MUNDER INSTITUTIONAL S&P 500 INDEX EQUITY FUND
MUNDER INSTITUTIONAL S&P MIDCAP INDEX EQUITY FUND
MUNDER INSTITUTIONAL S&P SMALLCAP INDEX EQUITY FUND
MUNDER INSTITUTIONAL SHORT TERM TREASURY FUND
MUNDER INSTITUTIONAL MONEY MARKET FUND
STATEMENT OF ADDITIONAL INFORMATION
August 1, 1997, as supplemented August 26, 1997
St. Clair Funds, Inc. (the "Company") currently offers a selection of
11 investment portfolios, five of which are discussed in this Statement of
Additional Information: Munder Institutional S&P 500 Index Equity Fund
("LargeCap 500 Index Fund"), Munder Institutional S&P MidCap Index Equity Fund
("MidCap Index Fund"), Munder Institutional S&P SmallCap Index Equity Fund
("SmallCap Index Fund") (collectively, the "Index Funds"), Munder Institutional
Short Term Treasury Fund ("Short Term Treasury Fund") and Munder Institutional
Money Market Fund ("Money Market Fund") (collectively with the Index Funds, the
"Funds"). The Funds' investment advisor is Munder Capital Management (the
"Advisor").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Funds' Prospectus dated August 1, 1997
and has been filed with the Securities and Exchange Commission ("SEC") as part
of the Company's Registration Statement. This Statement of Additional
Information is not a prospectus, and should be read only in conjunction with the
Funds' Prospectus dated August 1, 1997. The contents of this Statement of
Additional Information are incorporated by reference in the Prospectus in their
entirety. A copy of the Prospectus may be obtained through Funds Distributor,
Inc. (the "Distributor"), or by calling the Funds at (800) 438-5789. This
Statement of Additional Information is dated August 1, 1997, as supplemented on
August 26, 1997.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
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TABLE OF CONTENTS
Page
GENERAL............................................................ 3
FUND INVESTMENTS................................................... 3
RISK FACTORS AND SPECIAL CONSIDERATIONS ........................... 11
INVESTMENT LIMITATIONS............................................. 12
DIRECTORS AND OFFICERS............................................. 14
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS................. 17
PORTFOLIO TRANSACTIONS............................................. 19
PURCHASE AND REDEMPTION INFORMATION................................ 21
NET ASSET VALUE.................................................... 21
PERFORMANCE INFORMATION............................................ 22
TAXES ............................................................. 24
ADDITIONAL INFORMATION CONCERNING SHARES........................... 28
MISCELLANEOUS...................................................... 29
REGISTRATION STATEMENT............................................. 29
APPENDIX A......................................................... A-1
APPENDIX B......................................................... B-1
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the 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 Prospectus does not
constitute an offering by the Funds or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
<PAGE>
GENERAL
The Company was organized as a Maryland corporation on May 23, 1984 under
the name St. Clair Money Market Fund, Inc., which was changed to St. Clair Fixed
Income Fund, Inc. on December 30, 1986 and to St. Clair Funds, Inc. on September
18, 1996.
As stated in the Prospectus, the investment advisor of the Fund is Munder
Capital Management (the "Advisor"). The principal partners of the Advisor are
Old MCM, Inc. ("Old MCM"), Munder Group LLC, Woodbridge Capital Management, Inc.
("Woodbridge") and WAM Holdings, Inc. ("WAM"). Mr. Lee P. Munder, the Advisor's
Chief Executive Officer, indirectly owns or controls a majority of the
partnership interests of the Advisor.
Capitalized terms used herein and not otherwise defined have the same
meanings as are given to them in the Prospectus.
FUND INVESTMENTS
The following supplements the information contained in the Funds'
Prospectus concerning the investment objective and policies of the Funds. Each
Fund's investment objective is a non-fundamental policy and may be changed
without the authorization of the holders of a majority of the Fund's outstanding
shares. There can be no assurance that any Fund will achieve its objective.
Investment Company Securities. The Funds (other than the Short-Term
Treasury Fund) may invest in securities issued by other investment companies.
The LargeCap 500 Index Fund and the MidCap Index Fund may invest in Standard &
Poor's Depositary 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 certain corresponding S&P indices. 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 corresponding S&P index. SPDRs are traded on
the American Stock Exchange.
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.
Non-Domestic Bank Obligations. 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
(other than Short Term Treasury Fund) will invest in obligations of foreign
banks or foreign branches of U.S. banks only when the Advisor 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.
Commercial Paper. Investments by a Fund (other than the Short-Term
Treasury and Money Market Fund) in commercial paper will consist of issues rated
at the time in one of the highest four rating categories by at least one
nationally-recognized statistical rating organization ("NRSRO"). Investments by
the Money Market Fund will consist of issues rated at the time of issuers having
at the time, a quality rating within the two highest rating categories of an
NRSRO. In addition, the Funds may acquire unrated commercial paper and corporate
bonds that are determined by the Advisor at the time of purchase to be of
comparable quality to rated instruments that may be acquired by such Fund as
previously described.
Variable Master Demand Notes. The Funds (other than Short Term Treasury
Fund) 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, the 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, the 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 demand notes only when the Advisor deems the investment
to involve minimal credit risk.
Options. The Index Funds may write covered call options, buy put
options, buy call options and write secured put options in an amount not
exceeding 5% of their net assets for investment or hedging purposes. Such
options may relate to particular securities and may or may not be listed on a
national securities exchange and issued by the Options Clearing Corporation.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves.
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A put option for a particular security gives the purchaser the right
to sell the underlying security at the stated exercise price at any time prior
to the expiration date of the option, regardless of the market price of the
security.
The writer of an option that wished to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of 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 transaction may be greater than the
premium received upon the original option, in which event the relevant 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 Index 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 such 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.
The Index Funds may write options in connection with buy-and-write
transactions; that is, the Index Funds may purchase a security and then write a
call option against that security. The exercise price of the call such 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 cash equivalents in such
amount as are held in a segregated account by its custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if a Fund maintains with its Custodian cash or cash
equivalents 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 is maintained by the portfolio in cash or cash
equivalents in a segregated account with its custodian. The Index Funds may
write call options that are not covered for cross-hedging purposes. Each of the
Index Funds will limit its investment in uncovered put and call options
purchased or written by the Fund to 5% of the Fund's total assets. The Index
Funds will write put options only if they are "secured" by cash or cash
equivalents maintained in a segregated account by the Funds' 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.
Each of the Index Funds may purchase put options to hedge against a
decline in the value of its portfolio. 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. Each of the Index Funds may purchase call options to hedge against an
increase in the price of securities that it anticipates purchasing in the
future. The premium paid for the call option plus any transaction costs will
reduce the benefit, if any, realized by the relevant 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 a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised the Fund realizes a
loss equal to the premium paid. If a Fund enters into a closing sale transaction
on an option purchased by it, the Fund will realize a gain if the premium
received by the Fund on the closing transaction is more than the premium paid to
purchase the option, or a loss if it is less. If an option written by a Fund
expires on the stipulated expiration date or if 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 related to such option will be eliminated. If an option
written by a Fund is exercised, the proceeds of the sale will be increased by
the net premium originally received and the Fund will realize a gain or loss.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the segregated account (in the case of a secured put
option) until the option expires or the optioned security is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline or appreciation in the security during such
period.
There is no assurance that a Fund will be able to close an unlisted
option position. Furthermore, unlisted options are not subject to the
protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options.
In addition, a liquid secondary market for particular options, whether
traded over-the-counter or on a national securities exchange ("Exchange") may be
absent for reasons which include the following: there may be insufficient
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.
Rights and Warrants. As stated in the Prospectus, each Index Fund may
purchase warrants, which are privileges issued by corporations enabling the
owners to subscribe to and purchase a specified number of shares of the
corporation at a specified price during a specified period of time. Subscription
rights normally have a short life span to expiration. The purchase of warrants
involves the risk that a Fund could lose the purchase value of a warrant if the
right to subscribe to additional shares is not exercised prior to the warrant's
expiration. Also, the purchase of warrants involves the risk that the effective
price paid for the warrant added to the subscription price of the related
security may exceed the value of the subscribed security's market price such as
when there is no movement in the level of the underlying security. Warrants
acquired by a Fund in units or attached to other securities are not subject to
this restriction.
Stock Index Futures, Options on Stock Indices and Options on Stock
Index Futures Contracts. The Index Funds may purchase and sell stock index
futures, options on stock indices and options on stock index futures contracts
as a hedge against movements in the equity 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 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 index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of that stock 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 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 expects general stock 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 relevant Fund's futures contract or
index option resulting from the increase in the index. If, on the other hand,
the Advisor expects general stock 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 relevant Fund's
portfolio may also be expected to decline, but that decrease would be offset in
part by the increase in the value of the Fund's position in such futures
contract or put option.
The Index Funds may purchase and write call and put options on stock
index futures contracts. Each Index 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, the Index Funds may purchase put
options or write call options on stock index futures, rather than selling
futures contracts, in anticipation of a decline in general stock market prices
or purchase call options or write put options on stock 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 index futures, stock index
options and options on stock index futures, the Funds will be required to
deposit as "initial margin" an amount of cash and/or short-term U.S. Government
securities equal to from 5% to 8% of the contract amount. Thereafter, subsequent
payments (referred to as "variation margin") are made to and from the broker to
reflect changes in the value of the option or futures contract. 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. For a
detailed description of futures contracts and related options, see Appendix B to
this Statement of Additional Information.
U.S. Government Obligations. The Funds may purchase obligations issued
or guaranteed by the U.S. Government and U.S. Government agencies and
instrumentalities, except that the Short Term Treasury Fund will only purchase
obligations issued by the U.S. Treasury. Obligations of certain agencies and
instrumentalities of the U.S. Government, such as those of the Government
National Mortgage Association, 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,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, Federal National Mortgage Association,
Government National Mortgage Association, General Services Administration,
Student Loan Marketing Association, Central Bank for Cooperatives, Federal Home
Loan Mortgage Corporation, Federal Intermediate Credit Banks and the Maritime
Administration.
Stripped Securities. The Money Market Fund 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 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 is 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 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 or
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Under the STRIPS program, the Money Market 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.
Variable and Floating Rate Instruments. Debt instruments purchased by a
Fund may be structured to have variable or floating interest rates. 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 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 the relevant 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 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 when the 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.
Repurchase Agreements. 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 them at an agreed-upon time and price ("repurchase agreements"). The
Short Term Treasury Fund will invest only in repurchase agreements fully
collateralized by U.S. Treasury securities. The Advisor will review and
continuously monitor the creditworthiness of the seller under a repurchase
agreement, and will require the seller to maintain liquid assets in a segregated
account in an amount that is greater than the repurchase price. Default by, or
bankruptcy of the seller would, however, expose a Fund to possible loss because
of adverse market action or delays in connection with the disposition of
underlying obligations. With respect to the Money Market Fund, the securities
held subject to a repurchase agreement may have stated maturities exceeding
thirteen months, provided that the repurchase agreement itself matures in one
year.
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by a fund's
custodian or a sub-custodian in the Federal Reserve/Treasury book-entry system
or by another authorized securities depository. Repurchase agreements are
considered to be loans by a Fund under the Investment Company Act of 1940, as
amended (the "1940 Act").
Borrowing. Each Fund is authorized to borrow money in an amount up to
5% of the value of its total assets at the time of such borrowings for temporary
purposes, and is authorized to borrow money in excess of the 5% limit as
permitted by the 1940 Act to meet redemption requests. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage of
300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, a Fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. 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.
Reverse Repurchase Agreements. The Funds 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 the
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, in a segregated account, cash,
U.S. Government securities or other liquid portfolio securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
Guaranteed Investment Contracts. The 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 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 limitation
on illiquid investments.
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 a 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 Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case a Fund may be required subsequently to
place additional assets in the separate account 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 a Fund's net assets will fluctuate to a
greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because a Fund's liquidity and ability
to manage its portfolio might be affected when it sets aside cash or portfolio
securities to cover such purchase commitments, the Advisor 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.
The Funds 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 a 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 net asset value
of a Fund starting on the day the Fund agrees to purchase the securities. A Fund
does not earn interest on the securities it has committed to purchase until they
are paid for and delivered on the settlement date.
Lending of Portfolio Securities. To enhance the return on its
portfolio, each Fund may lend securities in its portfolio (subject to a limit of
25% of its total assets) to securities firms and financial institutions,
provided that each loan is secured continuously by collateral in the form of
cash or U.S. Government securities (only cash and short-term U.S. Treasury
securities in the case of the Short Term Treasury Fund) adjusted daily to have a
market value at least equal to the current market value of the securities
loaned. These loans are terminable at any time, and the Fund will receive any
interest or dividends paid on the loaned securities. In addition, it is
anticipated that 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 a possible delay in recovery of the securities or a possible loss of
rights in the collateral should the borrower fail financially. In determining
whether a Fund will lend securities, the Advisor will consider all relevant
facts and circumstances. A Fund will only enter into loan arrangements with
broker-dealers, banks or other institutions which the Advisor has determined are
creditworthy under guidelines established by the Board of Directors.
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 nationally
recognized statistical rating organizations 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.
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 or the Advisor, pursuant to
guidelines established by the Board, 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.
Other. It is possible that unregistered securities purchased by a Fund
in reliance upon Rule 144A under the Securities Act of 1933, as amended (the
"Act"), could have the effect of increasing the level of a Fund's illiquidity to
the extent that qualified institutional buyers become, for a period,
uninterested in purchasing these securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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. The Index Funds are not managed in this
manner. Instead, with the aid of a computer program, the Advisor purchases and
sells securities for each Index Fund in an attempt to produce investment results
that substantially duplicate the investment composition and performance of each
Index Fund's respective corresponding index (the "Corresponding Index"), taking
into account redemptions, sales of additional Fund shares, and other adjustments
as described below.
An Index Fund does not expect to hold at any particular time all of the
stocks included in the Corresponding Index. The Advisor believes, however, that
through the application of capitalization weighing and sector balancing
techniques it will be able to construct and maintain each Index Fund's
investment portfolio so that it reasonably tracks the performance of its
Corresponding Index. The Advisor will compare the industry sector
diversification of the stocks an Index Fund would acquire solely on the basis of
their weighted capitalizations with the industry sector diversification of all
issuers included in the relevant Corresponding Index. This comparison is made
because the Advisor believes that, unless an Index Fund holds all stocks
included in its Corresponding Index, 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. As a result, events
disproportionately affecting such industries could affect the performance of the
Fund differently than the performance of the Corresponding Index. Conversely, if
smaller companies were not purchased by the Fund, the representation of
industries included in the Corresponding Index 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 an Index Fund's
portfolio and will purchase balancing securities in these sectors until the
portfolio's sector weightings closely match those of the Corresponding Index.
This process continues until the portfolio is fully invested (except for cash
holdings).
Redemptions of a substantial number of shares of an Index 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 Corresponding Index.
If an issuer drops in ranking, or is eliminated entirely from an Index
Fund's Corresponding Index, 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 Corresponding
Index, such securities might not be sold. Such sales may result in lower prices
for such securities than may 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 Corresponding Index. However, although the Advisor does not
intend to screen securities for investment by an Index Fund by traditional
methods of financial and market analysis, the Advisor will monitor each Index
Fund's investment with a view towards removing stocks of companies which may
impair for any reason the Fund's ability to achieve its investment objective.
The Index Funds will invest primarily in the common stocks that
constitute their Corresponding Indexes in accordance with their relative
capitalization and sector weightings as described above. It is possible,
however, that a Fund will from time to time receive, as part of a "spin-off" or
other corporate reorganization of an issuer included in a Corresponding Index,
securities that are themselves outside the Corresponding Index. Such securities
will be disposed of by the Fund in due course consistent with the Fund's
investment objective.
INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
section which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous Shareholder Approvals").
Each Fund may not:
1. With respect to 75% of the Fund's assets, invest more
than 5% of the Fund's assets (taken at 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 United States Government, its agencies or
instrumentalities. However, as an operating policy the
Money Market Fund intends to adhere to the 5%
limitation (with respect to the Fund's investment in
the outstanding securities of any one issuer) with
regard to 100% of its portfolio to the extent required
under applicable regulations under the 1940 Act;
2. Purchase securities if more than 25% of the value of
the Fund's total assets would be invested in the
securities of issuers conducting their principal
business activities in the same industry; provided
that: (i) there is no limit on investments in U.S.
Government Securities or, with respect to the Money
Market Fund, obligations of domestic commercial banks
(including U.S. branches of foreign banks subject to
regulations under U.S. laws applicable to domestic
banks and, to the extent that its parent is
unconditionally liable for the obligation, foreign
branches of U.S. banks); (ii) there is no limit on
investments in issuers domiciled in a single country;
(iii) financial service companies are classified
according to the end users of their services (for
example, automobile finance, bank finance and
diversified finance are each considered to be a
separate industry); and (iv) utility companies are
classified according to their services (for example,
gas, gas transmission, electric, and telephone are each
considered to be a separate industry);
3. Borrow money or enter into reverse repurchase
agreements except that the Fund may (i) borrow money or
enter into reverse repurchase agreements for temporary
purposes in amounts not exceeding 5% of its total
assets and (ii) borrow money for the purpose of meeting
redemption 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 restriction 3 above
(collateral arrangements with respect to margin
requirements for options and futures transactions are
not deemed to be pledges or hypothecations for this
purpose);
5. Make loans of securities to other persons in excess of
25% of the Fund's total assets, provided the Fund may
invest without limitation in short-term debt
obligations (including repurchase agreements) and
publicly distributed debt obligations;
6. Underwrite securities of other issuers, except insofar
as the Fund may be deemed an underwriter under the Act
in selling portfolio securities;
7. Purchase or sell real estate or any interest therein,
but not including securities issued by companies
(including real estate investment trusts) that invest
in real estate or interests therein;
8. Make investments for the purpose of exercising control
of management;
9. Invest in commodities or commodity futures contracts,
provided that this limitation shall not prohibit the
purchase or sale by a Fund of financial futures and
stock index futures contracts, options on futures
contracts, options on securities and securities
indices, as permitted by the Fund's Prospectus; or
10. 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 may be deemed to give rise to a senior
security and as consistent with interpretations under
the 1940 Act.
Although not a matter of fundamental policy, the Funds consider
securities which are issued or guaranteed by the same foreign government to be
issued by the same industry for purposes of the 25% asset limitation on
investments in securities of issuers conducting their principal business
activity in the same industry.
Additional investment restrictions adopted by each Fund, 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 or which are not otherwise
marketable;
2. Invest in other investment companies except as
permitted under the 1940 Act; or
3. Purchase securities on margin, or make short sales of
securities except for the use of short-term credit
necessary for the clearance of purchase and sales of
portfolio securities, but a Fund may make margin
deposits in connection with transactions in options,
futures and options on futures.
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). In addition,
if a Fund's holdings of illiquid securities exceeds 15% (10% for the Money
Market Fund) because of changes in the value of the Fund's investments, the Fund
will take action to reduce its holdings of illiquid securities within a time
frame deemed to be in the best interest of the Fund. 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.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
<S> <C> <C>
Principal Occupations
Name, Address and Age Positions with Company During the Past Five Years
Charles W. Elliot 1/3338 Bronson Chairman of the Board of Directors Senior Advisor to the President -
Boulevard Kalamazoo, MI 49008 Western Michigan University since
Age: 64 July 1995; prior to that Executive
Vice President-Administration &
Chief Financial Officer, Kellogg
Company from January 1987 through
June 1995; before that Price Waterhouse.
Board of Directors, Steelcase Financial
Corporation.
John Rakolta, Jr. Director and Vice Chairman of the Chairman, Walbridge Aldinger Company
1876 Rathmor Board of Directors (construction company).
Bloomfield Hills, MI 48304
Age: 49
Thomas B. Bender Director Investment Advisor, Financial &
7 Wood Ridge Road Investment Management Group (since
Glen Arbor, MI 49636 April, 1991); Vice President
Age: 63 Institutional Sales, Kidder, Peabody
& Co. (Retired April, 1991).
David J. Brophy Director Professor, University of Michigan;
1025 Martin Place Director, River Place Financial
Ann Arbor, MI 48104 Corp.; Trustee, Renaissance Assets
Age: 60 Trust.
Dr. Joseph E. Champagne Director Corporate and Executive Consultant
319 Snell Road since September 1995; prior to that
Rochester, MI 48306 Chancellor, Lamar University from
Age: 58 September 1994 until September 1995;
before that Consultant to Management,
Lamar University; President and
Chief Executive Officer, Crittenton
Corporation (holding company that
owns healthcare facilities), and
Crittenton Development Corporation
until August 1993; before that
President, Oakland University of
Rochester, MI, until August 1991;
Member, Board of Directors, Ross
Operating Valve of Troy, MI.
Thomas D. Eckert Director President and COO, Mid-Atlantic
10726 Falls Pointe Drive Group of Pulte Home Corporation
Great Falls, VA 22066 (developer of residential land and
Age: 49 construction of housing units).
Lee P. Munder President President and CEO of the Advisor;
480 Pierce Street Chief Executive Officer and
Suite 300 President of Old MCM, Inc.; Chief
Birmingham, MI 48009 Executive Officer of World Asset
Age: 51 Management; and Director, LPM
Investment Services, Inc. ("LPM").
Terry H. Gardner Vice President, Chief Financial Vice President and Chief Financial
480 Pierce Street Officer and Treasurer Officer of the Advisor; Vice
Suite 300 President and Chief Financial
Birmingham, MI 48009 Officer of Old MCM, Inc. (February
Age: 36 1993 to present); Audit Manager
Arthur Anderson & Co. (1991 to
February 1993); Secretary of LPM.
Paul Tobias Vice President Executive Vice President and Chief
480 Pierce Street Operating Officer of the Advisor
Suite 300 (since April 1995) and Executive
Birmingham, MI 48009 Vice President of Comerica, Inc.
Age: 45
Gerald Seizert Vice President Executive Vice President and Chief
480 Pierce Street Investment Officer/Equities of the
Suite 300 Advisor (since April 1995); Managing
Birmingham, MI 48009 Director (1991-1995), Director
Age: 44 (1992-1995) and Vice President
(1984-1991) of Loomis, Sayles and
Company, L.P.
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Marketing for the Advisor; Vice
Suite 300 President and Director of Client
Birmingham, MI 48009 Services of Old MCM, Inc. (August
Age: 38 1988 to December 1994).
<PAGE>
James C. Robinson Vice President Vice President and Chief Investment
480 Pierce Street Officer/Fixed Income for the
Suite 300 Advisor; Vice President and Director
Birmingham, MI 48009 of Fixed Income of Old MCM, Inc.
Age: 35 (1987-1994).
Leonard J. Barr, II Vice President Vice President and Director of Core
480 Pierce Street Equity Research of the Advisor;
Suite 300 Director and Senior Vice President
Birmingham, MI 48009 of Old MCM, Inc. (since 1988);
Age: 52 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: 51 Woodbridge Capital Management, Inc.
Richard H. Rose Assistant Treasurer Senior Vice President, First Data
First Data Investor Services Investor Services Group, Inc. (since
Group, Inc. May 6, 1994). Formerly, Senior Vice
One Exchange Place President, The Boston Company
8th Floor Advisors, Inc. since November 1989.
Boston, MA 02109
Age: 41
Lisa A. Rosen Secretary, Assistant Treasurer General Counsel of the Advisor since
480 Pierce Street May, 1996; Formerly Counsel, First
Suite 300 Data Investor Services Group, Inc.;
Birmingham, MI 48009 Assistant Vice President and Counsel
Age: 29 with The Boston Company Advisors,
Inc.; Associate with Hutchins,
Wheeler & Dittmar.
Teresa M.R. Hamlin Assistant Secretary Counsel, First Data Investor
First Data Investor Services Services Group, Inc. (since 1995);
Group, Inc. Formerly Paralegal Manager, The
One Exchange Place Boston Company Advisors, Inc.
8th Floor
Boston, MA 02109
Age: 33
Julie A. Tedesco Assistant Secretary Counsel, First Data Investor
First Data Investor Services Services Group, Inc. (since May,
Group, Inc. 1994); Formerly, Assistant Vice
One Exchange Place President and Counsel of The Boston
8th Floor Company Advisors, Inc. since July,
Boston, MA 02109 1992.
Age: 39
1/ Director is an "interested person" of the Company as defined in the 1940 Act.
</TABLE>
Directors of the Company receive an aggregate fee from the Company, The
Munder Funds Trust (the "Trust"), The Munder Funds, Inc. ("Munder") and The
Munder Framlington Funds Trust ("Framlington Trust") comprised of an annual
retainer fee and a fee for each Board meeting attended, and are reimbursed for
all out-of-pocket expenses relating to attendance at meetings.
The following table summarizes the compensation paid by the Company,
Munder, the Trust and Framlington Trust to their respective Directors/Trustees
for the year ended June 30, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Aggregate Pension
Compensation Retirement Estimated
Name of from the Company, the Benefits Annual Total from
Person Trust, Munder and Accrued Benefits the Fund
and Position Framlington Trust as Part of upon Complex
Fund Expenses Retirement
Charles W. Elliott $20,000.00 None None $20,000.00
Chairman
John Rakolta, Jr. $18,500.00 None None $18,500.00
Vice Chairman
Thomas B. Bender $20,000.00 None None $20,000.00
Trustee and Director
David J. Brophy $20,000.00 None None $20,000.00
Trustee and Director
Dr. Joseph E. Champagne $20,000.00 None None $20,000.00
Trustee and Director
Thomas D. Eckert $20,000.00 None None $20,000.00
Trustee and Director
</TABLE>
No officer, director or employee of the Advisor, Comerica, the
Distributor, the Administrator or the Transfer Agent currently receives any
compensation from the Company, the Trust, Munder or Framlington Trust.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
Investment Advisor. The Advisor of the Fund is Munder Capital
Management, a Delaware general partnership. The general partners of the Advisor
are Woodbridge, WAM, Old MCM, and Munder Group, LLC. Woodbridge and WAM are
wholly-owned subsidiaries of Comerica Bank -- Ann Arbor, which, in turn is a
wholly-owned subsidiary of Comerica Incorporated, a publicly-held bank holding
company.
Under the terms of the Investment Advisory Agreement between the
Company and the Advisor with respect to the Funds (the "Advisory Agreement"),
the Advisor furnishes continuing investment supervision to the Funds and is
responsible for the management of each Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Advisor, subject to review by the Company's Board of Directors.
For the advisory services provided and expenses assumed with regard to
the Funds, the Advisor has agreed to a fee from each Fund, computed daily and
payable monthly on a separate Fund-by-Fund basis, at an annual rate of .07% of
the average daily net assets of the LargeCap 500 Index Fund, .15% of the average
daily net assets of each of the MidCap Index Fund and SmallCap Index Fund and
.20% of the average daily net assets of each of the Short Term Treasury Fund and
Money Market Fund.
The Advisory Agreement will continue in effect for a period of two
years from its effective date. If not sooner terminated, the Advisory Agreement
will continue in effect for successive one year periods thereafter, provided
that each continuance is specifically approved annually by (a) the vote of a
majority of the Board of Directors who are not parties to the Advisory Agreement
or interested persons (as defined in the 1940 Act), cast in person at a meeting
called for the purpose of voting on approval, and (b) either (i) the vote of a
majority of the outstanding voting securities of the Fund, or (ii) the vote of a
majority of the Board of Directors. The Advisory Agreement is terminable by vote
of the Board of Directors, or by the holders of a majority of the outstanding
voting securities of a Fund, at any time without penalty, upon 60 days' written
notice to the Advisor. The Advisor may also terminate its advisory relationship
with a Fund without penalty upon 90 days' written notice to the Company. The
Advisory Agreement terminates automatically in the event of its assignment (as
defined in the 1940 Act).
Portfolio Manager. Sharon E. Fayolle, Vice President and Director of
Money Market Trading for the Advisor, is primarily responsible for the day to
day management of the investment selections of the Short Term Treasury Fund. She
is also responsible for overseeing the management of cash portfolios, money
market funds and foreign currency trading since May, 1996. Prior to joining the
Advisor in 1996, she was employed in the investment area of Ford Motor Company
as European Portfolio Manager responsible for investment and cash management for
Ford's European operations (August, 1981 to April, 1996).
Distribution Agreement. The Company has entered into a distribution
agreement, under which the Distributor, as agent, sells shares of the Fund on a
continuous basis. The Distributor has agreed to use appropriate efforts to
solicit orders for the purchase of shares of the 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 fund
shares (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.
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 Company pursuant to an
administration agreement (the "Administration Agreement"). State Street has
agreed to maintain office facilities for the Company; provide accounting and
bookkeeping services for the Funds; 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 or any state securities commission
having jurisdiction over the Company. 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.
The 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 or from
the reckless disregard by it of its duties and obligations thereunder.
Custodian, Sub-Custodian and Transfer Agency Agreements. Comerica Bank,
whose principal business address is One Detroit Center, 500 Woodward Avenue,
Detroit, MI 48226, maintains custody of each Fund's assets pursuant to a
custodian agreement ("Custody Agreement") with the Company. Under the Custody
Agreement, the Custodian (i) maintains a separate account in the name of each
Fund, (ii) holds and transfers portfolio securities on account of 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 Board of
Directors concerning each Fund's operations. The Custodian has entered into a
Sub-Custody Agreement with State Street pursuant to which State Street will
serve as sub-custodian of the Funds.
First Data Investor Services Group, Inc. ("Investor Services Group"),
located at 53 State Street, Boston, Massachusetts 02109, serves as the transfer
and dividend disbursing agent for the Funds pursuant to a transfer agency
agreement (the "Transfer Agency Agreement") with the Company, 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 each Fund and (v)
makes periodic reports to the Board of Directors concerning the operations of
the Funds.
Other Information Pertaining to Administration and Transfer Agency
Agreements. As stated in the Prospectus, the Administrator and Transfer Agent
each receives a separate fee for its services. In approving the Administration
Agreement and Transfer Agency Agreement, the Board of Directors did consider the
services that are to be provided under their respective agreements, the
experience and qualifications of the respective service contractors, the
reasonableness of the fees payable by the Company in comparison to the charges
of competing vendors, the impact of the fees on the estimated total ordinary
operating expense ratio of each Fund and the fact that neither the Administrator
nor the Transfer Agent is affiliated with the Company or the Advisor. The Board
also considered its responsibilities under federal and state law in approving
these agreements.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors, the
Advisor makes decisions with respect to and places orders for all purchases and
sales of portfolio securities for each Fund.
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.
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 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 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 believes
such practice to be in each Fund's interests.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Fund during the year. Each Fund may engage in short-term
trading to achieve its investment objective. Portfolio turnover may vary greatly
from year to year as well as within a particular year.
In the Advisory Agreement, the Advisor agrees to select broker-dealers
in accordance with guidelines established by the Company's Board of Directors
from time to time and in accordance with applicable law. In assessing the terms
available for any transaction, the Advisor shall consider all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker-dealer,
and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In addition, the Advisory Agreement
authorizes the Advisor, subject to the prior approval of the Company's Board of
Directors, to cause each Fund to pay a broker-dealer which furnishes brokerage
and research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that the
Advisor determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Advisor to the Fund. Such brokerage and research
services might consist of reports and statistics on specific companies or
industries, general summaries of groups of bonds and their comparative earnings
and yields, or broad overviews of the securities markets and the economy.
Supplementary research information so received is in addition to, and
not in lieu of, services required to be performed by the Advisor and does not
reduce the advisory fees payable to the 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, the Funds may be the
primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
Portfolio securities will not be purchased from or sold to the Advisor,
the Distributor or any affiliated person (as defined in the 1940 Act) of the
foregoing entities except to the extent permitted by SEC exemptive order or by
applicable law.
Investment decisions for each Fund and for other investment accounts
managed by the 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 the Funds are concerned, in other cases it is believed to be
beneficial to the Funds. To the extent permitted by law, the Advisor may
aggregate the securities to be sold or purchased for the Funds with those to be
sold or purchased for other investment companies or accounts in executing
transactions.
The Funds will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which the Advisor
or any affiliated person (as defined in the 1940 Act) thereof is a member except
pursuant to procedures adopted by the Company's Board of Directors in accordance
with Rule 10f-3 under the 1940 Act.
Except as noted in the Prospectus and this Statement of Additional
Information the Funds' service contractors bear all expenses in connection with
the performance of their services and each Fund bears the expenses incurred in
its operations. These expenses include, but are not limited to, fees paid to the
Advisor, Administrator, Custodian and Transfer Agent; fees and expenses of
officers and Directors; taxes; interest; legal and auditing fees; brokerage fees
and commissions; certain fees and expenses in registering and qualifying each
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; the expense of using independent pricing
services; and other expenses which are not assumed by the Administrator. Any
general expenses of the Company that are not readily identifiable as belonging
to a particular investment portfolio of the Company are allocated among all
investment portfolios of the Company by or under the direction of the Board of
Directors in a manner that the Board of Directors determines to be fair and
equitable, taking into consideration whether it is appropriate for expenses to
be borne by the Funds in addition to the Company's other funds. The Advisor,
Administrator, Custodian and Transfer Agent may voluntarily waive all or a
portion of their respective fees from time to time.
PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions are discussed in the Funds' prospectus and
such information is incorporated herein by reference.
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.
The Funds may suspend the right of redemption or postpone the date of
payment for shares during any period when: (a) trading on the New York Stock
Exchange (the "Stock Exchange") is restricted by applicable rules and
regulations of the SEC; (b) the Stock Exchange is closed for other than
customary weekend and holiday closings; (c) the SEC has by order permitted such
suspension; or (d) an emergency exists as determined by the SEC. Upon the
occurrence of any of the foregoing conditions, the Funds may also suspend or
postpone the recordation of the transfer of its Shares.
In addition, the Funds may compel the redemption of, reject any order
for, or refuse to give effect on the Funds' books to the transfer of, its Shares
where the relevant investor or investors have not furnished the Funds with
valid, certified taxpayer identification numbers and such other tax-related
certifications as the Fund may request. The Funds may also redeem shares
involuntarily if it otherwise appears appropriate to do so in light of the
Funds' responsibilities under the 1940 Act or in connection with a failure of
the appropriate person(s) to furnish certified taxpayer identification numbers
and other tax-related certifications.
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 Prospectus. For further information about this form of payment
please contact the Transfer Agent. In connection with an in-kind securities
payment, the Funds will require, among other things, that the securities be
valued on the day of purchase in accordance with the pricing methods used by the
Fund and that the Fund receive satisfactory assurances that (1) it will have
good and marketable title to the securities received by it; (2) that the
securities are in proper form for transfer to the Funds; and (3) adequate
information will be provided concerning the basis and other tax matters relating
to the securities.
Redemption proceeds are normally paid in cash; however, each Fund may
pay the redemption price in whole or in part by a distribution in kind of
securities from the portfolio of the particular Fund, in lieu of cash, in
conformity with applicable rules of the SEC. If shares are redeemed in kind, the
redeeming shareholder might incur transaction costs in converting the assets
into cash. The Funds are obligated to redeem shares solely in cash up to the
lesser of $250,000 or 1% of its net assets during any 90-day period for any one
shareholder.
NET ASSET VALUE
In determining the approximate market value of portfolio investments,
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 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 of Directors.
PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included
in advertisements, sales literature, or reports to shareholders or prospective
investors. These performance figures are calculated in the following manner:
Yield of the Money Market Fund
The Money Market Fund's 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 described above), raising the sum to
a power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of the Fund will fluctuate, it 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 the 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.
Yield of the Short Term Treasury Fund
The Short Term Treasury Fund's 30-day SEC yield (or one month) standard
yield described in the Prospectus is calculated for the Fund in accordance with
the method prescribed by the SEC for mutual funds:
a - b
YIELD = 2[(-----+1)6 - 1]
cd
<TABLE>
<CAPTION>
<S> <C> <C>
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of expense 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.
</TABLE>
For the purpose of determining interest earned on debt obligations
purchased by the Fund at a discount or premium (variable "a" in the formula),
the 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 (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 the 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).
Average Annual Total Return
A Fund may advertise its "average annual total return" and will compute
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: T = average annual total return;
ERV = ending redeemable value of a
hypothetical $1,000
payment made at the beginning of the
1, 5, or 10 year (or other) periods
at the end of the applicable period
and of any CDSC deduction (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000;
n = number of years and portion of a year
Aggregate Total Return
A Fund may advertise its "aggregate total return" and will compute such
return 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 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, the
Funds' 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, the Money Market 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.
TAXES
The following summarizes certain additional tax considerations
generally affecting each Fund and its shareholders that are not described in the
Funds' Prospectus. No attempt is made to present a detailed explanation of the
tax treatment of the Funds or its shareholders, and the discussion here and in
the Prospectus is not intended as a substitute for careful tax planning.
Potential investors should consult their tax advisors with specific reference to
their own tax situations.
Each Fund intends to elect and qualify annually to be taxed as a
regulated investment company under Subchapter M, of the Internal Revenue Code of
1986, as amended (the "Code"). As a regulated investment company, a Fund
generally is exempt from Federal income tax on its net investment income and
realized capital gains which it distributes to its shareholders, provided that
it distributes an amount equal to the sum of (a) at least 90% of its investment
company taxable income (net investment income and the excess of net short-term
capital gain over net long-term capital loss), if any, for the year and (b) at
least 90% of its net tax-exempt interest income, if any, for the year (the
"Distribution Requirement") and satisfies certain other requirements of the Code
that are described below. Distributions of investment company taxable income and
net tax-exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Fund
must derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short Gain
Test").
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,
<PAGE>
securities of other regulated investment companies, and securities of other
issuers (as to which the Fund has not invested more than 5% of the value of its
total assets in securities of such issuer and as to which the Fund does not hold
more than 10% of the outstanding voting securities of such issuer) and no more
than 25% of the value of 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 investment companies), or in two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses.
Certain debt instruments acquired by a Fund may include "original issue
discount" or "market discount". As a result, a Fund may be deemed under tax law
rules to have earned discount income in taxable periods in which it does not
actually receive any payments on the particular debt instruments involved. This
income, however, will be subject to the Distribution Requirements and must also
be distributed in accordance with the excise tax distribution rules discussed
below, which may cause the Fund to have to borrow or liquidate securities to
generate cash in order to timely meet these requirements (even though such
borrowing or liquidating securities at that time may be detrimental from the
standpoint of optimal portfolio management). Gain from the sale of a debt
instrument having market discount may be treated for tax purposes as ordinary
income to the extent that market discount accrued during the Fund's ownership of
that instrument.
Distributions of net investment income received by a Fund and any net
realized short-term capital gains distributed by the Fund will be taxable to
shareholders as ordinary income. If a portion of a Fund's income consists of
dividends paid by U.S. corporations, a portion of the dividends paid by the Fund
may 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. Any such gain which a Fund designates as a capital gain
dividend is taxable to shareholders as long-term capital gain, regardless of the
length of time the shareholder has held the shares, and is not eligible for the
dividends received deduction.
If for any taxable year a Fund does not qualify as a regulated
investment company, all of its taxable income will be subject to tax at regular
corporate rates without any deduction for distributions to shareholders. In such
event, all distributions (whether or not derived from exempt-interest income)
would be taxable as ordinary income and would be eligible for the dividends
received deduction in the case of corporate shareholders to the extent of the
Fund's current and accumulated earnings and profits.
Shareholders will be advised annually as to the Federal income tax
consequences of distributions made by the Fund 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, each 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 the 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, each Fund intends to make its
distributions in accordance with the calendar year distribution requirement.
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 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.
Certain options and futures contracts in which a Fund may invest are
"section 1256 contracts." Gains or losses on section 1256 contracts generally
are considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses (as discussed below) arising from
certain section 1256 contracts may be treated as ordinary income or loss. Also,
section 1256 contracts held by a Portfolio 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" (that is, treated as sold at fair market value), resulting in
unrealized gains or losses being treated as though they were realized.
Generally, the hedging transactions 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 a Fund. 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 the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Funds of engaging in hedging
transactions are not entirely clear. 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.
Each Fund 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 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 may be distributed to
shareholders, and which will be taxed to them as ordinary income or long-term
capital gain, may be increased or decreased as compared to a fund that did not
engage in such hedging transactions.
The Short-Short Gain Test and the diversification requirements
applicable to each Fund's assets may limit the extent to which each Fund will be
able to engage in transactions in options and futures contracts.
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 or ordinary loss. Similarly, on disposition of debt securities
denominated in a foreign currency and on disposition of certain options and
futures contracts, gains or losses attributable to fluctuations in the value of
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.
Upon the sale or other disposition of shares of a Fund, a shareholder
may realize a capital gain or loss which will be long-term or short-term,
generally depending upon the shareholder's holding period for the shares. Any
loss realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. 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 a disposition 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 by the
shareholder with respect to such shares.
If a Fund invests in stock of certain foreign investment companies, the
Fund may be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income tax rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any amount
of distribution or gain allocated to the taxable year of the distribution or
disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
A Fund may be able to make an election, in lieu of being taxable in the
manner described above, to include annually in income its pro rata share of the
ordinary earnings and net capital gain of the foreign investment company,
regardless of whether it actually received any distributions from the foreign
company. These amounts would be included in the Fund's investment company
taxable income and net capital gain which, to the extent distributed by the Fund
as ordinary or capital gain dividends, as the case may be, would not be taxable
to the Fund. In order to make this election, the Fund would be required to
obtain certain annual information from the foreign investment companies in which
is invests, which in many cases may be difficult to obtain. Alternatively, the
Fund may be eligible to elect to mark to market its foreign investment company
stock, resulting in the stock being treated as sold at fair market value on the
last business day of each taxable year. Any resulting gain would be reported as
ordinary income, and any resulting loss would not be recognized. If this
election were made, the special rules described above with respect to excess
distributions and dispositions would still apply.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
The Company will be required in certain cases to withhold and remit to
the United States Treasury 31% of taxable distributions paid to any shareholder
(i) who has provided either an incorrect tax identification number or no number
at all, (ii) who is subject to backup withholding by the Internal Revenue
Service for failure to report the receipt of taxable interest or dividend income
properly, or (iii) who has failed to certify to the Company that he is not
subject to backup withholding or that he is an "exempt recipient."
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 a 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 a Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
The foregoing general discussion of Federal income tax consequences is
based on the Code and the regulations issued thereunder as in effect on the date
of this Statement of Additional Information. Future legislative or
administrative changes or court decisions may significantly change the
conclusions expressed herein, and any such changes or decisions may have a
retroactive effect with respect to the transactions contemplated herein.
Although each Fund expects to qualify as a "regulated investment
company" and to be relieved of all or substantially all Federal income taxes,
depending upon the extent of its activities in states and localities in which
its offices are maintained, in which its agents or independent contractors are
located or in which it is otherwise deemed to be conducting business, the Fund
may be subject to the tax laws of such states or localities.
ADDITIONAL INFORMATION CONCERNING SHARES
The Company is a Maryland corporation. The Company's Articles of
Incorporation authorize the Board of Directors to classify or reclassify any
authorized but unissued shares of the Company into one or more additional
portfolios (or classes of shares within a portfolio) by setting or changing in
any one or more respects their respective preferences, conversion or other
rights, voting powers, restrictions, limitations as to dividends, qualifications
and terms and conditions of redemption. Pursuant to such authority, the
Company's Board of Directors have authorized the issuance of shares of common
stock representing interests in Munder S&P 500 Index Equity Fund, Munder S&P
MidCap Index Equity Fund, Munder S&P SmallCap Index Equity Fund, Munder
Aggregate Bond Index Fund, Munder Foreign Equity Fund, Liquidity Plus Money
Market Fund, Munder Institutional S&P 500 Index Equity Fund, Munder
Institutional S&P MidCap Index Equity Fund, Munder Institutional S&P SmallCap
Index Equity Fund, Munder Institutional Short Term Treasury Fund and Munder
Institutional Money Market Fund.
Shares of the Funds have no subscription or pre-emptive rights and only
such conversion or exchange rights as the Board may grant in its discretion.
When issued for payment as described in the applicable Prospectus and Statement
of Additional Information, shares will be fully paid and non-assessable by the
Company. In the event of a liquidation or dissolution of 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 Fund
and the Company's other 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, based on the number of shares of the Fund that are held by each
shareholder.
Shareholders of the Funds, as well as those of any other investment
portfolio now or hereafter offered by 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 Board of Directors. 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 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 unless it is clear that the interests of
such Fund in the matter are substantially identical to the interests of other
Funds of the Company or that the matter does not affect any interest of such
Fund. Under the Rule, the approval of an investment 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 directors may be effectively acted upon by
shareholders of the Company voting together in the aggregate without regard to a
particular Fund.
Shareholder meetings to elect Directors will not be held unless and
until such time as required by law. At that time, the Directors then in office
will call a shareholders' meeting to elect Directors. Except as set forth above,
the Directors will continue to hold office and may appoint successor directors.
Meetings of the shareholders of the Company shall be called by the Directors
upon the written request of shareholders owning at least 10% of the outstanding
shares entitled to vote.
Notwithstanding any provision of Maryland law requiring a greater vote
of the Company's shares (or of any class voting as a class) in connection with
any corporate action, unless otherwise provided by law (for example, by Rule
18f-2) or the Company's Articles of Incorporation, the Company may take or
authorize such action upon the favorable vote of the holders of more than 50% of
the outstanding Common Stock of the Funds and the Company's other funds, if any
(voting together without regard to class).
MISCELLANEOUS
Counsel. The law firm of Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, DC 20005, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Company.
Independent Auditors. Ernst & Young LLP, 200 Clarendon Street,
Boston, MA 02116 serves as the Company's independent auditors.
Shareholder Approvals. As used in this Statement of Additional
Information and in the Prospectuses, a "majority of the outstanding shares" of
the Fund means the lesser of (a) 67% of the shares of the Fund represented at a
meeting at which the holders of more than 50% of the outstanding shares of the
Fund are present in person or by proxy, or (b) more than 50% of the outstanding
shares of the Fund.
Banking Laws. 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 Company contemplated by their respective agreements with the Company without
violation of applicable banking laws or regulations. It should be noted,
however, that there have been no cases deciding whether bank and non-bank
subsidiaries of a registered bank holding company may perform services
comparable to those that are to be performed by these companies, and future
changes in either Federal or state statutes and regulations relating to
permissible activities of banks and their subsidiaries or affiliates, as well as
future judicial or administrative decisions or interpretations of current and
future statutes and regulations, could prevent these companies from continuing
to perform such service for the Company.
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 Company, the Company might be required to alter
materially or discontinue its arrangements with such companies and change its
method of operations. It is not anticipated, however, that any change in the
Company's method of operations would affect the net asset value per share of the
Funds or result in a financial loss to any shareholder of the Funds.
REGISTRATION STATEMENT
This Statement of Additional Information and the Funds' Prospectus do
not contain all the information included in the Funds' registration statement
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Funds' Prospectus 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 Funds' registration statement,
each such statement being qualified in all respect by such reference.
<PAGE>
A-2
shared/bankgrp/stclr/sai/inssai4.doc
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.
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."
<PAGE>
B-6
shared/bankgrp/stclr/sai/inssai4.doc
APPENDIX B
As stated in the Prospectus, the Funds may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
I. Index Futures Contracts
General. A 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
indexed, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
A Fund will sell index futures contracts in order to offset a decrease
in market value of its portfolio securities that might otherwise result from a
market decline. A Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a Fund
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.
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>
<S> <C>
Portfolio Futures
-Day Hedge is Placed-
Anticipate buying $62,500 in Equity Securities Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Securities with Actual Cost = $65,000 Sell 1 Index Futures at 130
Increase in Purchase Price = $2,500 Value of Futures = $65,000/Contract
Gain on Futures = $2,500
</TABLE>
<PAGE>
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>
<S> <C>
Portfolio Futures
-Day Hedge is Placed-
Anticipate Selling $1,000,000 in Equity Securities Sell 16 Index Futures at 125
Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
II. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a 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 may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by 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 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. 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. 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 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 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 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
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.
IV. 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.
V. Other Matters
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
<PAGE>
