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ST. CLAIR FUNDS, INC.
480 PIERCE STREET
BIRMINGHAM, MICHIGAN 48009
TELEPHONE (800) 438-5789
PROSPECTUS
St. Clair Funds, Inc. (the "Company") is an open-end investment company (a
mutual fund) that currently offers a selection of investment portfolios. This
Prospectus describes five of the investment portfolios offered by the Company
(the "Funds"):
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
Munder Capital Management (the "Advisor") serves as investment advisor to
the Funds.
This Prospectus contains the information that a prospective investor should
know before investing in the Funds. Investors are encouraged to read this
Prospectus and retain it for future reference. A Statement of Additional
Information dated August 1, 1997, as amended or supplemented from time to
time, has been filed with the Securities and Exchange Commission (the "SEC")
and is incorporated by reference into this Prospectus. The Statement of
Additional Information may be obtained free of charge by calling the Company
at (800) 438-5789. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains the Statement of Additional Information and
other information regarding the Funds.
ALTHOUGH THE MUNDER INSTITUTIONAL MONEY MARKET FUND SEEKS TO
MAINTAIN A
CONSTANT NET ASSET VALUE OF $1.00 PER SHARE, THERE CAN BE NO
ASSURANCE THAT
THE FUND CAN DO SO ON A CONTINUING BASIS.
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.
SECURITIES OFFERED BY THIS PROSPECTUS HAVE NOT BEEN APPROVED OR
DISAPPROVED
BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE
SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE
SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Prospectus is August 1, 1997.
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TABLE OF CONTENTS
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PAGE
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<S> <C>
The Funds
Expense Table............................................................ 3
Investment Objectives and Policies....................................... 4
Portfolio Instruments and Practices and Associated Risk Factors.......... 8
Investment Limitations................................................... 14
Purchase and Redemption of Shares........................................ 15
Dividends and Distributions.............................................. 16
Other Information
Net Asset Value.......................................................... 16
Management............................................................... 17
Taxes.................................................................... 18
Description of Shares.................................................... 19
Performance.............................................................. 20
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION, OR TO MAKE
ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, OR IN THE FUNDS'
STATEMENT
OF ADDITIONAL INFORMATION INCORPORATED HEREIN BY REFERENCE, IN
CONNECTION WITH
THE OFFERING MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE
FUND OR FUNDS DISTRIBUTOR, INC. (THE "DISTRIBUTOR"). THIS PROSPECTUS
DOES NOT
CONSTITUTE AN OFFERING BY THE FUND OR BY THE DISTRIBUTOR IN ANY
JURISDICTION
IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE MADE.
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EXPENSE TABLE
The following table sets forth certain costs and expenses that an investor
will incur either directly or indirectly as a shareholder of the Funds based
on estimated operating expenses for the current fiscal year. Shares of the
Funds are sold without an initial or contingent deferred sales charge to
fiduciary and discretionary accounts of institutions, institutional investors
and high net worth individuals.
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MUNDER MUNDER
MUNDER INSTITUTIONAL INSTITUTIONAL MUNDER
MUNDER
INSTITUTIONAL S&P S&P INSTITUTIONAL
INSTITUTIONAL
S&P 500 MIDCAP SMALLCAP SHORT TERM MONEY
INDEX EQUITY INDEX EQUITY INDEX EQUITY TREASURY
MARKET
FUND FUND FUND FUND FUND
------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ANNUAL FUND OPERATING
EXPENSES:
(as a percentage of
average net assets)
Advisory Fees......... .07% .15% .15% .20% .20%
Other Expenses (after
expense
reimbursements)...... .02%* .03%* .03%* .03%* .0%*
---- ---- ---- ---- ----
Total Fund Operating
Expenses (after
expense
reimbursements)...... .09%* .18%* .18%* .23%* .20%*
==== ==== ==== ==== ====
</TABLE>
- --------
* The Advisor has voluntarily agreed to reimburse expenses to limit "Other
Expenses" to .03% with respect to the Munder Institutional S&P 500 Index
Equity Fund, Munder Institutional S&P MidCap Index Equity Fund and Munder
Institutional S&P SmallCap Index Equity Fund and .0% with respect to Munder
Institutional Short Term Treasury Fund and Munder Institutional Money
Market Fund. In the absence of such expense reimbursements, it is estimated
that total fund operating expenses would be as follows: .22% for Munder
Institutional S&P 500 Index Equity Fund, .30% for Munder Institutional S&P
MidCap Index Equity Fund, .30% for Munder Institutional S&P SmallCap Index
Equity Fund, .35% for Munder Institutional Short Term Treasury Fund and
.35% for Munder Institutional Money Market Fund.
"Other Expenses" in the above table include administration fees, custodial
fees, legal and accounting fees, printing costs, registration fees, fees for
any portfolio valuation service, the cost of regulatory compliance, the costs
of maintaining the Funds' legal existence and the costs involved with
communicating with shareholders. The amount of "Other Expenses" in the expense
table above is based on estimated expenses and projected assets for the
current fiscal year. The nature of the services for which the Funds are
obligated to pay advisory fees is described under "Management." Any fees
charged by institutions directly to customer accounts for services provided in
connection with investments in shares of the Funds are in addition to the
expenses shown in the above Expense Table and the Example shown below.
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EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in the Funds. These amounts are based on payment
by the Funds of operating expenses at the levels set forth in the above table,
and are also based on the following assumptions:
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a hypothetical 5% annual return and (2) redemption at the end of
the following time periods:
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1 3
YEAR YEARS
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Munder Institutional S&P 500 Index Equity Fund....................... $ 1 $ 3
Munder Institutional S&P MidCap Index Equity Fund.................... $ 2 $ 7
Munder Institutional S&P SmallCap Index Equity Fund.................. $ 2 $ 7
Munder Institutional Short Term Treasury Fund........................ $ 2 $ 7
Munder Institutional Money Market Fund............................... $ 3 $ 8
</TABLE>
The foregoing Expense Table and Example are intended to assist investors in
understanding the various shareholder transaction expenses and operating
expenses of the Funds that investors bear directly or indirectly.
The Advisor has voluntarily agreed to reimburse expenses with respect to
each Fund. The Advisor may discontinue such expense reimbursements at any time
in its sole discretion. Without expense reimbursements, an investor in shares
of the Funds would pay the following expenses on a $1,000 investment, assuming
redemption after one and three years, respectively, and assuming a
hypothetical 5% annual return: $2 and $7 for the Munder Institutional S&P 500
Index Equity Fund; $3 and $10 for the Munder Institutional S&P MidCap Index
Equity Fund; $3 and $10 for the Munder Institutional S&P SmallCap Index Equity
Fund; $4 and $11 for the Munder Institutional Short Term Treasury Fund; and $4
and $11 for the Munder Institutional Money Market Fund.
THE EXAMPLE SHOWN ABOVE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE
INVESTMENT RETURN OR OPERATING EXPENSES. ACTUAL INVESTMENT RETURN
AND
OPERATING EXPENSES MAY BE MORE OR LESS THAN THOSE SHOWN.
THE COMPANY
Each of the Funds is a diversified portfolio of shares issued by the
Company, an open-end management investment company registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Company's
principal office is located at 480 Pierce Street, Birmingham, Michigan 48009
and its telephone number is (800) 438-5789.
INVESTMENT OBJECTIVES AND POLICIES
This Prospectus describes the following Funds offered by the Company: 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"), Munder
Institutional Short Term Treasury Fund ("Short Term Treasury Fund") and Munder
Institutional Money Market Fund ("Money Market Fund"). Investing in shares of
any Fund should not be considered a complete investment program, but an
important segment of a well-diversified investment program.
LARGECAP 500 INDEX FUND
The investment objective of the LargeCap 500 Index Fund is to provide price
performance and income that is comparable to the Standard & Poor's 500
Composite Stock Price Index ("S&P 500"), an index which emphasizes large
capitalization companies. The S&P 500 is an index of 500 common stocks, most
of which trade on the New York Stock Exchange Inc. ("NYSE"). As of December
31, 1996, the S&P 500 represented approximately 85% of the market
capitalization of publicly owned stocks in the United States. Although the
Fund
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may not hold securities of all 500 issuers included in the S&P 500, it will
normally hold the securities of at least 80% of such issuers. Stock selections
are based primarily on market capitalization and industry weightings. The Fund
may also invest in Standard & Poor's Depositary Receipts ("SPDRs"). SPDRs are
securities traded on the American Stock Exchange 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 S&P indices. See "Portfolio Instruments and Practices
and Associated Risk Factors--Investment Company Securities." The Fund seeks
quarterly performance within a .95 correlation with the S&P 500. The Fund's
ability to achieve performance comparable to that of the S&P 500 may be
affected by, among other things, transaction costs; administration and other
expenses incurred by the Fund; changes in the composition of the S&P 500; and
the timing and amount of investor purchases and redemptions.
The Fund is managed through the use of a "quantitative" or "indexing"
investment approach, which attempts to duplicate the investment composition
and performance of the S&P 500 through statistical procedures. As a result,
the Advisor does not employ traditional methods of fund investment management,
such as selecting securities on the basis of economic, financial and market
analysis.
The Fund invests substantially all, and at least 65%, of its total assets in
the securities of issuers included in the S&P 500. In addition to investing in
stocks, the LargeCap 500 Index Fund is also authorized to invest in high
quality short-term fixed income securities as cash reserves or for temporary
defensive purposes. The Fund may also invest in stock index futures contracts
and options on stock indices and stock index futures contracts. See "Portfolio
Instruments and Practices and Associated Risk Factors" for a description of
investment practices of the Fund.
MIDCAP INDEX FUND
The investment objective of the MidCap Index Fund is to provide price
performance and income that is comparable to the Standard & Poor's MidCap 400
Index ("S&P MidCap 400"), an index which emphasizes medium capitalization
companies. The market capitalization of an issuer in the S&P MidCap 400
generally ranges from $100 million to $9 billion. As of December 31, 1996, the
S&P MidCap 400 represented approximately 10% of the market capitalization of
publicly owned stocks in the United States. Although the Fund may not hold
securities of all 400 issuers included in the S&P MidCap 400, it will normally
hold the securities of at least 80% of such issuers. Stock selections are
based primarily on market capitalization and industry weightings. The Fund may
also invest in SPDRs. See "Portfolio Instruments and Practices and Associated
Risk Factors--Investment Company Securities." The Fund seeks quarterly
performance within a .95 correlation with the S&P MidCap 400. The Fund's
ability to achieve performance comparable to that of the S&P MidCap 400 may be
affected by, among other things, transaction costs; administration and other
expenses incurred by the Fund; changes in the composition of the S&P MidCap
400; and the timing and amount of investor purchases and redemptions.
The Fund is managed through the use of a "quantitative" or "indexing"
investment approach, which attempts to duplicate the investment composition
and performance of the S&P MidCap 400 through statistical procedures. As a
result, the Advisor does not employ traditional methods of fund investment
management, such as selecting securities on the basis of economic, financial
and market analysis.
Medium capitalization companies typically are subject to a greater degree of
change in earnings and business prospects than larger, more established
companies. In addition, securities of medium capitalization companies are
traded in lower volume than those issued by larger companies and may be more
volatile. As a result, the Fund may be subject to greater price volatility
than a fund consisting of larger capitalization stocks.
The Fund invests substantially all, and at least 65%, of its total assets in
the securities of issuers included in the S&P MidCap 400. In addition to
investing in stocks, the MidCap Index Fund is also authorized to invest in
high quality short-term fixed income securities as cash reserves or for
temporary defensive purposes. The Fund may also invest in stock index futures
contracts and options on stock indices and stock index futures contracts. See
"Portfolio Instruments and Practices and Associated Risk Factors" for a
description of investment practices of the Fund.
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SMALLCAP INDEX FUND
The investment objective of the SmallCap Index Fund is to provide price
performance and income that is comparable to the Standard & Poor's SmallCap
600 Index ("S&P SmallCap 600"), an index which emphasizes small capitalization
companies. As of December 31, 1996, the S&P SmallCap 600 represented
approximately 5% of the market capitalization of publicly owned stocks in the
United States. Although the Fund may not hold securities of all 600 issuers
included in the S&P SmallCap 600, it will normally hold the securities of at
least 80% of such issuers. Stock selections are based primarily on market
capitalization and industry weightings. The Fund seeks quarterly performance
within a .95 correlation with the S&P SmallCap 600. The Fund's ability to
achieve performance comparable to that of the S&P SmallCap 600 may be affected
by, among other things, transaction costs; administration and other expenses
incurred by the Fund; changes in the composition of the S&P SmallCap 600; and
the timing and amount of investor purchases and redemptions.
The Fund is managed through the use of a "quantitative" or "indexing"
investment approach, which attempts to duplicate the investment composition
and performance of the S&P SmallCap 600 through statistical procedures. As a
result, the Advisor does not employ traditional methods of fund investment
management, such as selecting securities on the basis of economic, financial
and market analysis.
Smaller capitalization companies typically are subject to a greater degree
of change in earnings and business prospects than larger, more established
companies. In addition, securities of smaller capitalization companies are
traded in lower volume than those issued by larger companies and may be more
volatile. As a result, the Fund may be subject to greater price volatility
than a fund consisting of larger capitalization stocks.
The Fund invests substantially all, and at least 65%, of its total assets in
the securities of issuers included in the S&P SmallCap 600. In addition to
investing in stocks, the SmallCap Index Fund is also authorized to invest in
high quality short-term fixed income securities as cash reserves or for
temporary defensive purposes. The Fund may also invest in stock index futures
contracts and options on stock indices and stock index futures contracts. See
"Portfolio Instruments and Practices and Associated Risk Factors" for a
description of investment practices of the Fund.
SHORT TERM TREASURY FUND
The Fund's investment objective is to provide shareholders with a high level
of current income consistent with capital preservation. The Fund seeks to
achieve its objective by investing only in U.S. Treasury securities and
repurchase agreements fully collateralized by U.S. Treasury securities. Under
normal market conditions, the Fund will invest 100% of its total assets in
these securities. Under normal circumstances, the Fund will enter into
repurchase agreements with maturities of seven days or less and will invest in
securities with remaining maturities of three years or less. The dollar-
weighted average maturity of the Fund's portfolio is not expected to exceed
two years. The Fund also may borrow money for temporary purposes and to meet
redemption requests and may enter into reverse repurchase agreements. In
addition, the Fund may lend portfolio securities, purchase securities on a
"when-issued" basis and purchase or sell securities on a "forward commitment"
basis. See "Portfolio Instruments and Practices and Associated Risk Factors."
There can be no assurance that the Fund's investment objective will be
achieved.
The Fund is not a money market fund and, although it seeks to maintain
minimum fluctuation of principal value, no assurance can be given that, when
an investor desires to redeem Fund shares, the value of such shares will not
be less than the value when originally purchased.
The value of the portfolio securities held by the Fund will vary inversely
to changes in prevailing interest rates. Thus, if interest rates have
increased from the time a security was purchased, such security, if sold,
might be sold at a price less than its cost. Similarly, if interest rates have
declined from the time a security was purchased, such security, if sold, might
be sold at a price greater than its cost. In either instance, if the security
was purchased at face value and held to maturity, no gain or loss would be
realized.
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MONEY MARKET FUND
The investment objective of the Money Market Fund is to provide as high a
level of current interest income as is consistent with maintaining liquidity
and stability of principal.
The Fund seeks to maintain a stable net asset value of $1.00 per share,
although there is no assurance that it will be able to do so on a continuous
basis. In pursuing its investment objective, the Money Market Fund may invest
in a broad range of short-term, high quality, U.S. dollar-denominated
instruments, such as bank, commercial and other obligations (including
Federal, state and local government obligations) that are available in the
money markets. The instruments in which the Fund may invest are described
below under "Portfolio Instruments and Practices and Associated Risk Factors."
Securities acquired by the Fund will be "Eligible Securities" as defined by
the SEC. Eligible Securities consist of securities that are determined by the
Advisor, under guidelines established by the Board of Directors, to present
minimal credit risks.
Assets of the Fund will be invested solely in U.S. dollar-denominated debt
securities with remaining maturities of 397 days or less as defined by the SEC
(although securities subject to repurchase agreements, variable and floating
rate securities and certain other securities may bear longer maturities), and
the dollar-weighted average portfolio maturity of the Fund will not exceed 90
days.
Although the Money Market Fund expects under normal market conditions to be
as fully invested as possible, the Fund may hold uninvested cash pending
investment of late payments for purchase orders (or other payments) or during
temporary defensive periods. Uninvested cash will not earn income. In general,
investments in the Fund will not earn as high a level of current income as
longer-term or lower quality securities. Longer-term and lower quality
securities, however, generally have less liquidity, greater market risk and
more fluctuation in market value.
STANDARD & POOR'S INDEXES
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500",
"500", "S&P MidCap 400", "Standard & Poor's MidCap 400", "400", "S&P SmallCap
600(R)", "Standard & Poor's SmallCap 600", and "600" are trademarks of McGraw-
Hill Companies, Inc. ("McGraw-Hill") and have been licensed for use by the
Company. Standard and Poor's Ratings Service ("S&P") is a division of McGraw-
Hill.
The Funds are not sponsored, endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, express or implied, to the owners of the Funds or
any member of the public regarding the advisability of investing in securities
generally or in the Funds particularly or the ability of the S&P 500, the S&P
MidCap 400 or the S&P SmallCap 600 (together, the "Indexes") to track general
stock market performance. S&P's only relationship to the Company is the
licensing of certain trademarks and trade names of S&P and of the Indexes
which are determined, composed and calculated by S&P without regard to the
Company or the Funds. S&P has no obligation to take the needs of the Company
or the owners of the Funds into consideration in determining, composing or
calculating the Indexes. S&P is not responsible for and has not participated
in the determination of the prices and amount of the Funds or the timing of
the issuance or sale of the Funds or in the determination or calculation of
the equation by which the Funds are to be converted into cash. S&P has no
obligation or liability in connection with the administration, marketing or
trading of the Funds.
S&P does not guarantee the accuracy and/or the completeness of the Indexes
or any data included therein and S&P shall have no liability for any errors,
omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Company, owners of the Funds, or
any other person or entity from the use of the Indexes or any data included
therein. S&P makes no express or implied warranties, and expressly disclaims
all warranties of merchantability of fitness for a particular purpose or use
with respect to the Indexes or any data included therein. Without limiting any
of the foregoing, in no event shall S&P have any
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liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
INFORMATION REGARDING ALL FUNDS
Each Fund may also lend its portfolio securities. In addition, each Fund
(other than Short Term Treasury Fund and Money Market Fund) may enter into
transactions in options on securities, securities indices and futures
contracts and related options. When deemed appropriate by the Advisor, a Fund
(other than the Short Term Treasury Fund) may invest cash balances in
repurchase agreements and may invest in other money market investments to
maintain liquidity in an amount to meet redemptions or for day-to-day
operating purposes. In addition, the Short Term Treasury Fund may invest in
repurchase agreements fully collateralized by U.S. Treasury securities. These
investment techniques are described below and under the heading "Investment
Objectives and Policies" in the Statement of Additional Information.
When the Advisor believes that market conditions warrant, a Fund (other than
Short Term Treasury Fund) may adopt a temporary defensive position and may
invest without limit in money market securities denominated in U.S. dollars.
See "Portfolio Instruments and Practices and Associated Risk Factors--
Liquidity Management."
PORTFOLIO INSTRUMENTS AND PRACTICES AND
ASSOCIATED RISK FACTORS
Investment strategies that are available to the Funds are set forth below.
Additional information concerning certain of these strategies and their
related risks is contained in the Statement of Additional Information.
Equity Securities. "Equity securities," as used in this Prospectus, refers
to common stock, preferred stock, and warrants or rights to subscribe to or
purchase such securities. Securities considered for purchase by the Funds may
be listed or unlisted, and may be issued by companies with various levels of
market capitalization.
Each of the LargeCap 500 Index Fund, MidCap Index Fund and SmallCap Index
Fund (collectively, the "Index Funds") may invest up to 5% of its net assets
at the time of purchase in warrants and similar rights (other than those that
have been acquired in units or attached to other securities). Warrants
represent rights to purchase securities at a specific price valid for a
specific period of time. The prices of warrants do not necessarily correlate
with the prices of the underlying securities. Each Index Fund may invest in
convertible preferred stock. A convertible security is a security that may be
converted either at a stated price or rate within a specified period of time
into a specified number of shares of common stock. By investing in convertible
securities, a Fund seeks the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible, while earning higher current income than is
available from the common stock.
As mutual funds investing primarily in common stocks, the Index Funds are
subject to market risk--i.e., the possibility that common stock prices will
decline over short or even extended periods. Stock markets tend to be
cyclical, with periods when stock prices generally rise and periods when stock
prices generally decline.
Foreign Securities. There are certain risks and costs involved in investing
in securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in U.S. investments. These considerations
include the possibility of political instability (including revolution),
future political and economic developments and dependence on foreign economic
assistance. Investments in companies domiciled in foreign countries,
therefore, may be subject to potentially higher risks than investments in the
United States.
Depositary Receipts. American Depositary Receipts ("ADRs") are depositary
receipts typically issued by a U.S. bank or trust company which evidence
ownership of underlying securities issued by a foreign corporation. Generally,
depositary receipts in registered form are designed for use in the U.S.
securities market and depositary
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receipts in bearer form are designed for use in securities markets outside the
United States. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted.
Depositary receipts may be issued pursuant to sponsored or unsponsored
programs. In sponsored programs, an issuer has made arrangements to have its
securities traded in the form of depositary receipts. In unsponsored programs,
the issuer may not be directly involved in the creation of the program.
Although regulatory requirements with respect to sponsored and unsponsored
programs are generally similar, in some cases it may be easier to obtain
financial information from an issuer that has participated in the creation of
a sponsored program. Accordingly, there may be less information available
regarding issuers of securities underlying unsponsored programs and there may
not be a correlation between such information and the market value of the
depositary receipts. Depositary receipts also involve the risks of other
investments in foreign securities, as discussed above. For purposes of the
Funds' investment policies, a Fund's investments in depositary receipts will
be deemed to be investments in the underlying securities.
Futures Contracts and Options. The Index Funds may invest in futures
contracts and options on futures contracts for hedging purposes or to maintain
liquidity. However, a Fund may not purchase or sell a futures contract unless
immediately after any such transaction the sum of the aggregate amount of
margin deposits on its existing futures positions and the amount of premiums
paid for related options is 5% or less of its total assets.
Futures contracts obligate a Fund, at maturity, to take or make delivery of
certain securities or the cash value of a securities index. When interest
rates are rising, futures contracts can offset a decline in value of the
Fund's portfolio securities. When rates are falling, these contracts can
secure higher yields for securities the Fund intends to purchase.
The Index Funds may purchase and sell call and put options on futures
contracts traded on an exchange or board of trade. When a Fund purchases an
option on a futures contract, it has the right to assume a position as a
purchaser or seller of a futures contract at a specified exercise price at any
time during the option period. When a Fund sells an option on a futures
contract, it becomes obligated to purchase or sell a futures contract if the
option is exercised. In anticipation of a market advance, a Fund may purchase
call options on futures contracts as a substitute for the purchase of futures
contracts to hedge against a possible increase in the price of securities
which the Fund intends to purchase. Similarly, if the value of a Fund's
portfolio securities is expected to decline, the Fund might purchase put
options or sell call options on futures contracts rather than sell futures
contracts. In connection with a Fund's position in a futures contract or
option thereon, the Fund will create a segregated account of liquid assets or
will otherwise cover its position in accordance with applicable requirements
of the SEC.
In addition, the Index Funds may write covered call options, buy put
options, buy call options and write secured put options on particular
securities or various stock indices for investment or hedging purposes.
Options trading is a highly specialized activity which entails greater than
ordinary investment risks. 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. In contrast to an option on a particular
security, an option on a stock index provides the holder with the right to
make or receive a cash settlement upon exercise of the option.
The use of derivative instruments exposes a Fund to additional risks and
transaction costs. Risks inherent in the use of derivative instruments
include: (1) the risk that interest rates, securities prices and currency
markets will not move in the direction that a portfolio manager anticipates;
(2) imperfect correlation between the price of derivative instruments and
movements in the prices of the securities, interest rates or currencies being
hedged; (3) the fact that skills needed to use these strategies are different
than those needed to select portfolio securities; (4) inability to close out
certain hedged positions to avoid adverse tax consequences; (5) the possible
absence of a liquid secondary market for any particular instrument and
possible exchange-imposed price fluctuation limits,
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either of which may make it difficult or impossible to close out a position
when desired; (6) leverage risk, that is, the risk that adverse price
movements in an instrument can result in a loss substantially greater than a
Fund's initial investment in that instrument (in some cases, the potential
loss is unlimited); and (7) particularly in the case of privately-negotiated
instruments, the risk that the counterparty will fail to perform its
obligations, which could result in a loss to the Fund.
When a Fund invests in a derivative instrument, it may be required to
segregate cash and liquid portfolio securities to "cover" the Fund's position.
Assets segregated or set aside generally may not be disposed of so long as a
Fund maintains the positions requiring segregation or cover. Segregating
assets could diminish a Fund's return due to the opportunity losses of
foregoing other potential investments with the segregated assets.
The Funds are not commodity pools, and all futures transactions engaged in
by a Fund must constitute bona fide hedging or other permissible transactions
in accordance with the rules and regulations promulgated by the Commodity
Futures Trading Commission. Successful use of futures and options is subject
to special risk considerations.
For a further discussion see "Fund Investments" and Appendix B to the
Statement of Additional Information.
Repurchase Agreements. The Funds may agree to purchase securities from
financial institutions 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. With respect to the Money Market Fund, the
securities held subject to a repurchase agreement may have stated maturities
exceeding 397 days, provided the repurchase agreement itself matures in 397
days. The financial institutions with which a Fund may enter into repurchase
agreements include member banks of the Federal Reserve System, any foreign
bank or any domestic or foreign broker/dealer which is recognized as a
reporting government securities dealer. 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 the underlying obligations.
Investment Company Securities. In connection with the management of daily
cash positions, the Funds (other than the Short Term Treasury Fund) may invest
in securities issued by other investment companies which invest in short-term
debt securities and which seek to maintain a $1.00 net asset value per share
(i.e., "money market funds"). The LargeCap 500 Index Fund and the MidCap Index
Fund may also invest in SPDRs and shares of other open-end investment
companies that are structured to seek performance that corresponds to that of
the appropriate Index. Securities of other investment companies will be
acquired within limits prescribed by the 1940 Act. These limitations, among
other matters, restrict the purchase or acquisition of any security issued by
any other investment company (the "acquired fund"), if immediately after such
acquisition, a Fund would own more than 3% of the outstanding voting
securities of the acquired fund; more than 5% of a Fund's assets would be
invested in the securities of the acquired fund; or more than 10% of a Fund's
assets would be invested in securities issued by investment companies in the
aggregate. As a shareholder of another investment company, a Fund would bear,
along with other shareholders, its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in
addition to the expenses a Fund bears directly in connection with its own
operations.
Variable and Floating Rate Securities. Each Fund (other than the Short Term
Treasury Fund) may purchase variable and floating rate securities which are
debt instruments with variable or floating interest rates. These securities
may include variable amount master demand notes which are unsecured
instruments that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. Unrated variable and
floating rate securities will be determined by the Advisor to be of comparable
quality at the time of purchase to rated securities purchasable by a Fund. The
absence of an active secondary market, however, could make it difficult to
dispose of the securities, and a Fund could suffer a loss if the issuer
defaulted or during periods
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that the Fund is not entitled to exercise its demand rights. Variable and
floating rate securities 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.
Corporate Obligations. The Money Market Fund may purchase commercial paper,
other short-term obligations, bond debentures and notes. See Appendix A to the
Statement of Additional Information for a description of the ratings for
corporate obligations.
Bank Obligations. The Funds (other than the Short Term Treasury Fund) may
purchase U.S. dollar-denominated bank obligations, including certificates of
deposit, bankers' acceptances, bank notes, deposit notes and interest-bearing
savings and time deposits, issued by U.S. or foreign banks or savings
institutions having total assets at the time of purchase in excess of $1
billion. For this purpose, the assets of a bank or savings institution include
the assets of both its domestic and foreign branches. The Money Market Fund
will invest in the obligations of domestic banks and savings institutions only
if their deposits are federally insured. Investments by a Fund (other than the
Money Market Fund) in (i) obligations of domestic banks and (ii) obligations
of foreign banks and foreign branches of domestic banks each will not exceed
25% of the Fund's total assets at the time of investment. Foreign bank
obligations include Eurodollar Certificates of Deposit ("ECDs"), Eurodollar
Time Deposits ("ETDs"), Canadian Time Deposits ("CTDs"), Schedule Bs, Yankee
Certificates of Deposit ("Yankee CDs") and Yankee Bankers' Acceptances
("Yankee BAs"). A discussion of these obligations appears in the Statement of
Additional Information under "Fund Investments--Non-Domestic Bank
Obligations."
Asset-Backed Securities. Subject to applicable credit criteria, the Money
Market Fund may purchase asset-backed securities (i.e., securities backed by
mortgages, installment sales contracts, credit card receivables or other
assets). The average life of asset-backed securities varies with the
maturities of the underlying instruments which, in the case of mortgages, have
maximum maturities of forty years. The average life of a mortgage-backed
instrument, in particular, is likely to be substantially less than the
original maturity of the mortgage pools underlying the securities as the
result of unscheduled principal payments and mortgage prepayments. The rate of
such mortgage prepayments, and hence the life of the certificates, will be
primarily a function of current interest rates and current conditions in the
relevant housing markets. In calculating the average weighted maturity of the
Money Market Fund, the maturity of mortgage-backed instruments will be based
on estimates of average life. The relationship between mortgage prepayment and
interest rates may give some high-yielding mortgage-related securities less
potential for growth in value than conventional bonds with comparable
maturities. In addition, in periods of falling interest rates, the rate of
mortgage prepayment tends to increase. During such periods, the reinvestment
of prepayment proceeds by the Fund will generally be at lower rates than the
rates that were carried by the obligations that have been prepaid. Because of
these and other reasons, an asset-backed security's total return may be
difficult to predict precisely. To the extent that the Fund purchases
mortgage-related or mortgage-backed securities at a premium, mortgage
prepayments (which may be made at any time without penalty) may result in some
loss of the Fund's principal investment to the extent of the premium paid.
Stripped Securities. The Money Market Fund may purchase participations in
trusts that hold U.S. Treasury and agency securities (such as TIGRs and CATs)
and also may purchase Treasury receipts and other stripped securities which
represent beneficial ownership interests in either future interest payments or
the future principal payments on U.S. Government Obligations. These
instruments are issued at a discount to their "face value" and may
(particularly in the case of stripped mortgage-backed securities) exhibit
greater price volatility than ordinary debt securities because of the manner
in which their principal and interest are returned to investors. Stripped
securities will normally be considered illiquid investments and will be
acquired subject to the limitation on illiquid investments unless determined
to be liquid under guidelines established by the Board of Directors.
Illiquid Securities. Each Fund (other than the Money Market Fund and the
Short Term Treasury Fund) may invest up to 15% of the value of its net assets
(determined at time of acquisition) in securities which are illiquid. The
Money Market Fund may invest up to 10% of the value of its net assets
(determined at time of acquisition)
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in securities which are illiquid. Illiquid securities would generally include
securities for which there is a limited trading market, repurchase agreements
and time deposits with notice/termination dates in excess of seven days, and
certain securities which are subject to trading restrictions because they are
not registered under the Securities Act of 1933, as amended (the "Act"). If,
after the time of acquisition, events cause this limit to be exceeded, the
Fund will take steps to reduce the aggregate amount of illiquid securities as
soon as reasonably practicable in accordance with the policies of the SEC.
The Funds (other than the Short Term Treasury Fund) may invest in commercial
obligations issued in reliance on the "private placement" exemption from
registration afforded by Section 4(2) of the Act ("Section 4(2) paper"). The
Funds may also purchase securities that are not registered under the Act, but
which can be sold to qualified institutional buyers in accordance with Rule
144A under the Act ("Rule 144A securities"). Section 4(2) paper is restricted
as to disposition under the Federal securities laws, and generally is sold to
institutional investors who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of the
issuer or investment dealers which make a market in the Section 4(2) paper,
thus providing liquidity. Rule 144A securities generally must be sold only to
other qualified institutional buyers. If a particular investment in Section
4(2) paper or Rule 144A securities is not determined to be liquid, that
investment will be included within the Fund's limitation on investment in
illiquid securities. The Advisor will determine the liquidity of such
investments pursuant to guidelines established by the Company's Board of
Directors.
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.
U.S. Treasury Securities. Securities purchased by the Short Term Treasury
Fund are direct obligations of the U.S. Treasury and are guaranteed by the
full faith and credit of the U.S. government. These securities presently
consist of U.S. Treasury bills, U.S. Treasury notes and U.S. Treasury bonds.
U.S. Treasury securities differ in their interest rates, maturities and times
of issuance. Treasury bills have initial maturities of one year or less;
Treasury notes have initial maturities of one to ten years; and Treasury bonds
generally have initial maturities greater than ten years.
Zero Coupon Treasury Securities. A portion of the U.S. Treasury securities
purchased by the Short Term Treasury Fund may be "zero coupon" Treasury
securities. These are U.S. Treasury notes and bonds which have been stripped
of their unmatured interest coupons and receipts or which are certificates
representing interests in such stripped debt obligations and coupons. Such
securities are purchased at a discount from their face amount, giving the
purchaser the right to receive their full value at maturity. A zero coupon
security pays no interest to its holder during its life. Its value to an
investor consists of the difference between its face value at the time of
maturity and the price for which it was acquired, which is generally an amount
significantly less than its face value (sometimes referred to as a "deep
discount" price).
The interest earned on such securities is, implicitly, automatically
compounded and paid out at maturity. While such compounding at a constant rate
eliminates the risk of receiving lower yields upon reinvestment of interest if
prevailing interest rates decline, the owner of a zero coupon security will be
unable to participate in higher yields upon reinvestment of interest received
if prevailing interest rates rise. For this reason, zero coupon securities are
subject to substantially greater market price fluctuations during periods of
changing prevailing interest rates than are comparable debt securities which
make current distributions of interest. Current federal
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tax law requires that a holder (such as a Fund) of a zero coupon security
accrue a portion of the discount at which the security was purchased as income
each year even though the Fund receives no interest payments in cash on the
security during the year.
Certain banks and brokerage firms have separated ("stripped") the principal
portions ("corpus") from the coupon portions of the U.S. Treasury bonds and
notes and sell them separately in the form of receipts or certificates
representing undivided interests in these instruments (which instruments are
generally held by a bank in a custodial or trust account). The Short Term
Treasury Fund will not purchase any such receipts or certificates representing
stripped corpus or coupon interests in U.S. Treasury securities sold by banks
and brokerage firms. The Fund will only purchase zero coupon Treasury
securities which have been stripped by the Federal Reserve Bank.
Borrowing and Reverse Repurchase Agreements. Each Fund is authorized to
borrow money in amounts up to 5% of the value of the Fund's total assets at
the time of such borrowing for temporary purposes. The Funds may also borrow
funds for temporary purposes by selling portfolio securities to financial
institutions such as banks and broker/dealers and agreeing to repurchase them
at a mutually specified date and price ("reverse repurchase agreements").
Reverse repurchase agreements involve the risk that the market value of the
securities sold by a Fund may decline below the repurchase price. A Fund would
pay interest on amounts obtained pursuant to a reverse repurchase agreement.
Additionally, a Fund is authorized to borrow money in amounts up to 33 1/3% of
its assets, as permitted by the 1940 Act, for the purpose of meeting
redemption requests. Borrowed funds are subject to interest costs that may or
may not be offset by amounts earned on the borrowed funds. However, a Fund
will not purchase portfolio securities while borrowings exceed 5% of the
Fund's total assets. For more detailed information with respect to the risks
associated with borrowing, see the heading "Borrowing" in the Statement of
Additional Information.
When-Issued Purchases and Forward Commitments. Each Fund may purchase
securities on a "when-issued" basis and may purchase or sell securities on a
"forward commitment" basis. These transactions, which involve a commitment by
a Fund to purchase or sell particular securities with payment and delivery
taking place at a future date (perhaps one or two months later), permit the
Fund to lock in a price or yield on a security, regardless of future changes
in interest rates. When-issued and forward commitment transactions involve the
risk that the price or yield obtained may be less favorable than the price or
yield available when the delivery takes place. Each Fund will establish a
segregated account consisting of cash, U.S. Government securities or other
liquid portfolio securities in an amount equal to the amount of its when-
issued purchases and forward commitments. Each Fund's when-issued purchases
and forward purchase commitments are not expected to exceed 25% of the value
of the particular Fund's total assets absent unusual market conditions.
Guaranteed Investment Contracts. The Money Market Fund may make limited
investments in guaranteed investment contracts ("GICs") issued by the U.S.
insurance companies. Pursuant to such contracts, the 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. The Fund will only
purchase GICs from insurance companies which, at the time of purchase, have
assets of $1 billion or more and meet quality and credit standards established
by the Advisor pursuant to guidelines approved by the Board of Directors.
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.
Fixed Income Securities. Generally, the market value of fixed income
securities held by the Funds can be expected to vary inversely to changes in
prevailing interest rates. Investors should also recognize that, in periods
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of declining interest rates, the yields of investment portfolios composed
primarily of fixed income securities will tend to be higher than prevailing
market rates and, in periods of rising interest rates, yields will tend to be
somewhat lower. The market value of a Fund's investment will also change in
response to the relative financial strength of each issuer. Changes in the
ratings of a particular security may also affect the value of those
investments. Fluctuations in the market value of fixed income securities
subsequent to their acquisitions will not affect cash income from such
securities, but will be reflected in a Fund's net asset value.
The Funds (other than the Money Market Fund) may purchase zero coupon bonds
(i.e., discount debt obligations that do not make periodic interest payments).
Zero coupon bonds are subject to greater market fluctuations from changing
interest rates than debt obligations of comparable maturities which make
current distributions of interest.
Lending of Portfolio Securities. To enhance the return of the portfolio,
each Fund may lend securities in its portfolio representing up to 25% of its
total assets, taken at market value, to securities firms and financial
institutions, provided that each loan is secured continuously by collateral in
the form of cash, high quality money market instruments or short-term U.S.
Government securities (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. The
risk in lending portfolio securities, as with other extensions of credit,
consists of possible delay in the recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially.
Diversification. Each Fund is classified as a diversified investment company
under the 1940 Act.
Portfolio Transactions and Turnover. All orders for the purchase or sale of
securities on behalf of the Funds are placed by the Advisor with
broker/dealers that the Advisor selects. A high portfolio turnover rate
involves larger brokerage commission expenses or transaction costs which must
be borne directly by the Fund, and may result in the realization of short-term
capital gains which are taxable to shareholders as ordinary income. The
Advisor will not consider portfolio turnover rate a limiting factor in making
investment decisions consistent with a Fund's objective and policies. It is
anticipated that each Index Fund's annual portfolio turnover rate will range
from 12% to 15%. With respect to the Short Term Treasury Fund, it is
anticipated that the Fund's annual portfolio turnover rate will range from
100% to 200%.
Liquidity Management. Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure if the Advisor determines that
market conditions warrant, the Index Funds may also invest without limitation
in short-term U.S. Government obligations, high quality money market
instruments, variable and floating rate instruments and repurchase agreements
as described above. High quality money market instruments may include
commercial paper. Short-term obligations purchased by the Funds will either
have short-term debt ratings at the time of purchase in the top two categories
by one or more unaffiliated nationally recognized statistical rating
organizations ("NRSROs") or be issued by issuers with such ratings. Unrated
instruments purchased by a Fund will be of comparable quality as determined by
the Advisor.
INVESTMENT LIMITATIONS
The investment objective and policies of each Fund may be changed by the
Company's Board of Directors without shareholder approval. No assurance can be
given that any Fund will achieve its investment objective.
Each Fund has also adopted certain fundamental investment limitations that
may be changed only with the approval of a "majority of the outstanding shares
of the Fund" (as defined in the Statement of Additional Information). These
limitations are set forth in the Statement of Additional Information.
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PURCHASE AND REDEMPTION OF SHARES
Shares of each Fund are sold by the Distributor on a continuous basis for
the Fund. The Distributor is a registered broker/dealer with principal offices
at 60 State Street, Boston, Massachusetts 02109.
Purchase of Shares. Shares of the Funds are sold on a continuous basis
without an initial or contingent deferred sales charge to fiduciary and
discretionary accounts of institutions, institutional investors and high net
worth individuals. Institutional investors may include financial institutions
(such as banks, savings institutions and credit unions); corporations,
foundations, partnerships, pension and profit sharing and employee benefit
plans and trusts and insurance companies, investment companies, investment
advisors and broker-dealers acting for their own accounts or for the accounts
of institutional investors. The minimum initial investment of for each Fund is
as follows: $3,000,000 for the LargeCap 500 Index Fund; $1,000,000 for each of
the MidCap Index Fund and the SmallCap Index Fund and $10,000,000 for each of
the Short Term Treasury Fund and the Money Market Fund.
Shares of the Funds are sold at net asset value per share next determined
after a purchase order is received. Purchase orders by an institution for
shares of the Funds must be received by the Distributor or the Transfer Agent
before the close of regular trading hours (currently 4:00 p.m. Eastern time)
on the NYSE on any Business Day (as defined below). Payment for such shares
may be made by institutions in federal funds or other funds immediately
available to the Custodian no later than 4:00 p.m. (Eastern time) on the next
Business Day following the receipt of the purchase order.
It is the responsibility of each institution to transmit orders for
purchases by its customers and to deliver required funds on a timely basis. If
funds are not received within the periods described above, the order will be
canceled, notice thereof will be given, and the institution will be
responsible for any loss to the Funds or their shareholders. Institutions may
charge certain account fees depending on the type of account the investor has
established with the institution. In addition, an institution may receive fees
from the Funds as described below under "Management." Payments for shares of
the Funds may, in the discretion of the Advisor, be made in the form of
securities that are permissible investments for the Funds. For further
information see "Purchase and Redemption Information" in the Statement of
Additional Information.
Purchases may be effected on days on which the NYSE is open for business
(each, a "Business Day"). The Funds reserve the right to reject any purchase
order. Payment for orders which are not received in proper form or accepted
will be returned after prompt inquiry. The issuance of shares is recorded on
the books of the Funds, and share certificates are not issued unless expressly
requested in writing. Certificates are not issued for fractional shares.
Neither the Company, the Distributor nor the Transfer Agent will be
responsible for the authenticity of telephone instructions for the purchase or
redemption of shares where such instructions are reasonably believed to be
genuine. Accordingly, the institution will bear the risk of loss. The Company
will attempt to confirm that telephone instructions are genuine and will use
such procedures as are considered reasonable. If the Company fails to use
reasonable procedures to verify the genuineness of the telephone instructions,
it or its service providers may be liable for such instructions that prove to
be fraudulent or unauthorized.
Redemption of Shares. Redemption orders are effected at the net asset value
per share next determined after receipt of the order by the Transfer Agent.
Shares held by an institution on behalf of its customers must be redeemed in
accordance with instructions and limitations pertaining to the account at the
institution. The Company intends to pay cash for all shares redeemed, but in
unusual circumstances may make payment wholly or partly in portfolio
securities at their then market value equal to the redemption price. In such
cases, an investor may incur transaction costs in converting such securities
to cash. For further information see "Purchase and Redemption Information" in
the Statement of Additional Information.
Share balances may be redeemed pursuant to arrangements between institutions
and investors. It is the responsibility of an institution to transmit
redemption orders to the Transfer Agent and to credit its Customers'
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<PAGE>
accounts with the redemption proceeds on a timely basis. If a redemption order
for shares of the Funds is received by the Transfer Agent before 4:00 p.m.
Eastern time on a Business Day, payment is normally wired to the redeeming
institution on the following Business Day after receipt of the order by the
Transfer Agent. The Company reserves the right to delay the wiring of
redemption proceeds for up to seven days after it receives a redemption order
if, in the judgment of the Advisor, an earlier payment could adversely affect
a Fund.
DIVIDENDS AND DISTRIBUTIONS
Each Fund expects to pay dividends and distributions from the net income and
net realized capital gains, if any, earned on investments held by the Fund.
Dividends from net income are declared and paid quarterly for each Fund
(except the Money Market Fund and the Short Term Treasury Fund). Dividends
from net income are declared daily and paid monthly with respect to the Money
Market Fund and are declared and paid monthly with respect to the Short Term
Treasury Fund. Each Fund's net realized capital gains (including net short-
term capital gains), if any, are distributed at least annually. Dividends and
capital gains are paid in the form of additional shares of the same Fund
unless a shareholder requests that dividends and capital gains be paid in
cash. In the absence of this request on the Account Application Form, each
purchase of shares is made on the understanding that the Transfer Agent is
automatically appointed to receive the dividends upon all shares in the
shareholder's account and to reinvest them in full and fractional shares of
the same Fund at the net asset value in effect at the close of business on the
reinvestment date. Dividends are automatically paid in cash (along with any
redemption proceeds) not later than seven business day after a shareholder
closes an account with a Fund.
Shareholders of the Money Market Fund whose purchase orders are received and
become effective by 3:00 p.m. (Eastern Time) on any day on which the NYSE is
open for business receive dividends for that day. Shareholders of the Money
Market Fund whose redemption orders have been received by 3:00 p.m. (Eastern
Time) on a Business Day will not receive dividends for that day, while
shareholders whose redemption orders are received after 3:00 p.m. (Eastern
Time) on a Business Day will receive that day's dividends. Shareholders of
Funds other than the Money Market Fund will not receive dividends for the day
purchase orders are received, but will receive dividends for the day
redemption orders are received. The above-stated dividend determination time
with respect to redemptions is also applicable with respect to expedited
redemption orders received by telephone.
A Fund's expenses are deducted from the income of the Fund before dividends
are declared and paid. These expenses include, but are not limited to, fees
paid to the Advisor, Administrator, Sub-Custodian and Transfer Agent; fees and
expenses of officers and Directors; taxes; interest; legal and auditing fees;
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 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 fund of the Company are allocated among all funds of the
Company by or under the direction of the Board of Directors in a manner that
the Board 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. Except as noted in this Prospectus and the
Statement of Additional Information, the Funds' service contractors bear
expenses in connection with the performance of their services, and each Fund
bears the expenses incurred in its operations. The Advisor, Administrator,
Sub-Custodian and Transfer Agent may voluntarily waive all or a portion of
their respective fees from time to time.
NET ASSET VALUE
Net asset value for shares in a Fund is calculated by dividing the value of
all securities and other assets belonging to the Fund, less the liabilities
charged, by the number of outstanding shares.
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The net asset value per share of each Fund (except the Money Market Fund)
for the purpose of pricing purchase and redemption orders is determined as of
the close of regular trading hours on the NYSE (currently 4:00 p.m., New York
time) on each Business Day. Securities traded on a national securities
exchange or on NASDAQ for which there were no sales on the date of valuation
and securities traded on other over-the-counter markets, including listed
securities for which the primary market is believed to be over-the-counter,
are valued at the mean between the most recently quoted bid and asked prices.
Options will be valued at market value or fair value if no market exists.
Futures contracts will be valued in like manner, except that open futures
contract sales will be valued using the closing settlement price or, in the
absence of such a price, the most recently quoted asked price. Restricted
securities and securities and assets for which market quotations are not
readily available are valued at fair value by the Advisor under the
supervision of the Board of Directors. Debt securities with remaining
maturities of 60 days or less are valued at amortized cost, unless the Board
of Directors determines that such valuation does not constitute fair value at
that time. Under this method, such securities are valued initially at cost on
the date of purchase (or the 61st day before maturity).
The net asset value per share of the Money Market Fund for the purpose of
pricing purchase and redemption orders is determined as of 3:00 p.m. (Eastern
time) and as of the close of regular trading on the NYSE on each Business Day.
In seeking to maintain a stable net asset value of $1.00 per share with
respect the Fund, the Company values the Fund's portfolio securities according
to the amortized cost method of valuation. Under this method, securities are
valued initially at cost on the date of purchase. Thereafter, absent unusual
circumstances, the Fund assumes a constant proportionate amortization of any
discount or premium until maturity of the security.
The Company does not accept purchase and redemption orders on days on which
the NYSE is closed. The NYSE is currently scheduled to be closed on New Year's
Day, Martin Luther King Day, Presidents' Day, Good Friday, Memorial Day
(observed), Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively.
MANAGEMENT
BOARD OF DIRECTORS
The Company is managed under the direction of its Board of Directors. The
Statement of Additional Information contains the name and background
information regarding each Director.
INVESTMENT ADVISOR
Munder Capital Management, a Delaware general partnership with its principal
offices at 480 Pierce Street, Birmingham, Michigan 48009, serves as the Funds'
investment advisor. The Advisor was formed in December 1994. The principal
partners of the Advisor are Old MCM, Inc. ("MCM"), Munder Group LLC,
Woodbridge Capital Management, Inc. ("Woodbridge") and WAM Holdings, Inc.
("WAM"). MCM was founded in February 1985 as a Delaware corporation and was a
registered investment advisor. Woodbridge and WAM are indirect, wholly-owned
subsidiaries of Comerica Incorporated. Mr. Lee P. Munder, the Advisor's chief
executive officer, indirectly owns or controls a majority of the partnership
interests in the Advisor. As of June 30, 1997, the Advisor and its affiliates
had approximately $41 billion in assets under management, of which $22 billion
were invested in equity securities, $8 billion were invested in money market
or other short-term instruments, and $11 billion were invested in other fixed
income securities.
Subject to the supervision of the Board of Directors of the Company, the
Advisor provides overall investment management for the Funds, provides
research and credit analysis, is responsible for all purchases and sales of
portfolio securities, maintains books and records with respect to the Funds'
securities transactions and provides periodic and special reports to the Board
of Directors as requested.
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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 Advisor may, from time to time, make payments to banks, broker-dealers
or other financial institutions for certain services to the Funds and/or their
shareholders, including sub-administration, sub-transfer agency and
shareholder servicing. Such payments are made out of the Advisor's own
resources and do not involve additional costs to the Funds or their
shareholders.
ADMINISTRATOR, CUSTODIAN, SUB-CUSTODIAN AND TRANSFER AGENT
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. The Administrator generally assists the
Company in all aspects of its administration and operations, including the
maintenance of financial records and fund accounting.
As compensation for these services, the Administrator is entitled to receive
fees at an annual rate of .0125% of the first $3 billion of the Funds'
aggregate net assets; .01% of the next $3 billion and .0075% of the Funds'
aggregate net assets in excess of $6 billion, with a minimum annual fee of
$200,000.
First Data Investor Services Group, Inc. ("Investor Services Group"), whose
principal business address is 53 State Street, Boston, Massachusetts 02109,
serves as the Company's transfer agent and dividend disbursing agent. Investor
Services Group is a wholly-owned subsidiary of First Data Corporation. The
Transfer Agent is entitled to receive fees at an annual rate of $10,000 per
Fund plus .025% of the Funds' aggregate average daily net assets in excess of
$5 billion. The Administrator and Transfer Agent are also entitled to
reimbursement for out-of-pocket expenses. Shareholder inquiries may be
directed to Investor Services Group at P.O. Box 5130, Westborough,
Massachusetts 01581-5130.
Comerica Bank, whose principal business address is One Detroit Center, 500
Woodward Avenue, Detroit, Michigan 48226, provides custodial services to the
Funds. The Custodian is a wholly owned subsidiary of Comerica Incorporated, a
publicly-held bank holding company. No compensation is paid to the Custodian
for its services. State Street also serves as sub-custodian to the Funds. As
compensation for its services, the Sub-custodian is entitled to receive fees,
based on the aggregate average daily net assets of the Funds and certain other
investment portfolios that are advised by the Advisor for which the Sub-
custodian provides services, computed daily and payable monthly at an annual
rate of .01% of average daily net assets. The Sub-custodian also receives
certain transaction based fees.
For an additional description of the services performed by the
Administrator, Transfer Agent, Custodian and Sub-Custodian, see the Statement
of Additional Information.
TAXES
Each Fund intends to qualify as a regulated investment company under
Subchapter M of the Internal Revenue Code of 1986, as amended (the "Code").
Such qualification relieves a Fund of liability for Federal income or excise
taxes to the extent its earnings are distributed in accordance with the Code.
Qualification as a regulated investment company under the Code for any
taxable year requires, among other things, that a Fund distribute to its
shareholders an amount equal to at least 90% of its investment company taxable
income and 90% of its net tax-exempt interest income for such year. In general
a Fund's investment company income will be its taxable income (including
dividends, interest, and short-term capital gains) subject to certain
adjustments and excluding the excess of any net long-term capital gain for the
taxable year over the net short-term capital loss, if any, for such year. Each
Fund intends to distribute substantially all of its investment
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company taxable income each taxable year. Such distributions will be taxable
as ordinary income to the Fund's shareholders who are not currently exempt
from Federal income taxes, whether such income is received in cash or
reinvested in additional shares. (Federal income taxes for distributions to an
IRA or qualified retirement plan are deferred under the Code if applicable
requirements are met.) The dividends received deduction for corporations will
apply to such distributions by the Funds to the extent of the total qualifying
dividends received by the distributing fund from domestic corporations for the
taxable year and if other applicable requirements are met.
Substantially all of each of the Funds' net realized long-term capital
gains, if any, will be distributed at least annually. The Funds will generally
have no tax liability with respect to such gains, and the distributions will
be taxable to shareholders who are not currently exempt from Federal income
taxes as long-term capital gains, no matter how long the shareholders have
held their shares.
A taxable gain or loss may be realized by a holder of shares in the Funds
upon the redemption or transfer of shares depending upon the tax basis of the
shares and their price at the time of the transaction. Such gain or loss will
be long-term or short-term, generally depending upon the shareholders holding
period for the shares.
Dividends declared in October, November, or December of any year payable to
shareholders of record on a specified date in such months will be deemed to
have been received by shareholders and paid by a Fund on December 31 of such
year if such dividends are actually paid during January of the following year.
Before purchasing shares in the Funds, the impact of dividends or
distributions which are expected to be declared or have been declared, but not
paid, should be carefully considered. Any dividend or distribution declared
shortly after a purchase of such shares prior to the record date will have the
effect of reducing the per share net asset value by the per share amount of
the dividend or distribution. All or a portion of such dividend or
distribution, although in effect a return of capital, may be subject to tax.
Investments in zero coupon securities will result in income to a Fund each
year equal to a portion of the excess of the face value of the securities over
their issue price, even though the Fund receives no cash interest payments
from the securities.
Each Fund may be required to withhold U.S. federal income tax at the rate of
31% of all taxable distributions payable to shareholders who fail to provide
the Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability.
On an annual basis, each Fund will send written notices to record owners of
shares regarding the Federal tax status of distributions made by the Fund.
Since this is not an exhaustive description of applicable tax consequences,
and since state and local taxes may be different than the Federal taxes
described below, investors may wish to contact their tax advisors concerning
investments in the Funds.
Further information relating to tax consequences is contained in the
Statement of Additional Information.
DESCRIPTION OF SHARES
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. 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
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Directors has 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 and Munder Institutional S&P SmallCap Index Equity Fund, Munder
Institutional Short Term Treasury Fund and Munder Institutional Money Market
Fund.
Each share of a Fund has a par value of $.001 and represents an equal
proportionate interest in the Fund and is entitled to such dividends and
distributions out of the income earned on the assets belonging to the Fund as
are declared at the discretion of the Company's Board of Directors. The
Company's shareholders are entitled to one vote for each full share held and
proportionate fractional votes for fractional shares held. Shareholders will
vote in the aggregate and not by Fund, except where otherwise required by law
or when the Board of Directors determines that the matter to be voted upon
affects only the interests of the shareholders of a particular Fund. Voting
rights are not cumulative and, accordingly, the holders of more than 50% of
the aggregate number of shares can elect 100% of the Directors, if they choose
to do so and, in such event, the holders of the remaining shares would not be
able to elect any person or persons to the Board of Directors. The Company is
not required and does not currently intend to hold annual meetings of
shareholders for the election of Board members except as required under the
1940 Act. A meeting of shareholders will be called upon the written request of
at least 10% of the outstanding shares of the Company. To the extent required
by law, the Company will assist in shareholder communications in connection
with such a meeting. For further discussion of the voting rights of
shareholders, see "Additional Information Concerning Shares" in the Statement
of Additional Information.
PERFORMANCE
From time to time, the Funds may quote performance and yields for shares in
advertisements or in communications to shareholders. The total return of
shares in the Funds may be calculated on an average annual total return basis,
and may also be calculated on an aggregate total return basis, for various
periods. Average annual total return reflects the average percentage change in
value of an investment of shares in the Funds from the beginning date of the
measuring period to the end of the measuring period. Aggregate total return
reflects the total percentage change in value over the measuring period. Both
methods of calculating total return assume that dividends and capital gains
distributions made during the period are reinvested in the same class of
shares.
The yield of shares in the Short Term Treasury Fund are computed based on
the net income of such Fund during a 30-day (or one month) period (which
period will be identified in connection with the particular yield quotation).
More specifically, the yield is computed by dividing the per share net income
for the class during a 30-day (or one-month) period by the maximum offering
price per share on the last day of the period and annualizing the result on a
semi-annual basis.
The yield of shares in the Money Market Fund refers to the income generated
by an investment the Fund over a seven-day period (which period will be stated
in the advertisement). This income is then "annualized;" that is, the amount
of income generated by the investment during that week is assumed to be
generated each week over a 52-week period and is shown as a percentage of the
investment. "Effective yield" is calculated similarly but, when annualized,
the income earned by an investment in the Fund is assumed to be reinvested.
The "effective yield" will be slightly higher than the "yield" because of the
compounding effect of this assumed reinvestment.
The Funds may compare the performance of their shares to the performance of
other mutual funds with similar investment objectives and to other relevant
indices or to rankings prepared by independent services or other financial or
industry publications that monitor the performance of mutual funds, including,
for example, Lipper Analytical Services, Inc., the Lehman Brothers
Government/Corporate Bond Index, a recognized unmanaged index of government
and corporate bonds, the Standard & Poor's 500 Index, an unmanaged index of a
group of common stocks, the Consumer Price Index, or the Dow Jones Industrial
Average, an unmanaged index of common stocks of 30 industrial companies listed
on the New York Stock Exchange. Performance and
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yield data as reported in national financial publications such as Morningstar,
Inc., Money Magazine, Forbes, Barron's, The Wall Street Journal and The New
York Times, or in publications of a local or regional nature, may also be used
in comparing the performance of a class of shares in the Fund.
Performance will fluctuate and any quotation of performance should not be
considered as representative of future performance of shares in the Funds.
Shareholders should remember that performance is generally a function of the
kind and quality of the instruments held in a Fund, portfolio maturity,
operating expenses, and market conditions. Any fees charged by institutions
directly to their customers' accounts in connection with investments in the
Funds will not be included in calculations of yield and performance.
21
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
St. Clair Funds, Inc. (the "Company") currently offers a
selection of 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.
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.
TABLE OF CONTENTS
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No person has been authorized to give any information or to make
any representations not contained in this Statement of Additional
Information or in the 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.
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 funds 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 Funds 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:
Principal Occupations
Name, Address and Age During the Past Five Years
Charles W. Elliott 1/ Senior Advisor to the
President -
3338 Bronson Boulevard Western Michigan University since
July
Kalamazoo, MI 49008 1995; prior to that Executive
Vice President
Age: 64 - Administration & Chief
Financial Officer,
Positions with Company Kellogg Company from January
1987
Chairman of the Board of Directors through June 1995; before that
Price
Waterhouse. Board of Directors,
Steelcase
Financial Corporation.
John Rakolta, Jr. Chairman, Walbridge Aldinger Company
1876 Rathmor (construction company).
Bloomfield Hills, MI 48304
Age: 49
Positions with Company
Director and Vice Chairman
of the Board of Directors
Thomas B. Bender Investment Advisor, Financial &
7 Wood Ridge Road Investment Management Group (since
Glen Arbor, MI 49636 April, 1991); Vice President
Institutional
Age: 63 Sales, Kidder, Peabody & Co.
Positions with Company (Retired April, 1991).
Director
David J. Brophy Professor, University of Michigan;
Director,
1025 Martin Place River Place Financial Corp.;
Trustee,
Ann Arbor, MI 48104 Renaissance Assets Trust.
Age: 60
Positions with Company
Director
Dr. Joseph E. Champagne Corporate and Executive Consultant
since
319 Snell Road September 1995; prior to that
Chancellor,
Rochester, MI 48306 Lamar University from
September 1994 until
Age: 58 September 1995; before that
Consultant to
Management, Lamar University; President
Director 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 President and COO, Mid-Atlantic
Group of
10726 Falls Pointe Drive Pulte Home Corporation
(developer of
Great Falls, VA 22066 residential land and
construction of housing
Age: 49 units).
Positions with Company
Director
Lee P. Munder President and CEO of the
Advisor; Chief
480 Pierce Street Executive Officer and President of
Old MCM,
Suite 300 Inc.; Chief Executive Officer of
World Asset
Birmingham, MI 48009 Management; and Director, LPM
Investment
Age: 51 Services, Inc. ("LPM").
Positions with Company
President
Terry H. Gardner Vice President and Chief Financial
Officer
480 Pierce Street of the Advisor; Vice President and
Chief
Suite 300 Financial Officer of Old MCM, Inc.
(February
Birmingham, MI 48009 1993 to present); Audit
Manager Arthur
Age: 36 Andersen & Co. (1991 to
February 1993);
Positions with Company Secretary of LPM.
Vice President, Chief Financial
Officer and Treasurer
Paul Tobias Executive Vice President and Chief
Operating
480 Pierce Street Officer of the Advisor (since April
1995) and
Suite 300 Executive Vice President of
Comerica, Inc.
Birmingham, MI 48009
Age: 45
Positions with Company
Vice President
Gerald Seizert Executive Vice President and
Chief
480 Pierce Street Investment Officer/Equities of the
Advisor
Suite 300 (since April 1995); Managing
Director
Birmingham, MI 48009 (1991-1995),Director (1992-
1995) and
Age: 44 Vice President (1984-1991) of
Loomis,
Positions with Company Sayles and Company, L.P.
Vice President
Elyse G. Essick Vice President and Director of
Marketing
480 Pierce Street for the Advisor; Vice President and
Director
Suite 300 of Client Services of Old MCM, Inc.
(August
Birmingham, MI 48009 1988 to December 1994).
Age: 38
Positions with Company
Vice President
James C. Robinson Vice President and Chief Investment
Officer/
480 Pierce Street Fixed Income for the Advisor; Vice
President
Suite 300 and Director of Fixed Income of Old
MCM,
Birmingham, MI 48009 Inc. (1987-1994).
Age: 35
Positions with Company
Vice President
Leonard J. Barr, II Vice President and Director of
Core Equity
480 Pierce Street Research of the Advisor; Director
and Senior
Suite 300 Vice President of Old MCM, Inc.
(since
Birmingham, MI 48009 1988); Director of LPM.
Age: 52
Vice President
Ann F. Putallaz Vice President and Director of
Fiduciary
480 Pierce Street Services of the Advisor (since
January
Suite 300 1995); Director of Client and
Marketing
Birmingham, MI 48009 Services of Woodbridge Capital
Age: 51 Management, Inc.
Positions with Company
Vice President
Richard H. Rose Senior Vice President, First Data
Investor
First Data Investor Services Services Group, Inc. (since
May 6, 1994).
Group, Inc. Formerly, Senior Vice
President, The Boston
One Exchange Place Company Advisors, Inc. since
November 1989.
8th Floor
Boston, MA 02109
Age: 41
Positions with Company
Assistant Treasurer
Lisa A. Rosen General Counsel of the Advisor
since May,
480 Pierce Street 1996; Formerly Counsel, First Data
Investor
Suite 300 Services Group, Inc.; Assistant Vice
President
Birmingham, MI 48009 and Counsel with The Boston
Company
Age: 29 Advisors, Inc.; Associate with
Hutchins,
Positions with Company Wheeler & Dittmar.
Secretary, Assistant Treasurer
Teresa M. R. Hamlin Counsel, First Data Investor
Services
First Data Investor Services Group, Inc. (since 1995);
Formerly
Group, Inc. Paralegal Manager, The Boston
Company
One Exchange Place Advisors, Inc.
8th Floor
Boston, MA 02109
Age: 33
Positions with Company
Assistant Secretary
Julie A. Tedesco Counsel, First Data Investor
Services
First Data Investor Services Group, Inc. (since May, 1994);
Formerly,
Group, Inc. Assistant Vice President and
Counsel of
One Exchange Place The Boston Company Advisors,
Inc.
8th Floor since July, 1992.
Boston, MA 02109
Age: 39
Positions with Company
Assistant Secretary
1/ Director is an "interested person" of the Company as defined
in the 1940 Act.
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.
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
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 Funds 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).
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 Funds 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 Funds 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
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.
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, 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.
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."
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
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
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 X $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
-Day Hedge is
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
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.
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