N/A N/A
Class K-2/9/87++ 5.44% 4.27% 5.57% N/A N/A N/A
Class Y-12/17/92 5.70% 4.51% 4.89% N/A N/A N/A
</TABLE>
____________________________________________________________
* Figures do not include the effect of the sales charge.
** Figures include the effect of the applicable sales charge.
+ As of June 15, 1998, Class K Shares of Short Term Treasury Fund were renamed
the Michigan Municipal Shares.
++ For the ten year period ended June 30, 1998, the average annual return for
Class K Shares was 5.72%.
As of June 30, 1998, the following Classes had not commenced operations:
Class A Shares of Global Financial Services Fund and Growth Opportunities Fund;
Class B Shares of Global Financial Services Fund, Growth Opportunities Fund,
Cash Investment Fund, International Bond Fund, NetNet Fund, Tax-Free Money
Market Fund and U.S. Treasury Money Market Fund; Class C Shares of Global
Financial Services Fund, Growth Opportunities Fund, Cash Investment Fund, Tax-
Free Money Market Fund, Index 500 Fund, Tax-Free Intermediate Bond Fund, NetNet
Fund and U.S. Treasury Money Market Fund; and Class K Shares of Global Financial
Services Fund, Growth Opportunities Fund and NetNet Fund.
The foregoing performance data reflects the imposition of the maximum sales
load on Class A Shares but does not reflect payments under the Trust's Class K
Plan or Class A Plan, which were not imposed before December 31, 1993.
61
<PAGE>
ALL FUNDS. 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, a
Fund's yields or total returns may be quoted and compared to those of other
mutual funds with similar investment objectives and to stock or other relevant
indices. For example, a Fund's yield may be compared to the IBC/Donoghue's Money
Fund Average, which is an average compiled by Donoghue's MONEY FUND REPORT of
Holliston, MA 01746, a widely recognized independent publication that monitors
the performance of money market funds, or to the data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service that monitors
the performance of mutual funds. In addition, as stated in the Funds'
Prospectuses, the tax-equivalent yield (and hypothetical examples illustrating
the effect of tax-equivalent yields) of a Fund may be quoted in advertisements
or reports to shareholders. Hypothetical examples showing the difference between
a taxable and a tax-free investment may also be provided to shareholders.
TAXES
The following summarizes certain additional federal and state income tax
considerations generally affecting the Funds and their shareholders that are not
described in the Funds' Prospectuses. 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 applicable Prospectus is not intended as a substitute
for careful tax planning. This discussion is based upon present provisions of
the Internal Revenue Code, the regulations promulgated thereunder, and judicial
and administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisors with regard to the federal tax consequences of the purchase, ownership
and disposition of Fund shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
GENERAL. Each Fund intends to elect and qualify to be taxed separately as
a regulated investment company under the Internal Revenue Code. As a regulated
investment company, each 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 Internal Revenue Code that are described below.
Distributions of investment company taxable income and net tax-exempt interest
income made during the taxable year or, 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"). Interest
(including original issue discount and "accrued market discount") received by a
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 a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a Fund does not hold more than 10% of
the outstanding voting securities of such issuer) and no more than 25% of the
value of each 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
62
<PAGE>
investment companies), or in two or more issuers which such Fund controls and
which are engaged in the same or similar trades or businesses.
Distributions of net investment income received by a Fund from investments
in debt securities (other than interest on tax-exempt municipal obligations held
by the Tax-Free Bond Funds and Tax-Free Money Market Fund) and any net realized
short-term capital gains distributed by a 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 gain from the sale or exchange of a capital asset held for
more than one year, regardless of the length of time a shareholder has held his
or her Fund shares and regardless of whether the distribution is paid in cash or
reinvested in shares. The Funds expect that capital gain dividends will be
taxable to shareholders as long-term gain. Capital gain dividends are not
eligible for the dividends received deduction.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by such 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.
If for any taxable year any 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 such Fund's
current and accumulated earnings and profits.
Shareholders will be advised annually as to the federal income tax
consequences of distributions made by the Funds each year.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, a Fund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses, as prescribed by the Code) for the one-
year period ending on October 31 of the calendar year, and (3) any ordinary
income and capital gains for previous years that was not distributed during
those years. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by a Fund in October, November or
December with a record date in such a month and paid by a Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are received. To prevent application
of the excise tax, a Fund intends to make its distributions in accordance with
the calendar year distribution requirement.
Although a 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, a Fund may be subject to
the tax laws of such states or localities.
The Trust, the Framlington Trust and the Company will be required in
certain cases to withhold and remit to the United States Treasury 31% of taxable
distributions, including gross proceeds realized upon sale or other dispositions
paid to any shareholder (i) who has provided 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 that he is not
subject to backup withholding or that he is an "exempt recipient."
63
<PAGE>
DISPOSITION OF SHARES. Upon a redemption, sale or exchange of his or her
shares, a shareholder will realize a taxable gain or loss depending upon his or
her basis in the shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, generally, depending upon the shareholder's holding
period for the shares. Any loss realized on a redemption, sale or exchange will
be disallowed to the extent the shares disposed of are replaced (including
through reinvestment of dividends) within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the disallowed loss.
Any loss realized by a shareholder on the sale of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received or treated as
having been received by the shareholder with respect to such shares and treated
as long-term capital gains. Furthermore, a loss realized by a shareholder on the
redemption, sale or exchange of shares of a Fund with respect to which exempt-
interest dividends have been paid will, to the extent of such exempt-interest
dividends, be disallowed if such shares have been held by the shareholder for
six months or less.
In some cases, shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their stock. This prohibition generally applies where (1)
the shareholder incurs a sales charge in acquiring the stock of a Fund, (2) the
stock is disposed of before the 91st day after the date on which it was
acquired, and (3) the shareholder subsequently acquires the stock of the same or
another fund and the otherwise applicable sales charge is reduced under a
"reinvestment right" received upon the initial purchase of regulated investment
company shares. The term "reinvestment right" means any right to acquire stock
of one or more funds without the payment of a sales charge or with the payment
of a reduced sales charge. Sales charges affected by this rule are treated as
if they were incurred with respect to the stock acquired under the reinvestment
right. This provision may be applied to successive acquisitions of Fund shares.
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.
TAX-FREE BOND FUNDS AND TAX-FREE MONEY MARKET FUND. The Michigan Bond
Fund, Tax-Free Bond Fund, Tax-Free Intermediate Bond Fund, and Tax-Free Money
Market Fund are designed to provide investors with current tax-exempt interest
income. Shares of the Funds would not be suitable for tax-exempt institutions
and may not be suitable for retirement plans qualified under Section 401 of the
Code, H.R. 10 plans and individual retirement accounts since such plans and
accounts are generally tax-exempt and, therefore, not only would not gain any
additional benefit from the Funds' dividends being tax-exempt but also such
dividends would be taxable when distributed to the beneficiary. In addition,
the Funds may not be an appropriate investment for entities which are
"substantial users" of facilities financed by private activity bonds or "related
persons" thereof. "Substantial user" is defined under U.S. Treasury Regulations
to include a non-exempt person who regularly uses a part of such facilities in
his trade or business and (a) whose gross revenues derived with respect to the
facilities financed by the issuance of bonds are more than 5% of the total
revenues derived by all users of such facilities, (b) who occupies more than 5%
of the entire usable area of such facilities, or (c) for whom such facilities or
a part thereof were specifically constructed, reconstructed or acquired.
"Related persons" generally include certain related natural persons, affiliated
corporations, a partnership and its partners and an S corporation and its
shareholders.
In order for the Funds to pay exempt-interest dividends with respect to any
taxable year, at the close of each quarter of each Fund's taxable year at least
50% of the value of the Fund's assets must consist of tax-exempt municipal
obligations. Exempt-interest dividends distributed to shareholders are not
included in the shareholder's gross income for regular federal income tax
purposes. However, all shareholders required to file a federal income tax
return are required to report the receipt of exempt-interest dividends and other
tax-exempt interest on their returns. Moreover, while such dividends and
interest are exempt from regular federal income tax, they may be subject to
alternative minimum tax in two circumstances. First, exempt-interest dividends
derived from certain "private activity" bonds issued after August 7, 1986 will
generally constitute an item of tax preference for both corporate and non-
corporate taxpayers. Second, exempt-interest dividends derived from all bonds,
regardless of the date of issue, must be taken into account by corporate
taxpayers in determining the amount of certain adjustments
64
<PAGE>
for alternative minimum tax purposes. Receipt of exempt-interest dividends may
result in collateral federal income tax consequences to certain other taxpayers,
including financial institutions, property and casualty insurance companies,
individual recipients of Social Security or Railroad Retirement benefits, and
foreign corporations engaged in a trade or business in the United States.
Prospective investors should consult their own tax advisors as to such
consequences.
The percentage of total dividends paid by the Fund with respect to any
taxable year which qualifies as federal exempt-interest dividends will be the
same for all shareholders receiving dividends during such year. If a
shareholder receives an exempt-interest dividend with respect to any share and
such share is held for six months or less, any loss on the sale or exchange of
such share will be disallowed to the extent of the amount of such dividends.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Funds generally is not deductible for federal income tax purposes
if the Funds distribute exempt-interest dividends during the shareholder's
taxable year.
Investors may be subject to state and local taxes on income derived from an
investment in a Fund. In certain states, income derived from a Fund which is
attributable to interest on obligations of that state or any municipality or
political subdivision thereof may be exempt from taxation.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in a Fund. Persons who
may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before investing in a Fund.
MICHIGAN TAX CONSIDERATIONS - MICHIGAN BOND FUND AND TAX-FREE INTERMEDIATE
BOND FUND. As stated in the Michigan Bond Fund Prospectus and the Tax-Free
Intermediate Bond Fund Prospectus, dividends paid by the Fund that are derived
from interest attributable to tax-exempt Michigan Municipal Obligations will be
exempt from Michigan Income Tax and Michigan Single Business Tax. Conversely, to
the extent that the Fund's dividends are derived from interest on obligations
other than Michigan Municipal Obligations, such dividends will be subject to
Michigan Income and Michigan Single Business Taxes, even though the dividends
may be exempt for federal Income Tax purposes.
In particular, gross interest income and dividends derived from obligations
or securities of the State of Michigan and its political subdivisions, exempt
from federal Income Tax, are exempt from Michigan Income Tax under Act No. 281,
Public Acts of Michigan, 1967, as amended, and are exempt from Michigan Single
Business Tax under Act No. 228, Public Acts of Michigan, 1975, as amended. The
Michigan Income Tax act levies a flat-rate income tax on individuals, estates,
and trusts. The Single Business Tax Act levies a tax upon the "adjusted tax
base" of most individuals, corporations, financial organizations, partnerships,
joint ventures, estates, and trusts with "business activity" in Michigan.
The transfer of obligations or securities of the State of Michigan and its
political subdivisions by the Fund, as well as the transfer of Fund shares by a
shareholder, is subject to Michigan taxes measured by gain on the sale, payment,
or other disposition thereof.
INTERNATIONAL EQUITY FUND, INTERNATIONAL GROWTH FUND, EMERGING MARKETS
FUND, GLOBAL FINANCIAL SERVICES FUND AND INTERNATIONAL BOND FUND. Income
received by the International Equity Fund, the International Growth Fund, the
Emerging Markets Fund, the Global Financial Services Fund and the International
Bond Fund 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 a Fund
qualifies as a regulated investment company, certain distribution requirements
are satisfied, and more than 50% of the value of the Fund's assets at the close
of the taxable year consists of securities of foreign corporations, the Fund may
elect, subject to limitation, to pass through its foreign tax credits to its
shareholders. The Fund may qualify for and make this election in some, but not
necessarily all, of its taxable years. If a Fund were to make an election, an
amount equal to the foreign income taxes paid by the Fund would be included in
the income of its shareholders and
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<PAGE>
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, a Fund will report to its shareholders, in writing, the amount per
share of such foreign tax that must 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 limitations, including the restriction 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 some
of the Funds. These rules may have a particular impact on the amount of income
or gain that the Funds must distribute to their respective shareholders to
comply with the Distribution Requirement, on the income or gain qualifying under
the Income Requirement, all described above.
MARKET DISCOUNT. If a Fund purchases a debt security at a price lower than
the stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for
each period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by a Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligations
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Funds may
be treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by a Fund, original issue discount that accrues on a debt security in a
given year generally is treated for federal income tax purposes as interest and,
therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies.
Some debt securities may be purchased by the Fund, at a discount that
exceeds the original issue discount on such debt securities, if any. This
additional discount represents market discount for federal income tax purposes
(see above).
HEDGING TRANSACTIONS. The taxation of equity options and over-the-counter
options on debt securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by a Fund for selling a put or call option is
not included in income at the time of receipt. If the option expires, the
premium is short-term capital gain to the Fund. If the Fund enters into a
closing transaction, the difference between the amount paid to
66
<PAGE>
close out its position and the premium received is short-term capital gain or
loss. If a call option written by a Fund is exercised, thereby requiring the
Fund to sell the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or loss will be a
capital gain or loss, and will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by a Fund, if the option is sold, any resulting gain or loss will be a
capital gain or loss, and will be long-term or short-term, depending upon the
holding period of the option. If the option expires, the resulting loss is a
capital loss and is long-term or short-term, depending upon the holding period
of the option. If the option is exercised, the cost of the option, in the case
of a call option, is added to the basis of the purchased security and, in the
case of a put option, reduces the amount realized on the underlying security in
determining gain or loss.
Any regulated futures and foreign currency contracts and certain options
(namely, nonequity options and dealer equity options) in which a Fund may invest
may be "section 1256 contracts." Gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain section 1256
contracts may be treated as ordinary income or loss. Also, section, 1256
contracts held by a Fund at the end of each taxable year (and generally for
purposes of the 4% excise tax, on October 31 of each year) are "marked-to-
market" with the result that unrealized gains or losses are treated as though
they were realized.
Generally, hedging transactions, if any, undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by the Funds. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of hedging transactions to the Funds are not
entirely clear. The hedging transactions may increase the amount of short-term
capital gain realized by the Funds which is taxed as ordinary income when
distributed to shareholders.
The Funds may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections
may operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The diversification requirements applicable to the Funds' assets may limit
the extent to which the Funds will be able to engage in transactions in options,
futures or forward contracts.
CONSTRUCTIVE SALES. Recently enacted rules may affect the timing and
character of gain if a Fund engages in transactions that reduce or eliminate its
risk of loss with respect to appreciated financial positions. If the Fund
enters into certain transactions in property while holding substantially
identical property, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code.
CURRENCY FLUCTUATIONS - "Section 988" Gains or Losses. Under the Code,
gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues receivables or liabilities denominated in a
foreign currency and the time the Fund actually collects such receivables or
pays such liabilities generally are treated as ordinary income and loss.
Similarly, on disposition of debt securities denominated in a foreign currency
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<PAGE>
and on disposition of certain futures, forward contracts and options, gains or
losses attributable to fluctuations in the value of the foreign currency between
the date of acquisition of the security or contract and the date of disposition
also are treated as ordinary gain or loss. These gains or losses, referred to
under the Code as "Section 988" gains or losses, may increase or decrease the
amount of a Fund's investment company taxable income to be distributed to its
shareholders as ordinary income.
PASSIVE FOREIGN INVESTMENT COMPANIES. Certain Funds may invest in shares
of foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least on-half of its assets constitute investment-type assets,
or 75% or more of its gross income investment-type income. If a Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. Each Fund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election would
involve marking to market the Fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to market losses and any
loss from an actual disposition of Fund shares would be deductible as ordinary
losses to the extent of any net mark-to-market gains included in income in prior
years.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations are exempt from taxation. The
tax consequences to a foreign shareholder of an investment in the Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
OTHER TAXATION
The foregoing discussion relates only to U.S. federal income tax law and
certain state taxes as applicable to U.S. persons (i.e., U.S. citizens and
residents and domestic corporations, partnerships, trusts and estates).
Distributions by the Funds, and dispositions of Fund shares also may be subject
to other state and local taxes, and their treatment under state and local income
tax laws may differ from the U.S. federal income tax treatment. Shareholders
should consult their tax advisers with respect to particular questions of U.S.
federal, state and local taxation. Shareholders who are not U.S. persons should
consult their tax advisers regarding U.S. and foreign tax consequences of
ownership of shares of the Fund, including the likelihood that distributions to
them would be subject to withholding of U.S. federal income tax at a rate of 30%
(or at a lower rate under a tax treaty). 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.
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<PAGE>
ADDITIONAL INFORMATION CONCERNING SHARES
The Trust and Framlington are Massachusetts business trusts. Under each
Declaration of Trust, the beneficial interest in the Trust or Framlington may be
divided into an unlimited number of full and fractional transferable shares. The
Company is a Maryland corporation. The Trust's and Framlington's Declaration of
Trust and the Company's Articles of Incorporation authorize the Boards of
Directors/Trustees to classify or reclassify any unissued shares of the Trust,
Framlington and the Company 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 the Balanced,
Growth & Income, Index 500, International Equity, Small Company Growth, Bond,
Intermediate Bond, U.S. Income, Michigan Bond, Tax-Free Bond, Tax-Free
Intermediate Bond, Cash Investment, Tax-Free Money Market and U.S. Treasury
Money Market Funds. The shares of each Fund (other than the Cash Investment
Fund, Tax-Free Money Market Fund and U.S. Treasury Money Market Fund) are
offered in five separate classes: Class A, Class B, Class C, Class K and Class Y
Shares. The Cash Investment Fund, Tax-Free Money Market Fund and U.S. Treasury
Money Market Fund offer only Class A Shares, Class K Shares and Class Y Shares.
Pursuant to the authority of Framlington's Declaration of Trust, the Trustees
have authorized the issuance of an unlimited number of shares of beneficial
interest in Framlington representing interests in the International Growth Fund,
Emerging Markets Fund, Global Financial Services Fund and 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. Pursuant to the authority of the Company's
Articles of Incorporation, the Directors have authorized the issuance of shares
of common stock representing interests in the Equity Selection Fund, Growth
Opportunities Fund, Micro-Cap Fund, Multi-Season Fund, Real Estate Fund, Small-
Cap Value Fund, Value Fund, International Bond Fund, Money Market Fund, All-
Season Conservative Fund, All-Season Moderate Fund, All-Season Aggressive Fund,
Financial Services Fund, Short Term Treasury Fund and NetNet Fund. The shares of
each Fund (other than the Money Market Fund, All-Season Conservative Fund, All-
Season Moderate Fund, All-Season Aggressive Fund, Financial Services Fund, Short
Term Treasury Fund and the NetNet Fund) are offered in five separate classes:
Class A, Class B, Class C, Class K and Class Y Shares. The Money Market Fund
offers only Class A, Class B and Class C Shares (which may be acquired only
through an exchange of shares from the corresponding classes of other funds of
the Trust, Framlington and the Company) and Class Y Shares. The All-Season
Conservative Fund, All-Season Moderate Fund and All-Season Aggressive Fund offer
only Class A, Class B and Class Y Shares. The Short Term Treasury Fund offers
Class Y Shares and the Michigan Municipal Shares (formerly, Class K Shares). The
NetNet Fund offers only Class A, Class B, Class C and Class Y Shares.
The Boards of the Trust, the Company and Framlington have adopted plans
pursuant to Rule 18f-3 under the 1940 Act ("Multi-Class Plans") on behalf of
each Fund. Each Multi-Class Plan provides that shares of each class of a Fund
are identical, except for one or more expense variables, certain 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, Framlington or
the Company or an individual Fund, 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 values
of the Trust's, Framlington's or the Company's respective Funds, of any general
assets not belonging to any particular 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 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 a 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 a 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
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<PAGE>
by the Trust, Framlington or the Company, 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 Directors/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,
Framlington or the Company shall not be deemed to have been effectively acted
upon unless approved by the holders of a majority of the outstanding shares of
each Fund affected by the matter. A Fund is affected by a matter, (i) unless it
is clear that the interests of each Fund in the matter are substantially
identical or (ii) 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, Framlington or the Company voting
together in the aggregate without regard to a particular Fund.
Shares of each of the Trust, Framlington and the Company have noncumulative
voting rights and, accordingly, the holders of more than 50% of each of the
Trust's, Framlington's and the Company's outstanding shares (irrespective of
class) may elect all of the trustees or directors. 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 applicable
Prospectus, shares will be fully paid and non-assessable by each of the Trust,
Framlington and the Company.
Annual shareholder meetings to elect trustees or directors 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, Framlington or the Company
shall be called by the trustees or directors upon the written request of
shareholders owning at least 10% of the outstanding shares entitled to vote.
The Trust's and Framlington's Declaration of Trust, as amended, each
authorizes the 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 and Framlington's Board of Trustees may authorize the termination of 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, 1775 Eye Street, N.W.,
Washington, DC 20006, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Trust, Framlington
and the Company.
INDEPENDENT AUDITORS. Ernst & Young LLP, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Trust's, Framlington's and the Company's
independent auditors.
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<PAGE>
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of October 1,
1998, Comerica Bank, One Detroit Center, 500 Woodward Ave., Detroit, Michigan
48226, held of record substantially all of the outstanding shares of the Funds
as agent, custodian or trustee for its customers. As of such date, the
following persons were beneficial owners of 5% or more of the outstanding shares
of a Fund because they possessed voting or investment power with respect to such
shares:
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Balanced Fund - Y Vishay Employees Savings Plus Plan 23.369%
c/o Comerica Bank
One Detroit Center
500 Woodward Avenue
Detroit, MI 48226
Spicer Axle Savings Plan 13.496%
2100 West State Boulevard
Fort Wayne, IN 46808
Perfection Bakeries 401(k) Plan 8.377%
c/o Comerica Bank
One Detroit Center
500 Woodward Avenue
Detroit, MI 48226
Ferco 401(k) Plan 7.779%
c/o Comerica Bank
One Detroit Center
500 Woodward Avenue
Detroit, MI 48226
Growth & Income Fund - Y Detrex Corp. Employees Retirement Plan 5.581%
Attn: Gerald Israel
24901 Northwestern Suite 500
Southfield, MI 48075
Index 500 Fund - Y Vishay Employees Savings Plus Plan 9.702%
c/o Comerica Bank
One Detroit Center
500 Woodward Avenue
Detroit, MI 48226
International Equity Fund - Y Herrick Foundation 12.296%
100 East Patterson Street
Tecumseh, MI 49286
Cash Investment Fund - Y Investors Fiduciary Trust Co. TTEE 7.790%
FBO Various Retirement Plans (UPI)
801 Pennsylvania
Kansas City, MO 64105
</TABLE>
71
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Michigan Bond Fund - Y James P. Vondale 6.234%
Carol L. Vondale JTWROS
1735 Sunburst
Troy, MI 48098
Mary E. Smith TTEE Mary E. Smith Trust 8.074%
15051 U.S. 12 Highway
Brooklyn, MI 49230
Albert Jones TTEE Phillip Jones 18.598%
Irrevocable Trust
1701 Shadford Road
Ann Arbor, MI 48104
Intermediate Bond Fund - Y Wayne State University 10.765%
5700 Cass Avenue
Detroit, MI 48226
Tax-Free Bond Fund - Y P.F. Hurst T/W FBO Anthony Hurst 8.580%
Rehmann Robson Company
105 East Michigan
Jackson, MI 49201
P.F. Hurst T/W FBO Ronald Hurst 8.504%
Rehmann Robson Company
105 East Michigan
Jackson, MI 49201
P.F. Hurst T/A FBO Anthony Hurst 9.080%
Rehmann Robson Company
105 East Michigan
Jackson, MI 49201
P.F. Hurst T/A FBO Ronald Hurst 9.234%
Rehmann Robson Company
105 East Michigan
Jackson, MI 49201
Dorcas I. Gatley Irrevocable Trust 6.471%
n/o Sherry Ward
132 San Mateo Road
Half Moon Bay, CA 94019
Rufus W. Clark Family Testamentary Tst. 14.705%
P.O. Box 691
Wauna, WA 98395
</TABLE>
72
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Tax-Free Intermediate Bond Fund - Y Josephine Ford Employees Deferred Comp. 6.829%
Bodman, Longley & Dahling
Attn: David P. Larsen
100 Renaissance Center 34th Floor
Detroit, MI 48243
Leonard G. Miller Trust 6.899%
5325 Elmgate Bay
Orchard Lake, MI 48324
Money Market Fund - Y Koch Industries, Inc. 5.340%
c/o Wilshire Asset Management
1249 Ocean Avenue Suite 700
Santa Monica, CA 90401
Charles G. Koch 5.116%
Attn: Ruth Williams
4111 East 37th Street North
Wichita, KS 67220
Tax-Free Money Market Fund - Y Toni Wisne-Young Revocable Trust 23.414%
c/o Comerica Bank
One Detroit Center
500 Woodward Avenue
Detroit, MI 48226
George Rieveschl, Jr. Trust 11.641%
c/o Paul Trigg
Dykema, Gossett, Spencer et al
400 Renaissance Center
35th Floor
Detroit, MI 48243
Bruce Rockwell TUA 5.290%
364 Chalfonte
Grosse Pointe Farms, MI 48236
James A. Knight P/A 7.035%
P.O. Box 1089
Jackson, MI 49204
U.S. Treasury Money Market Fund - Y Pompano Beach Police & Fire 7.946%
Retirement System
Deputy Administrator
351 South Cypress Road
Suite 407
Pompano Beach, FL 22222
</TABLE>
73
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Canadian Imperial Bank 7.805%
909 Fannin Street
Suite 1200
Houston, TX 77010
Texas Political Sub Jt. Ins Fund 15.055%
12720 Hillcrest, Suite 1010
Dallas, TX 75230
Texas Political Sub Prop/Cas 10.949%
12720 Hillcrest, Suite 1010
Dallas, TX 75230
Micro-Cap Fund - Y Old Kent Bank on behalf of its clients 7.773%
Attn: Mutual Funds Specialist
4420 44th Street Suite A
Kentwood, MI 49512
International Growth Fund - Y Interstate/Johnson & Lane on behalf of its 5.290%
clients
Interstate Tower
P.O. Box 1220
Charlotte, NC 28201-1220
NetNet Fund - Y Stanley Pottinger Exempt Trust 5.826%
49 Twin Lakes Road
South Salem, NY 10590
Cash Investment Fund - A National Financial Services for the 70.201%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
J.C. Bradford & Co. for the exclusive 6.500%
benefit of its customers
330 Commerce Street
Nashville, TN 37201-1809
Donaldson Lufkin & Jenrette 6.476%
Securities for the exclusive benefit of its
customers
P.O. Box 2052
Jersey City, NJ 07303
Tax-Free Money Market Fund - A National Financial Services for the 97.300%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
</TABLE>
74
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
U.S. Treasury Money Market Fund - A National Financial Services for the 99.367%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Balanced Fund - A Wilson Reichardt & Lobert MPP 12.549%
18853 North Fruitport Road
Spring Lake, MI 49456
Small Company Growth Fund - A MLPF&S for the sole benefit of its 26.710%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Wheat First Securities, Inc. for the exclusive 7.560%
benefit of its customers
2950 Prairie Street SW
Grandville, MI 49418-2072
Index 500 Fund - A MLPF&S for the sole benefit of its 47.212%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Equity Fund - A MLPF&S for the sole benefit of its 29.941%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Main Street Trust Company for the benefit 15.589%
of its clients
1 Ellsworth Street
Martinsville, VA 24112-2811
Intermediate Bond Fund - A MLPF&S for the sole benefit of its 8.642%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Resources Trust Company 6.935%
P.O. Box 3865
Englewood, CO 80155
Bond Fund - A National Financial Services for the 20.802%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Roney & Co. for the benefit of its clients 6.148%
P.O. Box 50566
Kalamazoo, MI 49005-0566
Tax-Free Intermediate Bond Fund - A Irma F. Giffels TTEE 25.473%
Irma F. Giffels Trust
P.O. Box 66734
St. Louis, MO 63166
MLPF&S for the sole benefit of its 17.465%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
National Financial Services for the 5.073%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Balanced Fund - A Trans-Industries Inc. 20.897%
Employees 401(k) Profit Sharing
Plan & Trust
2637 South Adams Road
Rochester Hills, MI 48309
Donaldson Lufkin & Jenrette 12.550%
Securities for the exclusive benefit of its
customers
P.O. Box 2052
Jersey City, NJ 07303
MLPF&S for the sole benefit of its 12.278%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Investors Fiduciary Trust Co. TTEE 7.903%
FBO Regan Productions Inc. 401(k)
801 Pennsylvania Avenue
Kansas City, MO 64105
National Financial Services for the 6.227%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Michigan Bond Fund - A National Financial Services for the 62.804%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
MLPF&S for the sole benefit of its 10.472%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Tax-Free Bond Fund - A MLPF&S for the sole benefit of its 21.124%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Miaz & Co. 21.076%
Attn Mutual Funds Dept.
1000 North Water Street 14th Floor
Milwaukee, WI 53202
Paine Webber for the benefit of its clients 6.592%
19110 Devonshire
Birmingham, MI 48025-3946
Growth & Income Fund - A MLPF&S for the sole benefit of its 28.773%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
U.S. Income Fund - A Resources Trust Company 16.573%
P.O. Box 3865
Englewood, CO 80155
Eamco 11.939%
c/o Riggs Bank NA
Mutual Funds Desk
P.O. Box 96211
Washington, DC 20090-6211
National Financial Services for the 7.975%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
MLPF&S for the sole benefit of its 7.455%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Roney & Co. for the benefit of its clients 6.569%
46 Warner
Grosse Pointe Farms, MI 48236
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Multi-Season Growth Fund - A MLPF&S for the sole benefit of its 26.896%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Real Estate Fund - A Katina E. Dart 24.705%
P.O. Box 914
Okemos, MI 48805-0914
MLPF&S for the sole benefit of its 23.550%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Money Market Fund - A Credit Suisse First Boston Corp. 16.100%
11 Madison Ave. 4th Floor
New York, NY 10010
HC Fund Limited Partnership 8.164%
1300 West Belmont Ave Ste 209
Chicago, IL 60657-3240
Money Market Fund - A Appel Equity Group LTD PA 7.544%
150 Great Neck Road #301
Great Neck, NY 11021
Halpern-Crane Partnership 7.477%
1300 West Belmont
Suite 209
Chicago, IL 60657
Value Fund - A MLPF&S for the sole benefit of its 20.411%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Intetnational Bond Fund - A Delaware Charter GTEE & Trust Co. 63.21%
FBO B. Marlo Dirks IRA
c/o George K. Baum & Company
120 West 12th Street
Kansas City, MO 64105
Raymond James & Assoc. 32.633%
Benjamin A. Heskett IRA
550 Hartford Street
Worthington, OH 43085
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
NetNet Fund - A MLPF&S for the sole benefit of its 15.328%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Micro-Cap Fund - A MLPF&S for the sole benefit of its 26.820%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
National Financial Services for the 9.920%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Small-Cap Value Fund - A MLPF&S for the sole benefit of its 20.263%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
McDonald & Co. Securities for benefit of 10.033%
its clients
260 Brown Street
Birmingham, MI 48009
International Growth Fund - A Painewebber for the benefit of 13.212%
RDM Holding LTD
350 Woodward
Suite 100
Birmingham, MI 48009
Trans-Industries, Inc. 11.034%
Employees 401(k) Profit Sharing
Plan & Trust
2637 South Adams Road
Rochester Hills, MI 48309
Resources Trust Company 7.393%
P.O. Box 3865
Englewood, CO 80155
Emerging Markets Fund - A Painewebber for the benefit of 22.099%
RDM Holding LTD
350 Woodward
Suite 100
Birmingham, MI 48009
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Delaware Charter GTEE & Trust Co. 10.621%
FBO B. Marlo Dirks Ira
c/o George K. Baum & Company
120 West 12th Street
Kansas City, MO 64105
T.M.F. LTD Partnership I/A/A 5.700%
P.O. Box 554
Northville, MI 48167
Healthcare Fund - A MLPF&S for the sole benefit of its 65.992%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Small Company Growth Fund - B MLPF&S for the sole benefit of its 71.387%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Index 500 Fund - B MLPF&S for the sole benefit of its 55.951%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Equity Fund - B MLPF&S for the sole benefit of its 64.985%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Susan Deseranno TTEE 5.001%
Susan Deseranno Trust
UAD 10/13/93
1063 Hawthorne Road
Grosse Pointe Woods, MI 48236
Intermediate Bond Fund - B MLPF&S for the sole benefit of its 68.310%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
National Financial Services for the 5.623%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Bond Fund - B MLPF&S for the sole benefit of its 65.235%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
80
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Prudential Securities FBO 14.500%
Mr. William Holway
c/o Spike Trading
30 South Wacker Drive
Suite 1008
Chicago, IL 60606
State Street Bank & Trust CUST 7.114%
FBO Fredric Shotz IRA Rollover
798 Mere Point Road
Brunswick, ME 04011
Painewebber for the benefit of 5.225%
Verla M. Holmes
979 Moorings Drive
Colorado Springs, CO 80906
Tax-Free Intermediate Bond Fund - B MLPF&S for the sole benefit of its 97.731%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Balanced Fund - B MLPF&S for the sole benefit of its 66.344%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Michigan Bond Fund - B National Financial Services for the 63.719%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Wexford Clearing Services Corp. FBO 8.222%
Jeanne Brown TTEE
Jeanne M. Brown Rev. Trust
UAD 12/8/86
210 Artesian Street
Harbor Springs, MI 49740
MLPF&S for the sole benefit of its 7.012%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Tax-Free Bond Fund - B MLPF&S for the sole benefit of its 94.944%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
81
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Growth & Income Fund - B MLPF&S for the sole benefit of its 52.079%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
U.S. Income Fund - B MLPF&S for the sole benefit of its 91.727%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Multi-Season Growth Fund - B MLPF&S for the sole benefit of its 57.405%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Real Estate Fund - B MLPF&S for the sole benefit of its 64.421%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
82
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Money Market Fund - B Fred Kavli 11.191%
14501 East Los Angeles Avenue
Moorpark, CA 93021
National Financial Services for the 10.622%
exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
State Street Bank & Trust CUST 6.957%
FBO Donald Soenon IRA
46040 Ann Arbor Trail
Plymouth, MI 48071
Value Fund - B MLPF&S for the sole benefit of its 66.107%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Bond Fund - B MLPF&S for the sole benefit of its 95.662%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
NetNet Fund - B MLPF&S for the sole benefit of its 40.214%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Micro-Cap Fund - B MLPF&S for the sole benefit of its 51.639%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Small-Cap Value Fund - B MLPF&S for the sole benefit of its 59.573%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Growth Fund - B Wexford Clearing Services Corp. FBO 33.282%
County Employees Annuity TTEE
Benefit Fund #3
c/o CTC Illinois Trust Co.
Attn: Sonny Panaligan
Chicago, IL 60606-6905
MLPF&S for the sole benefit of its 17.620%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
83
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
International Growth Fund - B Delores L. Judler 6.822%
2711 Golfview Drive Apt. 206
Troy, MI 48084
Emerging Markets Fund - B Wexford Clearing Services Corp. FBO 57.275%
County Employees Annuity TTEE
Benefit Fund #3
c/o CTC Illinois Trust Co.
Attn: Sonny Panaligan
Chicago, IL 60606-6905
MLPF&S for the sole benefit of its 30.056%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Healthcare Fund - B MLPF&S for the sole benefit of its 42.419%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Wexford Clearing Services Corp. FBO 5.949%
County Employees Annuity TTEE
Benefit Fund #3
c/o CTC Illinois Trust Co.
Attn: Sonny Panaligan
Chicago, IL 60606-6905
National Financial Services 5.427%
for the exclusive benefit of
its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Small Company Growth Fund - C MLPF&S for the sole benefit of its 77.811%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Equity Fund - C MLPF&S for the sole benefit of its 94.613%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Intermediate Bond Fund - C MLPF&S for the sole benefit of its 74.512%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
84
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Intermediate Bond Fund - Class C First of Michigan Corp. CUST 14.127%
FBO Laurence C. Hanna IRA Rollover
7611 Oliver
Whitmore Lake, MI 48189
Frank E. Prahl 11.355%
Box 53 Lakeview Road
Gays, IL 61928
Bond Fund - C MLPF&S for the sole benefit of its 97.575%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Tax-Free Intermediate Bond Fund - C Eugene R. Daniels & 96.870%
Cay Carol Daniels JTWROS
121 North Plum
Paxton, IL 60957
Balanced Fund - C MLPF&S for the sole benefit of its 78.392%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
National Financial Services 15.217%
for the exclusive benefit of
its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Michigan Bond Fund - C Donaldson Lufkin Jenrette 67.787%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303
MLPF&S for the sole benefit of its 32.210%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Tax-Free Bond Fund - C MLPF&S for the sole benefit of its 99.977%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Growth & Income Fund - C MLPF&S for the sole benefit of its 61.340%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
85
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Growth & Income Fund - C Prudential Securities Inc. FBO 9.758%
Joseph Albert Mueller
IRA DTD 1/30/84
42723 Lulniu Lane
Oakhurst, CA 93644
Prudential Securities Inc. FBO 9.758%
Joseph A. Mueller
Heather A. Mueller JTTEN
42723 Lulniu Lane
Oakhurst, CA 93644
Marian C. Sherman 5.481%
8469 Ridge Road
East Jordan, MI 49727
U.S. Income Fund - C MLPF&S for the sole benefit of its 58.345%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Prudential Securities Inc. FBO 11.706%
Charles A. Gill DDS PA
Self Employed SEP DTD 6/24/87
1200 East Robinson Street
Orlando, FL 32801
Prudential Securities Inc. FBO 8.823%
Mr. Thomas A. Kazeck
IRA DTD 10/15/97
1731 Pinetree Road
Winter Park, FL 32789
Prudential Securities Inc. FBO 6.765%
Ruth Kazeck Cust
Elizabeth Ashley Kazeck
UNIF Trans Min Act FL
1731 Pinetree Road
Winter Park, FL 32789
Prudential Securities Inc. FBO 6.765%
Thomas Kazeck Cust
Andrew Kazeck
UNIF Trans Min Act FL
1731 Pinetree Road
Winter Park, FL 32789
</TABLE>
86
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Multi-Season Growth Fund - C MLPF&S for the sole benefit of its 91.369%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Real Estate Fund - C MLPF&S for the sole benefit of its 67.498%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Money Market Fund - C Abner Sheffer 18.230%
7 Piccadilly Road
Great Neck, NY 11023
William Harold Newman 15.747%
1205 Longleaf Drive
Fayetteville, NC 28305
State Street Bank & Trust CUST 10.440%
FBO Calvin Ackerman
150 Great Neck Road # 301
Great Neck, NY 11021
Abe Rosenblatt 8.336%
19706 Waters Pond Lane Apt. 501
Boca Raton, FL 33434
Prudential Securities CUST
Dr. David Nibouar IRA DTD 3/18/97
685 Pennsgrove Road
Lincoln University, PA 19352
Douglas Green 6.363%
P.O. Box 527
Pleasant Hills, OR 97455
Dr. Stuart S. Burnstein TTEE 5.980%
Stuart S. Burnsteiin MD
MPP/PS Plan DTD 1/1/96
932 Old Hickory Road
Pittsburgh, PA 15243
Dentistry For You 5.234%
Forsthoefel & Young Inc.
Pension Plan 1/1/95
136 North Enterprise Street
P.O. Box 650
Celina, OH 45822
</TABLE>
87
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Money Market Fund - C Frank Lee Pitcher DDS 5.079%
Sandra S. Pitcher JTWROS
7040 Navajo Tr. NE
Bremerton, WA 98311
Value Fund - C MLPF&S for the sole benefit of its 73.046%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
International Bond Fund - C State Street Bank & Trust CUST 99.156%
FBO Edward Moore IRA
24812 12th Avenue South
Des Moines, WA 98198
Small-Cap Value Fund - C MLPF&S for the sole benefit of its 51.181%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Painewebber for the benefit of 7.932%
Charles P. Huebner
1285 Avenue of the Americas
New York, NY 10019
International Growth Fund - C McDonald & Co. Securities Inc. FBO 50.170%
Grace Doreen Bull IRA Rollover
2711 Ridgewood Court
Bloomfield Hills, MI 48302
MLPF&S for the sole benefit of its 28.798%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Bryan Oreilly & Margaret Oreilly JTTEN 5.562%
7254 Overland Park
West Chester, OH 45069
Frank A. Ury APC Pension Plan 5.264%
DTD 12/16/97
P.O. Box 912
Vallejo, CA 94590
Emerging Markets Fund - C MLPF&S for the sole benefit of its 93.155%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
</TABLE>
88
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
Healthcare Fund - C MLPF&S for the sole benefit of its 88.358%
customers
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32246-6484
Balanced Fund - K Bill Knapp's Profit Sharing/ 12.888%
401(k) Control
110 Knapp Drive
Battle Creek, MI 49015
Micro-Cap Fund - K Paul W. O'Malley Irrevocable Trust 10.708%
QTIP Marital Trust Account B
05600 Horton Creek Road
Charlevoix, MI 49720
Real Estate Fund - K Bennett E. Bidwell IAA 19.120%
626 Yarboro Drive
Bloomfield Hills, MI 48304
Harold Poling Trust IAA 29.585%
Ford Motor - Fairlane Plaza North
290 Town Center Dr. Suite 322
Dearborn, MI 48126
David & Nancy Katzman Stk. AC/IAA 22.482%
DeeKay enterprises
400 galleria Ovvicentre Suite 400
Southfield, MI 48034
International Bond Fund - K Trinity Endowment Trust 16.685%
Reverend David Eberhard
Historic Trinity Lutheran Church
1345 Gratiot
Detroit, MI 48207
Lillman Dwarka SEP 7.962%
232 Woodwind Drive
Bloomfield Hills, MI 48304
Robert C. Williams Irrevocable Trust 5.225%
4561 Motorway Drive
Waterford, MI 48328
Florence Uzelac Trust 10.542%
21029 West Glenhaven Circle
Northville, MI 48167
</TABLE>
89
<PAGE>
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund - Class Name and Address Outstanding
- -------------------- ---------------- -----------
<S> <C> <C>
International Bond - K Herbert I. Weinberg IRA Rollover 6.220%
7441 East Windrose Drive
Scottsdale, AZ 85260
Frank B. Walker, M.D. IRA Rollover 43.033%
14004 Harbor Place Drive
St. Clair Shores, MI 48080
Healthcare Fund - K G. L. Faistenhammer IRA Rollover 27.423%
19314 Parke Lane
Grosse Ile, MI 48138
Hubert S. Smith, Jr. Trust 17.269%
1236 West Center Avenue
Essexville, MI 48732
Hubert S. & Rita C. Smith Charitable 10.386%
Remainder Trust
1236 West Center Avenue
Essexville, MI 48732
Moore Irrevocable Trust 23.424%
FBO Diane Wilson
4382 Hickory Wood Drive
Okemos, MI 48864
Laura V. Schimmel Revocable Trust 6.982%
RR #1 Box 220 Island 8
Cedarville, MI 49719
International Growth Fund - K Frances B. Lee Trust 8.863%
3500 West South Boulevard
Rochester Hills, MI 48309
Cathedral Investment Fund 20.059%
Cathedral Church of St. Paul
Attn: Locksley Smith, Tsr.
4800 Woodward Avenue
Detroit, MI 48201
Short Term Treasury Fund - K Karl M. & Diane J. Steinmann IAA 99.227%
3 Park Avenue
St. Clair, MI 48079
Cash Investment Fund - K Arbor Investments Property 9.251%
Sam Valenti
3331 West Big Beaver Road
Troy, MI 48084
</TABLE>
90
<PAGE>
As of September 30, 1998, Munder Capital Management, on behalf of their
clients owned 89.620% of the Bond Fund Class Y shares, 42.064% of the Michigan
Bond Fund Class Y shares, 22.982% of the Growth & Income Fund Class Y shares,
81.273% of the International Equity Fund Class Y shares, 60.483% of the Small
Company Growth Fund Class Y shares, 66.343% of the Intermediate Bond Fund Class
Y shares, 5.460% of the Tax-Free Bond Fund Class Y shares, 7.409% of the Real
Estate Fund Class K shares, 97.635% of the Real Estate Fund Class A shares,
7.287% of the Multi-Season Growth Fund Class A shares, 70.317% of the Multi-
Season Growth Fund Class Y shares, 27.760% of the Tax-Free Intermediate Bond
Fund Class Y shares, 74.558% of the U.S. Income Fund Class Y shares, 31.488% of
the Value Fund Class A shares, 15.841% of the Value Fund Class K shares, 92.389%
of the Value Fund Class Y shares, 64.840% of the International Growth Fund Class
A shares, 51.740% of the International Growth Fund Class K shares, 97.060% of
the International Growth Fund Class Y shares, 67.710% of the Emerging Markets
Fund Class Y shares, 95.710% of the Healthcare Fund Class Y shares, 99.110% of
the Global Financial Services Fund Class Y shares, 75.710% of the Growth
Opportunities Fund Class Y shares, 12.880% of the Micro-Cap Fund Class K shares,
87.900% of the Micro-Cap Fund Class Y shares, 59.850% of the NetNet Fund Class Y
shares, 82.750% of the Small-Cap Value Fund Class Y shares, 63.25% of the
International Bond Fund Class K shares, 99.630% of the International Bond Fund
Class Y shares, 94.880% of the Short Term Treasury Fund Class Y shares and
100.000% of the Money Market Fund Class Y shares.
SHAREHOLDER APPROVALS. As used in this Statement of Additional Information
and in each Prospectus, a "majority of the outstanding shares" of a Fund or
investment portfolio means the lesser of (a) 67% of the shares of the particular
Fund or portfolio represented at a meeting at which the holders of more than 50%
of the outstanding shares of such Fund or portfolio are present in person or by
proxy, or (b) more than 50% of the outstanding shares of such Fund or portfolio.
REGISTRATION STATEMENT
This Statement of Additional Information and each of the Fund's
Prospectuses do not contain all the information included in the Fund'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 each of the Fund's Prospectuses as to
the contents of any contract or 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 Fund's registration statement,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The financial statements for the Trust, Framlington and the Company
including the notes thereto, dated June 30, 1998 have been audited by Ernst &
Young LLP and are incorporated by reference into this Statement of Additional
Information from the Annual Reports of the Trust, Framlington and the Company
dated as of June 30, 1998. The information under the caption "Financial
Highlights" of the Funds for the period from commencement of operations through
June 30, 1998, appearing in the related Prospectuses dated October 27, 1998 has
been derived from the financial statements audited by Ernst & Young LLP except
for periods ended prior to June 30, 1995 for the Multi-Season Fund and Money
Market Fund, which have been derived from the financial statements audited by
other independent auditors. Such financial statements and financial highlights
are included or incorporated by reference herein in reliance upon their reports
given upon the authority of such firms as experts in accounting and auditing.
91
<PAGE>
APPENDIX A
----------
- Rated Investments -
Corporate Bonds
- ---------------
Excerpts from Moody's Investors Services, Inc. ("Moody's") description of
its bond ratings:
"Aaa":
Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
"Aa":
Bonds that are rated "Aa" are judged to be of high-quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as "high-grade" bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in "Aaa" securities.
"A":
Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
"Baa":
Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appears adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
"Ba":
Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection
of interest and principal payments may be very moderate and thereby not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
"B":
Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
"Caa":
Bonds that are rated "Caa" are of poor standing. These issues may be
in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
A-1
<PAGE>
Excerpts from Standard & Poor's Corporation ("S&P") description of its bond
ratings:
"AAA":
Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
"AA":
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from "AAA" issues by a small degree.
"A":
Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
"BBB":
Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
"BB", "B" and "CCC":
Bonds rated "BB" and "B" are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and repay principal
in accordance with the terms of the obligations. "BB" represents a lower
degree of speculation than "B" and "CCC" the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
To provide more detailed indications of credit quality, the "AA" or "A"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Commercial Paper
- ----------------
The rating "Prime-1" is the highest commercial paper rating assigned by
Moody's. These issues (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issues rated "Prime-2" (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of "Prime-1" rated issues, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Commercial paper ratings of S&P are current assessments of the likelihood
of timely payment of debt having original maturities of no more than 365 days.
Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted "A-1+."
Commercial paper rated "A-2" by S&P indicates that capacity for timely payment
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
A-2
<PAGE>
APPENDIX A
- Rated Investments -
Commercial Paper
- ----------------
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
Moody's: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that
the degree of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety characteristics
are denoted "A-1+".
A-3
<PAGE>
APPENDIX B
As stated in the applicable Prospectuses, the Equity Funds, the Balanced
Fund and the Bond Funds may enter into certain futures transactions and options
for hedging purposes. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a set price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge, against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The
specific securities delivered or taken, respectively, at settlement date, would
not be determined until or at near that date. The determination would be in
accordance with the rules of the exchange on which the futures contract sale or
purchase was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without making or taking of delivery of securities.
Closing out a futures contract sale is effected by the Fund's entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of the sale
exceeds the price of the offsetting purchase, the Fund is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly,
the closing out of a futures contract purchase is effected by the Fund entering
into a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges - principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes,
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities, three-month United States Treasury Bills, and ninety-day
commercial paper.
B-1
<PAGE>
The Funds may trade in any interest rate futures contracts for which there
exists a public market, including, without limitation, the foregoing
instruments.
Example of Futures Contract Sale. The Funds would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by a particular
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury Bonds"). The adviser wishes to fix the current
market value of the portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five point loss in the market value of the portfolio
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The advisor could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Example of Futures Contract Purchase. The Funds would engage in an
interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The advisor wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the advisor believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked on the books of
the Fund or the Fund's sub-custodian for sale in four months, for purchase of
the long-term bond at an assumed market price of 100. Assume these short-term
securities are yielding 15%. If the market price of the long-term bond does
indeed rise from 100 to 105, the equivalent futures market price for Treasury
bonds might also rise from 98 to 103. In that case, the 5 point increase in the
price that the Fund pays for the long-term bond would be offset by the 5 point
gain realized by closing out the futures contract purchase.
The advisor could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for long-
term bonds. The market price
B-2
<PAGE>
of available long-term bonds would have decreased. The benefit of this price
decrease, and thus yield increase, will be reduced by the loss realized on
closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rated, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. 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 indices,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower
market indices, such as the Standard & Poor's 100 or indices based on an
industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
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.
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 (net of commissions and premiums, if
any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
Anticipate buying $62,500 in Equity Securities -Day Hedge is Placed-
Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
Buy Equity Securities with Actual Cost = $65,000 Day Hedge is Lifted-
</TABLE>
B-3
<PAGE>
Increase in Purchase Price = $2,500 Sell 1 Index Futures at 130
Value of Futures = $65,000/Contract
Gain on Futures = $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
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
Anticipate Selling $1,000,000 in Equity Securities - Day Hedge is Placed-
Sell 16 Index Futures at 125
Value of Futures = $1,000,000
Equity Securities - Own Stock Day Hedge is Lifted-
with Value = $960,000 Buy 16 Index Futures at 120
Loss in Portfolio Value = $40,000 Value of Futures = $960,000
Gain on Futures = $40,000
</TABLE>
III. 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 Fund's sub-custodian in 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 particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Advisor or 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.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by the Funds
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 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
B-4
<PAGE>
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 involved 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, the 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 Advisor or Sub-Advisor. Conversely,
the Funds 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 Advisor or Sub-Advisor. It is also
possible that, when the 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 Funds
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 the Funds, 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 Fund's sub-
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.
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 Advisor or 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, the Funds 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
B-5
<PAGE>
fluctuation in a futures contract price during a single trading day. Once the
daily limit has been reached in the contract, no trades may be entered into at a
price beyond the limit, thus preventing the liquidation of open futures
positions. 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 the Funds is also subject to the Advisor's or
Sub-Advisor's ability to predict correctly movements in the direction of the
market. For example, if a particular 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 Funds
may have to sell securities at a time when they may be disadvantageous to do so.
V. Options on Futures Contracts
----------------------------
The 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 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 the 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.
VI. Currency Transactions
---------------------
The Fund 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. The 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 from a NRSRO or are
determined to be of equivalent credit quality by the Advisor.
B-6
<PAGE>
The 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 the 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 respect to portfolio security positions denominated or
generally quoted in that currency.
The 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.
The 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, the 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 Advisor or Sub-
Advisor considers that the Austrian schilling is correlated to the German mark
(the "D-mark"), the Fund holds securities denominated in shillings and the
Advisor or Sub-Advisor believes that the value of the schillings will decline
against the U.S. dollar, the Advisor or 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 the 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 earmark liquid, high grade
assets on the books of the Fund or the Fund's sub-custodian to the extent the
Fund's obligations are not otherwise "covered" through ownership of the
underlying currency.
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 to 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.
VII. Other Matters
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Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-7
