<PAGE>
As filed with the Securities and Exchange Commission on April 14, 1998
Securities Act File No. 2-91373
Investment Company Act of 1940 File No. 811-4038
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. 28 / X /
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
Amendment No. 29 / X /
St. Clair Funds, Inc.
(Exact Name of Registrant as Specified in Charter)
480 Pierce Street, Birmingham, Michigan 48009
(Address of Principal Executive Office) (Zip Code)
Registrant's Telephone Number (248) 647-9200
Cynthia Surprise
Vice President and Associate Counsel
State Street Bank and Trust Company
1776 Heritage Drive, AFB
North Quincy, MA 02171
(Name and Address of Agent for Service)
Copies to:
Lisa Anne Rosen, Esq. Paul F. Roye, Esq.
Munder Capital Management Dechert Price & Rhoads
480 Pierce Street 1775 Eye Street, NW
Birmingham, Michigan 48009 Washington, D.C. 20006
/X/ It is proposed that this filing will become effective April 28, 1998
pursuant to paragraph (b) of Rule 485.
<PAGE>
ST. CLAIR FUNDS, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Prospectus for St. Clair Funds, Inc.
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
Part A
Item Heading
- - - - ---- -------
1. Cover Page Cover Page
2. Synopis Fund Highlights; Financial Information
3. Condensed Financial Information Financial Information
4. General Description of Registrant Cover Page; Fund Highlights; Fund
Choices; Structure and Management of
the Funds
5. Management of Fund Structure and Management of the Funds;
Fund Choices; Dividends, Distributions
and Taxes; Performance
6. Capital Stock and Other Securities Structure and Management of the Funds;
Purchases of Shares; Redemptions of
Shares; Dividends, Distributions and
Taxes
7. Purchase of Securities Being Purchase of Shares
Offered
8. Redemption or Repurchase Redemptions of Shares
9. Pending Legal Proceedings Not Applicable
<PAGE>
ST. CLAIR FUNDS, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Prospectus for St. Clair Funds, Inc.
Liquidity Plus Money Market Fund
Part A
Item Heading
- - - - ---- -------
1. Cover Page Cover Page
2. Synopis Fund Information; Financial Information
3. Condensed Financial Information Financial Information
4. General Description of Registrant Cover Page; Fund Information;
Structure and Management of the Fund
5. Management of Fund Structure and Management of the Fund;
Dividends, Distributions and Taxes;
Performance
6. Capital Stock and Other Securities Structure and Management of the Fund;
Purchases of Shares; Redemptions of
Shares; Dividends, Distributions and
Taxes
7. Purchase of Securities Being Purchases of Shares
Offered
8. Redemption or Repurchase Redemptions of Shares
9. Pending Legal Proceedings Not Applicable
<PAGE>
ST. CLAIR FUNDS, INC.
CROSS REFERENCE SHEET
Pursuant to Rule 495(a)
Prospectus for St. Clair Funds, Inc.
Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index
Equity Fund, Munder S&P SmallCap Index Equity Fund, Munder
Foreign Equity Fund and Munder Aggregate Bond Index Fund
Part A
Item Heading
---- -------
1. Cover Page Cover Page
2. Synopsis Not Applicable
3. Condensed Financial Information Not Applicable
4. General Description of Cover Page; Investment Objectives and
Registrant Policies; Investment Limitations;
Portfolio Instruments and Practices and
Associated Risk Factors; Description of
Shares
5. Management of the Fund Management; Investment Objectives and
Policies; Dividends and Distributions;
Performance
6. Capital Stock and Other Management; Purchase and Redemption of
Securities Shares; Description of Shares; Dividends
and Distributions; Taxes
7. Purchase of Securities Being Net Asset Value; Purchase and Redemption
Offered of Shares
8. Redemption or Repurchase Purchase and Redemption of Shares
9. Pending Legal Proceedings Not Applicable
<PAGE>
ST. CLAIR FUNDS, INC.
Statement of Additional Information for St. Clair Funds, Inc.
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
Part B
Item Heading
- - - - ---- -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History See Prospectus -- "Structure and
Management of the Funds"; General;
Directors and Officers
13. Investment Objectives and Fund Investments; Investment
Policies Investment Limitations;
Portfolio Transactions
14. Management of Fund See Prospectus -- "Structure and
Management of the Funds"; Directors and
Officers; Miscellaneous
15. Control Persons and Principal See Prospectus -- "Structure and
Holders Management of the Funds"; Miscellaneous
of Securities
16. Investment Advisory and Other Investment Advisory and Other Service
Services Arrangements; See Prospectus --
"Structure and Management of the Funds"
17. Brokerage Allocation and Other Portfolio Transactions
Practices
18. Capital Stock and Other Securities See Prospectus -- "Structure and
Management of the Funds"; Additional
Information Concerning Shares
19. Purchase, Redemption and Pricing Additional Purchase and Redemption
of Securities Being Offered Information; Net Asset Value;
Additional Information Concerning
Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Other Service
Arrangements
<PAGE>
22. Calculation of Performance Data Performance Information
23. Financial Statements Financial Statements
<PAGE>
ST. CLAIR FUNDS, INC.
Statement of Additional Information for St. Clair Funds, Inc.
Liquidity Plus Money Market Fund
Part B
Item Heading
- - - - ---- -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History See Prospectus -- "Structure and
Management of the Fund"; General;
Directors and Officers
13. Investment Objectives and Fund Investments; Additional
Policies Investment Investment Limitations; Portfolio
Transactions
14. Management of Fund See Prospectus -- "Structure and
Management of the Fund"; Directors and
Officers; Miscellaneous
15. Control Persons and Principal See Prospectus -- "Structure and
Holders of Securities Management of the Fund"; Miscellaneous
16. Investment Advisory and Other Investment Advisory and Other Service
Services Arrangements; See Prospectus --
"Structure and Management of the Fund"
17. Brokerage Allocation and Other Portfolio Transactions
Practices
18. Capital Stock and Other Securities See Prospectus -- "Structure and
Management of the Fund"; Additional
Information Concerning Shares
19. Purchase, Redemption and Pricing Additional Purchase and Redemption
of Securities Being Offered Information; Net Asset Value;
Additional Information Concerning
Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Other Service
Arrangements
22. Calculation of Performance Data See Prospectus -- "Performance"
23. Financial Statements Financial Statements
<PAGE>
ST. CLAIR FUNDS, INC.
Statement of Additional Information for St. Clair Funds, Inc.
Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index
Equity Fund, Munder S&P SmallCap Index Equity Fund, Munder
Foreign Equity Fund and Munder Aggregate Bond Index Fund
Part B
Item Heading
---- -------
10. Cover Page Cover Page
11. Table of Contents Table of Contents
12. General Information and History See Prospectus -- "Management";
General; Directors and Officers
13. Investment Objectives and Fund Investments; Investment
Policies Limitations; Risk Factors and
Special Considerations - Index
Funds; Portfolio Transactions
14. Management of the Fund See Prospectus -- "Management";
Directors and Officers;
Miscellaneous
15. Control Persons and Principal See Prospectus -- "Management"; of
Holders Securities Miscellaneous; Control
Persons and Principal Holder of
Securities
16. Investment Advisory and Other Investment Advisory and Other
Services Service Arrangements; See
Prospectus -- "Management"
17. Brokerage Allocation and Other Portfolio Transactions
Practices
18. Capital Stock and Other See Prospectus -- "Description of
Securities Shares"; and "Management"'
Additional Information Concerning
Shares
19. Purchase, Redemption and Pricing Purchase and Redemption
of Securities Being Offered Information; Net Asset Value;
Additional Information Concerning
Shares
20. Tax Status Taxes
21. Underwriters Investment Advisory and Other
Service Arrangements
22. Calculation of Performance Data Performance Information
<PAGE>
23. Financial Statements Not Applicable
<PAGE>
ST. CLAIR FUNDS, INC.
The purposes of this filing are (i) to comply with an undertaking
pursuant to Item 32(b) of Form N-1A to file a post-effective amendment
containing unaudited financial statements within four to six months from the
commencement of operations with respect to the Munder Institutional S&P 500
Index Equity Fund and (ii) to bring other information for the St. Clair
Funds, Inc. up to date under Section 10(a)(3) of Securities Act of 1933, as
amended. The Munder Institutional S&P MidCap Index Equity Fund commenced
operations on February 13, 1998. As of the date of this filing the Munder
Institutional Short Term Treasury Fund, Munder Institutional Money Market
Fund, 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 and
Munder Foreign Equity Fund have not yet commenced operations.
<PAGE>
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 explains the objectives, policies, risks and fees of each
Fund. Investors are encouraged to read this Prospectus carefully before
investing and retain it for future reference. A Statement of Additional
Information ("SAI") has been filed with the Securities and Exchange Commission
(the "SEC") and is incorporated by reference into this Prospectus. The SAI 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
SAI 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 the principal amount invested.
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 May 1, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Fund Highlights...........................................................3
What are the key facts regarding the Funds?.........................3
Financial Information.....................................................5
Fund Choices..............................................................9
What Funds are offered?.............................................9
Who may want to invest in the Funds?...............................10
What are the Funds' investments and investment practices?..........11
What are the risks of investing in the Funds?......................15
Performance..............................................................16
How is the Funds' performance calculated?..........................16
Where can I obtain performance data?...............................17
Purchases of Shares......................................................17
What price do I pay for shares?....................................17
When can I purchase shares?........................................17
What is the minimum required investment?...........................17
How can I purchase shares?.........................................17
Redemption of Shares.....................................................18
What price do I receive for redeemed shares?.......................18
When can I redeem shares?..........................................18
How can I redeem shares?...........................................18
When will I receive redemption amounts?............................18
Structure and Management of the Funds....................................18
How are the Funds structured?......................................18
Who manages and services the Funds?................................18
What are my rights as a shareholder?...............................19
Dividends, Distributions and Taxes.......................................20
When will I receive distributions from the Funds?..................20
How will distributions be made?....................................20
Are there tax implications of my investments in the Funds?.........20
Additional Information...................................................21
Appendix A...............................................................22
</TABLE>
2
<PAGE>
FUND HIGHLIGHTS
What Are the Key Facts Regarding the Funds?
Q: What are the Funds' goals?
A:
o The Munder Institutional S&P 500 Index Equity Fund ("LargeCap 500
Index Fund") seeks to provide price performance and income that is
comparable to the Standard & Poor's 500 Composite Stock Price Index
("S&P 500").
o The Munder Institutional S&P MidCap Index Equity Fund ("MidCap Index
Fund") seeks to provide price performance and income that is
comparable to the Standard & Poor's MidCap 400 Index ("S&P MidCap
400").
o The Munder Institutional S&P SmallCap Index Equity Fund ("SmallCap
Index Fund") seeks to provide price performance and income that is
comparable to the Standard & Poor's SmallCap 600 Index ("S&P
SmallCap 600").
o The Munder Institutional Short Term Treasury Fund ("Short Term
Treasury Fund") seeks to provide an enhanced money market return
consistent with the preservation of capital.
o The Munder Institutional Money Market Fund ("Money Market Fund")
seeks to provide current income consistent with the preservation of
capital and liquidity.
Q: What are the Funds' strategies?
A: LargeCap 500 Index Fund
o This Fund invests primarily in Equity Securities and it normally
will hold the securities of at least 80% of the issuers in the S&P
500. The Fund is managed through a "quantitative" or "indexing"
investment approach, which attempts to duplicate the investment
composition and performance of the S&P 500 through statistical
procedures.
MidCap Index Fund
o This Fund invests primarily in Equity Securities and it normally
will hold the securities of at least 80% of the issuers in the S&P
MidCap 400. The Fund is managed through a "quantitative" or
"indexing" investment approach, which attempts to duplicate the
investment composition and performance of the S&P MidCap 400 through
statistical procedures.
SmallCap Index Fund
o This Fund invests primarily in Equity Securities and it normally
will hold the securities of at least 80% of the issuers in the S&P
SmallCap 600. The Fund is managed through a "quantitative" or
"indexing" investment approach, which attempts to duplicate the
investment composition and performance of the S&P SmallCap 600
through statistical procedures.
Short Term Treasury Fund
o This Fund invests only in U.S. Treasury securities and repurchase
agreements relating to U.S. Treasury securities.
Money Market Fund
o This Fund invests in a broad range of short-term, high quality, U.S.
dollar-denominated instruments that are available in the money
markets.
3
<PAGE>
Each Fund implements a different investment strategy which is described in
this Prospectus.
Q: What are the Funds' risks?
A: The following table summarizes the primary risks of investing in the
Funds:
Fund Risk
LargeCap 500 Index Fund Potential loss of investment due to
MidCap Index Fund changes in the stock market in general,
SmallCap Index Fund changes in the stock prices of
particular companies and perceptions
about particular industries.
Short Term Treasury Fund Potential loss of investment due to
changes in the bond market and in
interest rates.
Money Market Fund Potential failure to maintain
$1.00 net asset value.
Q: How do I buy and sell shares of the Funds?
A: Funds Distributor, Inc. (the "Distributor") sells shares of the Funds.
You may purchase shares directly from the Distributor or from the Funds'
transfer agent, First Data Investor Services Group, Inc. (the "Transfer Agent")
or through arrangements with institutions.
The minimum initial investment 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 may be redeemed through arrangements between the investors and
institutions.
Q: When and how are distributions made?
A: Dividend distributions are made from the dividends and interest earned on
investments. Dividends paid at least quarterly (if income is available):
LargeCap 500 Index Fund, MidCap Index Fund, SmallCap Index Fund.
Dividends paid monthly: Short Term Treasury Fund and Money Market Fund.
The Funds distribute capital gains at least annually. Unless you elect to
receive distributions in cash, we will use all dividends and capital gains
distributions of a Fund to purchase additional shares of that Fund.
Q: Who manages the Funds' assets?
A: Munder Capital Management is the Funds' investment advisor. The Advisor is
responsible for all purchases and sales of the securities held by the Funds.
4
<PAGE>
FINANCIAL INFORMATION
SHAREHOLDER TRANSACTION EXPENSES (1)
The purpose of this table is to assist you in understanding the expenses a
shareholder in the Funds will bear directly.
Maximum Sales Charge on Purchase (as a % of Offering Price) .......... None
Sales Charge Imposed on Reinvested Dividends ......................... None
Maximum Deferred Sales Charge ........................................ None
Redemption Fees (2) .................................................. None
Exchange Fees ........................................................ None
- - - - ----------
Notes:
(1) Does not include fees which institutions may charge for services they
provide to you.
(2) The Funds' transfer agent may charge a fee of $7.50 for wire redemptions
under $5,000.
FUND OPERATING EXPENSES
The purpose of this table is to assist you in understanding the expenses charged
directly to each Fund, which investors in the Funds will bear indirectly. Such
expenses include payments to Directors, auditors, legal counsel and service
providers (such as the Advisor), registration fees, and distribution fees. The
fees shown below are based on estimated operating expenses for the current
fiscal year. Any fees charged by institutions directly to customer accounts for
services provided in connection with investments in shares of the Fund are in
addition to the expenses shown in the table below and in the Example.
<TABLE>
<CAPTION>
LargeCap 500 SmallCap Short Term Money
Index MidCap Index Treasury Market
Fund Index 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+ .......................... .02%* .03%* .03%* .03%* .0%*
---- ---- ---- ---- ----
Total Fund Operating Expenses+ ........... .09%* .18%* .18%* .23%* .20%*
==== ==== ==== ==== ====
</TABLE>
- - - - ----------
* The Advisor has voluntarily agreed to reimburse expenses to limit
"Other Expenses" to .02% with respect to the LargeCap 500 Index Fund, .03%
with respect to the MidCap Index Fund, .03% with respect to the SmallCap
Index Fund, .03% with respect to the Short Term Treasury Fund, and .0%
with respect to the Money Market Fund. In the absence of such expense
reimbursements, it is estimated that other expenses and total fund operating
expenses would be as follows: .54% and .61%, respectively, for LargeCap 500
Index Fund, 3.73% and 3.88%, respectively, for MidCap Index Fund, 3.73% and
3.88%, repectively, for SmallCap Index Fund, .55% and .75%, respectively, for
Short Term Treasury Fund and .18% and .38%, respectively, for Money Market
Fund.
+ After expense reimbursements.
5
<PAGE>
EXAMPLE
This example shows the amount of expenses you would pay (directly or
indirectly) on a $1,000 investment in the Funds, assuming (1) a 5% annual return
and (2) redemption at the end of the following time periods. This example is not
a representation of past or future performance or operating expenses; actual
performance or operating expenses may be larger or smaller than those shown.
<TABLE>
<CAPTION>
1 3
Year Years
---- -----
<S> <C> <C>
LargeCap 500 Index Fund ..................................... $1 $3
MidCap Index Fund ........................................... $2 $6
SmallCap Index Fund ......................................... $2 $6
Short Term Treasury Fund .................................... $2 $7
Money Market Fund ........................................... $2 $6
</TABLE>
[The remainder of this page is intentionally left blank]
6
<PAGE>
FINANCIAL HIGHLIGHTS
The following financial highlights for the period ended December 31,
1997 were audited by Ernst & Young LLP, independent auditors. The financial
highlights for the LargeCap 500 Index Fund for the period ended March 31,
1998 are unaudited. The MidCap Index Fund commenced operations on February
13, 1998. As of the date of this prospectus, the Short Term Treasury Fund and
the Money Market Fund had not commenced operations. The financial highlights
should be read in conjunction with the Annual Report of the Munder
Institutional Funds dated December 31, 1997 , which is incorporated by
reference in the SAI and the unaudited Financial Statements for the LargeCap
500 Index Fund dated March 31, 1998 included in the SAI. You may obtain the
Annual Report of the Munder Institutional Funds and unaudited Financial
Statements for the LargeCap 500 Index Fund without charge by calling (800)
438-5789.
LargeCap 500 Index Fund
<TABLE>
<CAPTION>
Period Ended
3/31/98 Period Ended
(Unaudited) 12/31/97(a)
----------- -----------
<S> <C> <C>
Net asset value, beginning of period ................... $10.00 $10.00
------- -------
Income from investment operations:
Net investment income .................................. 0.04 0.04
Net realized and unrealized gain on investments ........ 1.35 0.00(b)
------- -------
Total from investment operations ....................... 1.39 0.04
------- -------
Less distributions:
Distributions from net investment income ............... -- (0.04)
-------
Total distributions .................................... -- (0.04)
-------
Net asset value, end of period ......................... $11.39 $10.00
======= =======
Total return(c) ........................................ 13.90% 0.39%
======= =======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) ................... $62,625 $63,999
Ratio of operating expenses to average net assets ...... 0.09%(d) 0.09%(d)
Ratio of net investment income to average net assets ... 1.46%(d) 1.76%(d)
Ratio of operating expenses to average net assets
without expense reimbursement........................... 0.33%(d) 0.61%(d)
Portfolio turnover rate ................................ 2% 0.08%
Average commission rate(e) ............................. $0.0242 $0.0100
</TABLE>
- - - - ----------
(a) LargeCap 500 Index Fund commenced operations on October 14, 1997.
(b) The amount shown at this caption for each share outstanding throughout the
period, may not accord with the change in aggregate gains and losses in
the portfolio securities for the period because of the timing of purchases
and withdrawals of shares in relation to the fluctuating market values of
the portfolio.
(c) Total return represents aggregate total return for the period indicated.
(d) Annualized.
(e) Average commission rate paid per share of securities purchased and sold by
the Fund.
7
<PAGE>
SmallCap Index Fund
<TABLE>
<CAPTION>
Period Ended
12/31/97(a)
-----------
<S> <C>
Net asset value, beginning of period ....................... $10.00
-------
Income from investment operations:
Net investment income ...................................... 0.04
Net realized and unrealized gain on investments ............ 0.26
-------
Total from investment operations ........................... 0.30
Less distributions: -------
Distributions from net investment income ................... (0.04)
Distributions from net realized gains ...................... (0.03)
-------
Total distributions ........................................ (0.07)
-------
Net asset value, end of period ............................. $10.23
=======
Total return(b) ............................................ 3.00%
=======
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) ....................... $2,559
Ratio of operating expenses to average net assets .......... 0.18%(c)
Ratio of net investment income to average net assets ....... 0.80%(c)
Ratio of operating expenses to average net assets
without expense reimbursement ............................... 3.88%(c)
Portfolio turnover rate .................................... 8%
Average commission rate(d) ................................. $0.0109
</TABLE>
- - - - ----------
(a) SmallCap Index Fund commenced operations on August 7, 1997.
(b) Total return represents aggregate total return for the period indicated.
(c) Annualized.
(d) Average commission rate paid per share of securities purchased and sold by
the Fund.
8
<PAGE>
FUND CHOICES
This Prospectus describes the following Funds offered by the Company:
LargeCap 500 Index Fund, MidCap Index Fund, SmallCap Index Fund, Short Term
Treasury Fund and 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.
What Funds are Offered?
LARGECAP 500 INDEX FUND
GOAL AND PRINCIPAL INVESTMENT. The goal of the LargeCap 500 Index Fund is
to provide performance and income that is comparable to the S&P 500. The S&P 500
is an index of 500 stocks which emphasizes large capitalization companies. See
Appendix A for more information on the S&P 500. The Fund will normally hold the
securities of at least 80% of the stocks in the S&P 500. Stock selections are
based primarily on market capitalization and industry weightings.
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.
PORTFOLIO MANAGEMENT. Darin McBride and Kenneth A. Schluchter III jointly
manage the Fund. Mr. McBride, a Portfolio Manager of the Advisor has managed
the portfolio since its inception. Previously, Mr. McBride was a Portfolio
Research Analyst at Flexible Plan Investments, Ltd. (1995-1997) and an
Account Executive at Ryder Systems, Inc. (1993-1994). Mr. Schluchter, the
Director of Domestic Investments of the Advisor, has also managed the Fund
since its inception. He was previously a Systems Developer and Data Analyst
for Compuware Incorporated (1993-1995).
MIDCAP INDEX FUND
GOAL AND PRINCIPAL INVESTMENT. The goal of the MidCap Index Fund is to
provide performance and income that is comparable to the S&P MidCap 400. The S&P
MidCap 400 is an index of 400 stocks which emphasize medium capitalization
companies. See Appendix A for more information on the S&P MidCap 400. The Fund
will normally hold the securities of at least 80% of the issuers included in the
S&P MidCap 400. Stock selections are based primarily on market capitalization
and industry weightings.
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.
PORTFOLIO MANAGEMENT. Darin McBride and Kenneth A. Schluchter III jointly
manage the Fund. Mr. McBride, a Portfolio Manager of the Advisor has managed
the portfolio since its inception. Previously, Mr. McBride was a Portfolio
Research Analyst at Flexible Plan Investments, Ltd. (1995-1997) and an
Account Executive at Ryder Systems, Inc. (1993-1994). Mr. Schluchter, the
Director of Domestic Investments of the Advisor, has also managed the Fund
since its inception. He was previously a Systems Developer and Data Analyst
for Compuware Incorporated (1993-1995).
9
<PAGE>
SMALLCAP INDEX FUND
GOAL AND PRINCIPAL INVESTMENTS. The goal of the SmallCap Index Fund is to
provide performance and income that is comparable to the S&P SmallCap 600. The
S&P SmallCap 600 is an index of 600 stocks which emphasize small capitalization
companies. See Appendix A for more information on the S&P SmallCap 600. The Fund
will normally hold the securities of at least 80% of the issuers included in the
S&P SmallCap 600. 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.
PORTFOLIO MANAGEMENT. Mark Drouse and Kenneth A. Schluchter III jointly
manage the Fund. Mr. Drouse has been Portfolio Manager of the Fund since its
inception. He is a Portfolio Manager for the Advisor utilizing his systems
experience in quantitative investment management. His prior positions include
Portfolio Analyst for Advisor (1996-1997), Systems Administrator of Munder
Capital Management (1995-1996) and WAN Network Administrator for Comerica
Bank (1993-1995). Mr. Schluchter, the Director of Domestic Investments of the
Advisor, has also managed the Fund since its inception. He was previously a
Systems Developer and Data Analyst for Compuware Incorporated (1993-1995).
SHORT TERM TREASURY FUND
GOAL AND PRINCIPAL INVESTMENTS. The goal of the Short Term Treasury Fund
is to provide investors with a high level of current income consistent with
capital preservation. Under normal conditions, the Fund invests 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. The Fund's dollar-weighted average
maturity usually will not exceed two years.
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.
PORTFOLIO MANAGEMENT. Sharon E. Fayolle, Vice President and Director of
Money Marketing Trading for Advisor, manages the Fund. Prior to joining the
Advisor in 1996, she was a European Portfolio Manager for Ford Motor Company.
MONEY MARKET FUND
GOAL AND PRINCIPAL INVESTMENTS. The primary goal 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 invests 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.
Who May Want to Invest in the Funds?
Index Funds
These Funds are designed for investors who desire potentially high capital
appreciation and who can accept short-term variations in return for potentially
greater returns over the long term. In general, the greater the risk, the
greater the potential reward. Investors who have a short time horizon, who
desire a high level of income or who are conservative in their investment
approach may wish to invest in other portfolios offered by the Company.
10
<PAGE>
Short Term Treasury Fund and Money Market Fund
These Funds are designed for investors who desire a high level of income
and liquidity and, in the case of the Money Market Fund, stability of principal.
What are the Funds' Investments and Investment Practices?
Each of the LargeCap 500 Index Fund, MidCap Index Fund and SmallCap Index
Fund (collectively, the "Index Funds") invests in Equity Securities which
include common stocks, preferred stocks, convertible preferred stocks 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 Fund (other than the Short Term Treasury Fund) may invest in Cash
Equivalents, which are high-quality, short-term money market instruments
including, among other things, commercial paper, bankers' acceptances and
negotiable certificates of deposit of banks or savings and loan associations,
short-term corporate obligations and short-term securities issued by, or
guaranteed by, the U.S. Government and its agencies or instrumentalities. These
instruments will be used primarily pending investment, to meet anticipated
redemptions or as a temporary defensive measure. If a Fund is investing
defensively, it may not be pursuing its investment objective.
The Index Funds may purchase American Depositary Receipts ("ADRs"),
European Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs").
ADRs are issued by U.S. financial institutions and EDRs and GDRs are issued by
European financial institutions. They are receipts evidencing ownership of
underlying foreign securities.
All Funds may enter into Repurchase Agreements. Under a repurchase
agreement, a Fund agrees to purchase securities from a seller and the seller
agrees to repurchase the securities at a later time, typically within seven
days, at a set price. The seller agrees to set aside collateral at least equal
to the repurchase price. This ensures that the Fund will receive the purchase
price at the time it is due, unless the seller defaults or declares bankruptcy,
in which event the Fund will bear the risk of possible loss due to adverse
market action or delays in liquidating the underlying obligation. 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 Funds (other than the Short Term Treasury Fund) may invest in Money
Market Funds. The LargeCap 500 Index Fund and the MidCap Index Fund may also
invest in Standard & Poor's Depositary Receipts ("SPDRs") and shares of other
open-end investment companies that are structured to seek performance that
corresponds to that of the appropriate Index. The Funds will bear a portion of
the expenses of any investment company whose shares they purchase, including
operating costs and investment advisory, distribution and administration fees.
These expenses would be in addition to a Fund's own expenses. Each Fund may
invest up to 10% of its assets in other investment companies and no more than 5%
of its assets in any one investment company.
Each Fund may Borrow Money in an amount up to 5% of its assets for
temporary purposes and in an amount up to 33 1/3% of its assets to meet
redemptions. This is a "fundamental" policy which only can be changed by
shareholders.
Each Index Fund may purchase Fixed Income Securities. Fixed Income
Securities are securities which either pay interest at set times at either fixed
or variable rates, or which realize a discount upon maturity. Fixed Income
Securities include corporate bonds, debentures, notes and other similar
corporate debt instruments, zero coupon bonds (discount debt obligations that do
not make interest payments) and variable amount master demand notes that permit
the amount of indebtedness to vary in addition to providing for periodic
adjustments in the interest rate.
11
<PAGE>
The Short Term Treasury Fund may purchase "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.
Each Fund is classified as a "diversified fund", which means that with
respect to 75% of each Fund's assets, each Fund cannot invest more than 5% of
its assets in a single issuer (other than the U.S. Government and its agencies
and instrumentalities). In addition, each Fund cannot invest more than 25% of
its assets in a single issuer.
The Money Market Fund will invest primarily in Eligible Securities (as
defined by the SEC) with remaining maturities of 397 days or less as defined by
the SEC (although securities subject to repurchase agreements, variable and
floating securities and certain other securities may bear longer maturities),
and the dollar-weighted average portfolio maturity of the Money Market Fund will
not exceed 90 days. Eligible Securities consist of securities that are
determined by the Advisor, under guidelines established by the Board of
Directors, to present minimal credit risk. The Money Market Fund may also hold
uninvested cash pending investment of late payments for purchase orders or
during temporary defensive periods.
Investment Chart
The following chart summarizes the Funds' investments and investment
practices. The SAI contains more details. All percentages are based on a Fund's
total assets except where otherwise noted. See "What are the Risks of Investing
in the Funds?" for a description of the risks involved with the Funds'
investment practices.
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------------
Short
LargeCap SmallCap Term Money
Investments and 500 Index MidCap Index Treasury Market
Investment Practices Fund Index Fund Fund Fund Fund
- - - - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Foreign Securities. Includes
securities issued by foreign
companies and foreign
governments and their
agencies, instrumentalities
or political subdivisions and
supranational organizations.
Present more risks than U.S.
securities. 25% 25% 25% N Y
- - - - --------------------------------------------------------------------------------
Forward Foreign Currency
Exchange Contracts.
Obligations of a Fund to
purchase or sell a specific
currency at a future date at
a set price. May decrease a
Fund's loss due to a change
in currency value, but also
limits gains from currency
changes. Y Y Y N N
- - - - --------------------------------------------------------------------------------
</TABLE>
Key:
Y = investment allowed without restriction
N = investment not allowed
12
<PAGE>
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------------
Short
LargeCap SmallCap Term Money
Investments and 500 Index MidCap Index Treasury Market
Investment Practices Fund Index Fund Fund Fund Fund
- - - - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Stripped Securities:
o Participations in
trusts that hold U.S.
Treasury and agency
securities N N N N Y
o U.S. Treasury-issued
receipts N N N Y Y
o Non-U.S. Treasury
receipts N N N N Y
- - - - --------------------------------------------------------------------------------
When-Issued Purchases and
Forward Commitments.
Agreement by a Fund to
purchase securities at a set
price, with delivery and
payment in the future. The
value of securities may
change between the time the
price is set and payment.
Not to be used for
speculation. Y Y Y Y Y
- - - - --------------------------------------------------------------------------------
Futures and Options on
Futures. (1) Contracts in
which a Fund agrees, at
maturity, to make delivery of
or receive securities, the
cash value of an index or
foreign currency. Used for
hedging purposes or to
maintain liquidity. Y Y Y N N
- - - - --------------------------------------------------------------------------------
Options. A Fund may buy options
giving it the right to require
a buyer to buy a security held
by the Fund (put options), buy
options giving it the right to
require a seller to sell
securities to the Fund (call
options), sell (write)
options giving a buyer the
right to require the Fund to
buy securities from the buyer
or write options giving a
buyer the right to require
the Fund to sell securities
to the buyer during a set
time at a set price. Options
may relate to stock indices,
individual securities,
foreign currencies or futures
contracts. See the SAI for
more details and additional
limitations. Y Y Y N N
- - - - --------------------------------------------------------------------------------
Reverse Repurchase
Agreements. A Fund sells
securities and agrees to buy
them back later at an agreed
upon time and price. A
method to borrow money for
temporary purposes. Y Y Y Y Y
- - - - --------------------------------------------------------------------------------
</TABLE>
Key:
Y = investment allowed without restriction
N = investment not allowed
(1) The limitation on margin and premiums for futures and related options is
5% of a Fund's assets
13
<PAGE>
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------------
Short
LargeCap SmallCap Term Money
Investments and 500 Index MidCap Index Treasury Market
Investment Practices Fund Index Fund Fund Fund Fund
- - - - --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Illiquid Securities.
Typically there is no ready
market for these securities,
which inhibits the ability to
sell them and to obtain their
full market value, or there
are legal restrictions on
their resale by the Fund. 15% 15% 15% N 10%
- - - - --------------------------------------------------------------------------------
Lending Securities. A Fund
may lend securities to
financial institutions which
pay for the use of the
securities. May increase
return. Slight risk of
borrower failing financially. 25% 25% 25% 25% 25%
- - - - --------------------------------------------------------------------------------
Bank Obligations. U.S.
dollar denominated bank
obligations, including
certificates of deposit,
bankers' acceptances, bank
notes, time deposits issued
by U.S. or foreign banks or
savings institutions having
total assets in excess of $1
billion. 25% 25% 25% N Y
- - - - --------------------------------------------------------------------------------
U.S. Government Obligations:
o Issued or guaranteed
by U.S. Government
o Issued or guaranteed
by U.S. Government Y Y Y Y Y
agencies and
instrumentalities Y Y Y N Y
- - - - --------------------------------------------------------------------------------
Corporate Obligations:
o Commercial paper
o Corporate bonds
Notes
o Other short-term
obligations
o Variable Master Demand
Notes
o Debentures Y Y Y N Y
- - - - --------------------------------------------------------------------------------
Asset-backed Securities.
Includes debt securities
backed by mortgages,
installment sales contracts
and credit card receivables. N N N N Y
- - - - --------------------------------------------------------------------------------
Guaranteed Investment
Contracts. Agreements of a
Fund to make payments to an
insurance company's general
account in exchange for a
minimum level of interest
based on an index. N N N N Y
- - - - --------------------------------------------------------------------------------
</TABLE>
Key:
Y = investment allowed without restriction
N = investment not allowed
14
<PAGE>
What are the Risks of Investing in the Funds?
All Funds
Consistent with a long-term investment approach, investors in a Fund
should be prepared and able to maintain their investments during periods of
adverse market conditions. By itself, no Fund constitutes a balanced investment
program and there is no guarantee that any Fund will achieve its investment
objectives since there is uncertainty in every investment.
A Fund's risk is mostly dependent on the types of securities it purchases
and its investment techniques. Certain Funds are authorized to use options,
futures, and forward foreign currency exchange contracts, which are types of
derivative instruments. Derivative instruments are instruments that derive their
value from a different underlying security, index or financial indicator. 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) the possible absence of a liquid secondary market for
any particular instrument and possible exchange-imposed price fluctuation
limits, either of which may make it difficult or impossible to close out a
position when desired; (5) leverage risk, that is, the risk that adverse price
movements in an instrument can result in a loss substantially greater than the
Fund's initial investment in that instrument (in some cases, the potential loss
is unlimited); and (6) particularly in the case of privately-negotiated
instruments, the risk that the counterparty will not perform its obligations,
which could leave the Fund worse off than if it had not entered into the
position.
The risks of various investment techniques the Funds use are described in
more detail in the SAI.
Index Funds
Investing in these Funds may be less risky than investing in individual
stocks due to the diversification of investing in a portfolio of many different
stocks; however, such diversification does not eliminate all risks. Because the
Funds invest mostly in Equity Securities, rises and falls in the stock market in
general, as well as in the value of particular Equity Securities held by the
Funds, can affect the Funds' performance. Your investment in the Funds is not
guaranteed. The net asset value of the Funds will change daily and you might not
recoup the amount you invest in the Funds.
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.
Short Term Treasury Fund
The value of the Short Term Treasury Fund's shares, like the value of most
fixed income securities, will rise and fall in response to changes in economic
conditions, interest rates and the market's perception of the underlying
securities held by the Fund. Investing in the Fund may be less risky than
investing in individual Fixed Income Securities due to the diversification of
investing in a portfolio containing many different Fixed Income Securities;
however, such diversity does not eliminate all risks. The Fund invests mostly in
Fixed Income Securities, whose values typically rise when interest rates fall
and fall when interest rates rise. Fixed Income Securities with shorter
maturities (time period until repayment) tend to be less affected by interest
rate changes, but generally offer lower yields than securities with longer
maturities. Current yield levels should not be considered representative of
yields for any future time. Securities with variable interest rates may exhibit
greater price
15
<PAGE>
variations than ordinary securities. 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.
Money Market Fund
The Money Market Fund attempts to maintain a constant net asset value of
$1.00 per share. However, your investment in the Fund is not guaranteed.
MidCap Index Fund and SmallCap Index Fund
The Advisor believes that smaller companies can provide greater growth
potential and potentially higher returns than larger firms. Investing in smaller
companies, however, is riskier than investing in larger companies. The stock of
smaller companies may trade infrequently and in lower volume. Smaller companies
may have limited product lines, markets, financial resources and distribution
channels, which makes them more sensitive to changing economic conditions.
Stocks of smaller companies historically have had larger fluctuations in price
than stocks of larger companies included in the S&P 500.
PERFORMANCE
How is the Funds' Performance Calculated?
There are various ways in which the Funds may calculate and report their
performance.
One method is to show a Fund's total return. Cumulative total return is
the percentage change in the value of an amount invested in a Fund over a stated
period of time and takes into account reinvested dividends. Cumulative total
return most closely reflects the actual performance of a Fund.
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.
Each Fund may also publish its current yield. Yield is the net investment
income generated by a share of the Fund during a 30-day period divided by the
maximum offering price per share on the 30th day.
The current yield of shares in the Money Market Fund refers to the net
income generated by an investment in shares of 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.
You should be aware that (i) past performance does not indicate how a Fund
will perform in the future; and (ii) each Fund's return and net asset value will
fluctuate, so you cannot use a Fund's performance data to compare it to
investments in certificates of deposit, savings accounts or other investments
that provide a fixed or guaranteed yield.
Each Fund may compare its performance to that of other mutual funds, such
as the performance of mutual funds reported by Lipper Analytical Services, Inc.
or information 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 local or regional publications. Each Fund may also compare its
total return to broad-based indices. These indices show the value of selected
portfolios of securities (assuming reinvestment of interest and dividends) which
are not managed by a portfolio manager. The Funds may report how they are
performing in comparison to the Consumer Price Index, an indication of inflation
reported by the U.S. Government.
16
<PAGE>
Where Can I Obtain Performance Data?
The Wall Street Journal and certain local newspapers report information on
the performance of mutual funds. In addition, performance information is
contained in the Fund's annual report dated December 31 of each year and
semi-annual report dated June 30 of each year, which will automatically be
mailed to shareholders. To obtain copies of financial reports or performance
information, call (800) 438-5789.
PURCHASES OF SHARES
The following persons may purchase shares of the Funds:
o fiduciary and discretionary accounts of institutions
o high net worth individuals
o institutional investors (including: banks, savings institutions,
credit unions and other financial institutions, 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)
What Price Do I Pay For Shares?
Shares of the Funds are sold at net asset value per share next determined
after receipt of a purchase order in proper form. Shares are sold without an
initial or contingent deferred sales charge. The net value ("NAV") of each Fund
(except the Money Market Fund) is determined as of the close of trading on the
New York Stock Exchange ("NYSE") (normally 4:00 p.m., Eastern time) on each day
the NYSE is open for trading (a "Business Day"). The NAV of the Money Market
Fund is determined as of 3:00 p.m. (Eastern time) and as of the close of trading
on the NYSE on each Business Day. NAV is calculated by totaling the value of all
of the assets of the Fund, subtracting the Fund's liabilities and expenses
charged and dividing the result by the number of outstanding shares.
When Can I Purchase Shares?
Shares of each Fund are sold on a continuous basis and can be purchased on
any Business Day.
What is the Minimum Required Investment?
The minimum initial investment 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.
How Can I Purchase Shares?
Purchase orders may be placed directly through the Distributor or the
Transfer Agent or through arrangements with institutions. Payments for shares
may be made by institutions in federal funds or other funds immediately
available to the Sub-Custodian no later than 4:00 p.m. (Eastern time) on the
next Business Day following receipt of the purchase order.
You will not be issued a share certificate unless you request one in
writing. We reserve the right to (i) reject any purchase order and (ii) suspend
the offering of Shares for any period of time. You may pay for shares of each
Fund with securities which the Fund is allowed to hold.
17
<PAGE>
REDEMPTIONS OF SHARES
What Price Do I Receive for Redeemed Shares?
The redemption price is the net asset value next determined after we
receive the redemption request in proper order.
When Can I Redeem Shares?
You can redeem shares on any Business Day, provided all required
documents have been received by the Transfer Agent. A Fund may temporarily
stop redeeming shares when the NYSE is closed or trading on the NYSE is
restricted, when an emergency exists and the Fund cannot sell its assets or
accurately determine the value of its assets or if the SEC orders the Fund to
suspend redemptions.
How Can I Redeem 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 that institution.
When Will I Receive Redemption Amounts?
If we receive a redemption order for a Fund before 4:00 p.m. (Eastern
time) on a Business Day, we will normally wire payment to the redeeming
institution on the next Business Day. We may delay wiring redemption proceeds
for up to seven days if we feel an earlier payment would have a negative impact
on the Fund.
STRUCTURE AND MANAGEMENT OF THE FUNDS
How are the Funds Structured?
The Company is an open-end management investment company, which is a
mutual fund that sells and redeems shares every day that it is open for
business. It is managed under the direction of its governing Board of Directors,
which is responsible for the overall management of the Company and supervises
the Funds' service providers. The Company is a Maryland corporation
Who Manages and Services the Funds?
Investment Advisor. The Funds' investment advisor is Munder Capital
Management, a Delaware general partnership with its principal offices at 480
Pierce Street, Birmingham, Michigan 48009. The principal partners of the Advisor
are Old MCM, Inc. ("MCM"), Munder Group LLC and WAM Holdings, Inc. ("WAM"). MCM
was founded in February 1985 as a Delaware corporation and was a registered
investment advisor. WAM is an indirect, wholly-owned subsidiary of Comerica
Incorporated. Mr. Lee P. Munder, the Advisor's chairman, indirectly owns or
controls approximately 45% and Comerica Incorporated owns or controls
approximately 44% of the partnership interests in the Advisor. As of December
31, 1997, the Advisor and its affiliates had approximately $45 billion in assets
under management, of which $22.2 billion were invested in equity securities, $9
billion were invested in money market or other short-term instruments, $9.3
billion were invested in other fixed income securities, and $4.5 billion in
non-discretionary assets.
The Advisor provides overall investment management for the Funds, provides
research and credit analysis and is responsible for all purchases and sales of
portfolio securities.
18
<PAGE>
The Advisor is entitled to receive an annual fee equal to .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. The Advisor may make such payments out of its own resources and there
are no additional costs to the Funds or their shareholders.
Administrator. State Street Bank and Trust Company ("State Street" or the
"Administrator") is the Funds' administrator. The Administrator is located at
225 Franklin Street, Boston, Massachusetts 02110. The Administrator generally
assists the Company in all aspects of its administration and operations,
including the maintenance of financial records and fund accounting. State Street
is entitled to receive fees at an annual rate of .0120% 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) plus the lesser of 0.005% of net assets or $150,000 for up to
ten funds, and $10,000 per fund in excess of ten funds.
State Street has entered into a Sub-Administration Agreement with the
Distributor under which the Distributor provides certain administrative services
with respect to the Fund. The Administrator pays the Distributor a fee for these
services out of its own resources at no cost to the Fund.
Transfer Agent. First Data Investor Services Group, Inc. is the Funds'
Transfer Agent. The Transfer Agent is a wholly-owned subsidiary of First Data
Corporation and is located at 53 State Street, Boston, Massachusetts 02109.
Custodian and Sub-Custodian. Comerica Bank (the "Custodian") whose
principal business address is One Detroit Center, 500 Woodward Avenue, Detroit,
Michigan 48226, provides custodial services to the Funds. No compensation is
paid to the Custodian for such services. Comerica receives a fee of 0.01% of the
aggregate average daily net assets of the Funds beneficially owned by Comerica
and its customers for certain shareholder services provided by Comerica to the
Funds. State Street serves as Sub-Custodian to the Funds.
Distributor. Funds Distributor, Inc. is the distributor of the Funds'
shares and is located at 60 State Street, Suite 1300, Boston, Massachusetts
02109. It markets and sells the Funds' shares.
For an additional description of the services performed by the
Administrator, Transfer Agent, Custodian, Sub-Custodian and the Distributor, see
the SAI.
What are My Rights as a Shareholder?
All shareholders have equal voting, liquidation and other rights. You are
entitled to one vote for each share you hold and a fractional vote for each
fraction of a share you hold. You will be asked to vote on matters affecting the
Company as a whole and affecting your particular Fund. The Company will not hold
annual shareholder meetings, but special meetings may be held at the written
request of shareholders owning more than 10% of outstanding shares for the
purpose of removing a Director. The SAI contains more information regarding
voting rights.
Comerica Bank currently has the right to vote a majority of the
outstanding shares of the Funds as agent, custodian or trustee for its customers
and therefore it is considered to be a controlling person of the Company.
19
<PAGE>
DIVIDENDS, DISTRIBUTIONS AND TAXES
When Will I Receive Distributions from the Funds?
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.
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.
It is possible that a Fund may make a distribution in excess of the Fund's
current and accumulated earnings and profits. You will treat such a distribution
as a return of capital which is applied against and reduces your basis in your
shares. To the extent that the amount of any such distribution exceeds your
basis in your shares, you will treat the excess as gain from a sale or exchange
of the shares.
How Will Distributions Be Made?
The Funds will pay dividend and capital gains distributions in additional
shares of a Fund. If you wish to receive distributions in cash, either indicate
this request on your Account Application Form or notify the Fund at (800)
438-5789.
Are There Tax Implications of My Investments in the Funds?
In general, as long as each Fund meets the requirements to qualify as a
regulated investment company ("RIC") under Federal tax laws, it will not be
subject to Federal income tax on its income and capital gains that it
distributes in a timely manner to its shareholders. Each Fund intends to qualify
annually as a RIC. Even if it qualifies as a RIC, a Fund may still be liable for
any excise tax on income that is not distributed in accordance with a calendar
year requirement; the Funds intend to avoid the excise tax by making timely
distributions.
Generally, you will owe tax on the amounts distributed to you, regardless
of whether you receive these amounts in cash or reinvest them in additional Fund
shares. Shareholders not subject to tax on their income generally will not be
required to pay any tax on amounts distributed to them. Federal income tax on
distributions to an IRA or to a qualified retirement plan will generally be
deferred.
Capital gains derived from sales of portfolio securities held by a Fund
will generally be designated as long-term or short-term. Distributions from a
Fund's long-term capital gains are generally taxed at the long-term capital
gains rates, regardless of how long you have owned shares in the Fund. Dividends
derived from other sources are generally taxed as ordinary income.
Dividends and capital gain distributions are generally taxable when you
receive them; however, if a distribution is declared in October, November or
December, but not paid until January of the following year, it will
20
<PAGE>
be considered to be paid on December 31 in the year in which it was declared.
Shortly after the end of each year, you will receive from each Fund in which you
are a shareholder a statement of the amount and nature of the distributions made
to you during the year.
If you redeem, transfer or exchange Fund shares, you may have taxable gain
or a loss. If you hold Fund shares for six months or less, and during that time
you receive a capital gain dividend, any loss you realize on the sale of these
Fund shares will be treated as a long-term loss to the extent of the earlier
distribution.
Dividends and certain interest income earned from foreign securities by a
Fund may be subject to foreign withholding or other taxes. A Fund may be
permitted to pass on to its shareholders the right to a credit or deduction for
income or other tax credits earned from foreign investments and will do so if
possible. These deductions or credits may be subject to tax law limitations.
If a Fund invests in certain "passive foreign investment companies"
("PFICs"), it will be subject to Federal income tax (and possibly additional
interest charges) on a portion of any "excess distribution" or gain from the
disposition of such shares, even if it distributes such income to its
shareholders. If a Fund elects to treat a PFIC as a "qualified electing fund"
("QEF") and the PFIC furnishes certain financial information in the required
form to such Fund, the Fund will instead be required to include in income each
year its allocable share of the ordinary earnings and net capital gains of the
QEF, regardless of whether received, and such amounts will be subject to the
various distribution requirements described above. The Funds may also elect to
mitigate the tax effects of owning PFIC stock by making an annual mark-to-market
election with respect to PFIC shares.
More information about the tax treatment of distributions from the Funds
and about other potential tax liabilities, including backup withholding for
certain taxpayers and information about tax aspects of dispositions of shares of
the Funds, is contained in the SAI. You should consult your tax advisor
regarding the impact of owning Fund shares on your own personal tax situation,
including the applicability of any state and local taxes.
ADDITIONAL INFORMATION
Shareholder Communications. You will receive unaudited Semi-Annual Reports
and audited Annual Reports on a regular basis from the Funds. In addition, you
will also receive updated Prospectuses or Supplements to this Prospectus. In
order to eliminate duplicate mailings, the Funds will only send one copy of the
above communications to (1) accounts with the same primary record owner, (2)
joint tenant accounts, (3) tenant in common accounts and (4) accounts which have
the same address.
21
<PAGE>
APPENDIX A
Standard & Poor's Indexes
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard and 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 liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
The S&P 500 is an index of 500 common stocks, most of which trade on
the NYSE. As of December 31, 1997, the S&P 500 represented approximately 70%
of the market capitalization of publicly owned stocks in the United States.
The S&P MidCap 400 is an index of 400 stocks 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, 1997, the S&P MidCap 400 represented approximately 8% of the market
capitalization of publicly owned stocks in the United States.
The S&P SmallCap 600 is an index of 600 stocks which emphasizes small
capitalization companies. As of December 31, 1997, the S&P SmallCap 600
represented approximately 4% of the market capitalization of publicly owned
stocks in the United States.
22
<PAGE>
p r o s p e c t u s
L I Q U I D I T Y P L U S M O N E Y M A R K E T F U N D
May 1, 1998
Prospectus begins on the next page ...
<PAGE>
Liquidity Plus Money Market Fund
- - - - --------------------------------------------------------------------------------
Liquidity Plus Money Market Fund (the "Fund") is a diversified portfolio of St.
Clair Funds, Inc. (the "Company"), an open-end management investment company.
The Fund is a mutual fund that seeks to provide current interest income
consistent with liquidity and stability of principal. The Fund invests
substantially all of its assets in a diversified portfolio of money market
instruments with remaining maturities of 397 days or less.
Munder Capital Management (the "Advisor") serves as investment advisor to the
Fund.
This Prospectus explains the objective, policies, risks and fees of the Fund.
You should read this Prospectus and retain it for future reference. A Statement
of Additional Information ("SAI") describing the Fund has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
into this Prospectus. You can obtain the SAI free of charge by calling the Fund
at (800) 438-5789. In addition, the SEC maintains a web site
(http://www.sec.gov) that contains the SAI and other information regarding the
Fund.
Shares of the Fund are not deposits or obligations of, or guaranteed or endorsed
by, any bank, and are not federally insured or guaranteed. An investment in the
Fund involves investment risks, including possible loss of the principal amount
invested.
Although the 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 Fund ("Shares") are sold only to Comerica Bank, its affiliate and
subsidiary banks, and certain other Institutional Investors ("Institutional
Investors"). Shares may be purchased by Institutional Investors for investment
of their own funds, or for funds of their customer accounts ("Customer
Accounts") for which they serve in a fiduciary, agency, or custodian capacity.
Shares are sold and redeemed without the imposition of a purchase or redemption
charge by the Fund, although Institutional Investors that are record owners of
Shares for their Customer Accounts may charge their Customers separate account
fees.
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 May 1, 1998.
1
<PAGE>
- - - - --------------------------------------------------------------------------------
Table of Contents
<TABLE>
<CAPTION>
Page
<S> <C>
Financial Information............................2
Fund Information.................................3
Purchases of Shares..............................6
Redemptions of Shares............................7
Structure and Management of Fund.................8
Dividends, Distributions and Taxes..............10
Performance.....................................11
Additional Information..........................12
</TABLE>
2
<PAGE>
- - - - --------------------------------------------------------------------------------
FINANCIAL INFORMATION
FUND OPERATING EXPENSES
The purpose of this table is to assist you in understanding the expenses charged
directly to the Fund, which investors in the Fund will bear indirectly for the
current fiscal year. Such expenses include payments to Directors, auditors,
legal counsel and service providers (such as the Advisor), registration fees and
distribution fees. The amount of "Other Expenses" in the table below is based on
estimated expenses and projected assets for the current fiscal year. Any fees
charged by institutions directly to customer accounts for services provided in
connection with investments in shares of the Fund are in addition to the
expenses shown in the table and in the Example shown below. Shares of the Fund
are sold without an initial or contingent deferred sales charge to Comerica
Bank, its affiliate and subsidiary banks, and certain other Institutional
Investors.
ANNUAL OPERATING EXPENSES
<TABLE>
<S> <C>
(as a percentage of average net assets)
Advisory Fees ......................... 0.35%
12b-1 Fees ............................ 0.35%
Other Expenses ........................ 0.16%
----
Total Fund Operating Expenses.......... 0.86%
====
</TABLE>
EXAMPLE
This example shows the amount of expenses you would pay (directly or
indirectly) on a $1,000 investment in the Fund assuming (1) a 5% annual return
and (2) redemption at the end of the time periods. This example is not a
representation of past or future performance or operating expenses; actual
performance or operating expenses may be larger or smaller than those shown.
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
------ ------- ------- --------
<S> <C> <C> <C> <C>
$9 $28 $48 $106
</TABLE>
3
<PAGE>
- - - - --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The following financial highlights were audited by Ernst & Young LLP,
independent auditors. This information should be read in conjunction with the
Fund's most recent Annual Report, which is incorporated by reference into the
SAI. You may obtain a copy of the Annual Report without charge by calling (800)
438-5789.
<TABLE>
<CAPTION>
Period Ended
12/31/97(a)
-----------
<S> <C>
Net asset value, beginning of period ............................. $1.00
-------
Income from investment operations:
Net investment income ........................................ 0.030
-------
Total from investment operations ............................. 0.030
-------
Less distributions:
Distributions from net investment income .................... (0.030)
-------
Total distributions ......................................... (0.030)
-------
Net asset value, end of period ................................... $1.00
=======
Total Return (b) ............................................. 2.59%
=======
Ratios to average net asset/supplemental data:
Net assets, end of period (in 000's) ........................ $56,636
Ratio of operating expenses to average net assets ........... 0.86%(c)
Ratio of net investment income to average net assets ........ 4.29%(c)
Ratio of operating expenses to average net assets
without expenses reimbursed ................................. 0.86%(c)
</TABLE>
- - - - ----------
(a) The Fund commenced operations on June 4, 1997.
(b) Total return represents aggregate total return for the period indicated.
(c) Annualized.
FUND INFORMATION
This section summarizes the Fund's principal investments. The sections
entitled "What are the Fund's Investments and Investment Practices?" and "What
are the Risks of Investing in the Fund?" and the SAI give more information about
the Fund's investment techniques and risks.
Goal and Principal Investments. The goal of the Fund is to provide current
interest income consistent with liquidity and stability of principal.
The Fund invests its assets in a broad range of short-term, high quality
U.S. dollar-denominated instruments such as government, bank, and commercial
paper obligations available in the money markets.
Who May Want To Invest?
The Fund is designed for investors who desire a high level of income,
liquidity and stability of principal.
4
<PAGE>
- - - - --------------------------------------------------------------------------------
What are the Fund's Investments and Investment Practices?
The Fund may invest in Cash Equivalents, which are high-quality,
short-term money market instruments including, among other things, commercial
paper, including variable amount master demand notes, bankers' acceptances and
negotiable certificates of deposit of banks or savings and loan associations,
short-term corporate obligations and short-term securities issued by, or
guaranteed by, the U.S. Government and its agencies or instrumentalities.
The Fund may invest in 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. Investments by the Fund in the obligations of foreign banks and foreign
branches of domestic banks will not exceed 25% of the Fund's total assets at the
time of investment. Foreign bank obligations include Eurodollar Certificates
("ECDs"), Eurodollar Time Deposits ("ETDs"), Canadian Time Deposits ("CTDs"),
Schedule Bs, Yankee Certificates of Deposit ("Yankee CDs") and Yankee Bankers'
Acceptances ("Yankee BAs").
The Fund may enter into Repurchase Agreements. Under a repurchase
agreement, the Fund agrees to purchase securities from a seller and the seller
agrees to repurchase the securities at a later time, typically within seven
days, at a set price. The seller agrees to set aside collateral at least equal
to the repurchase price. This ensures that the Fund will receive the purchase
price at the time it is due, unless the seller defaults or declares bankruptcy,
in which event the Fund will bear the risk of possible loss due to adverse
market action or delays in liquidating the underlying obligation.
The Fund may invest in Reverse Repurchase Agreements. Under a reverse
repurchase agreement, the Fund sells securities and agrees to buy them back
later at an agreed upon time and price. Reverse repurchase agreements are used
to borrow money for temporary purposes.
The Fund may buy shares of registered Money Market Funds. The Fund will
bear a portion of the expenses of any investment company whose shares it
purchases, including operating costs and investment advisory, distribution and
administration fees. These expenses would be in addition to the Fund's own
expenses. The Fund may invest up to 10% of its assets in other investment
companies and no more than 5% of its assets in any one investment company.
The Fund may purchase Fixed Income Securities. Fixed Income Securities are
securities which either pay interest at set times at either fixed or variable
rates, or which realize a discount upon maturity. Fixed income securities
include corporate bonds, debentures, notes and other similar corporate debt
instruments, zero coupon bonds (discount debt obligations that do not make
interest payments) and variable amount master demand notes that permit the
amount of indebtedness to vary in addition to providing for periodic adjustments
in the interest rate.
The Fund may purchase U.S. Government Securities, which are securities
issued by, or guaranteed by, the U.S. Government or its agencies or
instrumentalities. Such securities include U.S. Treasury bills, which have
initial maturities of less than one year, U.S. Treasury notes, which have
initial maturities of one to ten years, U.S. Treasury bonds, which generally
have initial maturities of greater than ten years, and obligations of the
Federal Home Loan Mortgage Corporation, Federal National Mortgage Association
and Government National Mortgage Association.
Subject to applicable maturity and credit criteria, the Fund may purchase
Asset-Backed Securities which are securities backed by mortgages, installment
sales contracts, credit card receivables or other assets.
5
<PAGE>
- - - - --------------------------------------------------------------------------------
The Fund may purchase Stripped Securities. Stripped securities include
participations in trusts that hold U.S. Treasury and agency securities (such as
TIGRs and CATS), U.S. Treasury-issued receipts and non-U.S. Treasury receipts.
The Fund may purchase Variable and Floating Rate Instruments which may
have stated maturities in excess of the Fund's maturity limitations but are
deemed to have shorter maturities because the Fund can demand payment of the
principal of the instrument at least once within such periods on not more than
thirty days' notice. 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 rate.
The Fund may invest up to 5% of its assets in Municipal Obligations which
are payable from the issuer's general revenues, the revenue of a specific
project, current revenues or a reserve fund.
The Fund may invest in Guaranteed Investment Contracts ("GICs"). GICs are
agreements of the Fund to make payments to an insurance company's general
account in exchange for a minimum level of interest based on an index.
The Fund may purchase securities on a "when-issued" basis and may purchase
or sell securities on a "forward commitment" basis. Although the price to be
paid by the Fund is set at the time of the agreement, the Fund usually does not
pay for securities until they are received. The value of the securities may
change between the time the price is set and the time the price is paid. When
the Fund purchases securities for future delivery, the Fund's custodian will set
aside cash or liquid securities to "cover" the Fund's position. The Fund does
not intend to purchase securities for future delivery for speculative purposes.
The Fund may invest up to 25% of its assets in U.S. dollar-denominated
Foreign Securities such as debt obligations issued by foreign governments and
their agencies, instrumentalities or political subdivisions, supranational
organizations, and foreign corporations or convertible into foreign stock.
The Fund may invest up to 10% of the value of its net assets in Illiquid
Securities. Illiquid securities are securities for which there is no ready
market, which inhibits the ability to sell them and obtain their full market
value, or which are legally restricted as to their resale by the Fund.
The Fund will invest primarily in Eligible Securities (as defined by the
SEC) 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. Eligible securities consist of securities that are determined by the
Advisor, under guidelines established by the Board of Directors, to present
minimal credit risk. The Fund may also hold uninvested cash pending investment
of late payments for purchase orders or during temporary defensive periods.
The Fund may Lend Securities to broker-dealers and other financially sound
institutional investors who will pay the Fund for the use of the securities,
thus potentially increasing the Fund's return. The borrower must set aside cash
or liquid securities equal to the value of the securities borrowed at all times
during the term of the loan. Loans may not exceed 25% of the value of the Fund's
total assets.
The Fund may Borrow Money in an amount up to 33 1/3% of its assets for
temporary purposes. This is a "fundamental" policy which only can be changed by
shareholders. Whenever borrowings exceed 5% of the Fund's total assets, the Fund
will not make any additional investments.
6
<PAGE>
- - - - --------------------------------------------------------------------------------
The Fund is classified as a "diversified fund." With respect to 75% of
the Fund's assets, it cannot invest more than 5% of its assets in a single
issuer (other than the U.S. Government and its agencies and
instrumentalities). In addition, the Fund cannot invest more than 25% of its
assets in a single issuer. This is a "fundamental" policy which can only be
changed by shareholders. However, as an operating policy the Fund intends to
adhere to the 5% limitation with regard to 100% of its portfolio. The Fund
may invest more than 25% of its assets in domestic bank certificates of
deposit, bankers' acceptances, U.S. Government Securities, and repurchase
agreements secured by such obligations.
What are the Risks of Investing in the Fund?
By itself, the Fund does not constitute a balanced investment program and
there is no guarantee that the Fund will achieve its investment objective since
there is uncertainty in every investment.
The Fund attempts to maintain a constant net asset value of $1.00 per
share. However, your investment in the Fund is not guaranteed. Although the Fund
expects under normal market conditions to be as fully invested as possible, the
Fund may hold uninvested cash pending investment of late payment for purchase
orders (or other payments) or during temporary defensive periods. Uninvested
cash will not earn income.
To the extent that the Fund invests in illiquid securities, the Fund risks
not being able to sell such securities at the time and the price that it would
like. The Fund may therefore have to lower the price, sell substitute securities
or forego an investment opportunity, each of which might adversely affect the
Fund.
Risks involved in lending securities include possible delay in recovering
the loaned securities and possible loss of the securities or the collateral if
the borrower fails financially.
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. Investments in foreign securities involve
higher costs than investments in U.S. securities, including higher transaction
costs as well as the imposition of additional taxes by foreign governments. In
addition, foreign investments may include additional risks associated with the
level of currency exchange rates, less complete financial information about the
issuers, less market liquidity, and political instability. Future political and
economic developments, the possible imposition of withholding taxes on interest
income, the possible seizure or nationalization of foreign holdings, the
possible establishment of exchange controls, or the adoption of other
governmental restrictions might adversely affect the payment of principal and
interest on foreign obligations. Additionally, foreign banks and foreign
branches of domestic banks may be subject to less stringent reserve
requirements, and to different accounting, auditing and record keeping
requirements.
The risks of the various investment techniques are described in further
detail in the SAI.
PURCHASES OF SHARES
Institutional Investors that have entered into agreements with the Company
to provide shareholder services for Customer Accounts may purchase shares of the
Fund.
7
<PAGE>
What Price Do I Pay for Shares?
Shares of the Fund are sold at net asset value next determined by the Fund
without any initial or contingent sales charge. The Fund determines its net
asset value ("NAV") as of 12:00 noon (Eastern time) and as of the close of
trading on the New York Stock Exchange ("NYSE") (normally 4:00 p.m. Eastern
time) on each day the NYSE is open for trading (a "Business Day"). Net asset
value for the Fund is calculated by dividing the value of all securities and
other assets belonging to the Fund, less the liabilities charged to the Fund, by
the number of outstanding shares of the Fund.
When Can I Purchase Shares?
Shares of the Fund are sold on a continuous basis and can be purchased on
any Business Day.
How Can I Purchase Shares?
All share purchases on behalf of a Customer Account are effected through
procedures established in connection with the requirements of the account.
Confirmations of share purchases will be sent to the institution involved.
Institutional Investors (or their nominees) will normally be the holders of
record of Fund shares acting on behalf of their Customers, and will reflect
their Customers' beneficial ownership of shares in the account statements
provided by them to their Customers.
Provided their procedures are compatible with the purchase and redemption
operations of the Fund, Institutional Investors may purchase shares of the Fund
on behalf of their Customers through automatic "sweeping" and other programs
established by the Institutional Investors. There is no minimum for initial or
subsequent investments.
Purchase orders by an institution for shares of the Fund must be received,
together with payment, by Funds Distributor, Inc. (the "Distributor") or
First Data Investor Services Group, Inc. (the "Transfer Agent") by 12:00 noon
(Eastern time) on any Business Day. A purchase order received by the Distributor
or by the Transfer Agent after such time will not be accepted; notice will be
given to the institution placing the order, and any funds received will be
returned promptly to the sending institution.
It is the responsibility of the institution to transmit orders for
purchases by their 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 will be given, and the institution will be responsible for any
loss to the Fund or its shareholders. Institutions may charge certain account
fees depending on the type of account the investor has established with the
institution.
You may pay for shares of the Fund with securities which the Fund is
allowed to hold, subject to approval by the Advisor.
We reserve the right to (i) reject any purchase order if, in our opinion,
it is in the Fund's best interest to do so and (ii) suspend the offering of
shares for any period of time. The issuance of shares is recorded on the books
of the Fund, and share certificates are not issued unless expressly requested in
writing. Certificates are not issued for fractional shares.
REDEMPTIONS OF SHARES
What Price Do I Receive for Redeemed Shares?
The redemption price is the net asset value next determined after the
Transfer Agent receives the redemption order.
8
<PAGE>
- - - - --------------------------------------------------------------------------------
When Can I Redeem Shares?
You can redeem shares on any Business Day, provided all required
documents have been received by the Transfer Agent. The Fund may temporarily
stop redeeming shares when the NYSE is closed or trading on the NYSE is
restricted, when an emergency exists and the Fund cannot sell its assets or
accurately determine the value of its assets or if the SEC orders the Fund to
suspend redemptions.
How Can I Redeem Shares?
Shares 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 Customer Accounts with the
redemption proceeds on a timely basis. 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.
When Will I Receive Redemption Amounts?
If a redemption order for shares of the Fund is received by the Transfer
Agent before 12:00 noon (Eastern time) on a Business Day, payment is normally
wired on the same Business Day; if a redemption order is received by the
Transfer Agent between 12:00 noon (Eastern time) and 4:00 p.m. (Eastern time) on
a Business Day, payment is normally wired on the next Business Day. 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 the Fund.
STRUCTURE AND MANAGEMENT OF THE FUND
How is the Fund Structured?
The Company is managed under the direction of the Board of Directors,
which is responsible for the overall management of the Company and supervises
the Fund's service providers. The Company is a Maryland corporation.
Who Manages and Services the Fund?
Investment Advisor. The Fund's investment advisor is Munder Capital
Management, a Delaware general partnership with its principal offices at 480
Pierce Street, Birmingham, Michigan 48009. The principal partners of the Advisor
are Old MCM, Inc. ("MCM"), Munder Group LLC and WAM Holdings, Inc. ("WAM"). WAM
is an indirect, wholly-owned subsidiary of Comerica Incorporated. Mr. Lee P.
Munder, the Advisor's chairman, indirectly owns or controls approximately 45%
and Comerica Incorporated owns or controls approximately 44% of the partnership
interests in the Advisor. As of December 31, 1997, the Advisor and its
affiliates had approximately $45 billion in assets under active management, of
which $22.2 billion were invested in equity securities, $9 billion were invested
in money market or other short-term instruments, $9.3 billion were invested in
other fixed income securities, and $4.5 billion in non-discretionary assets.
The Advisor provides overall investment management for the Fund, provides
research and credit analysis, is responsible for all purchases and sales of
portfolio securities, maintains books and records with respect to the Fund's
securities transactions and provides periodic and special reports to the Board
of Directors.
The Advisor is entitled to receive an annual fee equal to .35% of average
daily net assets of the Fund.
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The Advisor may, from time to time, make payments to banks, broker-dealers
or other financial institutions for certain services to the Fund and/or its
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 Fund or its shareholders.
Administrator. State Street Bank and Trust Company ("State Street" or the
"Administrator") serves as administrator for the Fund. The Administrator is
located at 225 Franklin Street, Boston, Massachusetts 02110. The Administrator
generally assists the Fund in all aspects of its administration and operations,
including the maintenance of financial records and fund accounting.
As compensation for its services, State Street is entitled to receive
fees, based on the aggregate average daily net assets of the Fund and certain
other investment portfolios that are advised by the Advisor and for which State
Street provides services, computed daily and payable monthly at the annual rate
of 0.113% on the first $2.8 billion of net assets, plus 0.103% on the next $2.2
billion of net assets, plus 0.101% on the next $2.5 billion of net assets, plus
0.095% on the next $2.5 billion of net assets, plus 0.080% on the next $2.5
billion of net assets, plus 0.070% on all net assets in excess of $12.5 billion
(with a $75,000 minimum fee per annum in the aggregate for all portfolios with
respect to the Administrator). State Street is also entitled to reimbursement
for out-of-pocket expenses. State Street has entered into a Sub-Administration
Agreement with the Distributor under which the Distributor provides certain
administrative services with respect to the Fund. The Administrator pays the
Distributor a fee for these services out of its own resources at no cost to the
Fund.
Transfer Agent. First Data Investor Services Group, Inc. ("First Data"),
whose principal business address is 53 State Street, Boston, Massachusetts 02109
serves as transfer agent and dividend disbursing agent. First Data is a
wholly-owned subsidiary of First Data Corporation. Shareholder inquiries may be
direct to First Data at P.O. Box 5130, Westborough, Massachusetts 01581-5130.
Custodian and Sub-Custodian. Comerica Bank (the "Custodian"), whose
principal business address is One Detroit Center, 500 Woodward Avenue, Detroit,
Michigan 48226, provides custodial services to the Fund. No compensation is paid
to the Custodian for such services. Comerica receives a fee of 0.01% of the
aggregate average daily net assets of the Fund beneficially owned by Comerica
and its customers for certain shareholder services provided by Comerica to the
Fund. State Street serves as Sub-Custodian to the Fund.
Distributor. Funds Distributor, Inc. (the "Distributor") is the
distributor of the Fund's shares. The distributor is located at 60 State Street,
Suite 1300, Boston, Massachusetts 02109. It markets and sells the Fund's shares.
The Fund has adopted a Distribution and Service Plan, pursuant to which
the Fund uses its assets to finance activities relating to the distribution of
its shares to investors and the provision of certain shareholder services (the
"Plan"). Under the Plan, the Distributor is paid a service fee at an annual rate
of 0.25% of the value of the average daily net assets of the Fund. The
Distributor is also paid a distribution fee at an annual rate of 0.10%, of the
value of the average daily net assets of the Fund.
Under the Plan, the Distributor uses the service fees primarily to pay
ongoing trail commissions to securities dealers (which may include the
Distributor itself) and other financial institutions and organizations
(collectively, the "Service Organizations") who provide shareholder services for
the Fund. These services include, among other things, processing new shareholder
account applications, preparing and transmitting to the Fund's Transfer Agent
computer processable tapes of all transactions by customers and serving as the
primary source of information to customers in answering questions concerning the
Fund and their transactions with the Fund.
The Plan permits payments to be made by the Fund to the Distributor for
expenditures incurred by it in connection with the distribution of Fund shares
to investors and the provision of certain shareholder services, including but
not limited to the payment of compensation, including incentive compensation, to
Service
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Organizations to obtain various distribution related services for the Fund. The
Distributor is also authorized to engage in advertising, the preparation and
distribution of sales literature and other promotional activities on behalf of
the Fund. In addition, the Plan authorizes payments by the Fund of the cost of
preparing, printing and distributing Fund prospectuses and statements of
additional information to prospective investors and of implementing and
operating the Plan. Distribution expenses also include an allocation of overhead
of the Distributor and accruals for interest on the amount of distribution
expenses incurred by the Distributor.
The Distributor expects to pay or arrange for payment of sales commissions
to dealers authorized to sell shares, all or a part of which may be paid at the
time of sale. The Distributor will use its own funds (which may be borrowed) to
pay such commissions pending reimbursement pursuant to the Plan. Because the
payment of distribution and service fees with respect to shares of the Fund is
subject to the 0.35% limitation described above and will therefore be spread
over a number of years, it may take the Distributor a number of years to recoup
sales commissions paid by it to dealers and other distribution and service
related expenses from the payments received by it from the Fund pursuant to the
Plan.
The Plan may be terminated at any time. The Plan provides that amounts
paid as prescribed by the Plan at any time may not cause the limitation on such
payments established by the Plan to be exceeded. The amount of daily
compensation payable to the Distributor with respect to each day will be accrued
each day as a liability of the Fund and will accordingly reduce the Fund's net
assets upon such accrual.
Payments under the Plans are not tied exclusively to the distribution
and/or shareholder service expenses incurred by the Distributor and the payments
may exceed distribution and/or service expenses actually incurred. The Company's
Board of Directors evaluates the appropriateness of the Plan and its payment
terms on a continuous basis and in so doing will consider all relevant factors,
including expenses incurred by the Distributor and the amount received under the
Plan.
What are My Rights as a Shareholder?
All shareholders have equal voting, liquidation and other rights. You are
entitled to one vote for each share you hold and a fractional vote for each
fraction of a share you hold. You will be asked to vote on matters affecting the
Company as a whole and affecting your particular Fund. The Company will not hold
annual shareholder meetings, but special meetings may be held at the written
request of shareholders owning more than 10% of outstanding shares for the
purpose of removing a Director. The SAI contains more information regarding
voting rights.
Comerica Bank currently has the right to vote a majority of the
outstanding shares of the Fund as agent, custodian or trustee for its customers
and therefore it is considered to be a controlling person of the Company.
DIVIDENDS, DISTRIBUTIONS AND TAXES
When Will I Receive Distributions?
The net investment income of the Fund is declared daily and distributed
monthly as a dividend to its shareholders. Capital gains distributions, if any,
will be made at least annually. Shareholders of the Fund whose purchase orders
are received and executed by 12:00 noon (Eastern time) receive dividends for
that day. Shareholders whose redemption orders who have been received by 12:00
noon (Eastern time) will not receive dividends for that day, while shareholders
whose redemption orders are received after 12:00 noon (Eastern time) will
receive that day's dividends.
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How Will Distributions Be Made?
Dividends are distributed monthly in the form of additional shares of the
Fund, or, if specifically requested (in writing) by the shareholder from the
Fund's Transfer Agent prior to the distribution date, in cash.
Are There Any Tax Implications of My Investments in the Funds?
In general, as long as the Fund meets the requirements to qualify as a
regulated investment company ("RIC") under Federal tax laws, it will not be
subject to Federal income tax on its income and capital gains that it
distributes in a timely manner to its shareholders. The Fund intends to qualify
annually as a RIC. Even if it qualifies as a RIC, a Fund may still be liable for
an excise tax on income that is not distributed in accordance with a calendar
year requirement; the Fund intends to avoid the excise tax by making timely
distributions.
Generally, you will owe tax on the amounts distributed to you, regardless
of whether you receive these amounts in cash or reinvest them in additional
shares of the Fund. Shareholders not subject to tax on their income generally
will not be required to pay any tax on amounts distributed to them. Federal
income tax on distributions to an IRA or to a qualified retirement plan will
generally be deferred.
The Fund does not expect to realize any net long-term capital gains and,
therefore, does not currently foresee paying any capital gains.
Corporate investors should note that dividends from the Fund's net
investment income will generally not qualify for the dividends-received
deduction for corporations.
Dividends declared in October, November or December but not paid until
January of the following year will be considered to be paid on December 31 of
the year in which the dividend was declared.
Shortly after the end of the year, you will receive from the Fund a
statement of the amount and nature of the distributions made to you during the
year.
More information about the tax treatment of distributions from the Fund
and about other potential tax liabilities, including backup withholding for
certain taxpayers and information about tax aspects of dispositions of shares of
the Fund, is contained in the SAI. You should consult your tax advisor regarding
the impact owning shares of the Fund on your own tax situation, including the
applicability of any state and local taxes.
PERFORMANCE
How is the Fund's Performance Calculated?
The Fund may publish its current yield. Yield is the net investment income
generated by a share of the Fund during a 30-day period divided by the maximum
offering price on the 30th day.
The current yield of shares in the Fund refers to the net income generated
by an investment in shares 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.
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You should be aware that (i) past performance does not indicate how the
Fund will perform in the future; and (ii) the Fund's return and net asset value
will fluctuate, so you cannot necessarily use a Fund' performance data to
compare it to investment in certificates of deposit, savings accounts or other
investments that provide a fixed or guaranteed yield.
The Fund may compare its performance to that of other mutual funds, such
as the performance of similar funds reported by Lipper Analytical Services, Inc.
or information reported in national financial publications (such as Money
Magazine, Forbes, Barron's, The Wall Street Journal and The New York Times) or
in local or regional publications. The Fund may also compare its performance to
broad-based indices. These indices show the value of selected portfolios of
securities (assuming reinvestment of interest and dividends) which are not
managed by a portfolio manager. The Fund may report how it is performing in
comparison to the Consumer Price Index, an indication of inflation reported by
the U.S. Government.
ADDITIONAL INFORMATION
Shareholder Communications. You will receive unaudited Semi-Annual Reports
and audited Annual Reports on a regular basis from the Fund. In addition, you
will receive updated Prospectuses or Supplements to this Prospectus. In order to
eliminate duplicate mailings, the Fund will only send one copy of the above
communications to (1) accounts with the same primary record owner, (2) joint
tenant accounts, (3) tenant in common accounts and (4) accounts which have the
same address.
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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 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
Shares of the Funds are available to the public only through the purchase
of certain variable annuity and variable life insurance contracts, subject to
obtaining regulatory approval ("Contracts") issued by various life insurance
companies (the "Insurers"). The Prospectus(es) for the specific Contract(s)
should be read in conjunction with this Prospectus.
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 May 1 1998, 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.
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 the principal amount invested.
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 _____, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
The Funds
Investment Objectives and Policies..................................3
Portfolio Instruments and Practices and Associated Risk Factors.....6
Investment Limitations.............................................13
Purchase and Redemption of Shares..................................13
Dividends and Distributions........................................13
Other Information
Net Asset Value....................................................14
Management.........................................................14
Taxes..............................................................16
Description of Shares..............................................17
Performance........................................................18
</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 Company or Huntleigh Fund Distibutors, Inc., ("the
"Distributor"). This Prospectus does not constitute an offering by the
Company or by the Distributor in any jurisdiction in which such offering may
not lawfully be made.
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<PAGE>
THE COMPANY
Each of the Funds is a series 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 S&P 500 Index Equity Fund ("LargeCap Index Fund"), Munder S&P MidCap
Index Equity Fund ("MidCap Index Fund"), Munder S&P SmallCap Index Equity Fund
("SmallCap Index Fund"), Munder Aggregate Bond Index Fund ("Bond Index Fund")
and Munder Foreign Equity Fund ("Foreign 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 Index Fund
The investment objective of the LargeCap 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, 1997, the S&P 500
represented approximately 70% of the market capitalization of publicly owned
stocks in the United States. Although the Fund 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.
In addition to investing in stocks, the LargeCap 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. As of December 31, 1997, the S&P MidCap 400 represented approximately
8% 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
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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.
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.
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, 1997, the S&P SmallCap 600 represented
approximately 4% 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.
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.
Bond Index Fund
The investment objective of the Bond Index Fund is to provide investment
exposure and income which generally correspond to the Lehman Brothers Aggregate
Bond Index ("Aggregate Bond Index"). The Aggregate Bond Index is a broad market
weighted index which encompasses three major classes of investment grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds and international (dollar-denominated) bonds, and
mortgage-backed securities, all with maturities of greater than one year. The
Bond
4
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Index Fund will be constructed to approximately match the composition of the
Aggregate Bond Index and seeks performance within a .95 correlation to the
Aggregate Bond Index.
The Aggregate Bond Index Includes fixed-rate debt issues rated investment
grade or higher by Moody's Investor Service, Inc. ("Moody's"), Standard and
Poor's Corporation, or Fitch Investors' Service. All issues have at least one
year maturity and an outstanding par value of at least $100 million for U.S.
Government issues and $25 million for all others.
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 Aggregate Bond Index 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 may temporarily hold securities in other categories,
including bankers acceptances, certificates of deposit and commercial paper that
the Advisor may determine to be a suitable investment to achieve the stated
objective for the Fund. The Fund may also invest in bond index futures contracts
and options on bond indices and bond index futures contracts. The Fund is
authorized to invest in high quality short-term fixed income securities as cash
reserves or for temporary defensive purposes. See "Portfolio Investments and
Practices and Associated Risk Factors" for a description of investment practices
of the Fund.
Foreign Fund
The investment objective of the Foreign Fund is to provide a long-term
appreciation by investing primarily in the common stock of foreign issuers and
American Depository Receipts ("ADRs"). ADRs are receipts typically issued by a
United States bank or trust company evidencing ownership of the underlying
foreign securities. The Fund will emphasize companies with a market
capitalization of at least $100 million. In selecting issuers, the Advisor may
consider, among other factors, the location of the issuer, its competitive
stature, the issuer's past record and future prospects for growth, and the
marketability of its securities.
The eligible universe of investments for the Fund will consist of common
stock and ADRs of foreign incorporated companies trading in the following
exchanges or markets: NYSE, American Stock Exchange ("AMEX"), NASDAQ National
Market System ("NASDAQ") and the United States over-the-counter market ("OTC")
(the "Eligible Universe").
On a continuing basis, but at least annually, the Advisor creates a list
of securities eligible for purchase by the Fund (the "Eligible List"). The
Advisor then calculates the adjusted market capitalization of all securities in
the Eligible Universe. The securities will then be sorted in descending order of
adjusted market capitalization. The securities in the Eligible Universe with a
market capitalization greater than $100 million will constitute the Eligible
List for the next 12-month period. On a regular basis, securities will be added
to the Eligible Universe as new ADR facilities and exchange listings occur,
provided these new listings meet the other stated eligibility requirements.
There will be no fixed limit as to the number of securities that the Fund can
hold.
The securities purchased by the Fund will be selected from the Eligible
List. These securities will be held in proportion to their individual market
capitalization as a percentage of the market capitalization of the entire Fund
portfolio. Market capitalization of a stock will be computed by multiplying the
market price of the stock by the number of shares outstanding, adjusted for
control blocks. A control block is defined as a block of stock owned by another
corporation. The primary sources of information regarding the existence and size
of control blocks will be the S&P Stock Reports and the Morgan Stanley Capital
International Perspective. Control blocks will be updated each time the Eligible
List of securities is created or an issuer is added to the Eligible Universe. A
security held in the Fund's portfolio may be retained even if such security is
no longer included on the Eligible List.
In addition to investing in stocks, the Fund may, for the purpose of
hedging its portfolio, purchase and write put and call options on foreign stock
indices listed on domestic stock exchanges. The Fund may also invest in
convertible securities, stock index futures contracts, options on stock index
futures contracts and, to a limited extent, warrants. The Fund is also
authorized to invest in high quality short-term fixed income securities as cash
reserves
5
<PAGE>
or for temporary defensive purposes. See "Portfolio Instruments and Practices
and Associated Risk Factors -- Foreign Securities."
Standard & Poor's Indexes
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard and Poor's 500",
"500", "S&P MidCap 400", "Standard & Poor's MidCap 400", "400", "S&P SmallCap
600(R)", "Standard & Poor's 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 Fund. 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 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 and borrow money for
investment purposes (i.e., "leverage" its portfolio). In addition, each 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
may invest cash balances in repurchase agreements and may invest in other money
market investments to maintain liquidity in an amount to meet expenses or for
day-to-day operating purposes. 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 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 and sponsored or unsponsored ADRs. Securities
considered for purchase by the Funds may be listed or unlisted, and may be
issued by companies with various levels of market capitalization.
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Each Fund (other than the Bond Index Fund) 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 Fund (other than the Bond 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 LargeCap Index
Fund, MidCap Index Fund, SmallCap Index Fund and Foreign Fund 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.
The Bond Index Fund may invest in international dollar-denominated bonds
and non-domestic bank obligations including Yankee bonds, which are dollar
denominated bonds issued in the U.S. by foreign banks and corporations; Yankee
Certificates of Deposit ("Yankee CDs"), which are U.S. dollar denominated
Certificates of Deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Banker's Acceptances ("Yankee Bas"), which are
U.S. dollar denominated bankers' acceptances issued by a U.S. branch of a
foreign bank and held in the U.S.
The Foreign Fund may invest in foreign securities of companies domiciled
in countries with emerging economies located in the Asia-Pacific region, Eastern
Europe, Latin and South America and Africa. Political and economic structures in
many of these countries may be undergoing significant evolution and rapid
development, and emerging market countries may lack the social, political and
economic stability characteristic of more developed countries.
In addition, many Asian countries may be subject to a greater degree of
social, political and economic instability than is the case in the United States
and European countries. Such instability may result from (i) authoritarian
governments or military involvement in political and economic decision-making;
(ii) popular unrest associated with demands for improved political, economic and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection.
The economies of most emerging markets and Asian countries are heavily
dependent upon international trade and are accordingly affected by protective
trade barriers and the economic conditions of their trading partners,
principally, the United States, Japan, China and the European Community. The
enactment by the United States or other principal trading partners of
protectionist trade legislation, reduction of foreign investment in the local
economies and general declines in the international securities markets could
have a significant adverse effect upon the securities of issuers domiciled in
such countries.
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 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
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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 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 bond or 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 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 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, 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 leave
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a Fund worse off than if it had not entered into the position. For a further
discussion, see "Fund Investments" and the Appendix in the Statement of
Additional Information.
When a Fund invests in a derivative instrument, it may be required to
segregate cash and other 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 "Additional Information on Fund Investments"
and the Appendix to the Statement of Additional Information.
Corporate Obligations. The Bond Index Fund may purchase corporate bonds
and commercial paper that meet the applicable quality and maturity limitations.
The Bond Index Fund will purchase only those securities which are considered to
be investment grade or better (within the four highest rating categories of S&P
or Moody's or, if unrated, of comparable quality). Obligations rated "Baa" by
Moody's lack outstanding investment characteristics and have speculative
characteristics. Adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of obligations rated "BBB" by S&P to pay
interest and repay principal than in the case of higher grade obligations. After
purchase by the Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by the Fund. Neither event will
require the Fund to sell such security. However, the Advisor will reassess
promptly whether the security presents minimal credit risks and determine
whether continuing to hold the security is in the best interests of the Fund. To
the extent that the ratings given by Moody's, S&P or another nationally
recognized statistical rating organization ("NRSRO") for securities may change
as a result of changes in the rating systems or because of corporate
reorganization of such rating organizations, the Fund will attempt to use
comparable ratings as standards for its investments in accordance with
investment objective and policies of the Fund. Descriptions of each rating
category are included as Appendix A to the Statement of Additional Information.
Asset-Backed Securities. Subject to applicable credit criteria, the Bond
Index 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 Bond Index 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.
Presently there are several types of mortgage-backed securities or
guaranteed by U.S. Government agencies, including guaranteed mortgage
pass-through certificates, which provide the holder with a pro rate interest in
the underlying mortgages, and collateralized mortgage obligations ("CMOs"),
which provide the holder with a specified interest in the cash flow of a pool of
underlying mortgages or other mortgage-backed securities. Insurers
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of CMOs frequently elect to be taxed as a pass-through entity known as real
estate mortgage investment conduits, or REMICs. CMOs are issued in multiple
classes, each with a specified fixed or floating interest rate and a final
distribution date. The relative payment rights of the various CMO classes may be
structured in many ways. In most cases, however, payments of principal are
applied to the CMO classes in the order of their respective stated maturities,
so that no principal payments will be made on a CMO class until all other
classes having an earlier stated maturity date are paid in full. The classes may
include accrual certificates (also known as "Z-Bonds"), which only accrue
interest at a specified rate until other specified classes have been retired and
are converted thereafter to interest-paying securities. They may also include
planned amortization classes ("PAC") which generally require, within certain
limits, that specified amounts of principal be applied on each payment date, and
generally exhibit less yield and market volatility than other classes. The Fund
will not purchase "residual" CMO interests, which normally exhibit the greatest
price volatility.
Stripped Securities. The Bond Index 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.
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 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 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 Foreign Fund
may purchase shares of investment companies investing primarily in foreign
securities, including so called "country funds". The LargeCap Fund and the
MidCap 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 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 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
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illiquid investments when the Fund may not demand payment of the principal
amount within seven days absent a reliable trading market.
Liquidity Management. Pending investment, to meet anticipated redemption
requests, or as a temporary defensive measure if the Advisor determines that
market conditions warrant, the 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. The
Funds may also purchase U.S. dollar-denominated bank obligations, such as
certificates of deposit, bankers' acceptances 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. The Bond Index
Fund may also invest in Yankee Bas and Yankee CDs. 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 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.
Illiquid Securities. Each Fund may invest up to 15% of the value of its
net assets (determined at time of acquisition) in securities which are illiquid.
Illiquid securities would generally 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 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. 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.
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 331/3% of its assets, as
permitted by the 1940 Act, for the purpose of meeting redemption requests.
Borrowing by a Fund creates an opportunity for greater total return but, at the
same time, increases exposure to capital risk. Leveraging by means of
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borrowing may exaggerate the effect of any increase or decrease in the value of
portfolio securities on a Fund's net asset value. In addition, borrowed funds
are subject to interest costs that may offset or exceed the return 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. The Funds do not intend to engage
in when-issued purchases and forward commitments for speculative purposes but
only in furtherance of their investment objectives.
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 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 strengths of each issuer. Changes in the financial strengths
of an issuer or charges 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 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.
As a mutual fund investing primarily in fixed-income securities, the Bond
Index Fund is subject to interest rate, income, call, credit and prepayment
risk.
Interest rate risk is the potential for fluctuations in bond prices due to
changing interest rates. Income risk is the potential for a decline in the
Fund's income due to falling market interest rates. Credit risk is the
possibility that a bond issuer will fail to make timely payments of either
interest or principal to the Fund. Prepayment risk (applicable to
mortgage-backed securities) and call risk (applicable to corporate bonds) is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity, requiring
the Fund to invest proceeds at generally lower interest rates.
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 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
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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 the annual portfolio
turnover rate for each Fund will be as follows: less than 10% for each of the
LargeCap Index Fund, MidCap Index Fund and SmallCap Index Fund; less than 25%
for the Bond Index Fund; and from 10% to 15% for the Foreign Fund.
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.
PURCHASE AND REDEMPTION OF SHARES
Shares of each Fund are sold by the Distributor on a continuous basis to
separate accounts of the Insurers. The Distributor is a registered broker/dealer
with principal offices at 222 South Central Avenue, Suite 300, St. Louis,
Missouri 63141.
Each Fund's Shares are continuously offered to each Insurer's separate
accounts at the net asset value per share next determined after a proper
purchase request has been received by the Insurer. The Funds and the Distributor
reserve the right to reject any purchase order for shares of the Funds.
Payments for redeemed shares will ordinarily be made within seven (7)
business days after the Funds receive a redemption order from the relevant
Insurer. The redemption price will be the net asset value per share next
determined after the Insurer receives the Contractowner's request in proper
form. The Company reserves the right to suspend or postpone redemptions during
any period when : (i) trading on the NYSE is restricted, as determined by the
SEC, or the NYSE is closed for other than customary weekend and holiday
closings; (ii) the SEC has by order permitted such suspension or postponement
for the protection of shareholders; or (iii) an emergency, as determined by the
SEC, exists, making disposal of portfolio securities or valuation of net assets
of the Funds not reasonably practicable.
The prospectus for the relevant Insurer's variable annuity or variable
life insurance policy describes the allocation, transfer and withdrawal
provisions of such annuity or policy.
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 (other
than the Foreign Fund). Dividends from net income are declared daily and paid at
least annually for the Foreign Fund. Each Fund's net realized capital gains
(including net short-term capital gains), if any, are distributed at least
annually. All dividends and capital gains distributions paid by each Fund will
be automatically reinvested, at net asset value, by the Insurer's separate
accounts in additional shares of the Fund. Contractowners who own units in a
separate account which correspond to shares in the Funds will be notified when
distributions are made.
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, Custodian and Transfer Agent;
shareholder servicing fees; fees and expenses of officers and Directors; taxes;
interest; legal and auditing fees; brokerage fees and commissions; expenses of
preparing prospectuses and statements of additional information; 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 or an Insurer. Any general expenses of the Company
that are not
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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, 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.
The net asset value per share of each 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 day on which the
NYSE is open for trading (a "Business Day"). With respect to the Funds,
securities traded on a national securities exchange or on NASDAQ are valued at
the last sale price on such exchange or market as of the close of business on
the date of valuation. 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 not 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 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, Jr. 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
and WAM Holdings, Inc. ("WAM"). MCM was founded in February 1985 as a Delaware
corporation and was a registered investment advisor. WAM is an indirect,
wholly-owned subsidiary of Comerica Incorporated. Mr. Lee P. Munder, the
Advisor's chairman, indirectly owns or controls approximately 45% and Comerica
Incorporated owns or controls approximately 44% of the partnership interests in
the Advisor. As of December 31, 1997, the Advisor and its affiliates had
approximately $45 billion in assets under management, of which $22.2 billion
were invested in equity securities, $9 billion were invested in money market or
other short-term instruments, $9.3 billion were invested in other fixed income
securities, and $4.5 billion in non-discretionary assets.
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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.
For the advisory services provided and expenses assumed with regard to the
Funds, the Advisor has agreed to a fee, computed daily and payable monthly at an
annual rate of .05% of the average daily net assets.
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.
Portfolio Managers
Todd B. Johnson, Chief Investment Officer of the Advisor is the co-manager
of the Foreign Fund. Mr. Johnson is also the co-manager of the Munder
International Equity Fund (previously, from January, 1996 to October, 1996, was
the portfolio manager) and the Munder Index 500 Fund (previously, from July,
1992 to October, 1996, was the portfolio manager) of the Munder Funds Trust. Mr.
Johnson previously served as a portfolio manager at Woodbridge Capital
Management (June, 1992 to December, 1994) and Manufacturers Bank (June, 1986 to
June, 1992). Mr. Johnson received a B.A. in Finance from Michigan State
University and M.B.A. from Wayne State University.
Theodore Miller, Senior Portfolio Manager of the Advisor is the co-manager
of the Foreign Fund. Mr. Miller is also the co-manager of the Munder
International Equity Fund of The Munder Funds Trust (since October, 1996). Prior
to being appointed co-manager of the Munder International Equity Fund, Mr.
Miller acted as the primary analyst for the Fund, assisting the manager with
portfolio decisions. Prior to joining the Advisor, Mr. Miller worked in
Derivatives Marketing for Interaciones Global Inc. (1993-1995), in Equity
Sales/Trader for McDonald & Co. Securities Inc. (1991-1993) and started his
career in 1986 and was a derivative and equity transaction execution specialist
with various New York investment banks. Mr. Miller received his B.S. from the
University of Pittsburgh and his M.B.A. from Indiana University.
Administrator, Transfer Agent, Custodian and Sub-Custodian
State Street Bank and Trust Company ("State Street" or the
"Administrator") is the Funds' administrator. The Administrator is located at
225 Franklin Street, Boston, Massachusetts 02110. The Administrator generally
assists the Company in all aspects of its administration and operations. State
Street is entitled to receive fees at an annual rate of 0.120% 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) plus the lesser of 0.005% of net assets or
$150,000 for up to ten funds, and $10,000 per fund in excess of ten funds. The
Administrator is also entitled to reimbursement for out-of-pocket expenses.
First Data Investor Services Group, Inc. ("First Data" or the "Transfer
Agent"), whose principal business address is 53 State Street, Boston,
Massachusetts 02109, serves as the Company's transfer agent and dividend
disbursing agent. First Data is a wholly-owned subsidiary of First Data
Corporation. Shareholder inquiries may be directed to First Data at P.O. Box
5130, Westborough, Massachusetts 01581-5130.
Comerica Bank (the "Custodian"), 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 such services. Comerica receives a fee of 0.01% of the
aggregate average daily net assets of the Funds beneficially owned by Comerica
and its customers for certain shareholder services provided by Comerica to the
Funds. State Street serves as Sub-Custodian to the Funds.
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For an additional description of the services performed by the
Administrator, Transfer Agent, Custodian and Sub-Custodian, see the Statement of
Additional Information.
Shareholder Servicing Arrangements
Under the Rule 12b-1 of the 1940 Act, the Funds have adopted a Shareholder
Servicing Plan (the "Plan") that provides for payment to the Insurers offering
the separate accounts, dealers that offer the Contracts and the Funds'
Distributor ("Service Organizations") for providing shareholder services to
Contractowners. The Plan authorizes payments at an annual rate of up to .25% of
each Fund's average daily net assets.
The services provided by the Service Organizations under the Plan may
include execution and processing of orders from Insurers; processing purchase,
exchange and redemption requests furnished to the Insurers by the
Contractowners; placing orders with the Transfer Agent; processing dividend and
distribution payments from the Funds; providing statements of additional
information and information periodically showing positions in Fund shares and
providing such other similar services as may reasonably be requested.
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 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 company taxable
income each taxable year.
The Funds serve as the underlying investments for Contracts issued through
separate accounts of life insurance companies which may or may not be
affiliated. Section 817(h) of the Code imposes certain diversification standards
on the underlying assets of segregated asset accounts that fund contracts such
as the Contracts (that is, the assets of the Fund's), which are in addition to
the diversification requirements imposed on the Funds by the 1940 Act and
Subchapter M. Failure to satisfy those standards would result in imposition of
Federal income tax on a Contract owner with respect to the increase in the value
of the contract. Section 817(h)(2) provides that a segregated asset account that
funds contracts such as the Contracts is treated as meeting the diversification
standards if, as of the close of each calendar quarter, the assets in the
account meet the diversification requirements for a regulated investment company
and no more than 55% of those assets consist of cash, cash items, U.S.
Government securities and securities of other regulated investment companies.
The Treasury Regulations amplify the diversification standards set forth
in Section 817(h) and provide an alternative to the provision described above.
Under the regulations, an investment portfolio will be deemed adequately
diversified if (i) no more than 55% of the value of the total assets of the
portfolio is represented by any one investment; (ii) no more than 70% of such
value is represented by any two investments; (iii) no more than 80% of such
value is represented by any three investments; and (iv) no more than 90% of such
value is represented by any four investments. For purposes of these Regulations
all securities of the same issuer are treated as a single investment, but each
United States government agency or instrumentality shall be treated as a
separate issuer.
Each Fund will be managed with the intention of complying with these
diversification requirements. It is possible that, in order to comply with these
requirements, less desirable investment decisions may be made which would affect
the investment performance of a Fund.
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Taxes-Foreign Investments
Income or gain from investments in foreign securities may be subject to
foreign withholding or other taxes. It is expected that the Funds will be
subject to foreign withholding taxes with respect to income received from
sources within foreign countries. If more than 50% of the value of a Fund's
total assets at the close of a taxable year consists of stock or securities of
foreign corporations, the Fund may elect, for U.S. Federal income tax purposes,
to treat certain foreign taxes paid by it, including generally any withholding
taxes and other foreign income taxes, as paid by its shareholders. If a Fund
makes this election, the amount of such foreign taxes paid by the Fund will be
included in its shareholders' income pro rata (in addition to taxable
distributions actually received by them), and the shareholders would be entitled
(a) to credit their proportionate amount of such taxes against their U.S.
Federal income tax liabilities subject to certain limitations described in the
Statement of Additional Information, or (b) if they itemize their deductions, to
deduct such proportionate amount from their U.S. income.
If a Fund invests in certain "passive foreign investment companies"
("PFICs"), it will be subject to Federal income tax (and possibly additional
interest charges) on a portion of any "excess distribution" or gain from the
disposition of such shares even if it distributes such income to its
shareholders. If a Fund elects to treat the PFIC as a "qualified election fund"
("QEF") and the PFIC furnishes certain financial information in the required
form to such Fund, the Fund will instead be required to include in income each
year its allocable share of the ordinary earnings and net capital gains on the
QEF, regardless of whether received, and such amounts will be subject to the
various distributions requirements described above. The Funds may also elect to
mitigate the tax effects of owning PFIC stock by making an annual mark-to-market
election with respect to PFIC Shares.
The prospectus for an Insurer's variable annuity contracts or variable
life insurance policies describes the federal income tax treatment of
distributions from such contracts of Contractowners.
The foregoing is only a brief summary of important tax law provisions that
can affect the Funds. Other Federal, state or local law provisions may also
affect the Funds and their operations. Anyone who is considering allocating,
transferring or withdrawing monies held under an Insurer's variable contract to
or from a Fund should consult a qualified tax adviser.
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 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, Munder
Institutional S&P SmallCap Index Equity Fund, Munder Institutional Short Term
Treasury Fund and Munder Institutional Money Market Fund, each of which is
classified as a diversified investment company under the 1940 Act.
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
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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.
Through their respective separate accounts, the Insurers are the Funds'
sole stockholders of record, and as such under the 1940 Act, the Insurers are
deemed to be in control of the Funds. Nevertheless, when a shareholders' meeting
occurs, each Insurer solicits and accepts voting instructions from its
Contractowners who have allocated or transferred monies for an investment in a
Fund as of the record date of the meeting. Each Insurer then votes each Fund's
shares that are attributable to its Contractowners' interests in the Fund in
proportion to the voting instructions received. Each Insurer will vote any share
that it is entitled to vote directly due to amounts it has contributed or
accumulated in its separate accounts in the manner described in the prospectuses
for its variable annuities and variable life insurance policies.
PERFORMANCE
The Funds' performance may be used from time to time in advertisements,
shareholder reports or other communications to existing or prospective owners of
the Insurers' Contracts. When performance information is provided in
advertisements, it will include the effect of all charges deducted under the
terms of the specified contracts, as well as all recurring and non-recurring
charges incurred by a Fund. Performance information may include a Fund's
investment results and/or comparisons of its investment results to various
unmanaged indices or results of other mutual funds or investment or savings
vehicles. The Fund's investment results as used in such communications will be
calculated on a total rate of return or yield basis in the manner set forth
below. From time to time, fund rankings may be quoted from various sources, such
as Lipper Analytical Services, Inc., Value Line and Morningstar Inc.
The Company may provide period and average annualized "total return"
quotations for the Funds. A Fund's "total return" refers to the change in the
value of an investment in the Fund over a stated period based on any change in
net asset value per share and including the value of any shares purchasable with
any dividends or capital gains distributed during such period. Period total
return may be annualized. An annualized total return is a compounded total
return which assumes that the period total return is generated over a one-year
period, and that all dividends and capital gains distributions are reinvested.
An annualized total return will be higher than a period total return if the
period is shorter than one year, because of the compounding effect.
The yield of shares in the Bond Index 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 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.
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 a Fund
will not be included in calculations of yield and performance.
Shareholders will receive unaudited financial reports semi-annually that
include the Funds' financial statements, including a list of investment
securities held by the Funds' at those dates. Annual reports are audited by
independent accountants.
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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
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 May 1, 1998 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 May 1, 1998. 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 May 1, 1998.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General........................................................... 3
Fund Investments.................................................. 3
Risk Factors and Special Considerations .......................... 16
Investment Limitations............................................ 17
Directors and Officers............................................ 19
Investment Advisory and Other Service Arrangements................ 23
Portfolio Transactions............................................ 25
Additional Purchase and Redemption Information.................... 27
Net Asset Value................................................... 28
Performance Information........................................... 28
Taxes............................................................. 31
Additional Information Concerning Shares.......................... 35
Miscellaneous..................................................... 36
Registration Statement............................................ 37
Financial Statements.............................................. 38
Appendix A........................................................ 39
Appendix B........................................................ 42
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
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.
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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 and WAM Holdings, Inc. ("WAM"). Mr.
Lee P. Munder, the Advisor's Chairman, indirectly owns or controls approximately
45% and Comerica Incorporated owns or controls approximately 44% 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.
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.
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Non-domestic bank obligations include Eurodollar Certificates of Deposit
("ECDs"), which are U.S. dollar-denominated certificates of deposit issued by
offices of foreign and domestic banks located outside the United States;
Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated deposits in
a foreign branch of a U.S. bank or a foreign bank; Canadian Time Deposits
("CTDs"), which are essentially the same as ETDs except they are issued by
Canadian offices of major Canadian banks; Schedule Bs which are obligations
issued by Canadian branches of foreign or domestic banks; Yankee Certificates of
Deposit ("Yankee CDs"), which are U.S. dollar-denominated certificates of
deposit issued by a U.S. branch of a foreign bank and held in the United States;
and Yankee Bankers' Acceptances ("Yankee BAs"), which are U.S.
dollar-denominated bankers' acceptances issued by a U.S. branch of a foreign
bank and held in the United States. 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 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 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 and Floating Rate Securities. The Funds (other than Short Term
Treasury Fund) may purchase variable and floating rate securities which are debt
instruments with variable or floating interest rates. Unrated variable and
floating 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
Funds (other than the 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.
The absence of a secondary market could make it difficult to dispose of
the securities, and a Fund could suffer a loss if the issuer defaulted or during
periods 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. 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. 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
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<PAGE>
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 purchase plus transaction costs 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
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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
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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.
Forward Foreign Currency Transactions. In order to protect against a
possible loss on investments resulting from a decline or appreciation in the
value of a particular foreign currency against the U.S. dollar or another
foreign currency, the Index Funds are authorized to enter into forward foreign
currency exchange contracts ("forward currency contracts"). These contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Fund to establish a rate of currency exchange for a future point in time.
When entering into a contract for the purchase or sale of a security, a
Fund may enter into a forward currency contract for the amount of the
purchase or sale price to protect against variations, between the date the
security is purchased or sold and the date on which payment is made or
received, in the value of the foreign currency relative to the U.S. dollar or
other foreign currency.
When the Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading
currencies, in order to reduce risk, a Fund may enter into a forward contract
to sell, for a fixed amount, the amount of foreign currency approximating the
value of some or all of the Fund's securities denominated in such foreign
currency. Similarly, when the obligations held by a Fund create a short
position in a foreign currency, the Fund may enter into a forward contract to
buy, for a fixed amount, an amount of foreign currency approximating the
short position. With respect to any forward foreign currency contract, it
will not generally be possible to match precisely the amount covered by that
contract and the value of the securities involved due to the changes in the
values of such securities resulting from market movements between the date
the forward contract is entered into and the date it matures. In addition,
while forward contracts may offer protection from losses resulting from
declines or appreciation in the value of a particular foreign currency, they
also limit potential gains which might result from changes in the value of
such currency. A Fund will also incur costs in connection with forward
currency contracts and conversions of foreign currencies and U.S. dollars.
A separate account consisting of cash or liquid securities equal to the
amount of a Fund's assets that could be required to consummate forward contracts
will be established with the Funds' Custodian except to the extent the contracts
are otherwise "covered." For the purpose of determining the adequacy of the
securities in the account, the deposited securities will be calculated at market
or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if a Fund holds a
forward contract (or put option) permitting the Fund to sell the same currency
at a price as high as or higher than the Fund's price to buy the currency.
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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 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. For purposes of the Funds' investment
policies, a Fund's investments in depositary receipts will be deemed to be
investments in the underlying securities.
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 or to the restriction that each Fund's investment in warrants
or rights may not exceed 5% of its net assets at the time of purchase.
Convertible Preferred Stock. 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 a 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.
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
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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 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 Maritime
Administration.
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
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and Treasury bonds generally have initial maturities greater than ten years. 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 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 Short Term Treasury Fund will only purchase zero coupon
Treasury securities which have been stripped by the Federal Reserve Bank.
U.S. Treasury Inflation-Protection Securities. The Short Term Treasury
Fund may purchase securities issued by the U.S. Government, which includes U.S.
Treasury inflation-protection securities. The Fund does not expect to invest
more than 5% of its total assets in such inflation-protection securities.
Inflation-protection securities are a new type of marketable book-entry
security issued by the United States Department of Treasury ("Treasury") with a
nominal return linked to the inflation rate in prices. Inflation-protection
securities will be auctioned and issued on a quarterly basis on the 15th of
January, April, July, and October beginning on January 15, 1997. Initially, they
will be issued as 10-year notes, with other maturities added thereafter. The
index used to measure inflation will be non-seasonally adjusted U.S. City
Average All Items Consumer Price Index for All Urban Consumers ("CPI-U").
The value of the principal will be adjusted for inflation, and every six
months the security will pay interest, which will be an amount equal to a fixed
percentage of the inflation-adjusted value of the principal. The final payment
of principal of security will not be less than the original par amount of the
security at issuance.
The principal of the inflation-protection security will be indexed to the
non-seasonally adjusted CPI-U. To calculate the inflation-adjusted principal
value for a particular valuation date, the value of the principal at issuance is
multiplied by the index ratio applicable to that valuation date. The index ratio
for any date is the ration of reference Consumer Price Index ("CPI") applicable
to such date to the reference CPI applicable to the original issue date.
Semiannual coupon interest is determined by multiplying the inflation-adjusted
principal amount by one-half of the stated rate of interest on each interest
payment date.
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Inflation-adjusted principal or the original par amount, whichever is
larger, will be paid on the maturity date as specified in the applicable
offering announcement. If at maturity the inflation-adjusted principal is less
than the original principal value of the security, an additional amount will be
paid at maturity so that the additional amount plus the inflation-adjusted
principal equals the original principal amount. Some inflation-protection
securities may be stripped into principal and interest components. In the case
of a stripped security, the holder of the stripped principal would receive this
additional amount. The final interest payment, however, will be based on the
final inflation-adjusted principal value, not the original par amount.
The reference CPI for the first day of any calendar month is the CPI-U for
the third preceding calendar month. (For example, the reference CPI for December
1 is the CPI-U reported for September of the same year, which is released in
October). The reference CPI for any other day of the month is calculated by a
linear interpolation between the reference CPI applicable to the first day of
the month and the reference CPI applicable to the first day of the following
month.
Any revision the Bureau of Labor Statistics (or successor agency) makes to
any CPI-U number that has been previously released will not be used in
calculations of the value of outstanding inflation-protection securities. In the
case that the CPI-U for a particular month is not reported by the last day of
the following month, the Treasury will announce an index number based on the
last year-over-year CPI-U inflation rate available. Any calculations of the
Treasury's payment obligations on the inflation-protection security that need
that month's CPI-U number will be based on the index number that the Treasury
has announced. If the CPI-U is rebased to a different year, the Treasury will
continue to use the CPI-U series based on the base reference period in effect
when the security was first issued as long as that series continues to be
published. If the CPI-U is discontinued during the period the
inflation-protection security is outstanding, the Treasury will, in consultation
with the Bureau of Labor Statistics (or successor agency), determine an
appropriate substitute index and methodology for linking the discontinued series
with the new price index series. Determinations of the Secretary of Treasury in
this regard are final.
Inflation-protection securities will be held and transferred in either of
two book-entry systems: the commercial book-entry system ("TRADES") and TREASURY
DIRECT system through which an individual investor can make a noncompetitive bid
on U.S. Treasury securities. The securities will be maintained and transferred
at their original par amount, i.e., not at their inflation-adjusted value.
Separate Trading of Registered Interest and Principal of Securities ("STRIPS")
components will be maintained and transferred in TRADES at their value based on
the original par amount of the fully constituted security.
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.
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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.
Stripped securities will normally be considered illiquid instruments and
will be acquired subject to the limitation on illiquid investments unless
determined to be liquid under guidelines established by the Board of Directors.
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 only invest 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 397
days, provided that the repurchase agreement itself matures in 397 days.
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).
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Securities subject to repurchase agreements will be held by the Company's
custodian (or 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. Money borrowed will be
subject to interest costs which may or may not be recovered by an appreciation
of the securities purchased. 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. A Fund may not purchase portfolio securities while borrowings
exceed 5% of the Fund's total assets.
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.
13
<PAGE>
When a Fund agrees to purchase securities on a when-issued or forward
commitment basis, the Sub-Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Sub-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.
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) 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
14
<PAGE>
Company's Board of Directors. It is possible that unregistered securities
purchased by a Fund in reliance upon Rule 144A 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.
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.
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 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
15
<PAGE>
whether the Fund involved should continue to hold the security in accordance
with the interests of the Fund and applicable regulations of the SEC.
RISK FACTORS AND SPECIAL CONSIDERATIONS
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 weighting 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.
16
<PAGE>
The Index Funds will invest primarily in the common stocks that constitute
their Corresponding Indexes in accordance with their relative capitalization and
sector weightings as described above. It is possible, however, that a Fund will
from time to time receive, as part of a "spin-off" or other corporate
reorganization of an issuer included in a Corresponding Index, securities that
are themselves outside the Corresponding Index. Such securities will be disposed
of by the Fund in due course consistent with the Fund's investment objective.
INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
section which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous - Shareholder Approvals").
Each Fund may not:
1. With respect to 75% of the Fund's assets, invest more than 5%
of the Fund's assets (taken at market value at the time of
purchase) in the outstanding securities of any single issuer
or own more than 10% of the outstanding voting securities of
any one issuer, in each case other than securities issued or
guaranteed by the United States Government, its agencies or
instrumentalities. However, as an operating policy the Money
Market Fund intends to adhere to the 5% limitation (with
respect to the Fund's investment in the outstanding securities
of any one issuer) with regard to 100% of its portfolio to the
extent required under applicable regulations under the 1940
Act;
2. Purchase securities if more than 25% of the value of the
Fund's total assets would be invested in the securities of
issuers conducting their principal business activities in the
same industry; provided that: (i) there is no limit on
investments in U.S. Government Securities or, with respect to
the Money Market Fund, obligations of domestic commercial
banks (including U.S. branches of foreign banks subject to
regulations under U.S. laws applicable to domestic banks and,
to the extent that its parent is unconditionally liable for
the obligation, foreign branches of U.S. banks); (ii) there is
no limit on investments in issuers domiciled in a single
country; (iii) financial service companies are classified
according to the end users of their services (for example,
automobile finance, bank finance and diversified finance are
each considered to be a separate industry); and (iv) utility
companies are classified according to their services (for
example, gas, gas transmission, electric, and telephone are
each considered to be a separate industry);
3. Borrow money or enter into reverse repurchase agreements
except that the Fund may (i) borrow money or enter into
reverse repurchase agreements for temporary purposes in
amounts not exceeding 5% of its total assets and (ii) borrow
money for the purpose of meeting redemption requests, in
amounts (when aggregated with amounts borrowed under clause
(i)) not exceeding 33 1/3% of its total assets;
4. Pledge, mortgage or hypothecate its assets other than to
secure borrowings permitted by restriction 3 above (collateral
arrangements with respect to margin requirements for options
and futures transactions are not deemed to be pledges or
hypothecations for this purpose);
17
<PAGE>
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
18
<PAGE>
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 Positions with Company During the Past Five Years
- - - - --------------------- ---------------------- --------------------------
Charles W. Elliott Chairman of the Board of Senior Advisor to the
3338 Bronson Boulevard Directors President - Western
Kalamazoo, MI 49008 Michigan University
Age: 65 since July 1995;
Executive Vice President -
Administration & Chief
Financial Officer, Kellogg
Company from January 1987
through June 1995; before
that Price Waterhouse.
Board of Directors,
Steelcase Financial
Corporation.
John Rakolta, Jr. Director and Vice Chairman and Chief
1876 Rathmor Chairman of the Board of Executive Officer,
Bloomfield Hills, MI Directors Walbridge Aldinger
48304 Company (construction
Age: 50 company).
Thomas B. Bender Director Investment Advisor,
7 Wood Ridge Road Financial & Investment
Glen Arbor, MI 49636 Management Group (since
Age: 64 April, 1991); Vice
President Institutional
Sales, Kidder, Peabody &
Co. (Retired April,
1991); Trustee, Vining
Real Estate Investment
Trust.
David J. Brophy Director Professor, University of
1025 Martin Place Michigan; Director,
Ann Arbor, MI 48104 River Place Financial
Age: 61 Corp.
19
<PAGE>
Dr. Joseph E. Champagne Director Dean, University Center,
319 East Snell Road Macomb College since
Rochester, MI 48306 September 1997;
Age: 59 Corporate and Executive
Consultant since September
1995; prior to that
Chancellor, Lamar
University from September
1994 until September 1995;
before that Consultant to
Management; President and
Chief Executive Officer,
Crittenton Corporation
(holding company that owns
healthcare facilities),
and Crittenton Development
Corporation until August
1993; before that
President, Oakland
University of Rochester,
MI, until August 1991;
Chairman, Board of
Directors, Ross Controls
of Troy, MI.
Thomas D. Eckert Director President and Chief
10726 Falls Pointe Drive Executive Officer,
Great Falls, VA 22066 Capital Automotive REIT
Age: 50 from November 1997 to
present (real estate
investment trust
specializing in retail
automotive properties);
prior to that President,
Mid-Atlantic Division of
Pulte Home Corporation
(developer of residential
land and construction of
housing units) from 1983
until 1997.
Lee P. Munder* Director and President Chairman of the Advisor
480 Pierce Street since February 1998;
Suite 300 Chief Executive Officer
Birmingham, MI 48009 of World Asset
Age: 52 Management since January
1995; Chief Executive
Officer of Old MCM, Inc.
(predecessor to Advisor)
since 1985; and
Director, LPM Investment
Services, Inc. ("LPM").
20
<PAGE>
Terry H. Gardner Vice President, Chief Vice President and Chief
480 Pierce Street Financial Officer and Financial Officer of the
Suite 300 Treasurer Advisor; Vice President
Birmingham, MI 48009 and Chief Financial
Age: 37 Officer of Old MCM, Inc.
(February 1993 to
present); and Secretary of
LPM.
Paul Tobias Vice President Chief Executive Officer
480 Pierce Street of the Advisor (since
Suite 300 February 1998);
Birmingham, MI 48009 Chief Operating
Age: 46 Officer of the Advisor
(since April 1995);
Executive Vice President
of the Advisor (April
1995 - February 1998); and
Executive Vice President
of Comerica, Inc.
Gerald Seizert Vice President Chief Executive Officer
480 Pierce Street of the Advisor (since
Suite 300 February 1998);
Birmingham, MI 48009 Chief Investment
Age: 45 Officer/Equities of the
Advisor (since April
1995); Executive Vice
President of the Advisor
(April 1995-February 1998);
Managing Director
(1991-1995), Director
(1992-1995) and Vice
President (1984-1991) of
Loomis, Sayles and
Company, L.P.
Elyse G. Essick Vice President Vice President and
480 Pierce Street Director of Marketing
Suite 300 for the Advisor; Vice
Birmingham, MI 48009 President and Director
Age: 40 of Client Services of
Old MCM, Inc. (August
1988 to December 1994).
James C. Robinson Vice President Vice President and Chief
480 Pierce Street Investment Officer/Fixed
Suite 300 Income for the Advisor;
Birmingham, MI 48009 Vice President and
Age: 36 Director of Fixed Income
of Old MCM, Inc.
(1987-1994).
Leonard J. Barr, II Vice President Vice President and
480 Pierce Street Director of Core Equity
Suite 300 Research of the Advisor;
Birmingham, MI 48009 Director and Senior Vice
Age: 53 President of Old MCM,
Inc. (since 1988);
Director of LPM.
21
<PAGE>
Ann F. Putallaz Vice President Vice President and
480 Pierce Street Director of Fiduciary
Suite 300 Services of the Advisor
Birmingham, MI 48009 (since January 1995);
Age: 54 Director of Client and
Marketing Services of
Woodbridge Capital
Management, Inc.
Lisa A. Rosen Secretary, Assistant General Counsel of the
480 Pierce Street Treasurer Advisor (since May
Suite 300 1996); formerly Counsel,
Birmingham, MI 48009 First Data Investor
Age: 30 Services Group, Inc.;
Assistant Vice President
and Counsel with The
Boston Company Advisors,
Inc.; Associate with
Hutchins, Wheeler &
Dittmar.
Therese Hogan Assistant Secretary Director, State
53 State Street Regulation Department,
Boston, MA 02109 First Data Investor
Age: 36 Services Group (June
1994-present); formerly
Senior Legal Assistant,
Palmer & Dodge (October
1993-June 1994); Blue Sky
Paralegal, Robinson & Cole
(February 1984-October
1993).
* "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,
the Trust, Munder, and Framlington Trust to their respective Directors/Trustees
for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Aggregate Pension
Compensation Retirement Estimated
from the Benefits Annual
Name of Company, the Accrued Benefits Total from
Person Trust, Munder and as Part of upon the Fund
and Position Framlington Trust Fund Expenses Retirement Complex
------------ ----------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Charles W. Elliott $26,000 None None $26,000
Chairman
John Rakolta, Jr. $23,000 None None $23,000
Vice Chairman
Thomas B. Bender $26,000 None None $26,000
Trustee and
Director
</TABLE>
22
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
David J. Brophy $26,000 None None $26,000
Trustee and
Director
Dr. Joseph E. $26,000 None None $26,000
Champagne
Trustee and
Director
Thomas D. Eckert $22,500 None None $22,500
Trustee and
Director
</TABLE>
No officer, director or employee of the Advisor, Comerica, the
Sub-Custodian, the Distributor, the Administrator or the Transfer Agent
currently receives any compensation from the Company. As of March 23, 1998,
the Directors and officers of the Company, as a group, owned less than 1% of
outstanding shares of the Funds of the Company.
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 WAM, Old
MCM and Munder Group, LLC. WAM is a wholly-owned subsidiary of Comerica Bank --
Ann Arbor, which, in turn is a wholly-owned subsidiary of Comerica Incorporated,
a publicly-held bank holding company.
The Investment Advisory Agreement between the Advisor and the Company with
respect to the Funds (the "Advisory Agreement") was approved by the Company's
Board of Directors on May 6, 1997 and by shareholders on May 6, 1997. Under the
terms of the Advisory Agreement, the Advisor furnishes continuing investment
supervision to the Funds and is responsible for the management of each Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Advisor, subject to review by the Company's
Board of Directors.
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).
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.
23
<PAGE>
For the period from commencement of operations on October 14, 1997 and
August 7, 1997, respectively for LargeCap 500 Index Fund and SmallCap Index
Fund through December 31, 1997, the Advisor received fees in the amounts of
$7,005 for the LargeCap 500 Index Fund and $1,554 for the SmallCap Index
Fund. For the period from commencement of operations through December 31,
1997, the Advisor voluntarily reimbursed expenses in the amounts of $53,427
for the LargeCap 500 Index Fund and $38,346 for the SmallCap Index Fund.
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,
Suite 1300, Boston, Massachusetts 02109.
Administration Agreement. State Street Bank and Trust Company ("State
Street") located at 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; 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
willful misfeasance, bad faith or negligence in the performance of its duties or
from the reckless disregard by it of its duties and obligations thereunder.
For the period from commencement of operations on October 14, 1997 and
August 7, 1997, respectively for LargeCap 500 Index Fund and SmallCap Index Fund
through December 31, 1997, the administration fees of State Street accrued as
follows: LargeCap 500 Index Fund $841 and SmallCap Index Fund $87.
Custodian, Sub-Custodian and Transfer Agency Agreements. Comerica Bank
(the "Custodian"), whose principal business address is One Detroit Center,
500 Woodward Avenue, Detroit, MI 48226, is the custodian of each Fund
pursuant to a custodian agreement ("Custody Agreement") with the Company. The
Custodian receives no compensation for such services. State Street serves as
the sub-custodian to the Funds pursuant to a sub-custodian agreement (the
"Sub-Custodian Contract") among the Company, Comerica Bank and State Street.
State Street is also the Sub-Custodian with respect to the custody of foreign
securities held by certain of the Funds. State Street has in turn entered
into additional agreements with financial institutions and depositaries
located in foreign countries with respect to the custody of such securities.
Under the Sub-Custodian Contract, the Sub-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.
First Data Investor Services Group Inc. ("Investor Services Group") 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
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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, Sub-Custodian and Transfer
Agency Agreements. As stated in the Prospectus, the Administrator, the Transfer
Agent and the Sub-Custodian each receives a separate fee for its services. In
approving the Administration Agreement, the Sub-Custodian Contract and the
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, the Sub-Custodian 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.
For the period from commencement of operations on October 14, 1997 and
August 7, 1997, respectively for LargeCap 500 Index Fund and SmallCap Index Fund
through December 31, 1997, the Funds paid brokerage commissions as follows:
$9,081 for the LargeCap 500 Index Fund and $1,241 for the SmallCap Index Fund.
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Advisor will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of securities purchased from underwriters
includes an underwriting commission or concession, and the prices at which
securities are purchased from and sold to dealers include a dealer's mark-up or
mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Advisor believes
such practice to be in each Fund's interests.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Fund during the year. Each Fund may engage in short-term
trading to achieve its investment objective. Portfolio turnover may vary greatly
from year to year as well as within a particular year.
In the Advisory Agreement, the Advisor agrees to select broker-dealers in
accordance with guidelines established by the Company's Board of Directors from
time to time and in accordance with applicable law. In assessing the terms
available for any transaction, the Advisor shall consider all factors
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<PAGE>
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.
The Company is required to identify the securities of their regular
brokers or dealers (as discussed in Rule 10b-1 under the 1940 Act) or their
parent companies held by them as of the close of their most recent fiscal year
and to state the value of such holding. As of December 31, 1997, the LargeCap
500 Index Fund held securities of Chase Manhattan valued at $394,200, First
Chicago NBD Corporation valued at $200,400, NationsBank Corporation valued at
$364,875, Merrill Lynch & Company, Inc. valued at $196, 931, J.P. Morgan &
Company, Inc. valued at $169,313, Morgan Stanley, Dean Witter, Discover & Co.
valued at $289, 712 and Charles Schwab Corporation valued at $92,263. As of
December 31, 1997, the SmallCap Index Fund held securities of Deposit Guaranty
Corporation valued at $17,062.
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
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the Advisor, Administrator, Sub-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, Sub-Custodian and Transfer Agent may
voluntarily waive all or a portion of their respective fees from time to time.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases 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.
Other Information. 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.
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<PAGE>
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
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.
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., Eastern
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).
In seeking to maintain a stable net asset value of $1.00 per share with
respect to the Money Market 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.
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:
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<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
Based on the foregoing calculation, the aggregate total return for the
period from commencement of operations on October 14, 1997 and August 7, 1997,
respectively for LargeCap 500 Index Fund and SmallCap Index Fund through
December 31, 1997 was 0.39% for the LargeCap 500 Index Fund and 3.0% for the
SmallCap Index Fund.
All Funds. The performance of any investment is generally a function of
portfolio quality and maturity, type of investment and operating expenses.
From time to time, in advertisements or in reports to shareholders, 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.
General. 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"). Interest (including
original issue discount and "accrued market discount") received by a Fund at
maturity or on disposition of a security held for less than three months will
not be treated (in contrast to other income which is attributable to realized
market appreciation) as gross income from the sale or other disposition of
securities held for less than three months for this purpose.
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<PAGE>
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 and will not be eligible for the dividends
received deduction for corporations.
Each Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain") for
each taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as gain from the sale or exchange of a capital asset
held for more than one year, regardless of the length of time the shareholder
has held the Fund shares, and regardless of whether the distribution is paid in
cash or reinvested in shares. The Funds expect that capital gain dividends will
be taxable to shareholders as long-term gains. Capital gain dividends are not
eligible for the dividends received deduction.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by such Fund for
the year and if certain holding period requirements are met. Generally, a
dividend will be treated as a "qualifying dividend" if it has been received from
a domestic corporation.
If for any taxable year 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
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<PAGE>
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.
Hedging Transactions. The taxation of equity options and over-the-counter
options on debt securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by a Fund for selling a put or call option is
not included in income at the time of receipt. If the option expires, the
premium is short-term capital gain to the Fund. If the Fund enters into a
closing transaction, the difference between the amount paid to close out its
position and the premium received is short-term capital gain or loss. If a call
option written by a Fund is exercised, thereby requiring the Fund to sell the
underlying security, the premium will increase the amount realized upon the sale
of such security and any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term depending upon the holding period of the
security. With respect to a put or call option that is purchased by a Fund, if
the option is sold, any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term, depending upon the holding period of the
option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If the
option is exercised, the cost of the option, in the case of a call option, is
added to the basis of the purchased security and, in the case of a put option,
reduces the amount realized on the underlying security in determining gain or
loss.
Any regulated futures contracts and certain options (namely, nonequity
options and dealer equity options) 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
33
<PAGE>
gain, may be increased or decreased as compared to a fund that did not engage in
such hedging transactions.
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.
Currency Fluctuations - "Section 988" Gains or Losses. Under the Code,
gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues receivables or liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables or
pays such liabilities, generally are treated as ordinary income 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.
Disposition of Shares. Upon the redemption, sale or exchange of shares of
a Fund, a shareholder may realize a capital gain or loss depending upon his or
her basis in the shares. Such gain or loss will be treated as capital gain or
loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, generally depending upon the shareholder's holding
period for the shares. Any loss realized on a redemption, sale or exchange will
be disallowed to the extent the shares disposed of are replaced (including
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 and treated as long-term
capital gains. Furthermore a loss realized by a shareholder on the redemption,
sale or exchange of shares of a Fund with respect to which exempt-interest
dividends have been paid will, to the extent of such exempt-interest dividends,
be disallowed if such shares have been held by the shareholder for six months or
less.
Constructive Sales. Recently enacted rules may affect the timing and
character of gain if a Fund engages in transactions that reduce or eliminate its
risk of loss with respect to appreciated financial positions. If the Fund enters
into certain transactions in property while holding substantially identical
property, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code.
Passive Foreign Investment Companies. Certain Funds may invest in shares
of foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least one-half of its assets constitute investment-type assets,
or 75% or more of its gross income investment-type income. If a Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. Each Fund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions.
34
<PAGE>
Excess distributions are characterized as ordinary income even though, absent
application of the PFIC rules, certain excess distributions might have been
classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating to the taxation of excess
distributions, would not apply. In addition, another election would involve
marking to market the Fund's PFIC shares at the end of each taxable year, with
the result that unrealized gains would be treated as though they were realized
and reported as ordinary income. Any mark-to-market losses and loss from an
actual disposition of Fund shares would be deductible as ordinary losses to the
extent of any net mark-to-market gains included in income in prior years.
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
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
35
<PAGE>
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, 1775 Eye Street, N.W.,
Washington, DC 20006, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Company.
36
<PAGE>
Independent Auditors. Ernst & Young LLP, 200 Clarendon Street, Boston, MA
02116 serves as the Company's independent auditors.
Control Persons and Principal Holders of Securities. As of March 23, 1998
the following persons were beneficial owners of 5% or more of the outstanding
shares of a Fund because they possessed voting or investment power with respect
to such shares:
<TABLE>
<CAPTION>
Percentage of Total
Name of Fund Name and Address Shares Outstanding
------------ ---------------- ------------------
<S> <C> <C>
Large Cap 500 Index Fund Calhoun & Company 100%
and c/o Comerica Bank Detroit
MidCap Index Fund P.O. Box 75000
Detroit, MI 48275-3455
As of March 23, 1998, Munder Capital Management, on behalf of its clients
owned 100% of the SmallCap Index Fund.
</TABLE>
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
37
<PAGE>
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.
FINANCIAL STATEMENTS
The financial statements for the Company including the notes thereto,
dated December 31, 1997 have been audited by Ernst & Young LLP and are
incorporated by reference into this Statement of Additional Information from the
Annual Report of the Company dated as of December 31, 1997. The information
under the caption "Financial Highlights" of the Funds for the period from
commencement of operations through December 31, 1997, appearing in the
Prospectus dated May 1, 1998 has been derived from the financial statements
audited by Ernst & Young LLP. The unaudited financial statements
and notes thereto for the LargeCap 500 Index Fund for the period from
commencement of operations through March 31, 1998 follow Appendix B to this
Statement of Additional Information.
38
<PAGE>
APPENDIX A
- Rated Investments -
Corporate Bonds
Excerpts from Moody's Investors Services, Inc. ("Moody's") description of
its bond ratings:
"Aaa": Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa": Bonds that are rated "Aa" are judged to be of high-quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as "high-grade" bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A": Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may be
present which suggest a susceptibility to impairment sometime in the future.
"Baa": Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appears adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
"Ba": Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B": Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa": Bonds that are rated "Caa" are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category; the modifier 2 indicates a
mid-range ranking; and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
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.
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<PAGE>
"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."
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<PAGE>
APPENDIX A
- Rated Investments -
Commercial Paper
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
Moody's: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted "A-1+".
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<PAGE>
APPENDIX B
As stated in the Prospectus, the Funds may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
I. Index Futures Contracts
General. A stock index assigns relative values to the stocks included in
the index and the index fluctuates with changes in the market values of the
stocks included. Some stock index futures contracts are based on broad market
indexed, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
A Fund will sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. A Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a Fund
will purchase such securities upon termination of the long futures position, but
a long futures position may be terminated without a corresponding purchase of
securities.
In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Examples of Stock Index Futures Transactions. The following are examples
of transactions in stock index futures (net of commissions and premiums, if
any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate buying $62,500 in Equity Securities Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Securities with Actual Cost = $65,000 Sell 1 Index Futures at 130
Increase in Purchase Price = $2,500 Value of Futures = $65,000/Contract
Gain on Futures = $2,500
</TABLE>
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<PAGE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 X $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
--------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 in Equity Securities Sell 16 Index Futures at 125
Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
II. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Advisor may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
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<PAGE>
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
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<PAGE>
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
45
<PAGE>
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.
46
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- 98.8%
Advertising -- 0.2%
1,000 Interpublic Group of
Companies, Inc. $ 62,125
1,100 Omnicom Group, Inc. 51,769
------------
113,894
------------
Aerospace -- 1.4%
6,900 Boeing Company 359,662
600 General Dynamics Corporation 51,675
1,300 Lockheed Martin Corporation 146,250
600 Northrop Grumman Corporation 64,463
2,300 Raytheon Company Class B 134,262
1,600 United Technologies Corporation 147,700
------------
904,012
------------
Airlines -- 0.4%
700 AMR Corporation + 100,231
600 Delta Air Lines, Inc. 70,950
1,550 Southwest Airlines Company 45,822
700 US Airways Group, Inc. + 51,888
------------
268,891
------------
Apparel -- 0.3%
600 Fruit Of The Loom, Inc. + 18,375
600 Liz Claiborne, Inc. 29,925
2,000 NIKE, Inc., Class B 88,500
400 Reebok International Ltd. 12,200
800 V.F. Corporation 42,050
------------
191,050
------------
Automobiles -- 1.7%
4,600 Chrysler Corporation 191,187
8,300 Ford Motor Company 537,944
4,900 General Motors Corporation 330,444
600 Navistar International Corporation + 21,000
------------
1,080,575
------------
Automobile Parts & Equipment -- 0.5%
1,000 AutoZone, Inc. + 33,875
300 Cummins Engine, Inc. 16,538
900 Dana Corporation 52,369
600 Echlin, Inc. 31,462
1,200 Genuine Parts Company 45,750
700 Johnson Controls, Inc. 42,481
600 Pep Boys-- Manny, Moe & Jack 13,913
600 Snap-On, Inc. 27,375
1,000 TRW, Inc. 55,125
------------
318,888
------------
Banks -- 9.4%
4,490 Banc One Corporation 283,992
2,600 Bank of New York, Inc. 163,312
4,800 BankAmerica Corporation 396,600
1,200 BankBoston 132,300
900 Bankers Trust New York
Corporation 108,281
1,100 BB&T Corporation 74,456
2,900 Chase Manhattan Corporation 391,137
3,200 Citicorp 454,400
900 Comerica, Inc. 95,231
1,400 CoreStates Financial Corporation 125,650
1,300 Fifth Third Bancorporation 111,150
2,000 First Chicago Corporation 176,250
4,300 First Union Corporation 244,025
2,100 Fleet Financial Group, Inc. 178,631
1,300 Huntington Bancshares, Inc. 47,369
3,000 KeyCorp (New) 113,438
3,500 MBNA Corporation 125,344
1,800 Mellon Bank Corporation 114,300
900 Mercantile Bancorporation 49,331
1,200 Morgan (J.P.) & Company, Inc. 161,175
4,100 Morgan Stanley, Dean Witter,
Discover and Company 298,787
1,500 National City Corporation 109,969
6,518 NationsBank Corporation 475,407
900 Northern Trust Corporation 67,275
5,200 Norwest Corporation 216,125
2,100 PNC Bank Corporation 125,869
400 Republic New York Corporation 53,350
1,300 State Street Corporation 88,481
1,200 Summit Bancorp 60,075
1,700 SunTrust Banks, Inc. 128,138
1,400 Synovus Financial Corporation 51,975
1,700 U.S. Bancorp 212,075
1,400 Wachovia Corporation 118,738
1,800 Washington Mutual, Inc. 129,094
700 Wells Fargo & Company 231,875
------------
5,913,605
------------
Broadcasting -- 0.4%
4,900 CBS Corporation 166,294
800 Clear Channel Communications + 78,400
400 Meredith Corporation 16,850
------------
261,544
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Building Materials -- 0.8%
600 Centex Corporation $ 22,875
400 Crane Company 21,200
300 Fleetwood Enterprises 13,969
5,000 Home Depot, Inc. 337,187
300 Kaufman & Broad Home Corporation 9,769
1,100 Masco Corporation 65,450
1,000 Pall Corporation 21,500
200 Pulte Corporation 9,300
------------
501,250
------------
Business Equipment and Supplies -- 1.8%
900 Avery Dennison Corporation 48,038
1,100 Ikon Office Solutions 38,019
6,700 International Business Machines
Corporation 695,962
2,000 Pitney Bowes, Inc. 100,375
2,200 Xerox Corporation 234,162
------------
1,116,556
------------
Business Services -- 0.4%
5,862 Cendant Corporation + 232,282
700 Deluxe Corporation 23,056
700 Moore Corporation Ltd. 11,638
------------
266,976
------------
Chemicals and Plastics -- 3.1%
900 Air Products & Chemicals, Inc. 74,587
1,600 Dow Chemical Company 155,600
7,800 dupont (E.I.) de Nemours & Company 530,400
700 Eastman Chemical Company 47,206
900 Ecolab, Inc. 26,100
1,200 Engelhard Corporation 22,800
300 FMC Corporation + 23,550
600 Grace (W.R.) & Company + 50,213
500 Great Lakes Chemical Corporation 27,000
800 Hercules, Inc. 39,500
400 Kerr-McGee Corporation 27,825
600 Mallinckrodt Group, Inc. 23,700
2,800 Minnesota Mining & Manufacturing
Company 255,325
4,100 Monsanto Company 213,200
1,100 Morton International, Inc. 36,094
600 Nalco Chemical Company 24,338
1,300 Praxair, Inc. 66,869
800 Raychem Corporation 33,250
1,400 Rockwell International Corporation 80,325
600 Rohm & Haas Company 61,987
900 Sigma-Aldrich Corporation 33,525
600 Union Camp Corporation 35,850
1,000 Union Carbide Corporation 50,125
------------
1,939,369
------------
Coal -- 0.2%
1,500 CSX Corporation 89,250
200 Eastern Enterprises 8,600
700 Fluor Corporation 34,825
------------
132,675
------------
Communication Equipment -- 1.3%
1,300 Cabletron Systems, Inc. + 18,931
6,600 GTE Corporation 395,175
700 Harris Corporation 36,488
4,100 Motorola, Inc. 248,562
1,200 National Semiconductor
Corporation + 25,125
700 Scientific-Atlanta, Inc. 13,694
1,300 Tellabs, Inc. + 87,262
------------
825,237
------------
Computer Hardware, Software or Services -- 7.2%
2,400 3COM Corporation + 86,250
600 Adobe Systems, Inc. 27,113
1,200 Advanced Micro Devices, Inc. + 34,875
1,500 AMP, Inc. 65,719
1,000 Apple Computer, Inc. + 27,500
400 Autodesk, Inc. 17,250
2,000 Automatic Data Processing, Inc. 136,125
1,700 Bay Networks, Inc. + 46,113
700 Ceridian Corporation + 37,756
6,950 CISCO Systems Inc. + 475,206
10,900 Compaq Computer Corporation 282,037
3,750 Computer Associates International,
Inc. 216,562
1,400 Computer Sciences Corporation 77,000
400 Data General Corporation + 7,075
4,600 Dell Computer Corporation + 311,650
1,000 Digital Equipment Corporation + 52,312
7,200 Hewlett Packard Company 456,300
1,000 Honeywell, Inc. 82,687
17,500 Microsoft Corporation + 1,566,250
2,400 Novell, Inc. + 25,725
6,800 Oracle Systems Corporation + 214,625
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Computer Hardware, Software or
Services -- (Continued)
2,000 Parametric Technology
Corporation + $ 66,625
1,700 Seagate Technologies, Inc. + 42,925
1,400 Silicon Graphics, Inc. + 19,513
2,600 Sun Microsystems, Inc. + 108,469
1,800 Unisys Corporation + 34,200
------------
4,517,862
------------
Computer -- Semiconductors -- 1.9%
2,500 Applied Materials + 88,281
3,400 EMC Corporation + 128,563
11,700 Intel Corporation 913,331
1,200 LSI Logic Corporation + 30,300
1,700 Micron Technology, Inc. + 49,406
------------
1,209,881
------------
Consumer Non-Durables -- 3.7%
1,600 Corning, Inc. 70,800
23,500 General Electric Company 2,025,406
400 Grainger (W.W.), Inc. 41,125
1,400 Lowe's Companies, Inc. 98,262
1,300 Newell Company 62,969
------------
2,298,562
------------
Consumer Services -- 0.2%
900 Block (H & R), Inc. 42,806
600 Manor Care, Inc. 22,200
1,700 Service Corporation International 72,144
------------
137,150
------------
Consumer Staples -- 0.1%
700 Pioneer Hi-Bred International, Inc. 68,294
------------
Containers -- 0.2%
300 Ball Corporation 9,825
1,000 Crown Cork & Seal Company, Inc. 53,500
1,200 Owens-Illinois, Inc. + 51,900
------------
115,225
------------
Cosmetics -- Toiletry -- 0.2%
400 Alberto-Culver Company, Class B 12,175
1,100 Avon Products, Inc. 85,800
------------
97,975
------------
Diversified -- 1.7%
300 Aeroquip-Vickers, Inc. 17,344
3,900 AlliedSignal Corporation 163,800
1,100 Cognizant Corporation 63,112
1,400 Fortune Brands, Inc. 55,825
1,000 Loews Corporation 104,250
250 Sodexho Marriott Services, Inc. 6,641
1,100 Textron, Inc. 84,700
1,000 Thermo Electron Corporation + 40,375
4,100 Tyco International Ltd. 223,962
4,400 Unilever NV 301,950
------------
1,061,959
------------
Electrical Equipment -- 0.4%
1,000 Cooper Industries, Inc. 59,438
300 Foster Wheeler Corporation 9,169
400 General Signal Corporation 18,700
400 Tektronix, Inc. 17,850
2,700 Texas Instruments, Inc. 146,137
400 Thomas & Betts Corporation 25,600
------------
276,894
------------
Electronics -- 0.6%
700 Eaton Corporation 66,631
400 EG & G, Inc. 11,625
3,100 Emerson Electric Company 202,081
1,000 General Instrument Corporation + 20,938
700 KLA-Tencor Corporation + 26,775
900 Tandy Corporation 42,300
------------
370,350
------------
Energy and Resources -- 0.2%
1,405 Burlington Resources, Inc. 67,352
1,400 Dresser Industries, Inc. 67,288
------------
134,640
------------
Entertainment -- 1.6%
900 Brunswick Corporation 31,388
4,700 Disney (Walt) Company 501,725
600 Harcourt General Corporation 33,225
1,000 Hasbro, Inc. 35,312
600 King World Productions, Inc. 17,550
2,000 Mattel, Inc. 79,250
3,900 Time Warner, Inc. 280,800
------------
979,250
------------
Enviromental Control -- 0.0%#
400 Safety-Kleen Corporation 11,350
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Financial Services -- 3.8%
3,200 American Express Company $ 293,800
1,700 American General Corporation 109,969
400 Beneficial Corporation 49,725
900 Countrywide Credit Industries 47,869
800 Dow Jones & Company, Inc. 42,350
1,000 Equifax, Inc. 36,500
4,800 Federal Home Loan Mortgage
Corporation 227,700
7,300 Federal National Mortgage
Association 461,725
3,000 First Data Corporation 97,500
1,100 Green Tree Financial Corporation 31,281
900 Household International, Inc. 123,975
900 Lehman Brothers Holdings, Inc. 67,387
2,300 Merrill Lynch & Company, Inc. 190,900
1,800 Schwab (Charles) Corporation 68,400
400 Temple-Inland, Inc. 24,850
8,267 Travelers Group, Inc. 496,020
------------
2,369,951
------------
Food and Beverages -- 6.4%
1,700 Albertson's, Inc. 89,463
3,400 Anheuser-Busch Companies, Inc. 157,462
3,200 Campbell Soup Company 181,600
17,700 Coca-Cola Company 1,370,644
3,300 ConAgra, Inc. 106,013
300 Coors (Adolph) Company, Class B 10,500
2,500 Heinz (H.J.) Company 145,937
1,200 Hershey Foods Corporation 85,950
2,800 Kellogg Company 120,750
10,900 PepsiCo, Inc. 465,294
17,400 Philip Morris Companies, Inc. 725,362
1,100 Quaker Oats Company 62,975
900 Ralston-Purina Company 95,400
3,300 Sara Lee Corporation 203,362
2,500 Seagram Company Ltd. 95,469
1,300 UST, Inc. 41,925
1,000 Wrigley (Wm) Jr. Company 81,750
------------
4,039,856
------------
Food Distribution -- 0.9%
3,800 Archer-Daniels-Midland Company 83,362
1,200 Bestfoods 140,250
1,300 General Mills, Inc. 98,800
600 Giant Food, Inc., Class A 23,175
300 Great Atlantic & Pacific Tea Company,
Inc. 9,075
1,800 Kroger Company + 83,138
600 Supervalu, Inc. 27,975
2,800 Sysco Corporation 71,750
1,000 Winn Dixie Stores, Inc. 46,375
------------
583,900
------------
Glass Products -- 0.1%
400 Owens Corning Fiberglass
Corporation 14,375
1,200 PPG Industries, Inc. 81,525
------------
95,900
------------
Health Care Facilities -- 0.4%
4,500 Columbia/HCA Healthcare
Corporation 145,125
1,100 Humana, Inc. + 27,294
2,100 Tenet Healthcare Corporation + 76,256
------------
248,675
------------
Health Care Products -- 4.0%
5,300 Abbott Laboratories 399,156
600 Allergan, Inc. 22,800
400 Bausch & Lomb, Inc. 18,275
1,000 Becton, Dickinson & Company 68,063
8,300 Merck & Company, Inc. 1,065,512
9,300 Pfizer, Inc. 927,094
------------
2,500,900
------------
Holding Companies -- 0.2%
700 Providian, LLC 40,206
1,600 Public Service Enterprise 60,600
------------
100,806
------------
Home Appliances -- 0.2%
800 Black & Decker Corporation 42,450
800 Maytag Corporation 38,250
600 Whirlpool Corporation 41,138
------------
121,838
------------
Home Furnishings and Housewares -- 0.8%
4,500 American Home Products Corporation 429,187
300 Armstrong World 25,969
1,000 Rubbermaid, Inc. 28,500
200 Springs Industries, Inc. 10,988
600 Tupperware Corporation 15,975
------------
510,619
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Hotels and Restaurants -- 0.9%
1,300 Darden Restaurants, Inc. $ 20,231
900 Harrah's Entertainment Corporation + 22,106
1,700 Hilton Hotels Corporation 54,187
1,000 Marriott International, Inc. + 37,187
1,000 Marriott International, Inc., Class A + 35,813
4,700 McDonald's Corporation 282,000
1,200 Mirage Resorts, Inc. + 29,175
1,000 Tricon Global Restaurants, Inc. + 30,063
1,100 Wendy's International, Inc. 24,544
------------
535,306
------------
Insurance -- 4.2%
1,000 Aetna Life & Casualty Company 83,437
3,000 Allstate Corporation 275,812
4,800 American International Group, Inc. 604,500
1,400 AON Corporation 90,650
1,400 Chubb Corporation 109,725
600 CIGNA Corporation 123,000
400 Cincinnati Financial Corporation 50,100
1,300 Conseco, Inc. 73,613
700 General Re Corporation 154,437
1,000 Hartford Financial Services Group, Inc. 108,500
600 Jefferson-Pilot Corporation 53,363
900 Lincoln National Corporation 76,387
1,400 Marsh & McLennan Companies, Inc. 122,237
800 MBIA, Inc. 62,000
1,000 MGIC Investment Corporation 65,688
600 Progressive Corporation 80,812
1,100 SAFECO Corporation 60,122
700 St. Paul Companies, Inc. 62,388
1,300 SunAmerica, Inc. 62,238
1,100 Torchmark, Inc. 50,394
600 Transamerica Corporation 69,900
1,300 United Healthcare Corporation 84,175
1,200 UNUM Corporation 66,225
900 USF & G Corporation 22,444
------------
2,612,147
------------
Machine -- Tool -- 0.1%
700 Stanley Works 39,025
------------
Machinery and Heavy Equipment -- 0.7%
2,600 Caterpillar, Inc. 143,162
300 Cincinnati Milacron, Inc. 9,563
1,700 Deere & Company 105,294
1,500 Dover Corporation 57,000
1,100 Ingersoll-Rand Company 52,731
1,000 Parker-Hannifin Corporation 51,250
------------
419,000
------------
Manufacturing -- 0.7%
1,600 Alcan Aluminum Ltd. 50,000
1,400 Aluminum Company of America 96,337
1,300 Boston Scientific Corporation + 87,750
200 Briggs & Stratton Corporation 9,163
600 Brown-Forman Corporation,
Class B 33,000
600 Case Corporation 40,875
700 PACCAR, Inc. 41,694
600 Reynolds Metals Company 36,862
1,400 Sherwin-Williams Company 49,700
------------
445,381
------------
Medical Instruments, Services, and
Supplies -- 2.2%
400 Bard (C.R.), Inc. 14,700
1,900 Baxter International, Inc. 104,737
900 Biomet, Inc. 27,000
900 Cardinal Health, Inc. 79,369
1,000 Guidant Corporation 73,375
1,700 HBO & Company 102,638
2,700 HEALTHSOUTH Corporation + 75,769
9,300 Johnson & Johnson Company 681,806
3,200 Medtronic, Inc. 166,000
200 Shared Medical Systems Corporation 15,675
700 St. Jude Medical, Inc. + 23,406
600 United States Surgical Corporation 19,800
------------
1,384,275
------------
Metals and Mining -- 0.5%
1,400 Allegheny Teldyne, Inc. 38,937
300 ASARCO, Inc. 8,006
2,600 Barrick Gold Corporation 56,225
1,600 Battle Mountain Gold Company 10,200
700 Cyprus Amax Minerals Company 11,638
1,300 Freeport McMoran Copper & Gold,
Class B 25,919
1,000 Homestake Mining Company 10,875
1,400 Inco Ltd. 26,163
1,300 Newmont Mining Corporation 39,731
600 Phelps Dodge Corporation 38,737
1,700 Placer Dome, Inc. 22,419
------------
288,850
------------
Metal Fabricating -- 0.2%
1,700 Illinois Tool Works, Inc. 110,075
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Natural Gas -- 0.4%
400 Columbia Gas System, Inc. $ 31,100
800 Consolidated Natural Gas Company 46,150
2,200 Enron Corporation 102,025
400 NICOR, Inc. 16,900
300 ONOEK, Inc. 12,225
700 Pacific Enterprises, Inc. 28,569
700 Sonat, Inc. 30,450
------------
267,419
------------
News and Publishing -- 0.6%
2,000 Gannett Company, Inc. 143,750
700 Knight-Ridder, Inc. 39,113
800 New York Times Company, Class A 56,000
800 Times Mirror Company (New),
Class A 50,700
1,000 Tribune Company 70,500
------------
360,063
------------
Oil -- 7.1%
700 Amerada Hess Corporation 40,819
3,400 Amoco Corporation 293,675
700 Apache Corporation 25,725
600 Ashland, Inc. 33,975
2,200 Atlantic Richfield Company 172,975
1,400 Baker Hughes, Inc. 56,350
4,500 Chevron Corporation 361,406
900 Coastal Corporation 58,613
17,700 Exxon Corporation 1,196,962
1,800 Halliburton Company 90,337
900 Louisiana Land & Exploration
Company 20,925
400 McDermott International, Inc. 16,525
5,400 Mobil Corporation 413,775
2,300 Occidental Petroleum Corporation 67,419
900 Oryx Energy Company + 23,400
400 Pennzoil Company 25,850
1,800 Phillips Petroleum Company 89,887
15,400 Royal Dutch Petroleum Company 874,912
1,400 Tenneco, Inc. 59,763
3,800 Texaco, Inc. 228,950
1,700 Union Pacific Corporation 95,519
1,800 Union Pacific Resources Group 42,975
1,700 Unocal Corporation 65,769
2,000 USX-Marathon Group 75,250
------------
4,431,756
------------
Oil Equipment and Services -- 0.5%
400 Helmerich & Payne, Inc. 12,500
3,400 Schlumberger Ltd. 257,550
400 Western Atlas, Inc. 30,950
------------
301,000
------------
Paper and Forest Products -- 1.1%
400 Bemis Company, Inc. 18,050
400 Boise Cascade Corporation 14,425
800 Champion International Corporation 43,450
1,600 Fort James Corporation 73,300
700 Georgia-Pacific Corporation 45,325
400 Harnischfeger Industries, Inc. 13,675
2,100 International Paper Company 98,306
3,742 Kimberly-Clark Corporation 187,568
900 Mead Corporation 32,231
300 Potlatch Corporation 12,919
900 Stone Container Corporation 11,250
1,400 Weyerhaeuser Company 79,100
900 Willamette Industries, Inc. 33,806
------------
663,405
------------
Personal Items -- 2.9%
2,000 Colgate-Palmolive Company 173,250
3,900 Gillette Company 462,881
900 International Flavors & Fragrances,
Inc. 42,413
300 Jostens, Inc. 7,200
9,300 Procter & Gamble Company 784,687
1,900 Warner-Lambert Company 323,594
------------
1,794,025
------------
Petroleum Refining -- 0.2%
500 Anadarko Petroleum Corporation 34,500
700 Rowan Companies + 20,300
600 Sun Company 24,525
2,200 Williams Companies, Inc. 70,400
------------
149,725
------------
Pharmaceuticals -- 2.8%
30 Allergan Specialty Therapeutics,
Inc. + 364
700 ALZA Corporation 31,369
6,900 Bristol-Myers Squibb Company 719,756
7,700 Lilly (Eli) & Company 459,112
3,500 Pharmacia & Upjohn, Inc. 153,125
5,100 Schering-Plough Corporation 416,606
------------
1,780,332
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C>
COMMON STOCKS -- (Continued)
Photographic Equipment and Supplies -- 0.3%
2,200 Eastman Kodak Company $ 142,725
400 Polaroid Corporation 17,600
------------
160,325
------------
Printing and Publishing -- 0.3%
600 American Greetings Corporation,
Class A 27,600
1,000 Donnelley (R.R.) & Sons Company 41,063
1,400 Dun & Bradstreet Corporation 47,862
800 McGraw-Hill, Inc. 60,850
900 Westvaco Corporation 27,675
------------
205,050
------------
Railroads -- 0.2%
2,600 Norfolk Southern Corporation 97,175
------------
Research and Development -- 0.2%
1,800 Amgen, Inc. 109,575
------------
Retail -- Store -- 3.8%
1,900 American Stores Company 49,400
900 Charming Shoppes, Inc. + 4,275
800 Circuit City Stores -- Circuit City
Group 34,200
900 Consolidated Stores Corporation + 38,644
1,700 Costco Companies, Inc. + 90,737
1,400 CVS Corporation 105,700
1,500 Dayton Hudson Corporation 132,000
1,000 Dillard's, Inc. 36,938
1,400 Federated Department Store + 72,538
2,750 Gap, Inc. 123,750
3,400 K mart Corporation + 56,738
1,900 Limited, Inc. 54,506
300 Longs Drug Stores Company 9,131
1,600 May Department Stores Company 101,600
300 Mercantile Stores Company 20,156
700 Nordstrom, Inc. 44,669
1,700 Penney (J.C.) Company, Inc. 128,669
1,700 Rite Aid Corporation 58,225
300 Russell Corporation 8,044
2,700 Sears, Roebuck & Company 155,081
1,100 TJX Companies, Inc. 49,775
2,000 Toys R Us, Inc. + 60,125
16,100 Wal-Mart Stores, Inc. 818,081
3,400 Walgreen Company 119,637
1,100 Woolworth Corporation + 27,500
------------
2,400,119
------------
Savings and Loan Associations -- 0.2%
800 Ahmanson (H.F.) Company 62,000
400 Golden West Financial
Corporation 38,325
------------
100,325
------------
Soaps and Detergents -- 0.1%
900 Clorox Company 77,119
------------
Steel -- 0.2%
900 Armco, Inc. + 5,288
1,000 Bethlehem Steel Corporation + 13,563
400 Inland Steel Industries, Inc. 11,050
700 Nucor Corporation 38,106
600 Timken Company 20,287
700 USX-U.S.Steel Group, Inc. 26,425
800 Worthington Industries, Inc. 14,500
------------
129,219
------------
Technology -- 0.7%
7,600 Ameritech Corporation 375,725
1,000 ITT Industries 38,063
400 Millipore Corporation 13,900
400 Perkin-Elmer Corporation 28,925
-------------
456,613
------------
Telecommunications -- 7.7%
3,500 AirTouch Communications, Inc. + 171,281
1,300 ALLTEL Corporation 56,794
700 Andrew Corporation + 13,869
11,700 AT & T Corporation 767,812
5,400 Bell Atlantic Corporation 553,500
6,800 BellSouth Corporation 459,425
2,400 Comcast Corporation Special,
Class A (non-voting) 84,750
1,000 DSC Communications Corporation + 18,188
1,100 Frontier Corporation 35,819
4,400 Lucent Technologies, Inc. 562,650
4,800 MCI Communications Corporation 237,600
3,600 Northern Telecommunications Ltd. 232,650
12,600 SBC Communications 549,675
3,000 Sprint Corporation 203,063
3,500 Tele-Communications, Inc., Class A 108,828
4,200 US West Media, Inc. 145,950
3,300 US West, Inc. + 180,675
2,400 Viacom, Inc., Class B + 129,000
7,000 WorldCom, Inc. 301,437
------------
4,812,966
------------
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Portfolio of Investments, March 31, 1998 (Unaudited)
(Continued)
<TABLE>
<CAPTION>
- - - - --------------------------------------------------------------------------
Shares Value
- - - - --------------------------------------------------------------------------
<S> <C> <C>
COMMON STOCKS -- (Continued)
Tire and Rubber -- 0.2%
700 Cooper Tire & Rubber Company $ 16,625
400 Goodrich (B.F.) Company 20,425
1,300 Goodyear Tire & Rubber Company 98,475
------------
135,525
------------
Transportation -- 0.4%
1,300 Burlington Northern Santa Fe 135,200
840 FDX Corporation + 59,745
700 Ryder System, Inc. 26,600
------------
221,545
------------
Utilities -- 2.4%
900 Ameren Corporation 37,912
1,300 American Electric Power Company, Inc. 65,325
1,000 Baltimore Gas & Electric Company 32,688
1,000 Carolina Power & Light Company 45,250
1,700 Central & Southwest Corporation 45,475
1,300 Cinergy Corporation 48,100
1,600 Consolidated Edison Company 74,800
1,300 Dominion Resources, Inc. 54,600
1,200 DTE Energy Company 47,175
2,500 Duke Energy Company 148,906
2,600 Edison International 76,375
1,700 Entergy Corporation 50,575
1,572 FirstEnergy Corporation 48,437
1,300 FPL Group, Inc. 83,525
1,000 GPU, Inc. 44,250
2,000 Houston Industries, Inc. 57,500
400 National Service Industries, Inc. 23,525
1,200 Niagara Mohawk Power Corporation + 15,600
600 Northern States Power Company 35,400
2,000 PacifiCorp 49,250
1,500 PECO Energy Company 33,187
300 People's Energy Corporation 10,913
3,000 PG & E Corporation 99,000
1,100 PP & L Resources, Inc. 25,988
4,800 Southern Company 132,900
1,700 Texas Utilities Company 66,831
1,500 Unicom Corporation 52,500
------------
1,505,987
------------
Waste Management -- 0.3%
1,400 Browning-Ferris Industries, Inc. 45,675
2,300 Laidlaw, Inc., Class B (non-voting) 36,512
3,100 Waste Management, Inc. 95,519
------------
177,706
------------
TOTAL COMMON STOCKS
(Cost $54,327,392) 61,857,392
------------
Principal
Amount
- - - - ---------
U.S. TREASURY BILLS -- 0.1%
$100,000 5.31%++ due 4/30/98 ** 99,589
------------
TOTAL U.S. TREASURY BILLS
(Cost $99,589) 99,589
------------
REPURCHASE AGREEMENT -- 0.8%
(Cost $496,000)
$496,000 Agreement with State Street Bank
and Trust Company, 5.750% dated
3/31/1998, to be repurchased at
$496,079 on 4/1/1998, collateralized
by $510,000 U.S. Treasury Note,
5.750% maturing 09/30/1999
(value $510,717) 496,000
------------
TOTAL INVESTMENTS
(Cost $54,922,981*) 99.7% 62,452,981
OTHER ASSETS AND
LIABILITIES (Net) 0.3 171,738
----- ------------
NET ASSETS 100.0% $ 62,624,719
===== ============
</TABLE>
- - - - --------------------------------------------------------------------------------
* Aggregate cost for Federal tax purposes is $54,922,981.
** Securities pledged as collateral for futures contracts.
+ Non-income producing security.
++ Rate represents annualized yield at date of purchase.
# Amount represents less than 0.1% of net assets.
<TABLE>
<CAPTION>
Number
of Unrealized
Contracts Appreciation
- - - - --------- ------------
<S> <C>
FUTURES CONTRACTS - LONG POSITION
2 S&P 500 Index,
June 1998 $ 6,282
============
</TABLE>
See Notes to Financial Statements
8
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Statement of Assets and Liabilities, March 31, 1998 (Unaudited)
- - - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost $54,922,981)
See accompanying schedule:
Securities ................................................... $61,956,981
Repurchase agreement ......................................... 496,000
-----------
Total investments ................................................ 62,452,981
Cash ............................................................. 20,831
Receivable for Fund shares sold .................................. 2,557
Receivable for investment securities sold ........................ 4,666
Dividends receivable ............................................. 66,599
Interest receivable .............................................. 79
Receivable from investment advisor ............................... 64,684
Variation margin ................................................. 2,400
Unamortized organization costs ................................... 7,603
Prepaid assets ................................................... 16,512
-----------
Total Assets ................................................. 62,638,912
-----------
LIABILITIES:
Custodian fees payable ........................................... 6,992
Shareholder servicing fees payable ............................... 1,540
Administration fee payable ....................................... 593
Accrued Director's fees and expenses ............................. 289
Accrued expenses and other payables .............................. 4,779
-----------
Total Liabilities ............................................ 14,193
-----------
NET ASSETS ....................................................... $62,624,719
===========
NET ASSETS consist of:
Undistributed net investment income .............................. 225,754
Accumulated net realized loss on investments sold and
futures contracts .............................................. 688,706
Net unrealized appreciation of investments and
futures contracts .............................................. 7,536,282
Par value ........................................................ 5,499
Paid-in capital in excess of par value ........................... 54,168,478
-----------
Total Net Assets ............................................. $62,624,719
===========
NET ASSET VALUE offering and redemption price per share
($62,624,719 / 5,499,155 shares of common stock outstanding).. $ 11.39
===========
</TABLE>
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Statement of Operations, Period Ended March 31, 1998* (Unaudited)
- - - - --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .................................................... $ 11,687
Dividends (c) ............................................... 226,597
-----------
Total investment income ................................. 238,284
-----------
EXPENSES:
Custodian fees .............................................. 23,016
Investment advisory fee ..................................... 10,747
Legal and audit fees ........................................ 6,133
Transfer agent fee .......................................... 3,297
Administration fee .......................................... 2,499
Directors' fees and expenses ................................ 160
Other ....................................................... 5,414
-----------
Total Expenses .......................................... 51,266
Expenses reimbursed by investment advisor ................... (37,382)
-----------
Net Expenses ............................................ 13,884
-----------
NET INVESTMENT INCOME ....................................... 224,400
-----------
NET REALIZED AND UNREALIZED GAIN/(LOSS) ON
INVESTMENTS:
Net realized loss gain/(loss) from:
Security transactions ................................... 589,583
Futures contracts ....................................... 133,841
Net change in unrealized appreciation of:
Securities .............................................. 7,223,141
Futures contracts ....................................... (26,278)
-----------
Net realized and unrealized gain on investments ............. 7,920,287
-----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS .................................................. $ 8,144,687
===========
(c) Net of foreign withholding taxes of: .................... $ 204
===========
</TABLE>
- - - - ----------
(*) The Institutional S&P 500 Index Equity Fund commenced operations on
October 14, 1997.
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Statement of Changes in Net Assets, Period Ended March 31, 1998
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
Ended Period
3/31/98 Ended
(Unaudited) 12/31/97(a)
----------- -----------
<S> <C> <C>
Net investment income ............................................ $ 224,400 $ 178,575
Net realized gain/(loss) on investments sold
and futures contracts during the year ........................ 723,424 (34,718)
Net change in unrealized appreciation of investments
and future contracts during the period ....................... 7,196,863 339,419
------------ ------------
Net increase in net assets resulting from operations ............. 8,144,687 483,276
Distributions to shareholders from net investment income ......... -- (178,471)
Net increase/(decrease) in net assets from Fund share transactions (9,518,944) 63,694,171
------------ ------------
Net increase/(decrease) in net assets ............................ (1,374,257) 63,668,976
NET ASSETS:
Beginning of period .............................................. 63,998,976 0
------------ ------------
End of period .................................................... $ 62,624,719 $ 63,998,976
============ ============
Undistributed net investment income .............................. $ 225,754 $ 1,354
============ ============
</TABLE>
- - - - ----------
(a) The Institutional S&P 500 Index Equity Fund commenced operations on
October 14, 1997.
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Financial Highlights, For a Share Outstanding Throughout The Period
- - - - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Period
Ended Period
3/31/98 Ended
(Unaudited) 12/31/97(a)
----------- -----------
<S> <C> <C>
Net asset value, beginning of period ................... $ 10.00 $ 10.00
----------- -----------
Income from investment operations:
Net investment income .................................. 0.04 0.04
Net realized and unrealized gain on investments .... 1.35 0.00(e)
----------- -----------
Total from investment operations ....................... 1.39 0.04
----------- -----------
Less distributions:
Distributions to shareholders from net investment income -- (0.04)
----------- -----------
Total distributions .................................... -- (0.04)
----------- -----------
Net asset value, end of period ......................... $ 11.39 $ 10.00
=========== ===========
Total return(b) ........................................ 13.90% 0.39%
=========== ===========
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) ................... $ 62,625 $ 63,999
Ratio of operating expenses to average net assets ...... 0.09%(c) 0.09%(c)
Ratio of net investment income to average net assets ... 1.46%(c) 1.76%(c)
Ratio of operating expenses to average net assets
without expense reimbursement ..................... 0.33%(c) 0.61%(c)
Portfolio turnover ..................................... 2% 0.08%
Average commission rate(d) ............................. $0.0242 $0.0100
</TABLE>
- - - - ----------
(a) Munder Institutional S&P 500 Index Equity Fund commenced operations on
October 14, 1997.
(b) Total return represents aggregate total return for the period indicated.
(c) Annualized.
(d) Average commission rate paid per share of securities purchased and sold by
the Fund.
(e) The amount shown at this caption for each share outstanding throughout the
period, may not accord with the change in aggregate gains and losses in
the portfolio securities for the period, because of the timing of
purchases and withdrawals of shares in relation to the fluctuating market
values of the portfolio.
See Notes to Financial Statements
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Notes To Financial Statements, March 31, 1998 (Unaudited)
================================================================================
1. Organization and Significant Accounting Policies
The Munder Institutional S&P 500 Index Equity Fund (the "Fund") is a
diversified portfolio of St. Clair Funds, Inc. (the "Company") which is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), as an open-end investment company. 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 Fund, Inc. on September 18, 1996. The Fund commenced
operations on October 14, 1997.
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of increases and
decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates. The following is a summary of
significant accounting policies followed by the Fund in the preparation of its
financial statements:
Security Valuation: Securities (including financial futures, if any)
traded on a recognized stock exchange or on the NASDAQ National Market System
("NASDAQ") are valued at the last sale price on the securities exchange on which
such securities are primarily traded or at the last sale price on the national
securities market as of the close of business on the date of the valuation.
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 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. 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 at the time of purchase are valued on an
amortized cost basis, 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 on the 61st
day before maturity). Thereafter, a constant proportionate amortization of any
discount or premium is recorded until maturity of the security.
Futures Contracts: The Fund may enter into futures contracts for the
purpose of hedging against changes in the value of the portfolio securities held
and in the value of the securities it intends to purchase, or in order to
maintain liquidity. Upon entering into a futures contract, the Fund is required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by the
Fund each day, depending on the daily fluctuation of the value of the contract.
The daily changes in the contract are recorded as unrealized gains or losses.
The Fund recognizes a realized gain or loss when the contract is closed. The net
unrealized appreciation/ (depreciation), if any, is shown in the financial
statements.
There are several risks in connection with the use of futures contracts as
a hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with the
change in value of the hedged investments. In addition, there is the risk that
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Notes To Financial Statements, March 31, 1998 (Unaudited)
(Continued)
================================================================================
Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
price and time, thereby determining the yield during the Fund's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. The value of the collateral is at
least equal, at all times, to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the right
to use the collateral to satisfy the terms of the repurchase agreement. However,
there could be potential loss to the Fund in the event the Fund is delayed or
prevented from exercising its right to dispose of the collateral securities,
including the risk of a possible decline in the value of the collateral
securities during the period while the Fund seeks to assert its rights. The
Fund's Advisor, acting under the supervision of the Board of Directors, reviews
the value of the collateral and the creditworthiness of those banks and dealers
with which a Fund enters into repurchase agreements to evaluate potential risks.
Security Transactions and Investment Income: Security transactions are
recorded on the trade date. The cost of investments sold is determined by use of
the specific identification method for both financial reporting and income tax
purposes. Interest income is recorded on the accrual basis.
Dividends and Distributions to Shareholders: Dividends from net investment
income are declared and paid at least quarterly by the Fund. Capital gains
distributions, if any, will be made at least annually. Distributions to
shareholders are recorded on the ex-dividend date.
Income dividends and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to differing
treatments of certain expenses and income and gains on various investment
securities held by the Fund, timing differences and differing characterization
of distributions made by the Fund as a whole.
Federal Income Taxes: The Fund intends to qualify as a regulated
investment company by complying with the requirements of the Internal Revenue
Code of 1986, as amended, applicable to regulated investment companies and to
distribute substantially all of its earnings to its shareholders. Therefore, no
Federal income or excise tax provision is required.
2. Investment Advisor, Administrator, Custodian, Transfer Agent and Other
Related Party Transactions
Munder Capital Management (the "Advisor"), an independent investment
management firm, serves as the Fund's investment advisor. For its advisory
services to the Munder Institutional S&P 500 Index Fund, the Advisor is entitled
to receive a fee, computed daily and payable monthly, at an annual rate of 0.07%
of the value of the Fund's average daily net assets.
<PAGE>
Munder Institutional S&P 500 Index Equity Fund
Notes To Financial Statements, March 31, 1998 (Unaudited)
(Continued)
================================================================================
The Advisor has reimbursed certain expenses, payable by the Fund, for the
period ended March 31, 1998, as reflected in the Statement of Operations.
Comerica Bank ("Comerica") provides custodial services to the Fund. No
compensation is paid to the Custodian for its services. State Street Bank &
Trust Company ("State Street") serves as the sub-custodian to the Fund. For its
services as sub-custodian, State Street receives a fee based on the aggregate
average daily net assets of the Fund and certain other investment portfolios
advised by the Advisor for which State Street provides custodial services, as
well as certain transaction based fees. As of November 1, 1997, Comerica
receives a fee of 0.01% of the aggregate average daily net assets of the Fund
beneficially owned by Comerica and its customers, as compensation for certain
shareholder services provided by Comerica to the Fund.
Each Director of the Company is paid an aggregate fee, consisting of a
$20,000 annual retainer, for services in such capacity plus $1,500 for each
meeting attended per year, plus out-of-pocket expenses incurred as a Board
member for services provided as a Board member of the Company, The Munder Funds
Trust, The Munder Funds, Inc., and Munder Framlington Funds Trust. The Trustees
or Directors are also reimbursed for any expenses incurred by them in connection
with their duties as Trustees or Directors. No officer, director or employee of
the Advisor, Comerica, or State Street currently receives any compensation from
the Company.
3. Securities Transactions
Cost of purchases and proceeds from sales of securities other than
short-term investments and U.S. Government securities were $861,486 and
$9,868,534, respectively, for the period ended March 31, 1998.
At March 31, 1998, aggregate gross unrealized appreciation for all
securities for which there was an excess of value over tax cost was $8,310,700
and aggregate gross unrealized depreciation for all securities for which there
was an excess of tax cost over value was $780,700.
4. Common Stock
At March 31, 1998, fifty million shares of $0.001 par value common stock
were authorized for the Fund.
Changes in common stock for the Fund were as follows:
<TABLE>
<CAPTION>
Period Ended Period Ended
3/31/98 12/31/97
====================== =====================
Shares Amount Shares Amount
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sold -- -- 6,397,926 $63,674,977
Issued as Reinvestment of
dividends -- -- 1,919 19,194
Redeemed (900,690) $(9,518,944) -- --
====================== =====================
Net Increase/(Decrease) (900,690) $(9,518,944) 6,399,845 $63,694,171
====================== =====================
</TABLE>
<PAGE>
LIQUIDITY PLUS MONEY MARKET FUND
Statement of Additional Information
Liquidity Plus Money Market Fund (the "Fund") is a diversified portfolio
of St. Clair Funds, Inc. (the "Company"), an open-end management investment
company. The Fund's investment advisor is Munder Capital Management (the
"Advisor").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Fund's Prospectus dated May 1, 1998 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 Fund's
Prospectus dated May 1, 1998. 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 Fund at (800) 438-5789. This Statement of
Additional Information is dated May 1, 1998.
Shares of the Fund 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 Fund involves investment risks, including the possible loss of
principal.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General............................................................2
Fund Investments...................................................2
Additional Investment Limitations..................................7
Directors and Officers.............................................9
Investment Advisory and Other Service Arrangements................13
Portfolio Transactions............................................15
Purchase and Redemption Information...............................16
Net Asset Value...................................................17
Yield.............................................................17
Taxes.............................................................18
Additional Information Concerning Shares..........................19
Miscellaneous.....................................................20
Registration Statement............................................21
Financial Statements..............................................21
Appendix..........................................................22
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
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 Fund or the Distributor. The 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.
<PAGE>
GENERAL
The Company was organized as a Maryland corporation on May 23, 1984 under
the name St. Clair Money Market Fund, Inc., which was changed to St. Clair Fixed
Income Fund, Inc. on December 30, 1986 and to St. Clair Funds, Inc. on September
18, 1996.
As stated in the Prospectus, the investment advisor of the Fund is Munder
Capital Management (the "Advisor"). The principal partners of the Advisor are
Old MCM, Inc., Munder Group LLC and WAM Holdings, Inc. ("WAM"). Mr. Lee P.
Munder, the Advisor's Chairman, indirectly owns or controls approximately 45%
and Comerica Incorporated owns or controls approximately 44% 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.
Shares of the Fund are sold only to Comerica Bank, its affiliate and
subsidiary banks, and certain other Institutional Investors ("Institutional
Investors"). Shares may be purchased by Institutional Investors for investment
of their own funds, or for funds of their customer accounts ("Customer
Accounts") for which they serve in a fiduciary, agency or custodial capacity.
Shares are sold and redeemed without the imposition of a purchase or redemption
charge by the Fund, although Institutional Investors that are record owners of
Shares for their Customer Accounts may charge their customers separate account
fees.
FUND INVESTMENTS
The following policies supplement the Fund's investment objective and
policies as set forth in the Prospectus. A description of applicable credit
ratings is set forth in the Appendix hereto.
BANK OBLIGATIONS. The 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 Fund will invest in the obligations of domestic banks and savings
institutions only if their deposits are federally insured.
Non-domestic bank obligations include Eurodollar Certificates of
Deposit ("ECDs"), which are U.S. dollar-denominated certificates of deposit
issued by offices of foreign and domestic banks located outside the United
States; Eurodollar Time Deposits ("ETDs"), which are U.S. dollar-denominated
deposits in a foreign branch of a U.S. bank or a foreign bank; Canadian Time
Deposits ("CTDs"), which are essentially the same as ETDs except they are
issued by Canadian offices of major Canadian banks; Schedule Bs, which are
obligations issued by Canadian branches of foreign or domestic banks; Yankee
Certificates of Deposit ("Yankee CDs"), which are U.S. dollar-denominated
certificates of deposit issued by a U.S. branch of a foreign bank and held in
the United States; and Yankee Bankers, Acceptances ("Yankee BAs"), which are
U.S. dollar-denominated bankers, acceptances issued by a U.S. branch of a
foreign bank and held in the United States. Although the 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.
Repurchase Agreements. The Fund may agree to purchase securities from
financial institutions such as banks and non-bank dealers of U.S. Government
securities that are listed on the Federal Reserve Bank of New York's list of
reporting dealers, subject to the seller's agreement to repurchase them at an
agreed-upon time and price ("repurchase agreements"). 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 the Fund to possible loss
because of adverse market action or delays in connection with the disposition of
underlying obligations except with respect to repurchase agreements secured by
U.S. Government securities.
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The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by the Fund plus interest negotiated
on the basis of current short-term rates (which may be more or less than the
rate on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by the Fund's
Custodian (or sub-custodian) in the Federal Reserve/Treasury book-entry system
or by another authorized securities depositary. Repurchase agreements are
considered to be loans by the Fund under the Investment Company Act of 1940 (the
"1940 Act").
Repurchase agreements shall be deemed to have a maturity equal to the
period remaining until the date on which the repurchase of the underlying
securities is scheduled to occur, or, where the agreement is subject to demand,
the notice period applicable to a demand for the repurchase of the securities.
Reverse Repurchase Agreements. The Fund may borrow funds for temporary or
emergency purposes by selling portfolio securities to financial institutions
such as banks and broker/dealers and agreeing to repurchase them at a mutually
specified date and price ("reverse repurchase agreements"). Reverse repurchase
agreements involve the risk that the market value of the securities sold by the
Fund may decline below the repurchase price. The Fund will pay interest on
amounts obtained pursuant to a reverse repurchase agreement. While reverse
repurchase agreements are outstanding, the Fund will maintain in a segregated
account cash, U.S. Government securities or other liquid securities in an amount
at least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
Investment Company Securities. The Fund may invest in securities issued by
other investment companies. As a shareholder of another investment company, the
Fund would bear its pro rata portion of the other investment company's expenses,
including advisory fees. These expenses would be in addition to the expenses the
Fund bears directly in connection with its own operations. The 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. It is the policy not to invest in securities issued by other investment
companies which pay asset-based fees to the Advisor, the Administrator, the
Custodian, the Distributor or their affiliates.
Stripped Securities. The 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
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holders of the underlying U.S. Government obligations for federal tax and
securities purposes. The Fund 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 recordkeeping 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 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.
Stripped securities will normally be considered illiquid instruments
and will be acquired subject to the limitation on illiquid investments unless
determined to be liquid under guidelines established by the Board of
Directors.
In addition, the Fund may invest in stripped mortgage-backed securities
("SMBS"), which represent beneficial ownership interests in the principal
distributions and/or the interest distributions on mortgage assets. SMBS are
usually structured with two classes that receive different proportions of the
interest and principal distributions on a pool of mortgage assets. One type of
SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of-the principal. In the most common case, one
class of SMBS will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). SMBS may be issued by FNMA or FHLMC.
The original principal amount, if any, of each SMBS class represents the
amount payable to the holder thereof over the life of such SMBS class from
principal distributions of the underlying mortgage assets, which will be zero in
the case of an IO class. Interest distributions allocable to a class of SMBS, if
any, consist of interest at a specified rate on its principal amount, if any, or
its notional principal amount in the case of an IO class. The notional principal
amount is used solely for purposes of the determination of interest
distributions and certain other rights of holders of such IO class and does not
represent an interest in principal distributions of the mortgage assets.
Yields on SMBS will be extremely sensitive to the prepayment experience on
the underlying mortgage loans, and there are other associated risks. For IO
classes of SMBS and SMBS that were purchased at prices exceeding their principal
amounts there is a risk that a Fund may not fully recover its initial
investment.
The determination of whether a particular government-issued IO or PO
backed by fixed-rate mortgages is liquid may be made under guidelines and
standards established by the Board of Directors. Such securities may be deemed
liquid if they can be disposed of promptly in the ordinary course of business at
a value reasonably close to that used in the calculation of the Fund's net asset
value per share.
Variable and Floating Rate Instruments. Debt instruments may be structured
to have variable or floating interest rates. Variable and floating rate
obligations purchased by the Fund may have stated maturities in excess of the
Fund's maturity limitation if the Fund can demand payment of the principal of
the instrument at least once during such period on not more than thirty days'
notice (this demand feature is not required if the instrument is guaranteed by
the U.S. Government or an agency thereof) or if the instruments are deemed to
have shorter maturities in accordance with the current regulations of the
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Securities and Exchange Commission. 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 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.
In determining average weighted portfolio maturity of the Fund, short-term
variable rate securities shall be deemed to have a maturity equal to the earlier
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand, and
short-term floating rate securities shall be deemed to have a maturity of one
day. For purposes of this paragraph, "short-term" with respect to a security
means that the principal amount, in accordance with the terms of the security,
must unconditionally be paid in 397 calendar days or less.
In determining average weighted portfolio maturity of the Fund, long-term
variable rate securities shall be deemed to have a maturity equal to the longer
of the period remaining until the next readjustment of the interest rate or the
period remaining until the principal amount can be recovered through demand, and
long-term floating rate securities shall be deemed to have a maturity equal to
the period remaining until the principal amount can be recovered through demand.
For purposes of this paragraph, "long-term" with respect to a security means
that the principal amount of the security is scheduled to be paid in more than
397 days.
Variable rate government securities where the variable rate of interest is
readjusted no less frequently than every 762 days shall be deemed to have a
maturity equal to the period remaining until the next interest rate
readjustment. Floating rate government securities shall be deemed to have a
remaining maturity of one day.
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the instruments, and
the Fund could suffer a loss if the issuer defaulted or during periods that the
Fund is not entitled to exercise its demand rights.
Variable and floating rate instruments held by the 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.
When-Issued Purchases and Forward Commitments (Delayed-Delivery
Transactions). When-issued purchases and forward commitments
(delayed-delivery transactions) are commitments by the Fund to purchase or
sell particular securities with payment and delivery to occur at a future
date (perhaps one or two months later). These transactions permit the Fund to
lock-in a price or yield on a security, regardless of future changes in
interest rates.
When the Fund agrees to purchase securities on a when-issued or forward
commitment basis, the Sub-Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Sub-Custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the 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 the Fund's net
assets will fluctuate to a
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greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because the 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 Fund will purchase securities on a when-issued or forward commitment
basis only with the intention of completing the transaction and actually
purchasing the securities. If deemed advisable as a matter of investment
strategy, however, the 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 the Fund engages in when-issued and forward commitment transactions,
it relies on the other party to consummate the trade. Failure of such party to
do so may result in the Fund's incurring a loss or missing an opportunity to
obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the market value of
the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
Commercial Paper. Commercial paper (short-term promissory notes issued
by corporations), including variable amount master demand notes, having
short-term ratings at the time of purchase, must be rated by at least two
nationally recognized statistical rating organizations ("NRSROs"), such as
Moody's Investors Service, Inc. ("Moody's") or Standard & Poor's Corporation
("S&P") within the highest rating category assigned to short-term debt
securities or, if not rated, or rated by only one agency, are determined to
be of comparable quality pursuant to guidelines approved by the Company's
Board of Directors. To the extent that the ratings accorded by NRSROs may
change as a result of changes in their rating systems, the Fund will attempt
to use comparable ratings as standards for its investments, in accordance
with the investment policies contained herein. Where necessary to ensure that
an instrument meets, or is of comparable quality to, the Fund's rating
criteria, the Fund may require that the issuer's obligation to pay the
principal of, and the interest on, the instrument be backed by insurance or
by an unconditional bank letter or line of credit, guarantee, or commitment
to lend. In addition, the Fund 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.
All obligations, including any underlying guarantees, must be deemed by
the Advisor to present minimal credit risks, pursuant to guidelines approved by
the Board of Directors. See the "Appendix" for a description of applicable
ratings.
ILLIQUID SECURITIES. The Fund may invest up to 10% of the value of
its net assets (determined at time of acquisition) 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 Fund may invest in commercial obligations issued in reliance on the
"private placement" exemption from registration afforded by Section 4(2) of
the Securities Act of 1933, as amended ("Section 4(2) paper"). The Fund may
also purchase securities that are not registered under the Securities Act of
1933, as amended, but which can be sold to qualified institutional buyers in
accordance with Rule 144A under that 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, such as the Fund, which
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 like the Fund through or with the assistance of the issuer or
investment dealers who make a market in the Section 4(2) paper, thus
providing liquidity. Rule 144A securities generally must be sold 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. It
is possible that unregistered securities purchased by a Fund in reliance upon
Rule 144A 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.
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Asset-Backed Securities. Subject to applicable maturity and credit
criteria, the 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 scheduled 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. 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 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. 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 premium paid.
FOREIGN SECURITIES. The Fund may invest up to 25% of its assets in
U.S. dollar denominated securities of foreign issuers such as foreign
commercial paper and obligations of foreign banks. Income and gains on such
securities may be subject to foreign withholding taxes. Investors should
consider carefully the substantial risks involved in securities of companies
and governments of foreign nations, which are in addition to the usual risks
inherent in domestic investments.
There may be less publicly available information about foreign
companies comparable to the reports and ratings published about companies in
the United States. Foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, and auditing
practices and requirements may not be comparable to those applicable to
United States companies. Foreign markets have substantially less volume than
the New York Stock Exchange and securities of some foreign companies are less
liquid and more volatile than securities of comparable United States
companies. Commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the United States, are likely to be
higher. In many foreign countries there is less government supervision and
regulation of stock exchanges, brokers, and listed companies than in the
United States. Such concerns are particularly heightened for emerging
markets and Eastern European countries.
Investments in companies domiciled in developing countries may be
subject to potentially higher risks than investments in developed countries.
These risks include (i) less social, political and economic stability; (ii)
the small current size of the markets for such securities and the currently
low or nonexistent volume of trading, which result in a lack of liquidity and
in greater price volatility; (iii) certain national policies which may
restrict the Fund's investment opportunities, including restrictions on
investment in issuers or industries deemed sensitive to national interest;
(iv) foreign taxation; (v) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (vi) the absence, until recently in certain
Eastern European countries, of a capital market structure or market-oriented
economy; and (vii) the possibility that recent favorable economic
developments in Eastern Europe may be slowed or reversed by unanticipated
political or social events in such countries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of East European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further,
no accounting standards exist in Eastern European countries. Finally, even
though certain Eastern European currencies may be convertible into United
States dollars, the conversion rates may be artificial to the actual market
values and may be adverse to the Fund.
The Advisor endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when the Fund changes
investments from one country to another or when proceeds of the sale of Fund
shares in U.S. dollars are used for the purchase of securities in foreign
countries. Also, some countries may adopt policies which would prevent the
Fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of
expropriation, nationalization or confiscatory taxation, withholding and
other foreign taxes on income or other amounts, foreign exchange controls
(which may include suspension of the ability to transfer currency from a
given country), default in foreign government securities, political or social
instability or diplomatic developments that could affect investments in
securities of issuers in foreign nations.
The Fund may be affected either unfavorably or favorably by
fluctuations in the relative rates of exchange between the currencies of
different nations, by exchange control regulations and by indigenous economic
and political developments. Changes in foreign currency exchange rates will
influence values within the Fund from the perspective of U.S. investors, and
may also affect the value of dividends and interest earned, gains and losses
realized on the sale of securities, and net investment income and gains, if
any, to be distributed to shareholders by the Fund. The rate of exchange
between the U.S. dollar and other currencies is determined by the forces of
supply and demand in the foreign exchange markets. These forces are affected
by the international balance of payments and other economic and financial
conditions, government intervention, speculation and other factors. The
Advisor will attempt to avoid unfavorable consequences and to take advantage
of favorable developments in particular nations where, from time to time, it
places the Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove
profitable and others may not. No assurance can be given that profits, if
any, will exceed losses.
VARIABLE AND FLOATING RATE SECURITIES. The Fund may purchase variable
and floating rate securities which are debt instruments with variable or
floating interest rates. Unrated variable and floating 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 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.
The absence of a secondary market could make it difficult to dispose of
the securities, and a Fund could suffer a loss if the issuer defaulted or
during periods 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. The Funds invest in variable amount master demand notes only when
the Advisor deems the investment to involve minimal credit risk.
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 Maritime Administration.
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. A portion of
the U.S. Treasury securities purchased by the 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 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 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.
MUNICIPAL OBLIGATIONS. The Fund may invest up to 5% of its assets in
municipal obligations which include general obligation securities, which are
backed by the full taxing power of a municipality, or revenue securities,
which are backed by revenues of a project or facility. Industrial
development bonds are a type of revenue bond backed by the credit and
security of a private issuer and may involve greater risk. Bond anticipation
notes normally provide interim financing in advance of an issue of bonds or
notes, the proceeds of which are used to repay anticipation notes. Tax and
revenue anticipation notes are issued by municipalities in expectation of
future tax or other revenues, and are payable from those specific taxes or
revenues. Tax-exempt commercial paper is issued by municipalities to help
finance short-term capital or operating needs.
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. Money borrowed will be subject to interest costs which may or may
not be recovered by an appreciation of the securities purchased. 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. A Fund
may not purchase portfolio securities while borrowings exceed 5% of the
Fund's total assets.
GUARANTEED INVESTMENT CONTRACTS. The 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.
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 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.
ADDITIONAL INVESTMENT LIMITATIONS
The Fund is subject to the investment restrictions and limitations listed
below which may be changed only by a vote of the holders of a majority of the
Fund's outstanding shares.
The Fund may not:
1. Purchase securities (other than obligations of the U.S. Government,
its agencies or instrumentalities) if more than 5% of the value of
the Fund's total assets would be invested in the securities of any
one issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 5% limitation.
However, as an operating policy the Fund intends to adhere to this
5% limitation with regard to 100% of its portfolio to the extent
required under applicable regulations under the 1940 Act;
2. Purchase more than 10% of the outstanding voting securities of any
issuer, except that up to 25% of the value of the Fund's total
assets may be invested without regard to this 10% limitation;
3. Invest 25% or more of the Fund's total assets in one or more issuers
conducting their principal business activities in the same industry,
provided that: (a) there is no limitation with respect to
obligations issued or guaranteed by the U.S. Government or its
agencies or instrumentalities, domestic bank certificates of
deposit, bankers' acceptances, and repurchase agreements secured by
such obligations; (b) wholly-owned finance companies will be
considered to be in the industries of their parents if their
activities are primarily related to financing the activities of
their parents; and (c) utilities will be divided according to their
services -- for example, gas, gas transmission, electric and gas,
electric, and telephone will each be considered separate industry;
4. Make loans, except that the Fund may purchase or hold certain debts
instruments and enter into repurchase agreements, in accordance with
its policies and limitations;
7
<PAGE>
5. Borrow money except for temporary purposes in amounts up to
one-third of the value of the Fund's total assets at the time of
such borrowing. Whenever borrowings exceed 5% of the Fund's total
assets, the Fund will not make any additional investments;
6. Knowingly invest more than 10% of its total assets in illiquid
securities including time deposits with maturities longer than seven
days and repurchase agreements providing for settlement more than
seven days after notice;
7. Pledge, mortgage or hypothecate its assets other than to secure
borrowings permitted by restriction 5 above.
8. Underwrite securities of other issuers, except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933, as
amended, in selling portfolio securities.
9. Purchase or sell real estate or any interest therein, including
interests in real estate limited partnerships, except securities
issued by companies (including real estate investment trusts) that
invest in real estate or interests therein.
10. Purchase securities on margin, or make short sales of securities,
except for the use of short-term credit necessary for the clearance
of purchases and sales of portfolio securities.
11. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by the Fund
of financial futures contracts and options on financial futures
contracts, options on securities and securities indices, as
permitted by the Fund's Prospectus.
Additional investment restrictions adopted by the Fund, which may be
changed by the Board of Directors, provide that the Fund may not:
1. Purchase or sell interests in oil, gas or other mineral exploration
or development plans or leases.
2. Invest in other investment companies except as permitted under the
1940 Act.
3. Make investments for the purpose of exercising control or
management.
If a percentage limitation is satisfied at the time of investment, a
later increase or decrease in such percentage resulting from a change in the
value of the Fund's investments will not constitute a violation of such
limitation. In addition, if the Fund's holdings of illiquid securities
exceeds 10% 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, the Fund
may continue to hold a security even though it causes the Fund to exceed a
percentage limitation because of fluctuation in the value of the Fund's
assets.
8
<PAGE>
DIRECTORS AND OFFICERS
The directors and executive officers of the Company, and their business
addresses and principal occupations during the past five years, are:
Name, Address and Age Positions with Company During the Past Five Years
- - - - --------------------- ---------------------- --------------------------
Charles W. Elliott Chairman of the Board of Senior Advisor to the
3338 Bronson Boulevard Directors President - Western
Kalamazoo, MI 49008 Michigan University since
Age: 65 July 1995; Executive Vice
President - Administration
& Chief Financial Officer,
Kellogg Company from
January 1987 through June
1995; before that Price
Waterhouse. Board of
Directors, Steelcase
Financial Corporation.
John Rakolta, Jr. Director and Vice Chairman and Chief
1876 Rathmor Chairman of the Board of Executive Officer,
Bloomfield Hills, MI Directors Walbridge Aldinger
48304 Company (construction
Age: 50 company).
Thomas B. Bender Director Investment Advisor,
7 Wood Ridge Road Financial & Investment
Glen Arbor, MI 49636 Management Group (since
Age: 64 April, 1991); Vice
President Institutional
Sales, Kidder, Peabody &
Co. (Retired April, 1991);
Trustee, Vining Real
Estate Investment Trust.
David J. Brophy Director Professor, University of
1025 Martin Place Michigan; Director, River
Ann Arbor, MI 48104 Place Financial Corp.;
Age: 61 Trustee
9
<PAGE>
Dr. Joseph E. Champagne Director Dean, University Center,
319 East Snell Road Macomb College since
Rochester, MI 48306 September 1997; Corporate
Age: 59 and Executive Consultant
since September 1995;
prior to that Chancellor,
Lamar University from
September 1994 until
September 1995; before
that Consultant to
Management; President and
Chief Executive Officer,
Crittenton Corporation
(holding company that owns
healthcare facilities),
and Crittenton Development
Corporation until August
1993; before that
President, Oakland
University of Rochester,
MI, until August 1991;
Chairman, Board of
Directors, Ross Controls
of Troy, MI.
Thomas D. Eckert Director President and Chief
10726 Falls Pointe Drive Executive Officer, Capital
Great Falls, VA 22066 Automotive REIT from
Age: 50 November 1997 to present
(real estate investment
trust specializing in
retail automotive
properties); prior to that
President and COO,
Mid-Atlantic Division of
Pulte Home Corporation
(developer of residential
land and construction of
housing units) from 1983
until 1997.
Lee P. Munder* Director and President Chairman of the Advisor
480 Pierce Street since February 1998; Chief
Suite 300 Executive Officer of World
Birmingham, MI 48009 Asset Management since
Age: 52 January 1995; Chief
Executive Officer of Old
MCM, Inc. (predecessor to
Advisor) since 1985; and
Director, LPM Investment
Services, Inc. ("LPM").
10
<PAGE>
Terry H. Gardner Vice President, Chief Vice President and Chief
480 Pierce Street Financial Officer and Financial Officer of the
Suite 300 Treasurer Advisor; Vice President
Birmingham, MI 48009 and Chief Financial
Age: 37 Officer of Old MCM, Inc.
(February 1993 to present)
and; Secretary of LPM.
Paul Tobias Vice President Chief Executive Officer of
480 Pierce Street the Advisor (since
Suite 300 February 1998); Chief
Birmingham, MI 48009 Operating Officer of the
Age: 46 Advisor (since April
1995); Executive Vice
President of the Advisor
(April 1995-February
1998); and Executive Vice
President of Comerica,
Inc.
Gerald Seizert Vice President Chief Executive Officer of
480 Pierce Street the Advisor (since
Suite 300 February 1998); Chief
Birmingham, MI 48009 Investment
Age: 45 Officer/Equities of the
Advisor (since April
1995); Executive Vice
President of the Advisor
(April 1995-February
1998); Managing Director
(1991-1995), Director
(1992-1995) and Vice
President (1984-1991) of
Loomis, Sayles and
Company, L.P.
Elyse G. Essick Vice President Vice President and
480 Pierce Street Director of Marketing for
Suite 300 the Advisor; Vice
Birmingham, MI 48009 President and Director of
Age: 40 Client Services of Old
MCM, Inc. (August 1988 to
December 1994).
James C. Robinson Vice President Vice President and Chief
480 Pierce Street Investment Officer/Fixed
Suite 300 Income for the Advisor;
Birmingham, MI 48009 Vice President and
Age: 36 Director of Fixed Income
of Old MCM, Inc.
(1987-1994).
Leonard J. Barr, II Vice President Vice President and
480 Pierce Street Director of Core Equity
Suite 300 Research of the Advisor;
Birmingham, MI 48009 Director and Senior Vice
Age: 53 President of Old MCM, Inc.
(since 1988); Director of
LPM.
11
<PAGE>
Ann F. Putallaz Vice President Vice President and
480 Pierce Street Director of Fiduciary
Suite 300 Services of the Advisor
Birmingham, MI 48009 (since January 1995);
Age: 52 Director of Client and
Marketing Services of
Woodbridge Capital
Management, Inc.
Lisa A. Rosen Secretary, Assistant General Counsel of the
480 Pierce Street Treasurer Advisor (since May 1996);
Suite 300 formerly Counsel, First
Birmingham, MI 48009 Data Investor Services
Age: 30 Group, Inc.; Assistant
Vice President and Counsel
with The Boston Company
Advisors, Inc.; Associate
with Hutchins, Wheeler &
Dittmar.
Therese Hogan Assistant Secretary Director, State Regulation
53 State Street Department, First Data
Boston, MA 02109 Investor Services Group
Age: 36 (June 1994-present);
formerly Senior Legal
Assistant, Palmer & Dodge
(October 1993-June 1994);
Blue Sky Paralegal,
Robinson & Cole (February
1984-October 1993).
* "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,
the Trust, Munder and Munder Framlington to the Directors/Trustees for the
fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Pension
Aggregate Retirement
Compensation Benefits Estimated
from the Company, Accrued Annual
Name of the Trust, Munder as Part of Benefits Total from
Person and Fund upon the Fund
and Position Framlington Trust Expenses Retirement Complex
------------ ----------------- -------- ---------- -------
<S> <C> <C>
Charles W. Elliott $26,000 None None $26,000
Chairman
John Rakolta, Jr. $23,000 None None $23,000
Vice Chairman
</TABLE>
12
<PAGE>
<TABLE>
<S> <C> <C>
Thomas B. Bender $26,000 None None $26,000
Trustee and
Director
David J. Brophy $26,000 None None $26,000
Trustee and
Director
Dr. Joseph E. $26,000 None None $26,000
Champagne
Trustee and
Director
Thomas D. Eckert $22,500 None None $22,500
Trustee and
Director
</TABLE>
No officer, director or employee of the Advisor, Comerica, the
Sub-Custodian, the Distributor, the Administrator or Transfer Agent currently
receives any compensation from the Company.
As of March 23, 1998, the Directors and officers of the Company, as a
group, owned less than 1% of outstanding shares of the Fund.
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 WAM, Old
MCM, and Munder Group, LLC. WAM is a wholly-owned subsidiary of Comerica Bank --
Ann Arbor, which in turn is a wholly-owned subsidiary of Comerica Incorporated,
a publicly held bank holding company.
The Advisory Agreement between the Advisor and the Company with respect to
the Fund (the "Advisory Agreement") was approved by the Company's Board of
Directors on November 7, 1996 and by shareholders on November 7, 1996. Under the
terms of the Advisory Agreement, the Advisor furnishes continuing investment
supervision to the Fund and is responsible for the management of the Fund's
portfolio. The responsibility for making decisions to buy, sell or hold a
particular security rests with the Advisor, subject to review by the Company's
Board of Directors.
For the advisory services provided and expenses assumed by it, the Advisor
has agreed to a fee from the Fund, computed daily and payable monthly, at an
annual rate of .35% of average daily net assets of the 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 with
respect to the Fund by a vote of the Board of Directors, or by the holders of a
majority of the outstanding voting securities of the Fund, at any time without
penalty, on 60 days' written notice to the Advisor. The Advisor may also
13
<PAGE>
terminate its advisory relationship with respect to the Fund on 60 days' written
notice to the Company, and the Advisory Agreement terminates automatically in
the event of its assignment.
For the period from commencement of operations on June 4, 1997 through
December 31, 1997, the Advisor received fees in the amount of $52,118.
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 Distibutor's principal offices are located at 60 State Street,
Suite 1300, Boston, Massachusetts 02109.
Distribution Services Arrangements. The Fund has adopted a Service and
Distribution Plan ("The Plan"), pursuant to which it uses its assets to
finance activities relating to the distribution of its shares to investors
and the provision of certain shareholder services. Under the Service and
Distribution Plans, the Distributor is paid an annual service fee of 0.25% of
the value of average daily net assets of the Fund and an annual distribution
fee at the rate of 0.10% of the value of average daily net assets of the Fund.
During the period from commencement of operations on June 4, 1997 through
December 31, 1997, the Fund paid the Distributor service fee in the amount of
$37,266 and distribution fees in the amount of $14,890.
Under the terms of the Plan, the Plan continues from year to year,
provided such continuance is approved annually by vote of the Board of
Directors, including a majority of the Board of Directors who are not
interested persons of the Company, as applicable, and who have no direct or
indirect financial interest in the operation of that Plan (the
"Non-Interested Plan Directors"). The Plan may not be amended to increase the
amount to be spent for the services provided by the Distributor without
shareholder approval, and all amendments of the Plan also must be approved by
the Directors in the manner described above. The Plan may be terminated at
any time, without penalty, by vote of a majority of the Non-Interested Plan
Directors or by a vote of a majority of the outstanding voting securities of
the Fund (as defined in the 1940 Act) upon not more than 30 days' written
notice to any other party to the Plan. Pursuant to the Plan, the Distributor
will provide the Board of Directors periodic reports of amounts expended
under the Plan and the purposes for which such expenditures were made.
The Distributor expects to pay sales commissions to dealers authorized
to sell the Fund's shares at the time of sale. The Distributor will use its
own funds (which may be borrowed) to pay such commissions pending
reimbursement pursuant to the Plan. In addition, the Advisor may use its own
resources to make payments to the Distributor or dealers authorized to sell
the Fund's shares to support their sales efforts.
Administration Agreement. State Street Bank and Trust Company ("State
Street"), located at 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
Fund, including 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
14
<PAGE>
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 Fund.
The Administration Agreement provides that the Administrator performing
services thereunder shall not be liable under the Agreement except for its
willful misfeasance, bad faith or negligence 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
(the "Custodian"), whose principal business address is One Detroit Center, 500
Woodward Avenue, Detroit, Michigan 46226, is the custodian of the Company's
assets pursuant to a custodian agreement (the "Custody Agreement"). For the
period from commencement of operations to October 31, 1997 the Custodian
received fees of $1,609.64. Commencing October 31, 1997 the Custodian
receives no compensation for such services. State Street serves as
sub-custodian to the Fund pursuant to a sub-custodian agreement (the
"Sub-Custodian Contract") among the Company, Comerica Bank and State street.
State Street is also the Sub-Custodian with respect to the custody of foreign
securities held by the Fund. State Street has in turn entered into additional
agreements with financial institutions and depositaries located in foreign
countries with respect to the custody of such securities. Under the
Sub-Custodian Contract, the Sub-Custodian (i) maintains a separate account in
the name of the Fund, (ii) holds and transfers portfolio securities on
account of the Fund, (iii) accepts receipts and makes disbursements of money
on behalf of the Fund, (iv) collects and receives all income and other
payments and distributions on account of the Fund's securities and (v) makes
periodic reports to the Company's Board of Directors concerning the Fund's
operations.
First Data Investor Services Group, Inc. ("Investor Services Group" or
the "Transfer Agent") located at 53 State Street, Boston, Massachusetts 02109
serves as the transfer and dividend disbursing agent for the Company pursuant
to a transfer agency agreement (the "Transfer Agency Agreement"), under which
Investor Services Group (i) issues and redeems shares of the Fund, (ii)
addresses and mails all communications by the Fund to its record owners,
including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders, (iii) maintains shareholder
accounts, (iv) responds to correspondence by shareholders of the Fund and (v)
makes periodic reports to the Company's Board of Directors concerning the
operations of the Fund.
OTHER INFORMATION PERTAINING TO ADMINISTRATION, SUB-CUSTODIAN AND
TRANSFER AGENCY AGREEMENTS. As stated in the Prospectus, the Administrator,
the Transfer Agent and the Sub-Custodian each receives a separate fee for its
services. In approving the Administration Agreement, the Sub-Custodian
Contract and the 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, the Sub-Custodian 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
Pursuant to the Advisory Agreement, the Advisor determines which
securities are to be sold and purchased by the Fund and which brokers are to be
eligible to execute its portfolio transactions. Portfolio securities are
normally purchased directly from the issuer or from an underwriter or market
maker for the securities. Purchases from underwriters of portfolio securities
include a commission or concession paid by the issuer to the underwriter and
purchases from dealers serving as market makers may include the spread between
the bid and asked price. While the Advisor generally seeks competitive spreads
or commissions, the Fund may not necessarily pay the lowest spread or commission
available on each transaction for reasons discussed below.
Allocation of transactions, including their frequency, to various dealers
is determined by the Advisor in its best judgment and in a manner deemed fair
and reasonable to shareholders. The primary consideration is the prompt
execution of orders in an effective manner at the most favorable price. Subject
to this consideration, dealers who provide supplemental investment research to
the Advisor may
15
<PAGE>
receive orders for transactions by the Fund. Information so received is in
addition to and not in lieu of services required to be performed by the Advisor,
nor would the receipt of such information reduce the Advisor's fees. Such
information may be useful to the Advisor in serving both the Fund and other
clients, and conversely, supplemental information obtained by the placement of
business of other clients may be useful to the Advisor in carrying out its
obligations to the Fund.
The Fund will not execute portfolio transactions through, acquire
portfolio securities issued by, make savings deposits in, or enter into
repurchase or reverse repurchase agreements with the Advisor, the
Distributor, or their affiliates.
Investment decisions for the Fund are made independently from those for
any other investment portfolios or accounts ("accounts") managed by the Advisor.
Such accounts may also invest in the same securities as the Fund. When a
purchase or sale of the same security is made at substantially the same time on
behalf of the Fund and another account, the transaction will be averaged as to
price, and available investments allocated as to amount, in a manner which the
Advisor believes to be equitable to the Fund and such other account. In some
instances, this investment procedure may adversely affect the price paid or
received by the Fund or the size of the position obtained or sold by the Fund.
To the extent permitted by law, the Advisor may aggregate the securities to be
sold or purchased for the Fund with those to be sold or purchased for other
accounts in order to obtain the best execution.
The Fund does not intend to seek profits through short-term trading. Since
the Fund will invest only in short-term debt instruments, brokerage commissions
will not normally be paid, and portfolio turnover is not expected to have a
material effect on the net income of the Fund. The Fund's portfolio turnover
rate is expected to be zero for regulatory reporting purposes.
PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions are discussed in the Fund's Prospectus and
such information is incorporated herein by reference.
Differing types of Customer Accounts over which Institutional Investors
exercise substantial investment discretion may be used to purchase Fund Shares,
including trust accounts. Investors purchasing Fund Shares may include officers,
directors, or employees of Comerica Bank or its affiliated banks.
The Fund 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 "Exchange") is restricted by applicable rules and regulations
of the SEC; (b) the 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 Fund may also suspend or postpone the
recordation of the transfer of its Shares.
In addition, the Fund may compel the redemption of, reject any order for,
or refuse to give effect on the Fund's books to the transfer of, its Shares
where the relevant investor or investors have not furnished the Fund with valid,
certified taxpayer identification numbers and such other tax-related
certifications as the Fund may request. The Fund may also redeem Shares
involuntarily if it otherwise appears appropriate to do so in light of the
Fund's 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.
16
<PAGE>
Payment for shares may, in the discretion of the Advisor, be made in the
form of securities that are permissible investments for the Fund as described in
the Prospectus. For further information about this form of payment please
contact the Transfer Agent. In connection with an in-kind securities payment,
the Fund will require, among other things, that the securities be valued on the
day of purchase in accordance with the pricing methods used by the Fund and that
the Fund receive satisfactory assurances that (1) it will have good and
marketable title to the securities received by it; (2) that the securities are
in proper form for transfer to the Fund; and (3) adequate information will be
provided concerning the basis and other tax matters relating to the securities.
NET ASSET VALUE
The Fund has elected to use the amortized cost method of valuation
pursuant to Rule 2a-7 under the 1940 Act. This involves valuing an instrument at
its cost initially and thereafter assuming a constant amortization to maturity
of any discount or premium, regardless of the impact of fluctuating interest
rates on the market value of the instrument. This method may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the Fund would receive if it sold the instrument. The value of securities
in the Fund can be expected to vary inversely with changes in prevailing
interest rates.
Pursuant to Rule 2a-7, as amended, the Fund will maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value per Share, provided that the Fund will
neither purchase any security with a remaining maturity of more than 397 days
(securities subject to repurchase agreements, variable and floating rate
instruments, and certain other securities may bear longer maturities) nor
maintain a dollar-weighted average portfolio maturity which exceeds 90 days.
In addition, the Fund may acquire only U.S. dollar-denominated obligations
that present minimal credit risks and that are "First Tier Securities" at the
time of investment. First Tier Securities are those that are rated in the
highest rating category by at least two nationally recognized security rating
organizations ("NRSROs") or by one if it is the only NRSRO rating such
obligation or, if unrated, determined to be of comparable quality. A security is
deemed to be rated if the issuer has any security outstanding of comparable
priority and security which has received a short-term rating by an NRSRO. The
Adviser will determine that an obligation presents minimal credit risks or that
unrated investments are of comparable quality, in accordance with guidelines
established by the Board of Directors.
The Company's Board of Directors has also undertaken to establish
procedures reasonably designed, taking into account current market conditions
and the Fund's investment objective, to stabilize the Fund's net asset value per
Share for purposes of sales and redemptions at $1.00. These procedures include
review by the Board of Directors, at such intervals as it deems appropriate, to
determine the extent, if any, to which the Fund's net asset value per Share
calculated by using available market quotations deviates from $1.00 per Share.
In the event such deviation exceeds one-half of one percent, the Rule requires
that the Board promptly consider what action, if any, should be initiated. If
the Board believes that the extent of any deviation from the Fund's $1.00
amortized cost price per Share may result in material dilution or other unfair
results to new or existing investors, it will take such steps as it considers
appropriate to eliminate or reduce to the extent reasonably practicable any such
dilution or unfair results. These steps may include: selling portfolio
instruments prior to maturity; shortening the average portfolio maturity;
withholding or reducing dividends; or redeeming Shares in kind.
YIELD
17
<PAGE>
The Fund's annual standardized 7-day yield is computed by determining
the net change, exclusive of capital changes, in the value of a hypothetical
pre-existing account in the Fund having a balance of one Share at the
beginning of the period, dividing the net change in account value by the
value of the account at the beginning of the base period to obtain the base
period return, and multiplying the base period return by 365/7. The net
change in the value of an account in the Fund includes the value of
additional Shares purchased with dividends from the original Share and any
such additional Shares, and all fees, other than non-recurring account or
sales charges, that are charged to all shareholder accounts in proportion to
the length of the base period and the Fund's average account size. The
capital changes to be excluded from the calculation of the net change in
account value are realized gains and losses from the sale of securities and
unrealized appreciation and depreciation. The Fund's effective annualized
yield is computed by compounding the unannualized base period return
(calculated as above) by adding 1 to the base period return, raising the sum
to a power equal to 365 divided by 7, and subtracting 1 from the result.
Based on the foregoing computations, for the seven-day period ended
December 31, 1997 the Fund's annualized yield was 4.89% and the effective yield
was 5.01%.
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.
From time to time, in advertisements or in reports to shareholders,
the Fund's yields or total returns may be quoted and compared to those of
other mutual funds with similar investment objectives and to stock or other
relevant indices. For example, the 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 the Fund and its shareholders that are not described in
the Fund's 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.
GENERAL. The 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, the Fund
must derive with respect to a taxable year at least 90% of its gross income
from dividends, interest, certain payments with respect to securities loans
and gains from the sale or other disposition of stock or securities or
foreign currencies, or from other income derived with respect to its business
of investing in such stock, securities, or currencies (the "Income
Requirement"). Interest (including original issue discount and "accrued
market discount") received by a Fund at maturity or on disposition of a
security held for less than three months will not be treated (in contrast to
other income which is attributable to realized market appreciation) as gross
income from the sale or other disposition of securities held for less than
three months for this purpose.
In addition to the foregoing requirements, at the close of each quarter
of its taxable year, at least 50% of the value of the Fund's assets must
consist of cash and cash items, U.S. Government securities, securities of
other regulated investment companies, and securities of other issuers (as to
which the Fund has not invested more than 5% of the value of its total assets
in securities of such issuer and as to which the Fund does not hold more than
10% of the outstanding voting securities of such issuer) and no more than 25%
of the value of the Fund's total assets may be invested in the securities of
any one issuer (other than U.S. Government securities and securities of other
regulated investment companies), or in two or more issuers which the Fund
controls and which are engaged in the same or similar trades or businesses.
Certain debt instruments acquired by the Fund may include "original
issue discount" or "market discount". As a result, the 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 the Fund and any net
realized short-term capital gains distributed by the Fund will be taxable to
shareholders as ordinary income and will not be eligible for the dividends
received deduction for corporations.
The Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain")
for each taxable year. Such gain is distributed as a capital gain dividend
and is taxable to shareholders as gain from the sale or exchange of a capital
asset held for more than one year, regardless of the length of time the
shareholder has held the Fund shares, and regardless of whether the
distribution is paid in cash or reinvested in shares. The Fund expects that
capital gain dividends will be taxable to shareholders as long-term gains.
Capital gain dividends are not eligible for the dividends received deduction.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends received deduction to the
extent of the gross amount of "qualifying dividends" received by such Fund
for the year and if certain holding period requirements are met. Generally,
a dividend will be treated as a "qualifying dividend" if it has been received
from a domestic corporation.
If for any taxable year the 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 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 the 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.
CURRENCY FLUCTUATIONS - "SECTION 988" GAINS OR LOSSES. Under the Code,
gains or losses attributable to fluctuations in exchange rates which occur
between the time a Fund accrues receivables or liabilities denominated in a
foreign currency, and the time the Fund actually collects such receivables or
pays such liabilities, generally are treated as ordinary income 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 the Fund's investment company taxable
income to be distributed to its shareholders as ordinary income.
DISPOSITION OF SHARES. Upon the redemption, sale or exchange of shares
of the Fund, a shareholder may realize a capital gain or loss depending upon
his or her basis in the shares. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets in the shareholder's hands and
will be long-term or short-term, generally depending upon the shareholder's
holding period for the shares. Any loss realized on a redemption, sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(including 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 and treated as long-term capital gains. Furthermore a
loss realized by a shareholder on the redemption, sale or exchange of shares
of a Fund with respect to which exempt-interest dividends have been paid
will, to the extent of such exempt-interest dividends, be disallowed if such
shares have been held by the shareholder for six months or less.
CONSTRUCTIVE SALES. Recently enacted rules may affect the timing and
character of gain if a Fund engages in transactions that reduce or eliminate
its risk of loss with respect to appreciated financial positions. If the
Fund enters into certain transactions in property while holding substantially
identical property, the Fund would be treated as if it had sold and
immediately repurchased the property and would be taxed on any gain (but not
loss) from the constructive sale. The character of gain from a constructive
sale would depend upon the Fund's holding period in the property. Loss from
a constructive sale would be recognized when the property was subsequently
disposed of, and its character would depend on the Fund's holding period and
the application of various loss deferral provisions of the Code.
18
<PAGE>
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 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 Fund's Prospectus and this Statement of Additional
Information, the Fund's Shares will be fully paid and nonassessable. In the
event of a liquidation or dissolution of the Company, Shares of the Fund are
entitled to receive the assets available for distribution belonging to the Fund,
and a proportionate distribution, based upon the relative asset values of the
Fund and the Company's other Portfolios, of any general assets not belonging to
any particular Portfolio which are available for distribution.
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 a
Portfolio affected by the matter. A Portfolio is affected by a matter unless it
is clear that the interests of the Portfolio in the matter are identical to the
interests of the Company's other Portfolios or that the matter does not affect
any-interest of the Portfolio. Under Rule 18f-2, the approval of an investment
advisory agreement or any change in a fundamental investment policy would be
effectively acted upon with respect to a Portfolio only if approved by a
majority of the outstanding shares of the
19
<PAGE>
Portfolio. However, Rule 18f-2 also provides that the ratification 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 without regard to class.
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 by 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 Fund and the Company's other Portfolios, if any,
(voting together without regard to class).
MISCELLANEOUS
Counsel. The law firm of Dechert Price & Rhoads, 1775 Eye Street, N.W.,
Washington, D.C. 20006, serves as counsel to the Company.
Independent Auditors. Ernst & Young LLP, 200 Clarendon Street, Boston, MA
02116, serves as the Company's independent auditors.
Control Persons and Principal Holders of Securities. As of March 23, 1998
the following persons were beneficial owners of 5% or more of the outstanding
shares of the Fund because they possessed voting or investment power with
respect to such shares:
<TABLE>
<CAPTION>
Percentage of Total Shares
Name and Address Outstanding
---------------- -----------
<S> <C>
National Financial 100%
Services
P.O. Box 3908
Church Street Station
New York, NY 10008
</TABLE>
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 or banks and their subsidiaries or affiliates, as well as
20
<PAGE>
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 any
Fund or result in a financial loss to any Customer.
Shareholder Approvals. As used in this Statement of Additional Information
and in the Prospectus, a "majority of the outstanding shares" of a Fund or
investment portfolio means the lesser of (a) 67% of the shares of the particular
Fund portfolio represented at a meeting at which the holders of more than 50% of
the outstanding shares of such Fund or portfolio are present in person or by
proxy, or (b) more than 50% of the outstanding shares of such Fund or portfolio.
REGISTRATION STATEMENT
This Statement of Additional Information and the Fund's Prospectus do not
contain all the information included in the, Fund's registration statement filed
with the SEC under the 1933 Act with respect to the securities offered hereby,
certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits filed
therewith, may be examined at the offices of the SEC in Washington, D.C.
Statements contained herein and in the Fund's Prospectus as to the
contents of any contract of other documents referred to are not necessarily
complete, and, in such instance, reference is made to the copy of such contract
or other documents filed as an exhibit to the Fund's registration statement,
each such statement being qualified in all respect by such reference.
FINANCIAL STATEMENTS
The financial statements for the Fund including the notes thereto dated
December 31, 1997 have been audited by Ernst & Young LLP and are incorporated by
reference into this SAI from the Annual Report of the Fund dated December 31,
1997. The information under the caption "Financial Highlights" of the Fund for
the period from commencement of operations through December 31, 1997 appearing
in the Prospectus dated May 1, 1998 has been derived from the financial
statements audited by Ernst & Young LLP.
21
<PAGE>
APPENDIX
- 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
rgade 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 seculative
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."
22
<PAGE>
APPENDIX
- - - - - Rated Investments -
Commercial Paper
Rated commercial paper purchased by the Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by the Fund's Board of Directors.
Highest quality ratings for commercial paper for Moody's and S & P are as
follows:
Moody's: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted "A-1+".
23
<PAGE>
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
STATEMENT OF ADDITIONAL INFORMATION
_____, 1998
St. Clair Funds, Inc. (the "Company") currently offers a selection of
investment portfolios, five of which are offered in this Statement of Additional
Information: Munder S&P 500 Index Equity Fund ("LargeCap Index Fund"), Munder
S&P MidCap Index Equity Fund ("MidCap Index Fund"), Munder S&P SmallCap Index
Equity Fund ("SmallCap Index Fund"), Munder Aggregate Bond Index Fund ("Bond
Index Fund") and Munder Foreign Equity Fund ("Foreign Fund") (collectively, the
"Funds"). The Fund's investment advisor is Munder Capital Management (the
"Advisor").
Shares of the Funds are available to the public only through the purchase
of certain variable annuity and variable life insurance contracts subject to
regulatory approval ("Contracts") issued by various life insurance companies
(the "Insurers").
This Statement of Additional Information is intended to supplement the
information provided to investors in the Funds' Prospectus dated _____, 1998
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 _____, 1998. 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 Huntleigh
Fund Distributors, Inc. (the "Distributor"), or by calling the Funds at (800)
438-5789. This Statement of Additional Information is dated _____, 1998.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
General........................................................................3
Fund Investments...............................................................3
Risk Factors and Special Consideration - Index Funds..........................14
Investment Limitations........................................................16
Directors and Officers........................................................17
Investment Advisory and Other Service Arrangements............................22
Control Person and Principal Holder of Securities.............................24
Portfolio Transactions........................................................24
Purchase and Redemption Information...........................................26
Net Asset Value...............................................................27
Performance Information.......................................................27
Taxes.........................................................................29
Additional Information Concerning Shares......................................31
Miscellaneous.................................................................32
Appendix A...................................................................A-1
Appendix B...................................................................B-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
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.
2
<PAGE>
GENERAL
The Company was organized as a Maryland corporation on May 23, 1984 under
the name St. Clair Money Market Fund, Inc. which was changed to St. Clair Fixed
Income Fund, Inc. on December 30, 1986 and to St. Clair Funds, Inc. on September
18, 1996.
As stated in the Prospectus, the investment advisor of the Fund is Munder
Capital Management (the "Advisor"). The principal partners of the Advisor are
Old MCM, Inc. ("Old MCM"), Munder Group LLC and WAM Holdings, Inc. Mr. Lee P.
Munder, the Advisor's Chairman, indirectly owns or controls approximately 45%
and Comerica Incorporated owns or controls approximately 44% 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.
Foreign Securities. The Foreign Fund may invest in common stock of foreign
issuers and American Depositary Receipts ("ADRs") listed on a domestic
securities exchange or included in the NASDAQ National Market System or the
United States Over-the-Counter Market ("OTC"). ADRs are receipts typically
issued by a United States bank or trust company evidencing ownership of the
underlying foreign securities. Certain such institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depositary may not provide the same
shareholder information that a sponsored depositary is required to provide under
its contractual arrangements with the issuer.
The Bond Index Fund may invest in international dollar-denominated bonds
such as Yankee bonds, which are dollar denominated bonds issued in the U.S. by
foreign banks and corporations.
Income and gains on foreign securities may be subject to foreign
withholding taxes. Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations which are
in addition to the usual risks inherent in domestic investments.
There may be less publicly available information about foreign domiciled
companies comparable to the reports and ratings published about companies in the
United States. Investments in companies domiciled in foreign countries may be
subject to potentially higher risks than investments in the United States. These
risks include (i) less social, political and economic stability (ii) certain
national policies which may restrict a Fund's investment opportunities,
including restrictions on investment in issuers or industries deemed sensitive
to national interest; (iii) the absence, until recently in certain Eastern
European countries, of a capital market structure or market-oriented economy and
(iv) the possibility that recent favorable economic developments in Eastern
Europe may be slowed or reversed by unanticipated political or social events in
such countries.
Many Asian countries may be subject to a greater degree of social,
political and economic instability than is the case in the United States and
European countries. Such instability may result from (I) authoritarian
governments or military involvement in political and economic decision-making;
(ii)
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popular unrest associated with demands for improved political and economic and
social conditions; (iii) internal insurgencies; (iv) hostile relations with
neighboring countries; and (v) ethnic, religious and racial disaffection. The
economies of most of emerging markets and Asian countries are heavily dependent
upon international trade and are accordingly affected by protective trade
barriers and the economic conditions of their trading partners, principally, the
United States, Japan, China and the European Community.
Futures Contracts and Related Options. The Funds currently expect that
they may purchase and sell futures contracts on interest-bearing securities or
securities or bond indices, and may purchase and sell call and put options on
futures contracts. For a detailed description of futures contracts and related
options, see Appendix B to this Statement of Additional Information.
Interest Rate Swap Transactions. The Bond Index Fund may enter into
interest rate swap agreements for purposes of attempting to obtain a particular
desired return at a lower cost to the Fund than if the Fund had invested
directly in an instrument that yielded that desired return. Interest rate swap
transactions involve the exchange by the Fund with another party of its
commitments to pay or receive interest, such as an exchange of fixed rate
payments for floating rate payments. Typically, the parties with which the Fund
will enter into interest rate swap transactions will be brokers, dealers or
other financial institutions known as "counterparties." Certain Federal Income
tax requirements may, however, limit the Fund's ability to engage in certain
interest rate transactions. Gains from transactions in interest rate swaps
distributed to shareholders of the Fund will be taxable as ordinary income or,
in certain circumstances, as long-term capital gains to the shareholders
The Bond Index Fund's obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). The Fund's obligations under a swap agreement
will be accrued daily (offset against any amounts owed to the Fund). Accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
maintenance of a segregated account consisting of cash. U.S. Government
securities or other high-grade debt securities, to avoid any potential
leveraging of the Fund's portfolio.
The Bond Index Fund will not enter into any interest rate swap transaction
unless the credit quality of the unsecured senior debt or the claims-paying
ability of the other party to the transaction is rated in one of the highest
four rating categories by at least one nationally-recognized statistical rating
organization ("NRSRO") or is believed by the Advisor to be equivalent to that
rating. If the other party to a transaction defaults, the Fund will have
contractual remedies pursuant to the agreements related to the transactions.
The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Advisor is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of the Fund would be lower than it would have been if
interest rate swaps were not used. The swaps market has grown substantially in
recent years with a larger number of banks and investment banking firms acting
both as principals and as agents utilizing standardized swap documentation. As a
result, the swaps market has become relatively liquid in comparison with other
similar instruments traded in the interbank market. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect the Fund's ability to terminate existing swap agreements
or to realize amounts to be received under such agreements.
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Investment Company Securities. The Funds may invest in securities issued
by other investment companies. The Foreign Fund may purchase shares of
investment companies investing primarily in foreign securities, including so
called "country funds". In addition, the LargeCap 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 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.
Money Market Instruments. As described in the Prospectus, the Funds may
invest from time to time in "money market instruments," a term that includes,
among other things, bank obligations, commercial paper, variable amount master
demand notes and corporate bonds with remaining maturities of 397 days or less.
Bank obligations including bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in obligations of foreign
banks or foreign branches of U S. banks only 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. All investments in bank obligations are limited
to the obligations of financial institutions having more than $1 billion in
total assets at the time of purchase, and investments by a Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of such Fund's total assets at the time of purchase.
Investments by a Fund in commercial paper will consist of issues rated at
the time A-1 and/or P-1 by Standard & Poor's Rating Service ("S&P"), a division
of McGraw-Hill Companies, Inc., or Moody's Investor Services, Inc. ("Moody's").
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.
Mortgage-Related Securities. There are a number of important differences
among the agencies and instrumentalities of the U.S. Government that issue
mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie
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Maes") which are guaranteed as to the timely payment of principal and interest
by GNMA and such guarantee is backed by the full faith and credit of the United
States. GNMA is a wholly-owned U.S. Government corporation within the Department
of Housing and Urban Development. GNMA certificates also are supported by the
authority of GNMA to borrow funds from the U.S. Treasury to make payments under
its guarantee. Mortgage-related securities issued by the Federal National
Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations of
the FNMA and are not backed by or entitled to the full faith and credit of the
United States, but are supported by the right of the issuer to borrow from the
Treasury. FNMA is a government-sponsored organization owned entirely by private
stockholders. Fannie Maes are guaranteed as to timely payment of the principal
and interest by FNMA. Mortgage-related securities issued by the Federal Home
Loan Mortgage Corporation ("FHLMC") include FHLMC Mortgage Participation
Certificates (also known as "Freddie Macs" or "PCs"). FHLMC is a corporate
instrumentality of the United States, created pursuant to an Act of Congress,
which is owned entirely by Federal Home Loan Banks. Freddie Macs are not
guaranteed by the United States or by any Federal Home Loan Banks and do not
constitute a debt or obligation of the United States or of any Federal Home Loan
Bank. Freddie Macs entitle the holder to timely payment of interest, which is
guaranteed by the FHLMC. FHLMC guarantees either ultimate collection or timely
payment of all principal payments on the underlying mortgage loans. When FHLMC
does not guarantee timely payment of principal, FHLMC may remit the amount due
on account of its guarantee of ultimate payment of principal at any time after
default on an underlying mortgage, but in no event later than one year after it
becomes payable.
Options. The 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. 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 obligation 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 purchase plus transaction costs may be
greater than the premium received upon the original option, in which event each
Fund will have incurred a loss in the transaction. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option will
permit the Funds to write another call option on the underline, security with
either a different exercise price or expiration date or
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both, or in the case of a written put option, will permit the Funds to write
another put option to the extent that the exercise price thereof is secured by
deposited cash or short-term securities. Also, effecting a closing transaction
will permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Fund investments. If a Fund desires
to sell a particular security from its portfolio on which it has written a call
option, it will effect a closing transaction prior to or concurrent with the
sale of the security.
The Funds may write options in connection with buy-and-write transactions;
that is, the Funds may purchase a security and then write a call option against
that security. The exercise price of the call the Funds determine to write will
depend upon the expected price movement of the underlying security. The exercise
price of a call option may be below ("in-the-money"), equal to ("at-the-money")
or above ("out-of-the-money") the current value of the underlying security at
the time the option is written. Buy-and-write transactions using in-the-money
call options may be used when it is expected that the price of the underlying
security will remain flat or decline moderately during the option period.
Buy-and-write transactions using out-of-the-money call options may be used when
it is expected that the premiums received from writing the call option plus the
appreciation in the market price of the underlying security up to the exercise
price will be greater than the appreciation in the price of the underlying
security alone. If the call options are exercised in such transactions, the
maximum gain to the relevant Fund will be the premium received by it for writing
the option, adjusted upwards or downwards by the difference between the Fund's
purchase price of the security and the exercise price. If the options are not
exercised and the price of the underlying security declines, the amount of such
decline will be offset in part, or entirely, by the premium received.
In the case of a call option on a security the option is "covered" if a
Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or if
additional cash consideration is required cash or 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 Funds may write call
options that are not covered for cross-hedging purposes. Each of the 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 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 Funds may purchase put options to hedge against a decline in
the value of its portfolio. By using put options in this way, the Funds 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
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transaction costs. Each of the 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 Funds upon exercise of the option,
and, unless the price of the underlying security rises sufficiently, the option
may expire worthless to the Fund.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by the Fund expires unexercised the Fund realizes
a loss equal to the premium paid. If the Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by
the Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by the Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the 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 Corporate, 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 value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
could 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 Fund (other than
the Bond Index Fund) may purchase warrants, which are privileges issued by
corporations enabling the owners to subscribe to
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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 and Bond Indices and Options on
Stock and Bond Index Futures Contracts. The Funds (except the Bond Index Fund)
may purchase and sell stock index futures, and options on stock indices and
stock index futures contracts and the Bond Index Fund may purchase and sell bond
index futures and options on bond indices and bond index futures contracts as a
hedge against movements in the equity and bond markets, respectively.
A stock index futures contract is an agreement in which one party agrees
to deliver to the other an amount of cash equal to a specific dollar amount
times the difference between the value of a specific stock index at the close of
the last trading day of the contract and the price at which the agreement is
made. No physical delivery of securities is made.
Options on stock and bond indices are similar to options on specific
securities, described above, except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock or
bond index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of that stock or bond index is greater
than, in the case of a call option, or less than, in the case of a put option,
the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery, of this
amount. Unlike options on specific securities, all settlements of options on
stock or bond indices are in cash, and gain or loss depends on general movements
in the stocks included in the index rather than price movements in particular
stocks.
If the Advisor expects general stock or bond market prices to rise, it
might purchase a stock index futures contract, or a call option on that index,
as a hedge against an increase in prices of particular securities it ultimately
wants to buy. If in fact the index does rise, the price of the particular
securities intended to be purchased may also increase, but that increase would
be offset in part by the increase in the value of the 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 or bond market prices to decline,
it might sell a futures contract, or purchase a put option. 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 Funds (except the Bond Index Fund) may purchase and write call and put
options on stock index futures contracts and the Bond Index Fund may purchase
and write call and put options on bond index futures contracts. Each 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 Funds may purchase put options or write call options on stock and index
futures (bond index futures in the case of the Bond Index Fund), rather than
selling futures contracts, in anticipation of a decline in general stock or bond
market prices or purchase call options or write put options on stock or bond
index futures, rather than purchasing
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such futures, to hedge against possible increases in the price of securities
which the Funds intend to purchase.
In connection with transactions in stock or bond index futures, stock or
bond index options and options on stock index or bond futures, the Funds will be
required to deposit as "initial margin" an amount of cash and short-term U.S.
Government securities equal to from 5% to 8% of the contract amount. Thereafter,
subsequent payments (referred to as "variation margin") are made to and from the
broker to reflect changes in the value of the option or futures contract. No
Fund may at any time commit more than 5% of its total assets to initial margin
deposits on futures contracts, index options and options on futures contracts
Stripped Securities. The Bond Index 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 these stripped securities most likely will be
deemed the beneficial holders of the underlying U.S. Government obligations for
federal tax and securities purposes. The Trust 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 a Fund is able to have its beneficial
ownership of zero coupon securities recorded directly in the book-entry
record-keeping system in lieu of having to hold certificates or other evidences
of ownership of the underlying U.S. Treasury securities.
In addition, the Bond Index Fund may invest in stripped mortgage-backed
securities ("SMBS"), which represent beneficial ownership interests in the
principal distributions and/or the interest distributions on mortgage assets.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. One
type of SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In the most common case, one
class of SMBS will receive all of the interest (the interest-only or "I0"
class), while the other class will receive all of the principal (the
principal-only or "PO" class). SMBS may be issued by FNMA or FHLMC.
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The original principal amount, if any, of each SMBS class represents the
amount payable to the holder thereof over the life of such SMBS class from
principal distributions of the underlying mortgage assets, which will be zero in
the case of an IO class. Interest distributions allocable to a class of SMBS, if
any, consist of interest at a specified rate on its principal amount, if any, or
its notional principal amount in the case of an I0 class. The notional principal
amount is used solely for purposes of the determination of interest
distributions and certain other rights of holders of such IO class and does not
represent an interest in principal distributions of the mortgage assets.
Yields on SMBS will be extremely sensitive to the prepayment experience on
the underlying mortgage loans, and there are other associated risks. For IO
classes of SMBS and SMBS that were purchased at prices exceeding their principal
amounts there is a risk that a Fund may not fully recover its initial
investment.
The determination of whether a particular government-issued IO or PO
backed by fixed-rate mortgages is liquid may be made under guidelines and
standards established by the Board of Trustees. Such securities may be deemed
liquid if they can be disposed of promptly in the ordinary course of business at
a value reasonably close to that used in the calculation of a Fund's net asset
value per share.
U.S. Government Obligations. The Funds may purchase obligations issued or
guaranteed by the U.S. Government and U.S. Government agencies and
instrumentalities. Obligations of certain agencies and instrumentalities of the
U.S. Government, such as those of the GNMA, are supported by the full faith and
credit of the U.S. Treasury. Others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
U.S. Treasury; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentalities
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, FNMA, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, FHLMC, Federal Intermediate Credit
Banks and Maritime Administration.
Variable and Floating Rate Instruments. Debt instruments may be structured
to have variable or floating interest rates. 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 Fund,
the 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
the Bond Index Fund could suffer a loss if the issuer defaulted or during
periods that the Fund is not entitled to exercise its demand rights.
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Variable and floating rate instruments held by the Bond Index 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
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.
The repurchase price under the repurchase agreements described in the
Prospectus generally equals the price paid by a Fund plus interest negotiated on
the basis of current short-term rates (which may be more or less than the rate
on the securities underlying the repurchase agreement).
Securities subject to repurchase agreements will be held by the Company's
custodian (or subcustodian) 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. Borrowing may exaggerate
the effect on a Fund's net asset value of any increase or decrease in the market
value of securities purchased with borrowed funds. Money borrowed will be
subject to interest costs which may or may not be recovered by an appreciation
of the securities purchased. 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 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 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 high-grade debt securities of an amount at
least equal to the market value of the securities, plus accrued interest,
subject to the agreement.
12
<PAGE>
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 the Fund may be required subsequently to
place additional assets in the separate account in order to ensure the value of
the account remains equal to the amount of the Fund's commitments. It may be
expected that the market value of the Fund's net assets will fluctuate to a
greater degree when it 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 the 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 the Fund's incurring a loss or missing an opportunity to obtain
a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase or a
forward commitment to purchase securities, and any subsequent fluctuations in
their market value, are taken into account when determining the net asset value
of the Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
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 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 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.
13
<PAGE>
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 NRSROs represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. Consequently, obligations with the
same rating, maturity, and interest rate may have different market prices.
Other. Subsequent to its purchase by a Fund, a rated security may cease to
be rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Board of Directors 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.
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 - INDEX FUNDS
Traditional methods of fund investment management typically involve
relatively frequent changes in a portfolio of securities on the basis of
economic, financial and market analysis. Index funds such as the LargeCap Index
Fund, MidCap Index Fund, SmallCap Index Fund (the "Equity Index Funds") and the
Bond Index Fund are not managed in this manner. Instead, with the aid of a
computer program, the Advisor purchases and sells securities for each Fund in an
attempt to produce investment results that substantially duplicate the
investment composition and performance of each Fund's respective corresponding
Index (the "Corresponding Index"), taking into account redemptions, sales of
additional Fund shares, and other adjustments as described below.
With respect to the Equity Index Funds, a 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 be able to construct and maintain
each Equity 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 the Fund would acquire solely on the basis
of their weighted capitalizations with the industry, sector diversification of
all issuers included in the Corresponding Index. This comparison is made because
the Advisor believes that, unless a Fund holds all stocks included in the
Corresponding Index, the selection of stocks for purchase by the Fund solely on
the basis of their weighted market capitalizations would tend to place their
concentration in certain industry sectors. As a result, event 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.
14
<PAGE>
For these reasons, the Advisor will identify the sectors which are (or,
except for sector balancing, would be) most underrepresented in a 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 (exempt for cash
holdings).
Redemptions of a substantial number of shares of a 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 the
Corresponding Index, the Advisor may be required to sell some or all of the
common stock of such issuer then held by a 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 be 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 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 a Fund by traditional methods of
financial and market analysis, the Advisor will monitor the Fund's investment
with a view towards removing stocks of companies which exhibit extreme financial
distress or which may impair for any reason the Fund's ability to achieve its
investment objective.
The Funds will invest primarily in the common stocks that constitute the
Corresponding Index 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 the 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.
With respect to the Bond Index Fund, the Fund will invest in a group of
fixed income securities selected from the Lehman Brothers Aggregate Bond Index
("Aggregate Bond Index") which are expected to perform similarly to the Index as
a whole. The Bond Index Fund will be unable to hold all of the individual issues
which comprise the Aggregate Bond Index because of the large number of
securities involved. The Fund will however be constructed to approximately match
the composition of the Aggregate Bond Index.
As the Bond Index Fund will invest primarily in fixed-income securities,
the Fund is subject to interest rate, income, call, credit and prepayment risk
(with respect to mortgage-backed securities.) Interest rate risk is the
potential for fluctuations in bond prices due to changing interest rates. Income
risk is the potential for a decline in the Fund's income due to falling market
interest rates. Credit risk is the possibility that a bond issuer will fail to
make timely-payments of either interest or principal to the Fund. Prepayment
risk (for mortgage-backed securities) and call risk (for corporate bonds) is the
likelihood that, during periods of falling interest rates, securities with high
stated interest rates will be prepaid (or "called") prior to maturity requiring
the Fund to invest the proceeds at generally lower interest rates.
15
<PAGE>
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 or 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;
2. Invest more than 25% of its total assets in the securities of
issuers conducting their principal business activities in any one
industry (securities issued or guaranteed by the United States
Government, its agencies or instrumentalities are not considered to
represent industries);
3. Borrow money or enter into reverse repurchase agreements except that
the Fund may (i) borrow money, or enter into reverse repurchase
agreements for temporary purposes in amounts not exceeding 5% of its
total assets and (ii) borrow money for the purpose of meeting
redemption 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. 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 the Fund may make
margin deposits in connection with transactions in options, futures
and options on futures;
9. Make investments for the purpose of exercising control of
management;
16
<PAGE>
10. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by the Fund
of financial futures contracts and options on financial futures
contracts, options on securities and securities indices, as
permitted by the Fund's Prospectus; or
11. 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.
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 (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; or
2. Invest in other investment companies except as permitted under the
1940 Act.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
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% because of changes in the value of the Fund's
investments, the Fund will take action to reduce its holdings of illiquid
securities within a time frame deemed to be in the best interest of the Fund.
Otherwise, a Fund may continue to hold a security even though it causes the Fund
to exceed a percentage limitation because of fluctuation in the value of the
Fund's assets.
DIRECTORS AND OFFICERS
The directors and executive officers of the Company, and their business
addresses and principal occupations during the past five years, are:
<TABLE>
<CAPTION>
Name, Address and Age Positions with Company During the Past Five Years
- - - - --------------------- ---------------------- --------------------------
<S> <C> <C>
Charles W. Elliott Chairman of the Board of Senior Advisor to the
3338 Bronson Boulevard Directors President - Western Michigan
Kalamazoo, MI 49008 University since July 1995;
Age: 65 Executive Vice President -
Administration & Chief
Financial Officer, Kellogg
Company from January 1987
through June 1995; before
that Price Waterhouse. Board
of Directors, Steelcase
Financial Corporation.
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
John Rakolta, Jr. Director and Vice Chairman of Chairman and Chief Executive
1876 Rathmor the Board of Directors Officer, Walbridge Aldinger
Bloomfield Hills, MI 48304 Company (construction
Age: 50 company).
Thomas B. Bender Director Investment Advisor, Financial
7 Wood Ridge Road & Investment Management Group
Glen Arbor, MI 49636 (since April, 1991); Vice
Age: 64 President Institutional
Sales, Kidder, Peabody & Co.
(Retired April, 1991);
Trustee, Vining Real Estate
Investment Trust.
David J. Brophy Director Professor, University of
1025 Martin Place Michigan; Director, River
Ann Arbor, MI 48104 Place Financial Corp.
Age: 61
Dr. Joseph E. Champagne Director Dean, University Center,
319 East Snell Road Macomb College since
Rochester, MI 48306 September 1997; Corporate and
Age: 59 Executive Consultant since
September 1995; prior to that
Chancellor, Lamar University
from September 1994 until
September 1995; before that
Consultant to Management;
President and Chief Executive
Officer, Crittenton
Corporation (holding company
that owns healthcare
facilities), and Crittenton
Development Corporation until
August 1993; before that
President, Oakland University
of Rochester, MI, until
August 1991; Chairman, Board
of Directors, Ross Controls
of Troy, MI.
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
Thomas D. Eckert Director President and Chief Executive
10726 Falls Pointe Drive Officer, Capital Automotive
Great Falls, VA 22066 REIT from November 1997 to
Age: 50 present (real estate
investment trust specializing
in retail automotive
properties); prior to that
President and COO,
Mid-Atlantic Division of
Pulte Home Corporation
(developer of residential
land and construction of
housing units) from 1983
until 1997.
Lee P. Munder* Director and President Chairman of the Advisor since
480 Pierce Street February 1998; Chief
Suite 300 Executive Officer of World
Birmingham, MI 48009 Asset Management since
Age: 52 January 1995; Chief Executive
Officer of Old MCM, Inc.
(predecessor to Advisor)
since 1985; and Director, LPM
Investment Services, Inc.
("LPM").
Terry H. Gardner Vice President, Chief Vice President and Chief
480 Pierce Street Financial Officer and Financial Officer of the
Suite 300 Treasurer Advisor; Vice President and
Birmingham, MI 48009 Chief Financial Officer of
Age: 37 Old MCM, Inc. (February 1993
to present) and; Secretary of
LPM.
Paul Tobias Vice President Chief Executive Officer of
480 Pierce Street the Advisor (since February
Suite 300 1998); Chief Operating
Birmingham, MI 48009 Officer of the Advisor (since
Age: 46 April 1995); Executive Vice
President of the Advisor (April
1995-February 1998); and Executive
Vice President of Comerica,
Inc.
Gerald Seizert Vice President Chief Executive Officer of
480 Pierce Street the Advisor (since February
Suite 300 1998); Chief Investment
Birmingham, MI 48009 Officer/Equities of the Advisor
Age: 45 (since April 1995); Executive
Vice President of the Advisor
(April 1995-February 1998);
Managing Director
(1991-1995), Director
(1992-1995) and Vice
President (1984-1991) of
Loomis, Sayles and Company,
L.P.
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
Elyse G. Essick Vice President Vice President and Director
480 Pierce Street of Marketing for the Advisor;
Suite 300 Vice President and Director
Birmingham, MI 48009 of Client Services of Old
Age: 40 MCM, Inc. (August 1988 to
December 1994).
James C. Robinson Vice President Vice President and Chief
480 Pierce Street Investment Officer/Fixed
Suite 300 Income for the Advisor; Vice
Birmingham, MI 48009 President and Director of
Age: 36 Fixed Income of Old MCM, Inc.
(1987-1994).
Leonard J. Barr, II Vice President Vice President and Director
480 Pierce Street of Core Equity Research of
Suite 300 the Advisor; Director and
Birmingham, MI 48009 Senior Vice President of Old
Age: 53 MCM, Inc. (since 1988);
Director of LPM.
Ann F. Putallaz Vice President Vice President and Director
480 Pierce Street of Fiduciary Services of the
Suite 300 Advisor (since January 1995);
Birmingham, MI 48009 Director of Client and
Age: 52 Marketing Services of
Woodbridge Capital
Management, Inc.
Lisa A. Rosen Secretary, Assistant General Counsel of the
480 Pierce Street Treasurer Advisor (since May 1996);
Suite 300 formerly Counsel, First Data
Birmingham, MI 48009 Investor Services Group,
Age: 30 Inc.; Assistant Vice
President and Counsel with
The Boston Company Advisors,
Inc.; Associate with
Hutchins, Wheeler & Dittmar.
Therese Hogan Assistant Secretary Director, State Regulation
53 State Street Department, First Data
Boston, MA 02109 Investor Services Group (June
Age: 36 1994-present); formerly
Senior Legal Assistant,
Palmer & Dodge (October
1993-June 1994); Blue Sky
Paralegal, Robinson & Cole
(February 1984-October 1993).
</TABLE>
* "Interested person" of the Company, as defined in the 1940 Act.
20
<PAGE>
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,
the Trust, Munder, and Framlington Trust to their respective
Directors/Trustees for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Aggregate Pension
Compensation Retirement Estimated
from the Company, Benefits Annual
Name of the Trust, Munder Accrued Benefits Total from
Person and as Part of upon the Fund
and Position Framlington Trust Fund Expenses Retirement Complex
------------ ----------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
Charles W. Elliott $26,000 None None $26,000
Chairman
John Rakolta, Jr. $23,000 None None $23,000
Vice Chairman
Thomas B. Bender $26,000 None None $26,000
Trustee and Director
David J. Brophy $26,000 None None $26,000
Trustee and Director
Dr. Joseph E. $26,000 None None $26,000
Champagne
Trustee and Director
Thomas D. Eckert $22,500 None None $22,500
Trustee and Director
</TABLE>
No officer, director or employee of the Advisor, Comerica, the
Distributor, the Administrator, the Sub-Custodian 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 WAM, Old
MCM and Munder Group, LLC. WAM is a wholly-owned subsidiary of Comerica Bank --
Ann Arbor, which, in turn is a wholly-owned subsidiary of Comerica Incorporated,
a publicly-held bank holding company.
Under the terms of the Investment Advisory Agreement between the Company
and the Advisor with respect to the Funds (the "Advisory Agreement"), the
Advisor furnishes continuing investment supervision to the Funds and is
responsible for the management of each Fund's portfolio. The
21
<PAGE>
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.
The Advisory Agreement will continue in effect for a period of two years
from its effective date. If not sooner terminated 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).
For the advisory services provided and expenses assumed by it, the Advisor
has agreed to a fee from each Fund, computer daily and payable monthly at an
annual rate of .05% of average daily net assets of the Fund.
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 to separate accounts of the Insurers. The Distributor's
principal offices are located at South Central Avenue, Suite 300, St. Louis,
Missouri 63141.
Shareholder Servicing Arrangements. Under Rule 12b-1 of the 1940 Act, the
Funds have adopted a Shareholder Servicing Plan (the "Plan") under which the
Distributor, Insurers, and other dealers that offer the Contracts may be paid by
the Funds in connection with providing shareholder services to the
Contractowners. Under the Plan, each Fund may incur such shareholder servicing
expenses in amounts up to an annual rate of .25% of the average daily net assets
of each Fund.
The services provided by the Service Organizations under the Plan may
include execution and processing of orders from Insurers; processing purchase,
exchange and redemption requests furnished to the Insurers by the
Contractowners; placing orders with the Transfer Agent; processing dividend and
distribution payments from the Funds; providing statements of additional
information and information periodically showing positions in Fund shares; and
providing such other personal and account maintenance services as may reasonably
be requested by the Funds.
Under the terms of the Plan, the Plan continues from year to year,
provided such continuance is approved annually by vote of the Board of
Directors, including a majority of the Board of Directors who are not interested
persons of the Company and who have no direct or indirect financial interest in
the operation of the Plan (the "Non-Interested Plan Directors"). The Plan may
not be amended to increase the amount to be spent for the services without
shareholder approval, and all amendments of the Plan also must be approved by
the Directors in the manner described above. The Plan may be terminated at any
time, without penalty, by vote of a majority of the Non-Interested Plan
Directors or by a vote of a majority of the outstanding voting securities of the
Fund (as defined in the 1940 Act) on not more than 30 days' written notice to
any other party to the Plan. Pursuant to the Plan, the Distributor will provide
the Board of Directors periodic reports of amounts expended under the Plan and
the purpose for which such expenditures were made.
22
<PAGE>
Administration Agreement. State Street Bank and Trust Company ("State
Street") located at 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; 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.
The Administration Agreement provides that the Administrator performing
services thereunder shall not be liable under the Agreement except for its
willful misfeasance, bad faith or negligence 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, is the custodian of each Fund pursuant to a custodian
agreement ("Custody Agreement") with the Company. The Custodian receives no
compensation for its services. State Street serves as the sub-custodian to the
Funds pursuant to a sub-custodian agreement (the "Sub-Custodian Contract") among
the Company, Comerica Bank and State Street. State Street is also the
Sub-Custodian with respect to the custody of foreign securities held by certain
of the Funds. State Street has in turn entered into additional agreements with
financial institutions and depositaries located in foreign countries with
respect to the custody of such securities. Under the Sub-Custodian Contract, 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.
First Data Investor Services Group Inc. ("Investor Services Group") 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, the Transfer Agent
and the Custodian 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.
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CONTROL PERSON AND PRINCIPAL HOLDER OF SECURITIES
The separate accounts of the Insurers are the sole shareholders of the
Funds and therefore are considered to be control persons of the Funds.
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. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed.
Over-the-counter issues, including corporate debt and government
securities are normally traded on a "net" basis (i.e., 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 foreign and domestic securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
The Funds may participate, if and when practicable. In bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Advisor believes
such practice to be in each Fund's interests.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Fund during the year. Each Fund may engage in short-term
trading to achieve its investment objective. Portfolio turnover may vary greatly
from year to year as well as within a particular year.
In the Advisory Agreement, the Advisor agrees to select broker-dealers in
accordance with guidelines established by the Company's Board of Directors from
time to time and in accordance with applicable law. In assessing the terms
available for any transaction, the Advisor shall consider all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker-dealer,
and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In addition, the Advisory Agreement
authorizes the Advisor, subject to the prior approval of the Company's Board of
Directors, to cause each Fund to pay a broker-dealer which furnishes brokerage
and research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that the
Advisor determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such
broker-dealer, viewed in terms of either the particular transaction or the
overall responsibilities of the Advisor to the Fund. Such brokerage and research
services might consist of reports and statistics on specific companies or
24
<PAGE>
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 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
foreign 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 equitable 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 its 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; shareholder servicing
fees; fees and expenses of officers and directors; taxes; interest; legal and
auditing fees; 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 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.
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<PAGE>
PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions are discussed in the Funds' Prospectus and such
information is incorporated herein by reference.
Purchases. Each Fund's shares are continuously offered to the Insurers'
separate accounts at the net asset value per share next determined after a
proper purchase request has been received by the Insurer. The Funds and the
Distributor reserve the right to reject any purchase order for shares of the
Funds.
Redemptions. Payments for redeemed shares will ordinarily be made within
seven (7) business days after the Funds receive a redemption order from the
relevant Insurer. The redemption price will be the net asset value per share
next determined after the Insurer receives the Contractowner's request in proper
form. The Company, reserves the right to suspend or postpone redemptions during
any period when: (i) trading on the New York Stock Exchange is restricted, as
determined by the SEC, or the New York Stock Exchange is closed for other than
customary weekend and holiday closings; (ii) the SEC has by order permitted such
suspension or postponement for the protection of shareholders; or (iii) an
emergency, as determined by the SEC, exists, making disposal of portfolio
securities or valuation of net assets of the Funds not reasonably practicable.
Redemption proceeds are normally paid in cash, however, each Fund may pay
the redemption price in whole or part by a distribution in kind of securities
from portfolio of the 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. Each Fund is
obligated to redeem Shares solely in cash up to the lesser of $250,000 or 1% of
its net assets during any 90 day period for any one Shareholder.
The prospectus(es) for the Insurers' variable annuities describe the
allocation, transfer and withdrawal provisions of such annuities.
NET ASSET VALUE
In determining the approximate market value of portfolio investments, the
Company may employ 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 existing or prospective owners
of the Insurers' Contracts. These performance figures are calculated in the
following manner:
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Yield
The Bond Index Fund's 30 day (or one month) standard yield described in
the Prospectus is calculated for the Fund in accordance with the method
described by the SEC for mutual funds:
YIELD= 2[((a - b)+1)^6 - 1]
-----
cd
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of reimbursements and
waivers);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
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, thematurity 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.
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 the 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;
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ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10 year
(or other) periods at the end of the applicable period
(or a fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation expressed in years.
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:
Aggregate Total Return = (ERV) - 1
---
P
The calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment crates 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
period 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 Funds' 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 the Fund and its shareholders that are not described in the Fund's
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Fund or its shareholders, and the discussion here and in the
Prospectuses 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 will elect to be taxed separately as a regulated investment
company under Subchapter M of the Internal Revenue Code of 1986, as amended (the
"Code"). As a regulated investment company,
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<PAGE>
a Fund generally is exempt from Federal Income tax on its net investment income
and realized capital gains which it distributes to the separate accounts,
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 gains 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 income derived with respect to its business of investing in such stock,
securities, or currencies (the "Income Requirement"). Interest (including
original issue discount and "accrued market discount") received by a Fund at
maturity or on disposition of a security held for less than three months will
not be treated (in contrast to other income which is attributable to realized
market appreciation) as gross income from the sale or other disposition of
securities held for less than three months for this purpose.
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which 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.
Repurchase agreements collateralized by U.S. treasury securities are not treated
for purposes of the diversification requirement described in this paragraph as
U.S. Government securities.
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
above, 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 from investments
in debt securities and any net realized short-term capital gains distributed by
the Fund will be taxable to the separate accounts as ordinary income and will
not be eligible for the dividends received deduction for corporations.
Each Fund intends to distribute to shareholders any excess of net
long-term capital gain over net short-term capital loss ("net capital gain") for
each taxable year. Such gain is distributed as a capital gain dividend and is
taxable to shareholders as gain from the sole exchange of a capital asset held
for more
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<PAGE>
than one year, regardless of the length of time the shareholder has held the
Fund shares, and regardless of whether the distribution is paid in cash or
reinvested in shares.
If for any taxable year a Fund does not qualify as a registered investment
company, all of its taxable income will be subject to tax at regular corporate
rates without any deduction for distributions to shareholders.
The Code imposes a non-deductible excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
To comply with regulations under Section 817(h) of the Code, each Fund
will be required to diversify its investments so that on the last day of each
calendar quarter no more than 55% of the value of its assets is represented by
any one investment, no more than 70% is represented by any two investments, no
more than 80% is represented by any three investments, and no more than 90% is
represented by any four investments. Generally, all securities of the same
issuer are treated as a single investment. For the purposes of Section 817(h) of
the Code, obligations of the U.S. Treasury and each U.S. Government
instrumentality are treated as securities of separate issuers. The Treasury
Department has indicated that it may issue future pronouncements addressing the
circumstances in which a variable annuity contract owner's control of the
investments of a separate account may cause the variable contract owner, rather
than the separate account's sponsoring insurance company, to be treated as the
owner of the assets held by the separate account. If the variable annuity
contract owner is considered the owner of the securities underlying the separate
account, income and gains produced by. those securities would be included
currently in the variable annuity contract owner's gross income. It is not known
what standards will be set forth in such pronouncements or when, if at all,
these pronouncements may be issued. In the event that rules or regulations are
adopted, there can be no assurance that a Fund will be able to operate as
described currently in the Prospectus or that the Fund will not have to change
its investment policies or goals.
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 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,
30
<PAGE>
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 and Institutional Index Equity
Fund.
Shares of 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 nonassessable 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 relating 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).
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MISCELLANEOUS
Counsel. The law firm of Dechert Price & Rhoads, 1775 Eye Street, N.W.,
Washington, DC 20006, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Company.
Independent Auditors. Ernst & Young LLP, 200 Clarendon Street, Boston,
Massachusetts, 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 voting 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 bank 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 compared 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 present 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.
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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 amplitude or there may be other elements present
which make the long-term risks appear some what 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 maybe
presents 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 may be lacking or may be characteristically unreliable over
any great length of time. Such bonds lack outstanding investment characteristics
and in fact have speculative characteristics as well.
"Ba": Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B": Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa": Bonds that are rated "Caa" are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated ranks
in the higher end of its generic rating category, the modifier 2 indicates a
mid-range ranking and the modifier 3 indicates that the bond ranks in the lower
end of its generic rating category.
A-1
<PAGE>
Excerpts from Standard & Poor's Corporation ("S&P") description of its bond
ratings:
"AAA": Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
"AA": Debt rated "AA" has a 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 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
exposure 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-l" 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-l+."
Commercial paper rated "A-2" by S&P indicates that capacity for timely payment
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
A-2
<PAGE>
APPENDIX A
- Rated Investments -
Commercial Paper
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality, pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
Moody's: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted "A-1+".
A-3
<PAGE>
APPENDIX B
As stated in the Prospectus, the Funds may enter into certain futures
transactions and options for hedging purposes. Such transactions are described
in this Appendix.
1. Interest Rate Futures Contracts
Use of Interest Rate Futures Contracts. Bond prices are established in
both the cash market and the futures market. In the cash market, bonds are
purchased and sold with payment for the full purchase price of the bond being
made in cash, generally, within five business days after the trade. In the
futures market, only a contract is made to purchase or sell a bond in the future
for a specified price on a certain date. Historically, the prices for bonds
established in the futures markets have tended to move generally in the
aggregate in concert with the cash market prices and have maintained fairly
predictable relationships. Accordingly, the Funds may use interest rate futures
contracts as a defense, or hedge against anticipated interest rate changes and
not for speculation. As described below, this would include the use of futures
contract sales to protect against expected increases in interest rates and
futures contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities arid investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until or at near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without making or taking of delivery of securities.
Closing out a futures contract sale is effected by the Fund's entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of the sale
exceeds the price of the offsetting purchase, the Fund is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price,. the Fund realizes a loss.
B-1
<PAGE>
Interest rate futures contracts are traded in an auction environment on
the floors of several exchanges principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes,
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month United States Treasury Bills; and ninety-day
commercial paper. The Funds may trade in any interest rate futures contracts for
which there exists a public market, including, without limitation, the foregoing
instruments.
Example of Futures Contract Sale. The Funds would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by a particular
Fund tends to move in concern with the futures market prices of long-term United
States Treasury bonds ("Treasury Bonds"). The Advisor wishes to fix the current
market value of the portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the Advisor believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 98 to 93.
In that case, the five point loss in the market value of the portfolio
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation cash and futures prices below.
The Advisor could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example
might incur a loss of 2 points (which might be reduced by an offsetting
transaction prior to the settlement date). In each transaction, transaction
expenses would also be incurred.
Example of Futures Contract Purchase. The Funds would engage in an
interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
B-2
<PAGE>
For example, assume that the market price of a long-term bond that the
Fund may purchase, currently yielding 10%, tends to move in concert with futures
market prices of Treasury bonds. The Advisor wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the Advisor believes that because of an
anticipated fall in interest rates, the prices will have risen to 105 (and the
yield will have dropped to about 9 1/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point increase in the price that the Fund pays for the long-term bond would be
offset by the 5 point gain realized by closing out the futures contract
purchase.
The Advisor could be wrong in its forecast of interest rates, long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for
long-term bonds. The market price of available long-term bonds would have
decreased. The benefit of this price decrease, and thus yield increase, will be
reduced by the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rated, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio. Including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase. In each transaction. expenses would also be incurred.
II. Index Futures Contracts
General. A bond index assigns relative values of the bonds included in the
index and the index fluctuates with changes in the market values of the bonds
included. The Chicago Board of Trade has designed a futures contract based on
the Bond Buyer Municipal Bond Index. This Index is composed of 40 revenue and
general obligation bonds and its composition is updated regularly as new bonds
meeting the criteria of the Index are issued and existing bonds mature. The
Index is intended to provide an accurate indicator of trends and changes in the
municipal bond market. Each bond in the Index is independently priced by six
dealer-to-dealer municipal bond brokers daily. The 40 prices then are averaged
and multiplied by a coefficient. The coefficient is used to maintain the
continuity of the Index when its composition changes.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market 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.
B-3
<PAGE>
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
--------- -------
Anticipate buying $62,500 in Equity Securities -Day Hedge is Placed-
Buying 1 Index Futures at 125
Value of Futures = $62,500/
Contract
Buying Equity Securities with Actual
Cost = $$62,500 -Day Hedge is Lifted-
Increase in Purchase Price = $2,500 Sell 1 Index Futures at 130
Value of Futures = $62,500/
Contract
Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
B-4
<PAGE>
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
--------- -------
Anticipate Selling $1,000,000 in
Equity Securities -Day Hedge is Placed-
Sell 16 Index Futures at 125
Value of Futures = $1,000,000
Equity Securities - Own Stock -Day Hedge is Lifted-
with Value = $960,000 Buy 16 Index Futures at 120
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
III. Margin Payments
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the 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.
B-5
<PAGE>
IV. Risks of Transactions in Futures Contracts
There are several risks in connection with the use of futures by the Funds
as hedging devices. One risk arises because of the imperfect correlation between
movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in 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
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.
B-6
<PAGE>
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 offsetting 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 spectators 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, an 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
contact 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 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, 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 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.
B-7
<PAGE>
V. Options on Futures Contracts
The Funds may purchase and write options on the futures contracts
described above. A futures option gives the holder, in return for the premium
paid, the right to buy (call) from or sell (put) to the writer of the option a
futures contract at a specified price at any time during the period of the
option. Upon exercise, the writer of, the option is obligated to pay the
difference between the cash value of the futures contract and the exercise
price. Like the buyer or seller of a futures contract, the holder, or writer, of
an option has the right to terminate its position prior to the scheduled
expiration of the option by selling, or purchasing an option of the same series,
at which time the person entering into the closing transaction will realize a
gain or loss. A Fund will be required to deposit initial margin and variation
margin with respect to put and call options on futures contracts written by it
pursuant to brokers' requirements similar to those described above. Net option
premiums received will be included as initial margin deposits.
Investments in futures options involve some of the same considerations
that are involved in connection with investments in future contracts (for
example, the existence of a liquid secondary market). In addition, the purchase
or sale of an option also entails 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.
VII. Other Matters
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-8
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Unaudited Financial Highlights for Munder Institutional S&P 500
Index Equity Fund for the period ended March 31, 1998.
Financial Highlights for Munder Institutional S&P 500 Index Equity
Fund for the period ended December 31, 1997.
Financial Highlights for Munder Institutional S&P Small-Cap Index
Equity Fund for the period ended December 31, 1997.
Financial Highlights for Liquidity Plus Money Market Fund for the
period ended December 31, 1997.
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended December
31, 1997 and the Report of the Independent Auditors dated February
9,1998 are incorporated by reference to the Definitive 30b-2 filed
(EDGAR Form N-30D) on March 11, 1998 as Accession No.
0000889697-98-000105; and
The following unaudited Financial Statements for Munder
Institutional S&P 500 Index Equity Fund for the period ended March
31, 1998 are included in Part B:
Portfolio of Investments
Statements of Assets and Liabilities
Statement of Operations
Statement of Changes in Net Assets
Financial Highlights, For a Share Outstanding Throughout the
Period
Notes to Financial Statements
(b) Exhibits:
(1)(a) Articles of Incorporation dated May 22, 1984 are incorporated herein
by reference to Post-Effective Amendment No. 20 to Registrant's
Registration Statement on Form N-1A filed with the Commission on
November 15, 1996.
<PAGE>
(b) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(c) Articles of Amendment to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(d) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(e) Certificate of Correction is incorporated herein by reference to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement on Form N-1A filed with the Commission on November 15,
1996.
(f) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(g) Certificate of Correction is incorporated herein by reference to
Post-Effective Amendment No. 20 to Registrant's Registration
Statement on Form N-1A filed with the Commission on November 15,
1996.
(h) Articles of Amendment to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(i) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 20
to Registrant's Registration Statement on Form N-1A filed with the
Commission on November 15, 1996.
(j) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 22
to Registrant's Registration Statement on Form N-1A filed with the
Commission on April 18, 1997.
(k) Articles Supplementary to Registrant's Articles of Incorporation are
incorporated herein by reference to Post-Effective Amendment No. 22
to Registrant's Registration Statement on Form N-1A filed with the
Commission on April 18, 1997 relating to Munder S&P 500 Index Equity
Fund, Munder S&P MidCap Index Equity Fund, Munder S&P SmallCap Index
Equity Fund, Munder Foreign Equity Fund and Munder Aggregate Bond
Index Fund.
(l) Certificate of Correction relating to the Liquidity Plus Money
Market Fund is incorporated herein by reference to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A
filed with the Commission on April 18, 1997.
2
<PAGE>
(m) Articles Supplementary to Registrant's Articles of Incorporation
relating to 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 is incorporated by
reference to Post-Effective Amendment No. 24 to Registrant's
Registration Statement on Form N-1A filed with the Commission on
July 23, 1997.
(2)(a) By-Laws as amended, restated and adopted by Registrant's Board of
Directors on March 2, 1990 are incorporated herein by reference to
Exhibit 2(a) of Post-Effective Amendment No. 9 to Registrant's
Registration Statement on Form N-1A, filed on November 29, 1990.
(3) Not Applicable.
(4) Not Applicable.
(5)(a) Form of Investment Advisory Agreement between Registrant and Munder
Capital Management with respect to the Liquidity Plus Money Market
Fund is incorporated herein by reference to Post-Effective Amendment
No. 20 to Registrant's Registration Statement on Form N-1A filed
with the Commission on November 15, 1996.
(b) Form of Investment Advisory Agreement between Registrant and Munder
Capital Management with respect to Munder S&P 500 Index Equity Fund,
Munder S&P MidCap Index Equity Fund, Munder S&P SmallCap Index
Equity Fund, Munder Foreign Equity Fund and Munder Aggregate Bond
Index Fund is incorporated herein by reference to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A
filed with the Commission on April 18, 1997.
(c) Form of Investment Advisory Agreement between Registrant and Munder
Capital Management with respect to 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 is incorporated by reference to Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A
filed with the Commission on July 23, 1997.
(6)(a) Form of Distribution Agreement between Registrant and Funds
Distributor Inc., with respect to the Liquidity Plus Money Market
Fund is incorporated herein by reference to Post-Effective Amendment
No. 20 to Registrant's Registration Statement on Form N-1A filed
with the Commission on November 15, 1996.
(b) Form of Distribution Agreement between Registrant and Huntleigh
Funds Distributor, Inc. Securities Inc., with respect to Munder
S&P 500 Index Equity Fund, Munder S&P MidCap Index Equity Fund,
Munder S&P SmallCap Index Equity Fund, Munder Foreign Equity Fund
and Munder Aggregate Bond Index Fund is filed herein.
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(c) Form of Distribution Agreement between Registrant and Funds
Distributor, Inc. with respect to 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 is incorporated by reference to Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A
filed with the Commission on July 23, 1997.
(7) Not Applicable.
(8)(a) Form of Custody Agreement between Registrant and Comerica Bank with
respect to Liquidity Plus Money Market Fund, Munder S&P 500 Index
Equity Fund, Munder S&P MidCap Index Equity Fund, Munder S&P
SmallCap Index Equity Fund, Munder Foreign Equity Fund and Munder
Aggregate Bond Index Fund is incorporated herein by reference to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A filed with the Commission on April 18, 1997.
(b) Form of Amendment to Custody Agreement between Registrant and
Comerica Bank is incorporated by reference to Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A
filed with the Commission on July 23, 1997.
(c) Form of Notice to Custody Agreement between Registrant and Comerica
Bank with respect to the addition of 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 is incorporated by reference to Post-Effective
Amendment No. 24 to Registrant's Registration Statement on Form N-1A
filed with the Commission on July 23, 1997.
(d) Form of Sub-Custodian Agreement among Registrant, Comerica Bank and
State Street Bank and Trust Company with respect to 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 is incorporated by reference
to Post-Effective Amendment No. 26 to Registration Statement on Form
N-1A filed with the Commission on December 30, 1997.
(9)(a) Form of Notice to Sub-Administration Agreement between Registrant
and FDI Distribution Services, Inc. with respect to the addition of
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 is incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A filed with the Commission on July 23, 1997.
4
<PAGE>
(b) Form of Administration Agreement between Registrant and State Street
Bank and Trust Company with respect to 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 is incorporated by reference to Post-Effective
Amendment No. 26 to Registration Statement on Form N-1A filed with
the Commission on December 30, 1997.
(c) Form of Transfer Agency and Registrar Agreement between Registrant
and First Data Investor Services Group, Inc. with respect to
Liquidity Plus Money Market Fund, Munder S&P 500 Index Equity Fund,
Munder S&P MidCap Index Equity Fund, Munder S&P SmallCap Index
Equity Fund, Munder Foreign Equity Fund and Munder Aggregate Bond
Index Fund is incorporated herein by reference to Post-Effective
Amendment No. 22 to Registrant's Registration Statement on Form N-1A
filed with the Commission on April 18, 1997.
(d) Form of Amendment to Transfer Agency and Registrar Agreement between
Registrant and First Data Investor Services Group, Inc. is
incorporated by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A filed with the
Commission on July 23, 1997.
(e) Form of Notice to Transfer Agency and Registrar Agreement with
respect to the addition of 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
is incorporated by reference to Post-Effective Amendment No. 24 to
Registrant's Registration Statement on Form N-1A filed with the
Commission on July 23, 1997.
(f) Form of Participation Agreement between Registrant, Kemper
Investors Life Insurance Company and Huntleigh Fund Distributors,
Inc., with respect to Munder S&P 500 Index Equity Fund, Munder
S&P MidCap Index Equity Fund, Munder S&P SmallCap Index Equity Fund,
Munder Foreign Equity Fund and Munder Aggregate Bond Index Fund is
filed herein.
(g) Form of Shareholder Servicing Plan with respect to Munder S&P 500
Index Equity Fund, Munder S&P MidCap Index Equity Fund, Munder S&P
SmallCap Index Equity Fund, Munder Foreign Equity Fund and Munder
Aggregate Bond Index Fund is incorporated herein by reference to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A filed with the Commission on April 18, 1997.
(10)(a) Opinion and consent of counsel for Liquidity Plus Money Market Fund
is incorporated herein by reference to Post-Effective Amendment No.
20 to Registrant's Registration Statement on Form N-1A filed with
the Commission on November 15, 1996.
5
<PAGE>
(b) Opinion and consent of counsel with respect to Munder S&P Index
Equity Fund, Munder S&P MidCap Index Equity Fund, Munder S&P
SmallCap Index Equity Fund, Munder Foreign Equity Fund and Munder
Aggregate Bond Index Fund is incorporated herein by reference to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-1A filed with the Commission on April 18, 1997.
(c) Opinion and consent of counsel with respect to 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 is incorporated by reference to
Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A filed with the Commission on July 23, 1997.
(11)(a) Powers of Attorney are incorporated herein by reference to
Post-Effective Amendment No. 27 to Registrant's Registration
Statement on Form N-1A filed with the Commission on February 27,
1998.
(b) Certified Resolution of Board authorizing signature on behalf of
Registrant pursuant to power of attorney is incorporated herein by
reference to Post-Effective Amendment No. 27 to Registrant's
Registration Statement on Form N-1A filed with the Commission on
February 27, 1998.
(c) Consent of Ernst & Young LLP is filed herein.
(12) Not Applicable.
(13) Not Applicable.
(14) Not Applicable.
(15)(a) Form of Service and Distribution Plan of the Liquidity Plus Money
Market Fund is incorporated herein by reference to Post-Effective
Amendment No. 20 to Registrant's Registration Statement on Form N-1A
filed with the Commission on November 15, 1996.
(b) Form of Service Plan with respect to Munder S&P 500 Index Equity
Fund, Munder S&P MidCap Index Equity Fund, Munder S&P SmallCap Index
Equity Fund, Munder Foreign Equity Fund and Munder Aggregate Bond
Index Fund is filed herein.
(16)(a) Schedules for computation of annualized and effective yields of the
Liquidity Plus Money Market Fund is incorporated herein by reference
to Post-Effective Amendment No. 20 to Registrant's Registration
Statement on Form N-1A filed with the Commission on November 15,
1996.
6
<PAGE>
(b) Schedules for computation of annualized and effective yields with
respect to Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index
Equity Fund, Munder S&P SmallCap Index Equity Fund, Munder Foreign
Equity Fund and Munder Aggregate Bond Index Fund is incorporated
herein by reference to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-1A filed with the
Commission on February 3, 1997.
(c) Schedules for computation of total return and yield with respect to
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 is incorporated by reference
to Post-Effective Amendment No. 24 to Registrant's Registration
Statement on Form N-1A filed with the Commission on July 23, 1997.
(17) Financial Data Schedules are filed herein.
(18) Not Applicable.
Item 25. Persons Controlled by or under Common Control with Registrant.
Not Applicable.
Item 26. Number of Holders of Securities
As of March 27, 1998, the number of shareholders of record for the
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 was 2,
2, 2, 1 and 1, respectively.
As of March 27, 1998, the number of shareholders of record for
Liquidity Plus Money Market Fund was 12,550.
As of March 27, 1998, there were no shareholders of record for
Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index Equity
Fund, Munder S&P SmallCap Index Equity Fund, Munder Foreign Equity
Fund and Munder Aggregate Bond Index Fund.
Item 27. Indemnification
Article VII, Section 3 of the Registrant's Articles of Incorporation
("Section 3") provides that the Registrant, including its successors
and assigns, shall indemnify its directors and officers and make
advance payment of related expenses to the fullest extent permitted,
and in accordance with the procedures required, by the General Laws
of the State of Maryland and the Investment Company Act of 1940.
Such indemnification shall be in addition to any other right or
claim to which any director, officer, employee or agent
7
<PAGE>
may otherwise be entitled. In addition, Article VI, Section 2 of the
Registrant's By-laws provides that any person who was or is a party
or is threatened to be made a party in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such
person is a current or former director or officer of the
Corporation, is or was serving while a director or officer of the
Corporation at the request of the Corporation as a director,
officer, partner, trustee, employee, agent or fiduciary of another
corporation, partnership, joint venture, trust, enterprise or
employee benefit plan, shall be indemnified by the Corporation
against judgments, penalties, fines, excise taxes, settlements and
reasonable expenses (including attorney's fees) actually incurred by
such person in connection with such action, suit or proceeding to
the full extent permissible under General Laws of the State of
Maryland and the Investment Company Act of 1940, as such statutes
are now or hereafter in force, except that such indemnity shall not
protect any such person against any liability to the Corporation or
any stockholder thereof to which such person would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the
conduct of his office.
The indemnification provided by this Section 2 shall not be deemed
exclusive of any other right, in respect of indemnification or
otherwise, to which those seeking such indemnification may be
entitled under any issuance or other agreement, vote of shareholders
or disinterested directors or otherwise, both as to action by a
director or officer of the Corporation in his official capacity and
as to action by such person in another capacity while holding such
office or position, and shall continue as to a person who has ceased
to be a director or officer and shall inure to the benefit of the
heirs, executors and administrators of such a person.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors,
officers and controlling persons of the Registrant by the Registrant
pursuant to the Fund's Articles of Incorporation, its By-Laws or
otherwise, the Registrant is aware that in the opinion of the
Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Act and, therefore, is
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of
expenses incurred or paid by directors, officers or controlling
persons of the Registrant in connection with the successful defense
of any act, suit or proceeding) is asserted by such directors,
officers or controlling persons in connection with shares being
registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the
Act and will be governed by the final adjudication of such issues.
8
<PAGE>
Item 28. Business and Other Connections of Investment Adviser
Munder Capital Management
Position
Name with Adviser
---- ------------
Old MCM, Inc. Partner
Munder Group LLC Partner
WAM Holdings, Inc. Partner
Lee P. Munder President and Chairman
Leonard J. Barr, II Senior Vice President and
Director of Research
Terry H. Gardner Vice President and Chief
Financial Officer
Clark Durant Vice President and Co-Director
of The Private Management Group
Elyse G. Essick Vice President and Director of
Client Services
Sharon E. Fayolle Vice President and Director of
Money Market Trading
Otto G. Hinzmann Vice President and Director of
Equity Portfolio Management
Anne K. Kennedy Vice President and Director of
Corporate Bond Trading
Richard R. Mullaney Vice President and Director of
The Private Management Group
Ann F. Putallaz Vice President and Director
of Fiduciary Services
Peter G. Root Vice President and Director of
Government Securities Trading
9
<PAGE>
Lisa A. Rosen General Counsel and Director
of Mutual Fund Operations
James C. Robinson Executive Vice President and Chief
Investment Officer/Fixed Income
Gerald L. Seizert Chief Executive Officer, Executive
Vice President and Chief Investment
Officer/Equity
Paul D. Tobias Chief Executive Officer, Executive
Vice President and Chief Operating
Officer
For further information relating to the Investment Adviser's officers,
reference is made to Form ADV filed under the Investment Advisers Act of
1940 by Munder Capital Management. See File No. 801-32415.
Item 29. Principal Underwriters.
(a) With respect to 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: Funds Distributor, Inc.
("FDI"), located at 60 State Street, Suite 1300, Boston,
Massachusetts 02109. FDI is an indirectly wholly-owned subsidiary of
Boston Institutional Group, Inc. a holding company, all of whose
outstanding shares are owned by key employees. FDI is a broker
dealer registered under the Securities Exchange Act of 1934, as
amended. FDI acts as principal underwriter of the following
investment companies:
American Century California Tax-Free Founders Funds, Inc.
and Municipal Funds
American Century Capital Portfolios,
Inc. Harris Insight Funds Trust
American Century Government Income
Trust HT Insight Funds, Inc.
d/b/a Harris Insight Funds
American Century International Bond
Funds JP Morgan Institutional
Funds
American Century Investment Trust JP Morgan Funds
American Century Municipal Trust JPM Series Trust
American Century Mutual Funds, Inc. JPM Series Trust II
American Century Premium Reserves, Inc. LaSalle Partners Funds,
Inc.
American Century Quantitative Equity
Funds Monetta Fund, Inc.
American Century Strategic Asset
Allocations, Inc. Monetta Trust
American Century Target Maturities
Trust The Montgomery Funds
The Montgomery Funds II
American Century Variable Portfolios,
Inc. The Munder Framlington
Funds Trust
The Munder Funds Trust
The Munder Funds, Inc.
American Century World Mutual Funds,
Inc. Orbitex Group of Funds
BJB Investment Funds St. Clair Funds, Inc.
The Brinson Funds The Skyline Funds
Dresdner RCM Capital Funds, Inc. Waterhouse Investor Family
of Funds, Inc.
Dresdner RCM Equity Funds, Inc. WEBS Index Fund, Inc.
10
<PAGE>
With respect to the Munder S&P 500 Index Equity Fund, Munder S&P
MidCap Index Equity Fund, Munder S&P SmallCap Index Equity Fund,
Munder Foreign Equity Fund and Munder Aggregate Bond Index Fund:
Huntleigh Fund Distributors, Inc. ("Huntleigh"), located at 222
South Central Avenue, Suite 300, St. Louis, Missouri 63141.
Huntleigh does not act as principal underwriter to any other
investment company other than the Registrant.
(b) The following is a list of the executive officers, directors and
partners of Funds Distributor, Inc.
Director, President and Chief Executive
Officer -Marie E. Connolly
Executive Vice President -Richard W. Ingram
Executive Vice President -Donald R. Roberson
Executive Vice President -William S. Nichols
Senior Vice President -Michael S. Petrucelli
Director, Senior Vice President,
Treasurer and Chief Financial Officer -Joseph F. Tower, III
Senior Vice President -Paula R. David
Senior Vice President -Bernard A. Whalen
Senior Vice President -Allen B. Closser
Director -William J. Nutt
The information required by this Item 29(b) with respect to each
director, officer or partner of Huntleigh is incorporated by
reference to Schedule A of Form BD filed by Huntleigh with the
Securities and Exchange Commission pursuant to the Securities
Exchange Act of 1934 (SEC File No. 2-21442).
(c) Not Applicable.
Item 30. Location of Accounts and Records
The account books and other documents required to be maintained by
Registrant pursuant to Section 31(a) of the Investment Company Act
of 1940 and the Rules thereunder will be maintained at the offices
of:
(1) Munder Capital Management, 480 Pierce Street or 255 East Brown
Street, Birmingham, Michigan 48009 (records relating to its
function as investment advisor);
(2) First Data Investor Services Group, Inc., 53 State Street,
Exchange Place, Boston, Massachusetts 02109 or 4400 Computer
Drive, Westborough, Massachusetts 01581 (records relating to
its functions transfer agent);
(3) State Street Bank and Trust Company, 225 Franklin Street or
150 Newport Avenue, North Quincy, Massachusetts 02171 (records
relating to its function as administrator and subcustodian);
11
<PAGE>
(4) Huntleigh Fund Distributors, Inc., 222 South Central Avenue,
Suite 300, St. Louis, Missouri 63105 (records relating to its
function as distributor of the Munder S&P Index Equity Fund,
Munder S&P MidCap Index Equity Fund, Munder S&P SmallCap
Index Equity Fund, Munder Foreign Equity Fund and Munder
Aggregate Bond Index Fund);
(5) Funds Distributor, Inc., 60 State Street, Boston,
Massachusetts 02109 (records relating to its function as
distributor); and
(6) Comerica Bank, 1 Detroit Center, 500 Woodward Avenue, Detroit,
Michigan 48226 (records relating to its function as
custodian).
Item 31. Management Services
None.
Item 32. Undertakings
(a) Not Applicable.
(b) Not Applicable.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered a copy of the Registrant's most recent
annual report to shareholders, upon request without charge.
(d) Registrant hereby undertakes to call a meeting of its shareholders
for the purpose of voting upon the question of removal of a director
or directors of Registrant when requested in writing to do so by the
holders of at least 10% of Registrant's outstanding shares.
12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant certifies that this
Post-Effective Amendment No. 28 to the Registration Statement meets the
requirements for effectiveness pursuant to Rule 485(b) of the Securities Act of
1933, as amended, and the Registrant has duly caused this Post-Effective
Amendment No. 28 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Quincy and The Commonwealth of Massachusetts, on the
14th day of April, 1998.
ST. CLAIR FUNDS, INC.
By: *
----------------------------------
Lee P. Munder
* By: /s/ Cynthia Surprise
----------------------------------
Cynthia Surprise
as Attorney-in-Fact
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
Signatures Title Date
* Director and April 14, 1998
- - - - -------------------- President
Lee P. Munder
* Director April 14, 1998
- - - - --------------------
Charles W. Elliott
* Director April 14, 1998
- - - - --------------------
Joseph E. Champagne
* Director April 14, 1998
- - - - --------------------
Thomas B. Bender
* Director April 14, 1998
- - - - --------------------
Thomas D. Eckert
* Director April 14, 1998
- - - - --------------------
John Rakolta, Jr.
* Director April 14, 1998
- - - - --------------------
David J. Brophy
13
<PAGE>
* Vice President, April 14, 1998
- - - - --------------------
Terry H. Gardner Treasurer and
Chief Financial
Officer
*By: /s/ Cynthia Surprise
----------------------------------
Cynthia Surprise
as Attorney-in-Fact
14
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
- - - - ----------- -----------
6(b) Form of Distribution Agreement between Registrant and
Huntleigh Fund Distributors, Inc., with respect to Munder
S&P 500 Index Equity Fund, Munder S&P MidCap Index Equity
Fund, Munder S&P SmallCap Index Equity Fund, Munder
Foreign Equity Fund and Munder Aggregate Bond Index Fund.
9(f) Form of Participation Agreement between Registrant,
Kemper Investors Life Insurance Company and Huntleigh
Fund Distributors, Inc., with respect to Munder S&P 500
Index Equity Fund, Munder S&P MidCap Index Equity Fund,
Munder S&P SmallCap Index Equity Fund, Munder Foreign
Equity Fund and Munder Aggregate Bond Index Fund.
11(c) Consent of Ernst & Young.
15(b) Form of Service Plan with respect to with respect to
Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index
Equity Fund, Munder S&P SmallCap Index Equity Fund, Munder
Foreign Equity Fund and Munder Aggregate Bond Index Fund.
17 Financial Data Schedules for the Munder Institutional S&P 500
Index Equity Fund, Munder Institutional S&P Small Cap Index
Equity Fund, Liquidity Plus Money Market Fund.
15
<PAGE>
EXHIBIT 6(b)
DISTRIBUTION AGREEMENT
This Distribution Agreement is made as of this ____ day of ___________,
1997 by and between ST. CLAIR FUNDS, INC., a Maryland corporation (the "Fund"),
and HUNTLEIGH FUND DISTRIBUTORS, INC., a Missouri corporation (the
"Distributor").
WHEREAS, the Fund is an open-end management investment company and is so
registered under the Investment Company Act of 1940, as amended (the "1940
Act"); and
WHEREAS, the Fund desires to retain Huntleigh Fund Distributors, Inc. as
distributor for the Fund's shares of common stock in the Fund's five separate
portfolios, Munder S&P 500 Index Equity Fund, Munder S&P MidCap Index Equity
Fund, Munder S&P SmallCap Index Equity Fund, Munder Foreign Equity Fund and the
Munder Aggregate Bond Index Fund (individually, a "Portfolio" and collectively,
the "Portfolios"), to provide for the sale and distribution of shares of the
Portfolios (the "Shares"), and the Distributor is willing to render such
services;
NOW, THEREFORE, in consideration of the premises and mutual covenants set
forth herein and intending to be legally bound hereby, the parties hereto agree
as follows:
I. DELIVERY OF DOCUMENTS
The Fund has delivered to the Distributor copies of each of the following
documents and will deliver to it all future amendments and supplements thereto,
if any:
(a) Resolutions of the Fund's Board of Directors authorizing the execution
and delivery of this Agreement;
(b) The Fund's Articles of Incorporation as filed with the State of
Maryland Department of Assessments and Taxation on May 23, 1984;
(c) The Fund's By-Laws;
(d) The Fund's Notification of Registration on Form N-8A under the 1940
Act as filed with the Securities and Exchange Commission ("SEC");
(e) The Fund's Registration Statement on Form N-1A (the "Registration
Statement") under the Securities Act of 1933 (the "1933 Act") and the
1940 Act, as filed with the SEC; and
(f) The Fund's most recent Prospectus(es) and Statements of Additional
Information and all amendments and supplements thereto (collectively,
the "Prospectuses").
<PAGE>
II. DISTRIBUTION
1. APPOINTMENT OF DISTRIBUTOR. The Fund hereby appoints Huntleigh Fund
Distributors, Inc. as distributor of the Portfolios' Shares and the Distributor
hereby accepts such appointment and agrees to render the services and duties set
forth in Section 2. In the event that the Fund establishes one or more
additional portfolios or classes of shares other than the Portfolios and the
Shares with respect to which it decides to retain the Distributor to act as
distributor hereunder, the Fund shall notify the Distributor in writing. If the
Distributor is willing to render such services, it shall so notify the Fund in
writing whereupon such portfolio and such shares shall become a Portfolio and
Shares hereunder and shall be subject to the provisions of this Agreement,
except to the extent that said provision is modified with respect to such
portfolio or shares in writing by the Fund and the Distributor at the time.
2. SERVICES AND DUTIES.
(a) The Fund agrees to sell through the Distributor, as agent, from time
to time during the term of this Agreement, Shares (whether authorized but
unissued or treasury shares, in the Fund's sole discretion) upon the terms and
at the current offering price as described in the applicable Prospectus. The
Distributor will act only in its own behalf as principal in making agreements
with selected dealers or others for the sale and redemption of Shares, and shall
sell Shares only at the offering price thereof as set forth in the applicable
Prospectus. The Distributor shall devote appropriate efforts to effect sales of
Shares of each of the Portfolios, but shall not be obligated to sell any certain
number of Shares.
(b) In all matters relating to the sale and redemption of Shares, the
Distributor will act in conformity with the Fund's Articles of Incorporation,
By-Laws and applicable Prospectuses and with the instructions and directions of
the Board of Directors of the Fund and will conform to and comply with the
requirements of the 1933 Act, the 1940 Act, the regulations of the National
Association of Securities Dealers, Inc. and all other applicable Federal or
state laws and regulations.
(c) All Shares of the Portfolios offered for sale by the Distributor shall
be offered for sale at a price per share (the "offering price") equal to their
net asset value (determined in the manner set forth in the applicable
Prospectuses). The offering price, if not an exact multiple of one cent, shall
be adjusted to the nearest cent.
(d) In consideration of its services hereunder and pursuant to the
Shareholder Servicing Agreement dated ______________, 1997, the Fund shall pay
to the Distributor a fee of 0.10 percent of the average daily net assets of the
Funds.
3. SALES AND REDEMPTIONS.
(a) The Fund shall pay all costs and expenses in connection with the
registration of the Shares under the 1933 Act, and all expenses in connection
with maintaining facilities for the issue and transfer of the Shares and for
supplying information, prices and other data to be
2
<PAGE>
furnished by the Fund hereunder, and all expenses in connection with preparing,
printing and distributing the Prospectuses which are not covered by insurance
companies which have entered into participation agreements with the Fund.
(b) The Fund shall execute all documents, furnish all information and
otherwise take all actions which may be reasonably necessary in the discretion
of the Fund's officers in connection with the sale of the Shares in such states
as the Distributor may designate to the Fund and the Fund may approve, and the
Fund shall pay all filing fees which may be incurred in connection with such
sales. The Distributor shall pay all other expenses incurred by the Distributor
in connection with the sale of the Shares, except as otherwise specifically
provided in this Agreement.
(c) The Fund shall have the right to suspend the sale of Shares at any
time in response to conditions in the securities markets or otherwise, and to
suspend the redemption of Shares of any Portfolio at any time permitted by the
1940 Act or the rules of the SEC ("Rules").
(d) The Fund reserves the right to reject any order for Shares, but will
not do so arbitrarily or without reasonable cause.
III. LIMITATIONS OF LIABILITY
The Distributor shall not be liable for any error of judgment or mistake of
law or for any loss suffered by the Fund or any Portfolio in connection with the
matters to which this Agreement relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement.
IV. CONFIDENTIALITY
The Distributor will treat confidentially and as proprietary information of
the Fund all records and other information relative to the Fund, to the Fund's
prior or current shareholders and to those persons or entities who respond to
the Distributor's inquiries concerning investment in the Fund, and, except as
provided below, will not use such records and information for any purpose other
than the performance of its responsibilities and duties hereunder. Any other
use by the Distributor of the information and records referred to above may be
made only after prior notification to and approval in writing by the Fund. Such
approval shall not be unreasonably withheld and may not be withheld where: (i)
the Distributor may be exposed to civil or criminal contempt proceedings for
failure to divulge such information; (ii) the Distributor is requested to
divulge such information by duly constituted authorities; or (iii) the
Distributor is so requested by the Fund.
3
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V. INDEMNIFICATION
1. FUND REPRESENTATION. The Fund represents and warrants to the
Distributor that at all times the Registration Statement and Prospectuses will
in all material respects conform to the applicable requirements of the 1933 Act,
the 1940 Act, and the Rules thereunder and will not include any untrue statement
of a material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they are made, not misleading, except that no
representation or warranty in this subsection shall apply to statements or
omissions made in reliance upon and in conformity with written information
furnished to the Fund by or on behalf of and with respect to the Distributor
expressly for use in the Registration Statement or Prospectuses.
2. THE DISTRIBUTOR REPRESENTATION. The Distributor represents and
warrants to the Fund that it is duly organized as a Missouri corporation and is
and at all times will remain duly authorized and licensed to carry out its
services as contemplated herein.
3. FUND INDEMNIFICATION. The Fund, on behalf of each Portfolio, agrees
that each Portfolio will indemnify, defend and hold harmless the Distributor,
its several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, from and against any losses,
claims, damages or liabilities, joint or several, to which any of them may
become subject under the 1933 Act, the 1940 Act, other securities laws, or
otherwise, insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of, or are based upon, any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement, the Prospectuses, the sales literature or other
promotional material of the Fund or in any application or other document
executed by or on behalf of a Portfolio, or arise out of or based upon,
information furnished by or on behalf of a Portfolio, filed in any state in
order to qualify the Shares under the securities or blue sky laws thereof ("Blue
Sky Application"), or arise out of, or are based upon, the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or arise out of, or are
based upon any breach of or failure to perform any obligation of the Fund under
the Participation Agreement of even date and will reimburse the Distributor, its
several officers and directors, and any person who controls the Distributor
within the meaning of Section 15 of the 1933 Act, for any legal or other
expenses reasonably incurred by any of them in investigating, defending or
preparing to defend any such action, proceeding or claim; PROVIDED, HOWEVER,
that neither the Fund nor any Portfolio shall be liable in any case to the
extent that such loss, claim, damage or liability arises out of, or is based
upon, any untrue statement, alleged untrue statement, or omission or alleged
omission made in the Registration Statement, the Prospectuses, any Blue Sky
Application or any application or other document executed by or on behalf of the
Fund in reliance upon and in conformity with written information furnished to
the Fund by or on behalf of the Distributor specifically for inclusion therein.
A Portfolio shall not indemnify any person pursuant to this subsection 3
unless the court or other body before which the proceeding was brought has
rendered a final decision on the merits that such person was not liable by
reason of his willful misfeasance, bad faith or gross
4
<PAGE>
negligence in the performance of his duties, or his reckless disregard of his
obligations and duties, under this Agreement ("disabling conduct") or, in the
absence of such a decision, a reasonable determination (based upon a review of
the facts) that such person was not liable by reason of disabling conduct has
been made by the vote of a majority of a quorum of Directors of the Fund who are
neither "interested parties" of the Fund (as defined in the 1940 Act) nor
parties to the proceeding, or by an independent legal counsel in a written
opinion.
Each Portfolio shall advance attorneys' fees and other expenses incurred by
any person in defending any claim, demand, action or suit which is the subject
of a claim for indemnification pursuant to this subsection 3, so long as: (i)
such person shall undertake to repay all such advances unless it is ultimately
determined that he or she is entitled to indemnification hereunder; and (ii)
such person shall provide security for such undertaking, or the Portfolio shall
be insured against losses arising by reason of any lawful advances, or a
majority of a quorum of the disinterested, non-party Directors of the Fund (or
an independent legal counsel in a written opinion) shall determine based on a
review of readily available facts (as opposed to a full trial-type inquiry) that
there is reason to believe that such person ultimately will be found entitled to
indemnification hereunder.
The obligations of each Portfolio under this subsection 3 shall be the
several (and not joint or joint and several) obligation of each Portfolio.
4. THE DISTRIBUTOR'S INDEMNIFICATION. The Distributor will indemnify,
defend and hold harmless the Fund, each Portfolio, the Fund's several officers
and Directors and any person who controls the Fund or any Portfolio within the
meaning of Section 15 of the 1933 Act, from and against any losses, claims,
damages or liabilities, joint or several, to which any of them may become
subject under the 1933 Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions or proceedings in respect hereof) arise out of, or
are based upon, any breach of its representations, warranties and agreements
herein, or which arise out of, or are based upon, any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement, the Prospectuses, any Blue Sky Application or any application or
other documents executed by or on behalf of the Fund or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, which statement or
omission was made in reliance upon and in conformity with information furnished
in writing to the Fund or any of its several officers and Directors by or on
behalf of the Distributor specifically for inclusion therein, and will reimburse
the Fund, each Portfolio, the Fund's several officers and Directors, and any
person who controls the Fund or any Portfolio within the meaning of Section 15
of the 1933 Act, for any legal or other expenses reasonably incurred by any of
them in investigating, defending or preparing to defend any such action,
proceeding or claim.
5. GENERAL INDEMNITY PROVISION. No indemnifying party shall be liable
under its indemnity agreement contained in subsection 3 or 4 hereof with respect
to any claim made against such indemnifying party unless the indemnified party
shall have notified the indemnifying party in writing within a reasonable time
after the summons or other first legal process giving information of the nature
of the claim shall have been served upon the
5
<PAGE>
indemnified party (or after the indemnified party shall have received notice of
such service on any designated agent), but failure to notify the indemnifying
party of any such claim shall not relieve it from any liability which it may
otherwise have to the indemnified party. The indemnifying party will be
entitled to participate at its own expense in the defense or, if it so elects,
to assume the defense of any suit brought to enforce any such liability, and if
the indemnifying party elects to assume the defense, such defense shall be
conducted by counsel chosen by it and reasonably satisfactory to the indemnified
party. In the event the indemnifying party elects to assume the defense of any
such suit and retain such counsel, the indemnified party shall bear the fees and
expenses of any additional counsel retained by the indemnified party.
VI. DURATION AND TERMINATION
This Agreement shall become effective as of the date first above written,
and, unless sooner terminated as provided herein, shall continue until
_____________, 1998. Thereafter, if not terminated, this Agreement shall
continue automatically for successive terms of one year, provided that such
continuance is specifically approved at least annually by a vote of the majority
of the Board of Directors of the Fund, including a majority of the Directors who
are not "interested persons" of the Fund and have no direct or indirect
financial interest in the operation of the Plan, this Agreement, or in any
agreement relating to the Plan (the "Plan Directors"), by vote cast in person at
a meeting called for the purpose of voting on such approval; PROVIDED, HOWEVER,
that this Agreement may be terminated with respect to any Portfolio by the Fund
at any time, without the payment of any penalty, by vote of a majority of the
Plan Directors or by a vote of a "majority of the outstanding voting securities"
of such Portfolio on 60 days' written notice to the Distributor, or by the
Distributor at any time, without the payment of any penalty, on 60 days' written
notice to the Fund. This Agreement will automatically and immediately terminate
in the event of its "assignment." (As used in this Agreement, the terms
"majority of the outstanding voting securities," "interested person" and
"assignment" shall have the same meanings as such terms have in the 1940 Act.)
VII. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived, discharged or
terminated except by an instrument in writing signed by the party against which
an enforcement of the change, waiver, discharge or termination is sought.
VIII. NOTICES
Notices of any kind to be given to the Fund hereunder by the Distributor
shall be in writing and shall be duly given if mailed or delivered to the Fund
at 480 Pierce Street, Suite 300, Birmingham, Michigan 48009, Attention: Lee
Munder, with a copy to Paul F. Roye, Esq., Dechert Price & Rhoads, 1500 K Street
N.W., Washington, D.C. 20005-1208, or at such other address or to such
individual as shall be so specified by the Fund to the Distributor. Notices of
any kind to be given to the Distributor hereunder by the Fund shall be in
writing and shall be duly given if mailed or delivered to the Distributor at
10845 Olive Boulevard, Suite 100, St.
6
<PAGE>
Louis, MO 63141 Attention: James Winkelman or at such other address or to such
individual as shall be so specified by the Distributor to the Fund.
IX. MISCELLANEOUS
The captions in this Agreement are included for convenience of reference
only and in no way define or delimit any of the provisions hereof or otherwise
affect their construction or effect. If any provision of this Agreement shall
be held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby. Subject to the
provisions of Section VI hereof, this Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
shall be governed by Maryland Law; PROVIDED, HOWEVER, that nothing herein shall
be construed in a manner inconsistent with the 1940 Act or any rule or
regulation of the SEC thereunder.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
ST. CLAIR FUNDS, INC.
By:
-----------------------------
Name: Lee P. Munder
Title: President
Attest:
-------------------------
HUNTLEIGH FUND DISTRIBUTORS, INC.
By:
-----------------------------
Name:
Title:
Attest:
-------------------------
7
<PAGE>
EXHIBIT 9(f)
PARTICIPATION AGREEMENT
AMONG
ST. CLAIR FUNDS, INC.
AND
KEMPER INVESTORS LIFE INSURANCE COMPANY
AND
HUNTLEIGH FUND DISTRIBUTORS, INC.
THIS AGREEMENT, made and entered into this_______ day of __________ 1997 by
and among St. Clair Funds, Inc. a Maryland corporation (the "Fund"); Kemper
Investors Life Insurance Company, an Illinois corporation (the "Company"), on
its own behalf and on behalf of each separate account of the Company named in
Schedule 1 to this Agreement as in effect at the time this Agreement is executed
and such other separate accounts that may be added to Schedule 1 from time to
time in accordance with the provisions of Article X of this Agreement (each such
account and sub-account thereof referred to as the "Account"); and Huntleigh
Fund Distributors, Inc., a corporation organized under the laws of Missouri (the
"Distributor").
WHEREAS, the Fund is engaged in business as an open-end management
investment company, and certain series of the Fund were established for the
purpose of serving as the investment vehicle for separate accounts established
for variable life insurance policies and variable annuity contracts
(collectively referred to herein as "Variable Insurance Products," the owners of
such products being referred to herein as "Product Owners") to be offered by
insurance companies which have entered into participation agreements with the
Fund ("Participating Insurance Companies"); and
WHEREAS, the common stock of the Fund (the "Fund shares") consists of
separate series, each such series representing an interest in a particular
managed portfolio of securities and other assets, and this Agreement relates to
those series of the Fund set forth on Schedule 3 to this Agreement as such
Schedule 3 to this Agreement may be amended by mutual written agreement of the
parties (referred to herein as the "Series"); and
WHEREAS, the Fund has filed with the Securities and Exchange Commission
(the "SEC") and the SEC has declared effective a registration statement
(referred to herein as the "Fund Registration Statement" and the prospectus
contained therein, or filed pursuant to Rule 497 under the Securities Act of
1933, as amended (the "1933 Act"), referred to herein as the "Fund Prospectus")
on Form N-1A to register the Series as open-end management investment companies
under the Investment Company Act of 1940, as amended (the "1940 Act"), and the
Fund shares under the 1933 Act; and
WHEREAS, the Company has filed or will file a registration statement with
the SEC to register under the 1933 Act interests in certain variable life
insurance policies and/or variable annuity contracts described in Schedule 2 to
this Agreement as in effect at the time this
<PAGE>
Agreement is executed and such other variable life insurance policies and/or
variable annuity contracts which may be added to Schedule 2 from time to time in
accordance with the terms and provisions of the Agreement, unless such interests
are exempt from registration under the 1933 Act (such policies and contracts
shall be referred to herein collectively as the "Contracts," each such
registration statement for a class or classes of contracts listed on Schedule 2
being referred to as the "Contracts Registration Statement," and the prospectus
with respect to the offering of the Contracts being referred to as the
"Prospectus" and the owners of such contracts, as distinguished from all Product
Owners, being referred to as "Contract Owners"); and
WHEREAS, the Accounts are validly existing separate accounts, duly
authorized by resolution of the Board of Directors of the Company to set aside
and invest assets attributable to the Contracts; and
WHEREAS, the Company has registered or will register each Account with the
SEC as a unit investment trust under the 1940 Act before certain Contracts are
issued by the Account, unless such Account is exempt from registration under the
1940 Act; and
WHEREAS, the Distributor is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a
member in good standing of the National Association of Securities Dealers, Inc.
(the "NASD"); and
WHEREAS, the Distributor and the Fund have entered into an agreement (the
"Fund Distribution Agreement") pursuant to which the Distributor will distribute
Fund shares; and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Series on behalf of
the Accounts to fund the Contracts, and the Distributor is authorized to sell
such shares to the Accounts at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Distributor agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1 The Distributor agrees to sell to the Company those shares of the
Series which the Company orders on behalf of the Account, executing such orders
on a daily basis in accordance with Section 1.4 of this Agreement.
1.2 The Fund agrees to make the shares of the Series available for
purchase by the Company on behalf of the Account at the then applicable net
asset value per share on Business Days as defined in Section 1.4 of this
Agreement, and the Fund shall use best efforts to calculate such net asset value
on each such Business Day. Notwithstanding any other provision in this
Agreement to the contrary, the Board of Directors of the Fund (the "Fund Board")
may suspend or terminate the offering of Fund shares, if such action is required
by law or by regulatory authorities having jurisdiction or if, in the sole
discretion of the Fund Board acting in good faith and in light of its fiduciary
duties under Federal and any applicable state laws, suspension or termination is
necessary and in the best interests of the shareholders of any Series (it being
understood that "shareholders" for this purpose shall mean Product Owners).
2
<PAGE>
1.3 The Fund agrees to redeem, at the Company's request, any full or
fractional shares of the Series held by an Account or the Company, executing
such requests at the net asset value on a daily basis in accordance with Section
1.4 of this Agreement, the applicable provisions of the 1940 Act and the then
currently effective Fund Prospectus. Notwithstanding the foregoing, the Fund
may delay redemption of Fund shares to the extent permitted by the 1940 Act, any
rules, regulations or orders thereunder, or the then currently effective
Prospectus.
1.4 (a) For purposes of Sections 1.1, 1.2 and 1.3, the Company shall be
the designee of the Fund for the limited purpose of receiving redemption and
purchase requests from each Account (but not from the general account of the
Company) based on transactions in the Account's securities or units, and receipt
on any Business Day by the Company as such designee of the Fund prior to the
time prescribed in the current Fund Prospectus (which as of the date of
execution of this Agreement is 4:00 p.m., Eastern time) shall constitute receipt
by the Fund on that same Business Day, provided that the Fund receives notice of
such redemption or purchase request by 9:00 a.m., Eastern time, on the next
following Business Day. For purposes of this Agreement, "Business Day" shall
mean any day on which the New York Stock Exchange is open for trading and on
which the Series calculate their respective net asset values pursuant to rules
of the SEC.
(b) The Company shall pay for shares of each Series on the same day
that it places an order with the Fund to purchase those shares. Payment for
Fund shares will be made by the Account or the Company in Federal Funds
transmitted to the Fund by wire to be received no later than 4:00 p.m., Eastern
time, on the day the Fund is properly notified of the purchase order for shares
(unless sufficient proceeds are available from redemption of shares of other
Series). The Fund will, upon receipt of notice of the purchase order, inform
the Fund's investment adviser of such order. In the event that the payment is
not received by the Fund by 4:00 p.m., Eastern time, on the same day the Company
places an order with the Fund, the Company will reimburse the Fund for all
interest, charges, costs, fees or other expenses, if any, imposed on the Fund,
and for all losses, if any, incurred by the Fund as a result of such delayed
payment.
(c) Payment for shares of each Series redeemed by an Account or the
Company will be made in Federal Funds transmitted to the Company by wire on the
next Business Day after the Fund is notified of the redemption order for shares,
provided such notification is received by the Fund by 4:00 p.m., Eastern time
(unless redemption proceeds are applied to the purchase of shares of other
Series). If payment in Federal Funds for any redemption order is received by
the Company after [ ] p.m., Eastern time on the next Business Day after the
Fund is notified of the redemption order, the Fund shall promptly upon the
Company's written request, reimburse the Company for any charges, costs, fees,
interest, or other expenses incurred by the Company as a result of such failure
to provide redemption proceeds within the specified time. The Fund reserves the
right to delay payment of redemption proceeds (i) under circumstances which
would entitle the Company to delay payment of redemption proceeds to the
separate accounts or (ii) when disposition of portfolio securities to pay
redemption proceeds would be a material detriment to the Fund's performance and
the Fund provides notice to the Company of the postponement of payment and of
the date on which payment will be made. In no event may such payment be delayed
longer than the period
3
<PAGE>
permitted under Section 22(e) of the 1940 Act and any such payments will be
delayed on a pro rata basis among the Company and other Participating Insurance
Companies. Neither the Fund nor the Distributor shall bear any responsibility
whatsoever for the proper disbursement or crediting of redemption proceeds to
Contract Owners; the Company alone shall be responsible for such action.
1.5 Issuance and transfer of Fund shares will be by book entry only.
Stock certificates will not be issued to the Company or the Accounts. Purchase
and redemption orders for Fund shares will be recorded in an appropriate ledger
for the Accounts.
1.6 The Fund shall furnish notice as soon as reasonably practicable to the
Company of any income dividends or capital gain distributions payable on any
shares of the Series. The Company, on its behalf and on behalf of the Accounts,
hereby elects to receive all such dividends and distributions as are payable on
any shares of the Series in the form of additional shares of that Series. The
Company reserves the right, on its behalf and on behalf of the Accounts, to
revoke this election and to receive all such dividends and distributions in
cash. The Fund shall notify the Company of the number of shares of the Series
so issued as payment of such dividends and distributions. The Fund shall to the
extent practicable provide advance notice to the Company of any date on which
the Fund reasonably expects to make a dividend distribution.
1.7 The Fund shall use its best efforts to make the net asset value per
share for each Series available to the Company by 6:00 p.m., Eastern Time, each
Business Day, and in any event, as soon as reasonably practicable after the net
asset value per share for such Series is calculated, and shall calculate such
net asset value in accordance with the then currently effective Fund Prospectus.
Any material error in the calculation or reporting of net asset value per share
shall be reported immediately upon discovery to the Company. In such event the
Company shall be entitled to an adjustment to the number of shares purchased or
redeemed to reflect the correct net asset value per share and the Fund or the
Fund's investment adviser shall bear the cost of correcting such errors.
Neither the Fund, any Series, the Distributor, nor any of their affiliates shall
be liable for any information provided to the Company pursuant to this Agreement
which information is based on incorrect information supplied by the Company to
the Fund or the Distributor.
1.8 The Fund and the Distributor agree that Fund shares will be sold only
to Participating Insurance Companies and their separate accounts or such other
persons, including qualified pension plans, as are permitted under applicable
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), and
regulations promulgated thereunder, the sale to which will not impair the tax
treatment currently afforded the Contracts. The Fund and the Distributor will
not sell Fund shares to any insurance company, separate account or other persons
unless an agreement complying with Article VI of this Agreement is in effect to
govern such sales. No shares of any Series will be sold directly to the general
public.
1.9 (a) Until this Agreement is terminated pursuant to Article IX, the
Company shall promote the Fund on the same basis as other funding
vehicles available under the Contracts. Funding vehicles other
than those listed on Schedule 3 to this Agreement may be
available for the investment of the cash value of the Contracts,
provided, however, (i) any such vehicle or series thereof has
4
<PAGE>
investment objectives and policies that are substantially
different from the investment objectives and policies of the
Series available hereunder; (ii) the Company gives the Fund and
the Distributor 45 days written notice of its intention to make
such other investment vehicle available as a funding vehicle for
the Contracts; or (iii) unless such other vehicle was available
as a funding vehicle for the Contracts prior to the date of this
Agreement and the Company has so informed the Fund and the
Distributor prior to their signing this Agreement, the Fund or
Distributor consents in writing to the use of such other vehicle,
such consent not to be unreasonably withheld.
(b) The Company shall not, without prior notice to the Distributor
(unless otherwise required by applicable law) take any action to
operate the Accounts as management investment companies under the
1940 Act.
(c) The Company shall not, without prior notice to the Distributor
and the Fund (unless otherwise required by applicable law),
induce Contract Owners to change or modify the Fund or change the
Fund's distributor or investment adviser.
ARTICLE II. REPRESENTATIONS, WARRANTIES AND UNDERTAKINGS
2.1 The Company represents and warrants (a) that the Contracts are
registered under the 1933 Act or will be so registered before the issuance
thereof, (b) that the Contracts will be issued in compliance in all material
respects with all applicable Federal securities and state insurance and
securities laws, and (c) that the Company will require of every person
distributing the Contracts that the Contracts be offered and sold in compliance
in all material respects with all applicable Federal and state laws and
regulations promulgated thereunder. The Company further represents and warrants
that it is an insurance company duly organized, validly existing and in good
standing under applicable law and that it has legally and validly authorized the
Accounts as separate accounts under applicable state insurance laws and
regulations. The Company further represents that for Accounts which are
governed by the 1940 Act, the Company has registered or, prior to the issuance
of any Contracts, will register such Accounts as such unit investment trusts in
accordance with the provisions of the 1940 Act (unless exempt therefrom) to
serve as separate accounts for the Contracts so requiring a registered account,
and that it will maintain such registration for so long as such Contracts are
outstanding.
2.2 The Fund represents and warrants that Fund shares sold pursuant to
this Agreement are and shall remain registered under the 1933 Act and are duly
authorized for issuance in accordance with applicable law and that the Fund is
and shall remain registered under and in compliance with the 1940 Act for so
long as the Fund shares are sold. The Fund further represents and warrants that
it is a Maryland corporation duly organized, validly existing and in good
standing under the laws of Maryland.
5
<PAGE>
2.3 The Fund represents that it and each Series currently qualifies and
will make every effort to continue to qualify as a Regulated Investment Company
under Subchapter M of the Code, and to maintain such qualification (under
Subchapter M or any successor or similar provision), and that it will notify the
Company immediately upon having a reasonable basis for believing that it has
ceased to so qualify or that it might not so qualify in the future.
2.4 The Fund represents that it will comply with Section 817(h) of the
Code, and all regulations issued thereunder so that the Contracts will be
treated as variable contracts under the Code. The Fund will notify the Company
immediately upon having a reasonable basis for believing that the Fund has
ceased to so comply or that the Fund might not so comply in the future. In the
event of a breach of this Section 2.4 by the Fund, the Fund will take all
reasonable steps to adequately diversify its portfolio within the grace period
provided by Code regulations. To the extent feasible, the Fund will also adjust
its investments to comply with such other provisions of the Code and regulations
issued thereunder as necessary to ensure that the Contracts will be treated as
variable contracts under the Code.
2.5 The Company represents that the Contracts currently are, and at the
time of issuance will be, treated as variable contracts under applicable
provisions of the Code. The Company shall make every effort to maintain such
treatment and shall notify the Fund and the Distributor immediately upon having
a reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.6 The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of any state. The
Company alone shall be responsible for informing the Fund of any investment
restrictions imposed by state insurance law and applicable to the Fund;
provided, however, that upon being so informed by the Company, the Fund shall
abide by such investment restrictions.
2.7 The Distributor represents and warrants that the Distributor is duly
registered as a broker-dealer under the 1934 Act, a member in good standing with
the NASD, and duly registered as a broker-dealer under applicable state
securities laws; its operations are in compliance with applicable law, and it
will distribute the Fund shares according to applicable law. The Distributor
represents and warrants that it shall remain duly registered under all
applicable federal and state securities laws as required to perform its
obligations under this Agreement.
2.8 Each party to this Agreement represents and warrants that it is not
aware of any pending or threatened litigation matter or claim or regulatory
proceeding, investigation or inquiry, involving such party or any of its
affiliates, the outcome of which would have a material adverse effect on this
Agreement or the transactions completed thereunder.
6
<PAGE>
2.9 The Company represents and warrants that all of its directors,
officers, employees, and other individuals or entities dealing with the money
and/or securities of the Accounts are and shall continue to be at all times
covered by a blanket fidelity bond or similar coverage for the benefit of the
Accounts in an amount not less than [$5 million]. The aforesaid bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company. The Company agrees to make all reasonable efforts to see that
this bond or another bond containing these provisions is always in effect, and
agrees to notify the Fund and the Distributor in the event that such coverage no
longer applies.
2.10 To the extent that it decides to finance distribution expenses
pursuant to Rule 12b-1, the Fund undertakes to have the Fund Board and a
majority of Fund Board members who are not interested persons of the Fund
formulate and approve any plan under Rule 12b-1 to finance distribution
expenses.
ARTICLE III. PROSPECTUSES AND PROXY STATEMENTS; SALES MATERIALS AND OTHER
INFORMATION
3.1 The Distributor shall provide the Company with as many copies of the
current Fund Prospectus (describing only the Series listed on Schedule 3
attached to this Agreement) as the Company may reasonably request.
3.2 The Fund Prospectus shall state that the Statement of Additional
Information for the Fund ("Statement") is available from the Distributor (or, in
the Fund's discretion, the Fund Prospectus shall state that such Statement is
available from the Fund), and the Distributor (or the Fund) shall provide such
Statement free of charge to the Company and to any outstanding or prospective
Contract Owner who requests such Statement.
3.3 The Fund shall provide the Company at the Fund's expense with copies
of its proxy material, shareholder reports and other communications to
shareholders in such quantities as the Company shall reasonably request for
distributing to Contract Owners.
3.4 The Company shall furnish to the Fund each piece of sales literature
or other promotional material, if any, in which a Series, the Fund or the
Distributor is named, at least eight Business Days prior to its use. No such
material shall be used if the Fund or the Distributor reasonably objects to its
use within five Business Days after receipt of such material. The Fund or its
designee reserves the right to reasonably object to the continued use of any
such sales literature or other promotional material in which the Fund (or a
Series thereof) or the Distributor is named, and no such material shall be used
if the Fund or its designee so object.
3.5 The Fund shall furnish to the Company each piece of sales literature
or promotional material, if any, in which the Company is named, at least eight
Business Days prior to its use. No such material shall be used if the Company
objects to its use within five Business Days after receipt of such materials.
The Company reserves the right to reasonably object to the continued use of any
such sales literature or other promotional material in which the Company is
named, and no such material shall be used if the Company objects.
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<PAGE>
3.6 The Company shall not give any information or make any representations
or statements on behalf of the Fund or concerning the Fund other than the
information or representations contained in the Fund Registration Statement or
Fund Prospectus, as such Fund Registration Statement, Fund Prospectus, as
applicable, may be amended or supplemented from time to time, or in reports or
proxy statements for the Fund, or in sales literature or other promotional
material approved by the Fund or its designee, except with the prior permission
of the Fund or its designee.
3.7 The Fund and the Distributor shall not give any information or make
any representations on behalf of the Company or concerning the Company, the
Account or the Contracts other than the information or representations contained
in the Prospectus, as such Prospectus may be amended or supplemented from time
to time, or in published reports of the Accounts which are in the public domain
or approved by the Company for distribution to Contract Owners, or in sales
literature or other promotional material approved by the Company, except with
the prior permission of the Company.
3.8 The Fund will provide to the Company at least one complete copy of all
Fund Registration Statements, Fund Prospectuses, Statements of Additional
Information, annual and semi-annual reports and other reports, proxy statements,
sales literature and other promotional materials, applications for exemptions,
requests for no-action letters, and all amendments or supplements to any of the
above, that relate to the Fund or Fund shares, promptly after the filing of such
document with the SEC or other regulatory authorities.
3.9 The Company will provide to the Fund at least one complete copy of all
Registration Statements, reports, sales literature and other promotional
materials, if any, applications for exemptions, requests for no-action letters,
and all amendments or supplements to any of the above, that relate to the
Contracts to which Contract purchase payments and value are allocable, promptly
after the filing of such document with the SEC or other regulatory authorities.
3.10 For purposes of this Article III, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use, in a newspaper, magazine or
other periodical, radio, television, electronic media, telephone or tape
recording, videotape display, signs or billboards, motion pictures or other
public media), sales literature (i.e., any written communication distributed or
made generally available to customers or the public, including brochures,
circulars, research reports, market letters, form letters, seminar texts, or
reprints or excerpts of any other advertisement, sales literature, or published
article), educational or training materials or other communications distributed
or made generally available to some or all agents or employees, registration
statements, prospectuses, Statements of Additional Information, shareholder
reports and proxy materials, and any other material constituting sales
literature or advertising under NASD rules, the 1940 Act or the 1933 Act.
ARTICLE IV. VOTING
To the extent required by law, the Company shall:
(a) solicit voting instructions from Contract Owners;
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(b) vote shares of each Series attributable to Contract Owners in
accordance with instructions or proxies timely received from such
Contract Owners;
(c) vote shares of each Series attributable to Contract Owners for which
no instructions have been received in the same proportion as shares of
such Series for which instructions have been timely received; and
(d) vote shares of each Series held by the Company on its own behalf or on
behalf of the Account that are not attributable to Contract Owners in
the same proportion as shares of such Series for which instructions
have been timely received.
The Company reserves the right to disregard the voting instructions of
Contract Owners to the extent such action is permitted by Rules 6e-2 or 6e-3(T)
under the 1940 Act and is permitted under applicable state insurance laws.
The Fund shall notify the Company of the Fund's intent to file proxy
solicitation materials with the SEC as soon as practicable prior to such filing
and shall notify the Company of any shareholder proposal upon its inclusion in
the proxy solicitation materials filed with the SEC.
ARTICLE V. FEES AND EXPENSES
5.1 The Fund and Distributor shall pay no fee or other compensation to the
Company under this Agreement, except that if the Fund or any Series adopts and
implements a plan pursuant to Rule 12b-1 under the 1940 Act to finance
distribution expenses, then the Distributor may make payments to the Company in
amounts agreed to by the Company and the Distributor in writing. Currently, no
such payments are contemplated. The Fund currently does not intend to make any
payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940
Act or in the contravention of such rule, although it may make payments pursuant
to Rule 12b-1 in the future. [OPEN ISSUE]
5.2 The Fund and the Company shall bear the expenses set forth opposite
their respective names on Schedule 4 to this Agreement. All expenses incident
to performance by the Fund under this Agreement (including expenses expressly
assumed by the Fund pursuant to this Agreement) shall be paid by the Fund to the
extent permitted by law.
ARTICLE VI. POTENTIAL CONFLICTS
The parties to this Agreement acknowledge that the Fund has filed an
application with the SEC to request an order granting relief from various
provisions of the 1940 Act and the rules thereunder to the extent necessary to
permit Fund shares to be sold to and held by variable annuity and variable life
insurance separate accounts of both affiliated and unaffiliated Participating
Insurance Companies. The parties to this Agreement agree that the conditions or
undertakings specified in such application and that may be imposed on the
Company, the Fund and/or the Distributor by virtue of such order shall be
incorporated herein by this reference, as of the date such order is granted, as
though set forth herein in full, and such parties agree to comply
9
<PAGE>
with such conditions and undertakings to the extent applicable to each such
party. The Fund and the Distributor will not enter into a participation
agreement with any other Participating Insurance Company unless it imposes the
same material conditions and undertakings incorporated by reference herein on
the parties to such agreement.
If and to the extent that Rule 6e-2 and Rule 6e-3(T) under the 1940 Act are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the 1940 Act or the rules promulgated thereunder with respect to mixed or
shared funding (as contemplated in the order applied for by the Fund) on terms
and conditions materially different from those contained in said order, then:
(a) the Fund and/or the Participating Insurance Companies, as appropriate, shall
take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as
amended and Rule 6e-3, as adopted, to the extent such rules are applicable; (b)
Article IV of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to said Article is contained in
such Rule(s) as so amended or adopted; and (c) this Agreement shall be otherwise
amended as required by such change in law.
ARTICLE VII. INDEMNIFICATION
7.1 INDEMNIFICATION BY THE COMPANY
The Company agrees to indemnify and hold harmless the Fund and the
Distributor, and each person who controls or is affiliated with the Fund or the
Distributor, within the meaning of such terms under the federal securities laws,
and any officer, trustee, director, employee or agent of the foregoing, against
any and all losses, claims, damages or liabilities, joint or several (including
any investigative, legal and other expenses reasonably incurred in connection
with, and any amounts paid in settlement of, any action, suit or proceeding or
any claim asserted), to which they or any of them may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages or liabilities (or settlements):
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Registration
Statement, sales literature or other promotional material for the
Contracts or the Contracts themselves (or any amendment or supplement
to any of the foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements
therein not misleading in light of the circumstances in which they
were made; provided that this obligation to indemnify shall not apply
if such statement or omission or such alleged statement or alleged
omission was made in reliance upon and in conformity with information
furnished in writing to the Company by the Fund or the Distributor, or
any person controlling or affiliated with such entities (or a person
authorized in writing to do so on behalf of such entities) for use in
the Registration Statement, or in the Contracts or sales literature
(or any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
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(b) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact by or on behalf of the Company (other
than statements or representations made by the Fund or the
Distributor, or any person controlling or affiliated with such
entities, or contained in the Fund Registration Statement, or sales
literature or other promotional material of the Fund not supplied by
the Company or persons under its control) or wrongful conduct of the
Company or persons under its control with respect to the sale or
distribution of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Fund Registration Statement, or sales
literature or other promotional material of the Fund or any amendment
thereof or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances in which they were made, if such statement or
omission was made in reliance upon and in conformity with information
furnished in writing to the Fund by or on behalf of the Company; or
(d) arise as a result of any material failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(e) arise out of any material breach by the Company of this Agreement,
including but not limited to a breach of any of the representations
and/or warranties made by Company hereunder, or any failure to
transmit a request for redemption or purchase of Fund shares on a
timely basis in accordance with the procedures set forth in Article I.
This indemnification will be in addition to any liability which the Company may
otherwise have; provided, however, that no party shall be entitled to
indemnification if such loss, claim, damage or liability is due to the willful
misfeasance, bad faith, gross negligence or reckless disregard of duty by the
party seeking indemnification.
7.2 INDEMNIFICATION BY THE FUND AND THE DISTRIBUTOR
The Fund and the Distributor, jointly and severally, agree to indemnify and
hold harmless the Company and each person who controls or is affiliated with the
Company, within the meaning of such terms under the federal securities laws, and
any officer, director, employee or agent of the Company, against any and all
losses, claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which they or any of them may become subject under any
statute or regulation, at common law or otherwise, insofar as such losses,
claims, damages, liabilities (or settlements):
11
<PAGE>
(a) arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Fund Registration
Statement (or any amendment or supplement thereto) or sales literature
or other promotional material of the Fund, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading in light of the circumstances in
which they were made; provided that this obligation to indemnify shall
not apply if such statement or omission or alleged statement or
alleged omission was made in reliance upon and in conformity with
information furnished in writing to the Fund or the Distributor, by
the Company or any person controlling or affiliated with the Company
(or a person authorized in writing to do so on behalf of the Company)
for use in the Fund Registration Statement (or any amendment or
supplement thereto), or sales literature for the Fund or otherwise for
use in connection with the sale of the Contracts or Fund shares: or
(b) arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact by or on behalf of the Distributor or the
Fund (other than statements or representations made by the Company or
any person controlling or affiliated with the Company or contained in
the Registration Statement or sales literature or other promotional
material for the Contracts not supplied by the Distributor or the Fund
or persons under their control) or wrongful conduct of the Distributor
or persons under its control with respect to the sale or distribution
of the Contracts or Fund shares; or
(c) arise out of any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or sales
literature or other promotional material for the Contracts (or any
amendment or supplement thereto), or the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading in light of
the circumstances in which they were made, if such statement or
omission was made in reliance upon information furnished in writing by
or on behalf of the Distributor or the Fund to the Company; or
(d) arise out of any material breach by the Distributor or the Fund of
this Agreement, including but not limited to a breach of any of the
representations and/or warranties made by the Distributor or the Fund
hereunder; or
(e) arise out of the Fund's failure to continue to qualify as a Regulated
Investment Company under Subchapter M of the Code or the Fund's
failure to comply with Section 817(h) of the Code and the regulations
issued thereunder.
This indemnification will be in addition to any liability which the Fund and the
Distributor may otherwise have; provided, however, that no party shall be
entitled to indemnification if such loss, claim, damage or liability is due to
the willful misfeasance, bad faith, gross negligence or reckless disregard of
duty by the party seeking indemnification.
12
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7.3 INDEMNIFICATION PROCEDURES
After receipt by a party entitled to indemnification ("indemnified party")
under this Article VII of notice of the commencement of any action, if a claim
in respect thereof is to be made by the indemnified party against any person
obligated to provide indemnification under this Article VII ("indemnifying
party"), such indemnified party will notify the indemnifying party in writing of
the commencement thereof as soon as practicable thereafter, provided that the
omission to so notify the indemnifying party will not relieve it from any
liability under this Article VII, except to the extent that the omission results
in a failure of actual notice to the indemnifying party and such indemnifying
party is damaged solely as a result of the failure to give such notice. The
indemnifying party, upon the request of the indemnified party, shall retain
counsel reasonably satisfactory to the indemnified party to represent the
indemnified party and any others entitled pursuant to this Agreement to such
representations as the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. The indemnifying party shall not be liable
for any settlement of any proceeding effected without its written consent but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment.
A successor by law of the parties to the Agreement shall be entitled to
the benefits of the indemnification contained in this Article VII. The
indemnification provisions contained in this Article VII shall survive any
termination of this Agreement
ARTICLE VIII. APPLICABLE LAW
8.1 This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the state of Michigan,
without giving effect to the principles of conflicts of laws.
8.2 This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 Acts, where applicable, and the rules and regulations and rulings
thereunder, including such exemptions from those statutes, rules and regulations
as the SEC may grant, and the terms hereof shall be limited, interpreted and
construed in accordance therewith.
ARTICLE IX. TERMINATION
9.1 This Agreement shall terminate:
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<PAGE>
(a) at the option of any party upon six months' advance written
notice to the other parties, such termination to be effective no earlier than
one year following the date on which the first Contract is issued; or
(b) at the option of the Company, if the Company reasonably
determines in good faith that shares of the Fund are not registered, issued or
sold in accordance with applicable federal or state law in such a way as to meet
the requirements of the Contracts or are otherwise inconsistent with the
Company's legal obligations to Contract Owners; or
(c) at the option of the Fund upon institution of formal proceedings
against the Company by the NASD, the SEC, the insurance commission of any state
or any other regulatory body regarding the Company's duties under this Agreement
or related to the sale of the Contracts, the operation of the Account, the
administration of the Contracts or the purchase of Fund shares, or an expected
or anticipated ruling, judgment or outcome which would, in the Fund's reasonable
judgment, materially impair the Company's ability to meet and perform the
Company's obligations and duties hereunder; or
(d) at the option of the Company upon institution of formal
proceedings against the Fund by the NASD, the SEC, or any state securities or
insurance commission or any other regulatory body; or
(e) at the option of the Company upon the breach by the Fund or the
Distributor of any material provision of this Agreement, and at the option of
the Fund upon the breach by the Company of any material provision of this
Agreement; or
(f) at the option of the Company in the event that due to future
changes in the wording or interpretation of Federal or state statues relating to
permissible activities of banks and their subsidiaries or affiliates, Munder
Capital Management is prohibited or restricted from providing services to the
Fund and the Fund is unable to retain a replacement investment adviser within
180 days of such change that is reasonably acceptable to the Company; or
(g) at the option of the Fund in the event any of the Contracts are
not issued or sold in accordance with applicable Federal and/or state law; or
(h) by either the Company or the Fund upon a determination by a
majority of the Fund Board, or a majority of disinterested Fund Board members,
that an irreconcilable material conflict exists among the interests of (i) all
Product Owners or (ii) the interests of the Participating Insurance Companies
investing in the Fund.
(i) at the option of the Company upon termination of the Fund's
Servicing Agreement with the Company; or
(j) at the option of the Fund or the Distributor following
consultation with the Fund Board by written notice to the Company, if either one
or both of the Fund or the Distributor, respectively, shall determine, in their
sole judgment exercised in good faith, that the Company and/or its affiliated
companies have suffered a material adverse change in their business, operations,
financial condition, or prospects since the date of this Agreement or are the
14
<PAGE>
subject of material adverse publicity; but no termination shall be effective
under this subsection (j) until the Company has been afforded a reasonable
opportunity to respond to a statement by the Fund or the Distributor concerning
the reason for notice of termination hereunder; or
(k) at the option of the Company by written notice to the Fund and
the Distributor, if the Company shall determine, in its sole judgment exercised
in good faith, that either the Fund or the Distributor has suffered a material
adverse change in its business, operations, financial condition, or prospects
since the date of this Agreement or is the subject of material adverse
publicity; but no termination shall be effective under this subsection (k) until
the Fund and the Distributor have been afforded a reasonable opportunity to
respond to a statement by the Company concerning the reason for notice of
termination hereunder; or
(l) in the event this Agreement is assigned without the prior written
consent of the Company, the Fund, or the Distributor, termination shall be
effective immediately upon such occurrence without notice, or such other time as
stipulated by the party not effecting the assignment.
In the event of termination of this Agreement pursuant to Section 9.1(f),
(i), or (l), the Fund agrees to bear the cost of filing with the SEC a
substitution application or such other documentation as may be required as a
result of such termination.
9.2 NOTICE REQUIREMENT Except as otherwise provided in Section 9.1, no
termination of this Agreement shall be effective unless and until the party
terminating this Agreement gives prior written notice to all other parties to
this Agreement of its intent to terminate which notice shall set forth the basis
for such termination. Furthermore:
(a) in the event that any termination is based upon the provisions of
Article VI or the provisions of Section 9.1(a) of this Agreement, such prior
written notice shall be given in advance of the effective date of termination as
required by such provisions; and
(b) in the event that any termination is based upon the provisions of
Section 9.1(c) or 9.1(d) of this Agreement, such prior written notice shall be
given at least ninety (90) days before the effective date of termination, unless
a shorter period is required by the Company's obligations under state law to
Contract Owners.
9.3 Except as necessary to implement Contract Owner initiated
transactions, or as required by state insurance laws or regulations, the Company
shall not redeem Fund shares attributable to the Contracts (as opposed to Fund
shares attributable to the Company's assets held in the Account).
9.4 EFFECT OF TERMINATION Notwithstanding any termination of this
Agreement, the Fund shall, at the option of the Company, continue to make
available additional shares of the Series pursuant to the terms and conditions
of this Agreement for all Contracts in effect on the effective date of
termination of this Agreement (hereinafter referred to as "Existing Contracts")
for so long after the termination of this Agreement as the Company desires;
PROVIDED, HOWEVER, that the obligation to make such additional shares of the
Series available shall continue only for two years after the termination of this
Agreement. Specifically, without limitation, if the Company
15
<PAGE>
elects to continue purchasing additional shares of the Series, the owners of the
Existing Contracts or the Company, whichever shall have legal authority to do
so, shall be permitted to reallocate investments in the Fund, redeem investments
in the Fund and/or invest in the Fund upon the making of additional purchase
payments under the Existing Contracts pursuant to the terms and conditions of
this Agreement.
ARTICLE X. APPLICABILITY TO NEW ACCOUNTS AND NEW CONTRACTS
The parties to this Agreement may amend the schedules to this Agreement from
time to time to reflect changes in or relating to the Contracts and to add new
separate accounts and classes of variable life insurance policies and/or
variable annuity contracts to be issued by the Company through a separate
account investing in the Fund. The provisions of this Agreement shall be
equally applicable to each such separate account and class of contracts or
policies, unless the context otherwise requires.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or certified
mail to the other party at the address of such party set forth below or at such
other address as such party may from time to time specify in writing to the
other party.
If to the Fund:
c/o Munder Capital Management
480 Pierce Street
Birmingham, MI 48009
Attn: Lee Munder
If to the Company:
Kemper Investors Life Insurance Company
1 Kemper Drive
Long Grove, IL 60049
Attn:
If to the Distributor:
Huntleigh Fund Distributors, Inc.
222 South Central Avenue
Suite 300
St. Louis, MO 63141
Attn:
16
<PAGE>
ARTICLE XII. MISCELLANEOUS
12.1 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.2 This Agreement may be executed simultaneously in two or more
counterparts, each of which together shall constitute one and the same
instrument.
12.3 If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of the Agreement shall
not be affected thereby.
12.4 The Company, the Fund and the Distributor shall cooperate with each
other party and all appropriate governmental authorities (including without
limitation the SEC, the NASD and state insurance regulators) and shall permit
such authorities reasonable access to its books and records in connection with
any investigation or inquiry relating to this Agreement or the transactions
contemplated hereby.
12.5 Each party represents that the execution and delivery of this
Agreement and the consummation of the transactions contemplated herein have been
duly authorized by all necessary corporate or trust action, as applicable, by
such party, and when so executed and delivered this Agreement will be the valid
and binding obligation of such party enforceable in accordance with its terms.
This Agreement may not be assigned by any party without the written consent
of all parties.
ST. CLAIR FUNDS, INC.
By:
------------------------------
Name:
Title:
KEMPER INVESTORS LIFE INSURANCE COMPANY
By:
------------------------------
Name:
Title:
17
<PAGE>
HUNTLEIGH FUND DISTRIBUTORS, INC.
By:
------------------------------
Name:
Title:
18
<PAGE>
SCHEDULE 1
SEPARATE ACCOUNTS
19
<PAGE>
SCHEDULE 2
VARIABLE LIFE INSURANCE POLICIES
VARIABLE ANNUITY CONTRACTS
20
<PAGE>
SCHEDULE 3
SERIES
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
21
<PAGE>
SCHEDULE 4
EXPENSES
1. In the event the prospectus, SAI, annual report or other communication of
the Fund is combined with a document of another party, the Fund will pay
the costs based upon the relative number of pages attributable to the Fund.
ITEM FUNCTION RESPONSIBLE
PARTY
PROSPECTUS
Update Typesetting Fund (1)
New Sales: Printing Company
Distribution Company
Existing Printing Fund (1)
Owners:
Distribution Fund (1)
STATEMENT OF
ADDITIONAL Same as Prospectus Same
INFORMATION
ANNUAL REPORTS &
OTHER COMMUNICATIONS
WITH SHAREHOLDERS
OF THE FUND
All Typesetting Fund (1)
Marketing: Printing Company
Distribution Company
Existing Owners: Printing Fund (1)
Distribution Fund (1)
22
<PAGE>
OPERATIONS OF FUND All operations and related expenses,
including the cost of registration Fund
and qualification of the Fund's
shares, preparation and filing of the
Fund's prospectus and registration
statement, proxy -- materials and
r e ports, the preparation of all
statements and notices required by
any federal or state law and all
taxes on the issuance of the Fund's
shares, and all costs of management
of the business affairs of the Fund.
23
<PAGE>
Exhibit 11(c)
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the references to our firm under the captions "Financial
Highlights" in the Prospectus for the Munder Institutional S&P 500 Index
Equity, Munder Institutional S&P MidCap Index Equity, Munder Institutional
S&P SmallCap Index Equity, Munder Institutional Short Term Treasury and
Munder Institutional Money Market Funds; (five of the Portfolios constituting
St. Clair Funds, Inc.) and the Prospectus for the Liquidity Plus Money Market
Fund of St. Clair Funds, Inc.; the Statement of Additional Information for
the Munder S&P 500 Index Equity, Munder S&P MidCap Index Equity, Munder S&P
SmallCap Index Equity, Munder Aggregate Bond Index and Munder Foreign Equity
Funds of St. Clair Funds, Inc; and "Independent Auditors" and "Financial
Statements" in the Statement of Additional Information for the Munder
Institutional S&P 500 Index Equity, Munder Institutional S&P MidCap Index
Equity, Munder Institutional S&P SmallCap Index Equity, Munder Institutional
Short Term Treasury and Munder Institutional Money Market Funds of St. Clair
Funds, Inc. and the Statement of Additional Information for the St. Clair
Funds, Inc. for the Liquidity Plus Money Market Fund included in
Post-Effective Amendment No. 28 to the Registration Statement of the St.
Clair Funds, Inc.
We also consent to the incorporation by reference into the respective
Statements of Additional Information of St. Clair Funds, Inc. of our reports
dated February 9, 1998 with respect to the financial statements and financial
highlights of the Munder Institutional S&P 500 Index Equity Fund, Munder
Institutional S&P SmallCap Index Equity Fund, and Liquidity Plus Money Market
Funds of St. Clair Funds.
/s/ Ernst & Young LLP
---------------------
ERNST & YOUNG LLP
April 14, 1998
Boston, Massachusetts
<PAGE>
Exhibit 15(b)
ST. CLAIR FUNDS, INC.
SERVICE PLAN
Section 1. Any officer of St. Clair Funds, Inc. (the "Company") is
authorized to execute and deliver, in the name and on behalf of the Company,
written agreements based on the form attached hereto as Appendix A or any other
form duly approved by the Company's Board of Directors ("Agreements") with
insurance companies offering variable insurance contracts for which certain
series of the Company identified in Appendix B hereto (the "Funds") serve as
funding vehicles ("Contracts") and the Principal Underwriter of the Funds'
shares or other organizations through whom Contacts are sold ("Shareholder
Organizations"). Pursuant to such Agreements, Shareholder Organizations shall
provide support services as set forth therein to the Company and the Funds, in
consideration of a fee, computed monthly in the manner set forth in the
Agreements, at an annual rate of up to 0.25% of the average daily net asset
value of each of the Funds to which support services are provided. Comerica
Bank, [Huntleigh] and their affiliates are eligible to become Shareholder
Organizations and to receive fees under this Plan.
Section 2. Huntleigh shall monitor the arrangements pertaining to
the Company's Agreements with Shareholder Organizations in accordance with the
terms of Huntleigh's agreement with the Company. Huntleigh shall not, however,
be obligated by this Plan to recommend, and the Company shall not be obligated
to execute, any Agreement with any qualifying Shareholder Organization.
Section 3. So long as this Plan is in effect, Huntleigh shall
provide to the Company's Board of Directors, and the Board of Directors shall
review, at least quarterly, a written report of the amounts expended pursuant to
this Plan and the purposes for which such expenditures were made.
Section 4. This Plan shall become effective immediately with respect
to the Funds upon the approval of the Plan (and the form of Agreement attached
hereto) by a majority of the Company's Board of Directors, including a majority
of the Directors who are not "interested persons," as defined in the Investment
Company Act of 1940, as amended (the "Act"), of the Company and who have no
direct or indirect financial interest in the operation of this Plan or in any
Agreement related to this Plan (the "Disinterested Directors"), pursuant to a
vote cast in person at a meeting called for the purpose of voting on the
approval of this Plan and form of Agreement.
Section 5. Unless sooner terminated, this Plan shall continue in
effect for so long as its continuance is approved at least annually in the
manner set forth in Section 4.
Section 6. This Plan may be amended at any time with respect to any
Fund by the Company's Board of Directors, provided that [this Plan may not be
amended to increase materially the amount of fees provided for in Section 1
unless such amendment is approved by a vote of the majority of the outstanding
voting securities of such Fund and any other] material amendment of the terms of
this Plan shall become effective only upon the approvals set forth in Section 4.
<PAGE>
Section 7. This Plan is terminable at any time with respect to any
Fund by vote of a majority of the Disinterested Directors.
Section 8. While this Plan is in effect, the selection and
nomination of Disinterested Directors shall be committed to the discretion of
the Disinterested Directors.
Adopted by the Board: ____________________, 1998
2
<PAGE>
APPENDIX A
ST. CLAIR FUNDS, INC.
FORM OF SERVICING AGREEMENT
To: [Shareholder Organization]
We wish to enter into this Servicing Agreement with you concerning the
provision of support services to certain series ("Funds") of St. Clair Funds,
Inc. identified on Schedule A attached hereto which serve as investment vehicles
for separate accounts ("Accounts") established for variable annuity contracts
("Contracts") offered by insurance companies.
The terms and conditions of this Servicing Agreement are as follows:
1. You agree to provide the following support services with respect to the
Funds:(1) (i) communicating directly with, and responding to inquiries from,
Contract owners regarding the Funds' operations, portfolio composition and
performance; (ii) providing information to the Funds with respect to Fund shares
attributable to Contract owners accounts; (iii) printing and mailing to Contract
owners copies of the Funds' prospectuses and shareholder communications from the
Funds (including proxy materials, periodic Fund reports to shareholders, annual
and semi-annual financial statements and dividend, distribution and tax notices)
and other materials that the Funds are required by law or otherwise to provide
to their shareholders, but that you are not otherwise required to provide to
Contract owners; (iv) facilitating tabulation and reporting with respect to
shareholder responses to Fund proxy solicitations; (v) aggregating purchase and
redemption orders for shares of the Funds held by the Accounts; (vi) recording
issuance and transfers of shares of the Funds held by the Accounts; (vii)
processing and reinvesting dividends and distributions of the Funds held by the
Accounts; (viii) providing financial consultants' advice with respect to
inquiries related to the Funds (not including information about performance or
related to sales); and (ix) providing such other similar services as the Funds
may reasonably request to the extent permitted or required under applicable
statutes, rules and regulations or as we may mutually agree and relieve the
Funds of other usual or incidental administrative services usually provided to
individual shareholders.
Section 2. You will provide such office space and equipment, telephone
facilities and personnel (which may be any part of the space, equipment and
facilities currently used in your business, or any personnel employed by you) as
may be reasonably necessary or beneficial in order to provide the aforementioned
services and assistance to the Funds.
Section 3. Neither you nor any of your officers, employees or agents are
authorized to make any representations concerning St. Clair Funds, Inc. or
shares of the Funds, except those contained in our then current prospectus,
statement of additional information, annual report, and semi-annual report,
copies of which will be supplied by us to you, or in such supplemental
literature or advertising as may be authorized by us in writing.
- - - - ----------
(1) Services may be modified or omitted in the particular case and items
renumbered.
A-1
<PAGE>
Section 4. For all purposes of this Agreement, you will be deemed to be an
independent contractor and will have no authority to act as agent for us in any
matter or in any respect. By your written acceptance of this Agreement, you
agree to and do release, indemnify and hold us harmless from and against any and
all direct or indirect liabilities or losses resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents regarding your responsibilities hereunder or the purchase, redemption,
transfer or registration of shares of the Funds (or orders relating to the same)
by or on behalf of shareholders. You and your employees will, upon request, be
available during normal business hours to consult with us or our designees
concerning the performance of your responsibilities under this Agreement.
Section 5. In consideration of the services and facilities provided by you
hereunder, we will pay to you, and you will accept as full payment therefor, a
fee at the annual rate of ____ of 1% of the average daily net asset value of the
Funds to which you provide support services, which fee will be computed daily
and payable monthly. For purposes of determining the fees payable under this
Section 5, the average daily net asset value of the Funds will be computed in
the manner specified in our Registration Statement (as the same is in effect
from time to time) in connection with the computation of the net asset value of
Fund shares for purposes of purchases and redemptions.
Section 6. You will furnish us or our designees with such information as
we or they may reasonably request (including, without limitation, periodic
certifications confirming the provision to the Funds of the services described
herein), and will otherwise cooperate with us and our designees (including,
without limitation, any auditors designated by us), in connection with the
preparation of reports to our Board of Directors concerning this Agreement and
the monies paid or payable by us pursuant hereto, as well as any other reports
or filings that may be required by law.
Section 7. We may enter into other similar Servicing Agreements with any
other persons without your consent.
Section 8. By your written acceptance of this Agreement, you represent,
warrant and agree that: (i) the compensation payable to you hereunder will be
disclosed in the prospectus for the Contracts; (ii) the services provided by you
under this Agreement will in no event be primarily intended to result in the
sale of shares of the Funds; and (iii) in the event an issue pertaining to our
Service Plan is submitted for shareholder approval, you will vote any Fund
shares held for your own account in the same proportion as the vote of Fund
shares attributable to Contract owners.
Section 9. This Agreement will become effective on the date a fully
executed copy of this Agreement is received by us or our designee. Unless sooner
terminated, this Agreement will continue until __________, 1999, and thereafter
will continue automatically for successive annual periods provided such
continuance is specifically approved at least annually by us in the manner
described in Section 12. This Agreement is terminable with respect to any or all
of the Funds, without penalty, at any time by us (which termination will be by
vote of a majority of the Disinterested Directors as defined in Section 12) or
by you upon written notice to the other party hereto.
A-2
<PAGE>
Section 10. All notices and other communications hereunder will be duly
given if mailed, telegraphed, telexed or transmitted by similar
telecommunications device to the appropriate address stated herein, or to such
other address as either party shall so provide the other.
Section 11. This Agreement will be construed in accordance with the
Investment Company Act of 1940, as amended (the "1940 Act"), and the rules
promulgated thereunder. This Agreement is non-assignable by the parties hereto.
Section 12. This Agreement is entered into pursuant to a Service Plan
which has been approved by vote of a majority of our Board of Directors,
including a majority of the Directors who are not "interested persons" (as
defined in the 1940 Act) of St. Clair Funds, Inc. and who have no direct or
indirect financial interest in the operation of the Service Plan or in any
agreement related thereto, cast in person at a meeting called for the purpose of
voting on such approval ("Disinterested Directors").
If you agree to be legally bound by the provisions of this Agreement,
please sign a copy of this letter where indicated below and promptly return it
to us, c/o Huntleigh Fund Distributors, Inc., [address].
Very truly yours,
ST. CLAIR FUNDS
Date: By:
------------ ----------------------------
(Authorized Officer)
St. Clair Funds, Inc.
- - - - --------------------------------------
480 Pierce Street
- - - - --------------------------------------
Birmingham, MI 48009
- - - - --------------------------------------
Accepted and Agreed to:
[SHAREHOLDER ORGANIZATION]
By:
----------------------------
Date: (Authorized Officer)
------------
Address of Shareholder Organization:
----------------------------
----------------------------
----------------------------
A-3
<PAGE>
APPENDIX B
SERIES
Munder S&P 500 Index Equity Fund
Munder S&P MidCap Index Equity Fund
Munder S&P SmallCap Index Equity Fund
Munder Foreign Equity Fund
Munder Aggregate Bond Index Fund
B-1
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<PAGE>
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<CIK> 0000746714
<NAME> ST. CLAIR FUNDS, INC.
<SERIES>
<NUMBER> 011
<NAME> MUNDER INST. S&P 500 INDEX FUND
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> OCT-14-1997
<PERIOD-END> DEC-31-1997
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<INVESTMENTS-AT-VALUE> 63,827,850
<RECEIVABLES> 111,306
<ASSETS-OTHER> 106,197
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,045,353
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 46,377
<TOTAL-LIABILITIES> 46,377
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 63,692,921
<SHARES-COMMON-STOCK> 6,399,845
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,354
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (34,718)
<ACCUM-APPREC-OR-DEPREC> 339,419
<NET-ASSETS> 63,998,976
<DIVIDEND-INCOME> 164,177
<INTEREST-INCOME> 23,270
<OTHER-INCOME> 0
<EXPENSES-NET> (8,872)
<NET-INVESTMENT-INCOME> 178,575
<REALIZED-GAINS-CURRENT> (34,718)
<APPREC-INCREASE-CURRENT> 339,419
<NET-CHANGE-FROM-OPS> 483,276
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (178,471)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,397,926
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 1,919
<NET-CHANGE-IN-ASSETS> 63,998,976
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 7,005
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 62,299
<AVERAGE-NET-ASSETS> 46,825,892
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.04)
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<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<PAGE>
<ARTICLE> 6
<CIK> 0000746714
<NAME> ST. CLAIR FUNDS, INC.
<SERIES>
<NUMBER> 011
<NAME> MUNDER INST. S&P 500 INDEX FUND
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<INVESTMENTS-AT-COST> 54,922,981
<INVESTMENTS-AT-VALUE> 62,452,981
<RECEIVABLES> 140,985
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 44,946
<TOTAL-ASSETS> 62,638,912
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 14,193
<TOTAL-LIABILITIES> 14,193
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 54,173,977
<SHARES-COMMON-STOCK> 5,499,155
<SHARES-COMMON-PRIOR> 6,399,845
<ACCUMULATED-NII-CURRENT> 225,754
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 688,706
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 7,536,282
<NET-ASSETS> 62,624,719
<DIVIDEND-INCOME> 226,597
<INTEREST-INCOME> 11,687
<OTHER-INCOME> 0
<EXPENSES-NET> (13,884)
<NET-INVESTMENT-INCOME> 224,400
<REALIZED-GAINS-CURRENT> 723,424
<APPREC-INCREASE-CURRENT> 7,196,863
<NET-CHANGE-FROM-OPS> 8,144,687
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 900,690
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> (1,374,257)
<ACCUMULATED-NII-PRIOR> 1,354
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 34,718
<GROSS-ADVISORY-FEES> 10,747
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 51,266
<AVERAGE-NET-ASSETS> 62,267,583
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 1.35
<PER-SHARE-DIVIDEND> 0.00
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 11.39
<EXPENSE-RATIO> 0.09
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746714
<NAME> ST. CLAIR FUNDS, INC.
<SERIES>
<NUMBER> 013
<NAME> MUNDER INST. S&P SMALL-CAP INDEX EQUITY FUND
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> AUG-07-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 2,505,233
<INVESTMENTS-AT-VALUE> 2,553,923
<RECEIVABLES> 40,658
<ASSETS-OTHER> 4,855
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,599,436
<PAYABLE-FOR-SECURITIES> 2,573
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,183
<TOTAL-LIABILITIES> 40,756
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,498,751
<SHARES-COMMON-STOCK> 250,001
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 771
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 10,468
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 48,690
<NET-ASSETS> 2,558,680
<DIVIDEND-INCOME> 8,288
<INTEREST-INCOME> 1,879
<OTHER-INCOME> 0
<EXPENSES-NET> (1,855)
<NET-INVESTMENT-INCOME> 8,312
<REALIZED-GAINS-CURRENT> 18,468
<APPREC-INCREASE-CURRENT> 48,690
<NET-CHANGE-FROM-OPS> 75,470
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (8,800)
<DISTRIBUTIONS-OF-GAINS> (8,000)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 250,001
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 2,558,680
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,554
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 40,201
<AVERAGE-NET-ASSETS> 2,573,164
<PER-SHARE-NAV-BEGIN> 10.00
<PER-SHARE-NII> 0.04
<PER-SHARE-GAIN-APPREC> 0.26
<PER-SHARE-DIVIDEND> (0.04)
<PER-SHARE-DISTRIBUTIONS> (0.03)
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 10.23
<EXPENSE-RATIO> 0.18
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000746714
<NAME> ST. CLAIR FUNDS, INC.
<SERIES>
<NUMBER> 05
<NAME> LIQUIDITY PLUS MONEY MARKET FUND
<S> <C>
<PERIOD-TYPE> 7-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-04-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 56,907,747
<INVESTMENTS-AT-VALUE> 56,907,747
<RECEIVABLES> 2,534
<ASSETS-OTHER> 18,125
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 56,928,406
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 292,689
<TOTAL-LIABILITIES> 202,689
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 56,634,307
<SHARES-COMMON-STOCK> 56,635,717
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 1,410
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 56,635,717
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 767,029
<OTHER-INCOME> 0
<EXPENSES-NET> (128,421)
<NET-INVESTMENT-INCOME> 638,608
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 638,608
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (638,608)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 74,164,373
<NUMBER-OF-SHARES-REDEEMED> (17,926,784)
<SHARES-REINVESTED> 398,127
<NET-CHANGE-IN-ASSETS> 56,635,717
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 52,118
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 128,421
<AVERAGE-NET-ASSETS> 25,158,976
<PER-SHARE-NAV-BEGIN> 1.00
<PER-SHARE-NII> 0.03
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.03)
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<PER-SHARE-NAV-END> 1.00
<EXPENSE-RATIO> 0.86
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</TABLE>
