<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
PAGE
Fund Highlights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
What are the key facts regarding the Funds? . . . . . . . . . . . . . . .3
Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Fund Choices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
What Funds are offered? . . . . . . . . . . . . . . . . . . . . . . . . .8
Who may want to invest in the Funds?. . . . . . . . . . . . . . . . . . 10
What are the Funds' investments and investment practices? . . . . . . . 10
What are the risks of investing in the Funds? . . . . . . . . . . . . . 13
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
How is the Funds' performance calculated? . . . . . . . . . . . . . . . 15
Where can I obtain performance data?. . . . . . . . . . . . . . . . . . 15
Purchases of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
What price do I pay for shares? . . . . . . . . . . . . . . . . . . . . 16
When can I purchase shares? . . . . . . . . . . . . . . . . . . . . . . 16
What is the minimum required investment?. . . . . . . . . . . . . . . . 16
How can I purchase shares?. . . . . . . . . . . . . . . . . . . . . . . 16
Redemptions of Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
What price do I receive for redeemed shares?. . . . . . . . . . . . . . 16
When can I redeem shares? . . . . . . . . . . . . . . . . . . . . . . . 17
How can I redeem shares?. . . . . . . . . . . . . . . . . . . . . . . . 17
When will I receive redemption amounts? . . . . . . . . . . . . . . . . 17
Structure and Management of the Funds. . . . . . . . . . . . . . . . . . . . 17
How are the Funds structured? . . . . . . . . . . . . . . . . . . . . . 17
Who manages and services the Funds? . . . . . . . . . . . . . . . . . . 17
What are my rights as a shareholder?. . . . . . . . . . . . . . . . . . 18
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . . . . . . . 18
When will I receive distributions from the Funds? . . . . . . . . . . . 18
How will distributions be made? . . . . . . . . . . . . . . . . . . . . 19
Are there tax implications of my investments in the Funds?. . . . . . . 19
Additional Information . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Appendix A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
2
<PAGE>
FUND HIGHLIGHTS
WHAT ARE THE KEY FACTS REGARDING THE FUNDS?
Q: WHAT ARE THE FUNDS' GOALS?
A:
- 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").
- 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").
- 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").
- 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.
- 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
- 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
- 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
- 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
- This Fund invests only in U.S. Treasury securities and repurchase
agreements relating to U.S. Treasury securities.
MONEY MARKET FUND
- This Fund invests in a broad range of short-term, high quality, U.S.
dollar-denominated instruments that are available in the money
markets.
Each Fund implements a different investment strategy which is described in
this Prospectus.
3
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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
SmallCap Index Fund general, 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.
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.
4
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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 the other expenses and the 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%,
respectively, 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.
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]
5
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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.
<TABLE>
<CAPTION>
LARGECAP 500 INDEX FUND
-----------------------
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.
6
<PAGE>
<TABLE>
<CAPTION>
SMALLCAP
INDEX
FUND
----
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.
7
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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. Kenneth A. Schluchter III and Darin McBride
jointly manage the Fund. Mr. Schluchter, the Director of Domestic
Investments of the Advisor, has managed the Fund since its inception. He was
previously a Systems Developer and Data Analyst for Compuware Incorporated
(1993-1995). Mr. McBride, a Portfolio Manager of the Advisor has also 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).
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.
8
<PAGE>
PORTFOLIO MANAGEMENT. Kenneth A. Schluchter III and Darin McBride jointly
manage the Fund. Mr. Schluchter, the Director of Domestic Investments of the
Advisor, has managed the Fund since its inception. He was previously a Systems
Developer and Data Analyst for Compuware Incorporated (1993-1995). Mr. McBride,
a Portfolio Manager of the Advisor has also 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).
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. Kenneth A. Schluchter III and Mark Drouse jointly
manage the Fund. Mr. Schluchter, the Director of Domestic Investments of the
Advisor, has managed the Fund since its inception. He was previously a
Systems Developer and Data Analyst for Compuware Incorporated (1993-1995).
Mr. Drouse has also been a 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).
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 Market Trading for the Advisor, manages the Fund. Prior to joining the
Advisor in 1996, she was a European Portfolio Manager for Ford Motor Company.
9
<PAGE>
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.
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.
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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.
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.
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<PAGE>
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
STRIPPED SECURITIES:
- Participations in trusts that hold U.S. N N N N Y
Treasury and agency securities
- U.S. Treasury-issued receipts. . . . . . N N N Y Y
- 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
</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.
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<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>
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
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:
- Issued or guaranteed by U.S.
Government . . . . . . . . . . . . . . . Y Y Y Y Y
- Issued or guaranteed by U.S.
Government agencies and
instrumentalities. . . . . . . . . . . . Y Y Y N Y
CORPORATE OBLIGATIONS:
- Commercial paper . . . . . . . . . . . . Y Y Y N Y
- Corporate bonds. . . . . . . . . . . . . Y Y Y N Y
- Notes. . . . . . . . . . . . . . . . . . Y Y Y N Y
- Other short-term obligations . . . . . . Y Y Y N Y
- Variable Master Demand Notes . . . . . . Y Y Y N Y
- 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
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.
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<PAGE>
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 whose values 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 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.
14
<PAGE>
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.
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.
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<PAGE>
PURCHASES OF SHARES
The following persons may purchase shares of the Funds:
- fiduciary and discretionary accounts of institutions
- high net worth individuals
- 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.
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.
16
<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. 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, Woodbridge and WAM
Holdings, Inc. ("WAM"). MCM was founded in February 1985 as a Delaware
corporation and was a registered investment advisor. Woodbridge and WAM are
indirect, wholly-owned subsidiaries of Comerica Incorporated. Mr. Lee P.
Munder, the Advisor's 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.
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
17
<PAGE>
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 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. 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, the Transfer Agent, the Custodian, the 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.
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.
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<PAGE>
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 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
19
<PAGE>
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.
20
<PAGE>
APPENDIX A
STANDARD & POOR'S INDEXES
"Standard & Poor's-Registered Trademark-", "S&P-Registered Trademark-",
"S&P 500-Registered Trademark-", "Standard and Poor's 500", "500", "S&P
MidCap 400", "Standard & Poor's MidCap 400", "400", "S&P SmallCap
600-Registered Trademark-", "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.
21
<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 Securities, its
affiliates and subsidiaries 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.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Financial Information. . . . . . . . . . . . . . . . . . . . . . 3
Fund Information . . . . . . . . . . . . . . . . . . . . . . . . 4
Purchases of Shares. . . . . . . . . . . . . . . . . . . . . . . 7
Redemptions of Shares. . . . . . . . . . . . . . . . . . . . . . 8
Structure and Management of Fund . . . . . . . . . . . . . . . . 9
Dividends, Distributions and Taxes . . . . . . . . . . . . . . . 11
Performance. . . . . . . . . . . . . . . . . . . . . . . . . . . 12
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 and will fluctuate based on the actual
amount of assets in the Fund. 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 Securities, its affiliates and
subsidiaries, and certain other Institutional Investors.
<TABLE>
<CAPTION>
ANNUAL OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS)
<S> <C>
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.
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
$9 $28 $48 $106
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.
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.
4
<PAGE>
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.
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.
5
<PAGE>
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.
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.
6
<PAGE>
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.
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.
7
<PAGE>
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.
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.
8
<PAGE>
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, Woodbridge and WAM
Holdings, Inc. ("WAM"). Woodbridge and WAM are indirect, wholly-owned
subsidiaries 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.
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 Advisors
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.
9
<PAGE>
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 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.
10
<PAGE>
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.
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.
11
<PAGE>
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. 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.
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.
12
<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 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 _______, 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> <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 DISTRIBUTORS, 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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<PAGE>
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
<PAGE>
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-Registered Trademark-", "S&P-Registered Trademark-",
"S&P 500-Registered Trademark-", "Standard and Poor's 500", "500", "S&P
MidCap 400", "Standard & Poor's MidCap 400", "400", "S&P SmallCap
600-Registered Trademark-", "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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<PAGE>
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, Woodbridge and WAM Holdings, Inc. ("WAM"). MCM was founded in February
1985 as a Delaware corporation and was a registered investment advisor.
Woodbridge and WAM are indirect, wholly-owned subsidiaries of Comerica
Incorporated. Mr. Lee P. Munder, the Advisor's 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
PAGE
<TABLE>
<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, Woodbridge Capital
Management, Inc. ("Woodbridge") 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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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.
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
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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 this
amount. Unlike options on specific securities, all settlements of options on
stock indices are in cash,
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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 and Treasury
bonds generally have initial maturities greater than ten years. A portion of
the U.S.
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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:
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Positions with Company During the Past Five Years
- --------------------- ---------------------- ---------------------------
<S> <C> <C>
Charles W. Elliott Chairman of the Board of Directors Senior Advisor to the President - Western
1024 Essex Circle Michigan University since July 1995;
Kalamazoo, MI 49008 Executive Vice President - Administration
Age: 65 & Chief Financial Officer, Kellogg Company
from January 1987 through June 1995;
before that Price Waterhouse. Board of
Directors, Steelcase Financial
Corporation.
John Rakolta, Jr. Director and Vice Chairman of the Board Chairman and Chief Executive Officer,
1876 Rathmor of Directors Walbridge Aldinger Company (construction
Bloomfield Hills, MI 48304 company).
Age: 50
Thomas B. Bender Director Investment Advisor, Financial & Investment
7 Wood Ridge Road Management Group (since April, 1991); Vice
Glen Arbor, MI 49636 President Institutional Sales, Kidder,
Age: 64 Peabody & Co. (Retired April, 1991);
Trustee, Vining Real Estate Investment
Trust.
David J. Brophy Director Professor, University of Michigan;
1025 Martin Place Director, River Place Financial Corp.
Ann Arbor, MI 48104
Age: 61
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Positions with Company During the Past Five Years
- --------------------- ---------------------- ---------------------------
<S> <C> <C>
Dr. Joseph E. Champagne Director Dean, University Center, Macomb College
319 East Snell Road since September 1997; Corporate and
Rochester, MI 48306 Executive Consultant since September 1995;
Age: 59 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 Executive Officer,
10726 Falls Pointe Drive Capital Automotive REIT from November
Great Falls, VA 22066 1997 to present (real estate investment
Age: 50 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 since February 1998;
480 Pierce Street Chief Executive Officer of World Asset
Suite 300 Management since January 1995; Chief
Birmingham, MI 48009 Executive Officer of Old MCM, Inc.
Age: 52 (predecessor to Advisor) since 1985; and
Director, LPM Investment Services, Inc.
(LPM).
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Positions with Company During the Past Five Years
- --------------------- ---------------------- ---------------------------
<S> <C> <C>
Terry H. Gardner Vice President, Chief Financial Officer Vice President and Chief Financial Officer
480 Pierce Street and Treasurer of the Advisor; Vice President and Chief
Suite 300 Financial Officer of Old MCM, Inc.
Birmingham, MI 48009 (February 1993 to present); and Secretary
Age: 37 of LPM.
Paul Tobias Vice President Chief Executive Officer of the Advisor
480 Pierce Street (since February 1998); Chief Operating
Suite 300 Officer of the Advisor (since April 1995);
Birmingham, MI 48009 Executive Vice President of the Advisor
Age: 46 (April 1995 to February 1998); and
Executive Vice President of Comerica, Inc.
Gerald Seizert Vice President Chief Executive Officer of the Advisor
480 Pierce Street (since February 1998); Chief Investment
Suite 300 Officer/Equities of the Advisor (since
Birmingham, MI 48009 April 1995); Executive Vice President of
Age: 45 the Advisor (April 1995 to 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 Director of Marketing
480 Pierce Street for the Advisor; Vice President and
Suite 300 Director of Client Services of Old MCM,
Birmingham, MI 48009 Inc. (August 1988 to December 1994).
Age: 40
James C. Robinson Vice President Vice President and Chief Investment
480 Pierce Street Officer/Fixed Income for the Advisor; Vice
Suite 300 President and Director of Fixed Income of
Birmingham, MI 48009 Old MCM, Inc. (1987-1994).
Age: 36
Leonard J. Barr, II Vice President Vice President and Director of Core Equity
480 Pierce Street Research of the Advisor; Director and
Suite 300 Senior Vice President of Old MCM, Inc.
Birmingham, MI 48009 (since 1988); Director of LPM.
Age: 53
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Principal Occupations
Name, Address and Age Positions with Company During the Past Five Years
- --------------------- ---------------------- ---------------------------
<S> <C> <C>
Ann F. Putallaz Vice President Vice President and Director of Fiduciary
480 Pierce Street Services of the Advisor (since January
Suite 300 1995); Director of Client and Marketing
Birmingham, MI 48009 Services of Woodbridge Capital Management,
Age: 54 Inc.
Lisa A. Rosen Secretary, Assistant Treasurer General Counsel of the Advisor (since May
480 Pierce Street 1996); formerly Counsel, First Data
Suite 300 Investor Services Group, Inc.; Assistant
Birmingham, MI 48009 Vice President and Counsel with The Boston
Age: 30 Company Advisors, Inc.; Associate with
Hutchins, Wheeler & Dittmar.
Therese Hogan Assistant Secretary Director, State Regulation Department,
53 State Street First Data Investor Services Group (June
Boston, MA 02109 1994-present); formerly Senior Legal
Age: 36 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.
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>
Pension
Aggregate Retirement Estimated
Compensation Benefits Annual
Name of from the Company, Accrued Benefits Total from
Person the 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
Chairman $26,000 None None $26,000
John Rakolta, Jr.
Vice Chairman $23,000 None None $23,000
Thomas B. Bender
Trustee and Director $26,000 None None $26,000
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
Pension
Aggregate Retirement Estimated
Compensation Benefits Annual
Name of from the Company, Accrued Benefits Total from
Person the Trust, Munder and as Part of upon the Fund
and Position Framlington Trust Fund Expenses Retirement Complex
------------ ----------------- ------------- ---------- -------
<S> <C> <C> <C> <C>
David J. Brophy
Trustee and Director $26,000 None None $26,000
Dr. Joseph E. Champagne
Trustee and Director $26,000 None None $26,000
Thomas D. Eckert
Trustee and Director $22,500 None None $22,500
</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 Woodbridge, WAM, Old MCM and Munder Group, LLC. Woodbridge and
WAM are wholly-owned subsidiaries of Comerica Bank -- Ann Arbor, which, in
turn is a wholly-owned subsidiary of Comerica Incorporated, a publicly-held
bank holding company.
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.
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
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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 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
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<PAGE>
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
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
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<PAGE>
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 defined in Rule 10b-1 under the 1940 Act) or their
parent companies held by them as of the close of their most recent fiscal
year and 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 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
26
<PAGE>
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:
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;
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<PAGE>
(b) dividing the net change by the value of the account at the beginning of
the period to obtain the base period return; and (c) annualizing the results
(i.e., multiplying the base period return by 365/7). The net change in the
value of the account reflects the value of additional shares purchased with
dividends declared and all dividends declared on both the original share and
such additional shares, but does not include realized gains and losses or
unrealized appreciation and depreciation. Compound effective yields are
computed by adding 1 to the base period return (calculated as described
above), raising the sum to a power equal to 365/7 and subtracting 1.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yield of the Fund will fluctuate, it cannot be
compared with yields on savings accounts or other investment alternatives that
provide an agreed to or guaranteed fixed yield for a stated period of time.
However, yield information may be useful to an investor considering temporary
investments in money market instruments. In comparing the yield of one money
market fund to another, consideration should be given to the Fund's investment
policies including the types of investments made, lengths of maturities of the
portfolio securities, and whether there are any special account charges which
may reduce the effective yield.
YIELD OF THE SHORT TERM TREASURY FUND
The Short Term Treasury Fund's 30-day SEC yield (or one month) standard
yield described in the Prospectus is calculated for the Fund in accordance
with the method prescribed by the SEC for mutual funds:
a - b
YIELD = 2[(-------+1)6 - 1]
cd
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of expense reimbursements
and waivers);
c = average daily number of shares outstanding during the period
entitled to receive dividends;
d = maximum offering price per share on the last day of the period.
For the purpose of determining interest earned on debt obligations
purchased by the Fund at a discount or premium (variable "a" in the formula),
the Fund computes the yield to maturity of such instrument based on the
market value of the obligation (including actual accrued interest) at the
close of business on the last business day of each month, or, with respect to
obligations purchased during the month, the purchase price (plus actual
accrued interest). Such yield is then divided by 360 and the quotient is
multiplied by the market value of the obligation (including actual accrued
interest) in order to determine the interest income on the obligation for
each day of the subsequent month that the obligation is in the portfolio. It
is assumed in the above calculation that each month contains 30 days. The
maturity of a debt obligation with a call provision is deemed to be the next
call date on which the obligation reasonably may be expected to be called or,
if none, the maturity date. For the purpose of computing yield on equity
securities held by the Fund, dividend income is recognized by accruing 1/360
of the stated dividend rate of the security for each day that the security is
held by the Fund.
Interest earned on tax-exempt obligations that are issued without
original issue discount and have a current market discount is calculated by
using the coupon rate of interest instead of the yield to maturity. In the
case of tax-exempt obligations that are issued with original issue discount
but which have discounts based on current market value that exceed the
then-remaining portion of the original issue
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<PAGE>
discount (market discount), the yield to maturity is the imputed rate based
on the original issue discount calculation. On the other hand, in the case
of tax-exempt obligations that are issued with original issue discount but
which have the discounts based on current market value that are less than the
then-remaining portion of the original issue discount (market premium), the
yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed debt obligations
purchased at a discount or premium, the formula generally calls for
amortization of the discount or premium. The amortization schedule will be
adjusted monthly to reflect changes in the market value of such debt
obligations. Expenses accrued for the period (variable "b" in the formula)
include all recurring fees charged by a Fund to all shareholder accounts in
proportion to the length of the base period and the Fund's mean (or median)
account size. Undeclared earned income will be subtracted from the offering
price per share (variable "d" in the formula).
AVERAGE ANNUAL TOTAL RETURN
A Fund may advertise its "average annual total return" and will compute
such return by determining the average annual compounded rate of return
during specified periods that equates the initial amount invested to the
ending redeemable value of such investment according to the following formula:
P (1 + T)n = ERV
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10
year (or other) periods at the end of the applicable
period and of any CDSC deduction (or a fractional
portion thereof);
P = hypothetical initial payment of $1,000;
n = number of years and portion of a year
AGGREGATE TOTAL RETURN
A Fund may advertise its "aggregate total return" and will compute such
return by determining the aggregate compounded rates of return during
specified periods that likewise equate the initial amount invested to the
ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
(ERV) - 1
Aggregate Total Return = -----
P
The calculations are made assuming that (1) all dividends and capital
gain distributions are reinvested on the reinvestment dates at the price per
share existing on the reinvestment date, (2) all recurring fees charged to
all shareholder accounts are included, and (3) for any account fees that vary
with the size of the account, a mean (or median) account size in the Fund
during the periods is reflected. The ending redeemable value (variable "ERV"
in the formula) is determined by assuming complete redemption of the
hypothetical investment after deduction of all non-recurring charges at the
end of the measuring period.
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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.
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
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<PAGE>
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 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
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<PAGE>
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 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.
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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. 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
34
<PAGE>
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 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.
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<PAGE>
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.
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:
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<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL SHARES
NAME OF FUND NAME AND ADDRESS OUTSTANDING
------------ ---------------- -----------
<S> <C> <C>
LargeCap 500 Index Fund Calhoun & Company 100%
and c/o Comerica Bank Detroit
MidCap Index Fund P.O. Box 75000
Detroit, MI 48275-3455
</TABLE>
As of March 23, 1998, Munder Capital Management, on behalf of its
clients owned 100% of the SmallCap Index Fund.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in the Prospectuses, a "majority of the outstanding shares"
of the Fund means the lesser of (a) 67% of the shares of the Fund represented
at a meeting at which the holders of more than 50% of the outstanding shares
of the Fund are present in person or by proxy, or (b) more than 50% of the
outstanding shares of the Fund.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956
or any bank or non-bank affiliate thereof from sponsoring, organizing,
controlling or distributing the shares of a registered, open-end investment
company continuously engaged in the issuance of its shares, and prohibit
banks generally from underwriting securities, but such banking laws and
regulations do not prohibit such a holding company or affiliate or banks
generally from acting as investment advisor, administrator, transfer agent or
custodian to such an investment company, or from purchasing shares of such a
company as agent for and upon the order of customers. The Advisor and the
Custodian are subject to such banking laws and regulations.
The Advisor and the Custodian believe they may perform the services for
the Company contemplated by their respective agreements with the Company
without violation of applicable banking laws or regulations. It should be
noted, however, that there have been no cases deciding whether bank and
non-bank subsidiaries of a registered bank holding company may perform
services comparable to those that are to be performed by these companies, and
future changes in either Federal or state statutes and regulations relating
to permissible activities of banks and their subsidiaries or affiliates, as
well as future judicial or administrative decisions or interpretations of
current and future statutes and regulations, could prevent these companies
from continuing to perform such service for the Company.
Should future legislative, judicial or administrative action prohibit or
restrict the activities of such companies in connection with the provision of
services on behalf of the Company, the Company might be required to alter
materially or discontinue its arrangements with such companies and change its
method of operations. It is not anticipated, however, that any change in the
Company's method of operations would affect the net asset value per share of
the Funds or result in a financial loss to any shareholder of the Funds.
REGISTRATION STATEMENT
This Statement of Additional Information and the Funds' Prospectus do
not contain all the information included in the Funds' registration statement
filed with the SEC under the 1933 Act with respect to the securities offered
hereby, certain portions of which have been omitted pursuant to the rules and
regulations of the SEC. The registration statement, including the exhibits
filed therewith, may be examined at the offices of the SEC in Washington, D.C.
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<PAGE>
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.
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<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
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate buying $62,500 in Buying 1 Index Futures at 125
Equity Securities Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Securities with Actual Sell 1 Index Futures at 130
Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
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HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 X $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 Sell 16 Index Futures at 125
in Equity Securities Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
II. MARGIN PAYMENTS
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract.
Initially, the Fund will be required to deposit with the broker or in a
segregated account with the Custodian an amount of cash or cash equivalents,
known as initial margin, based on the value of the contract. The nature of
initial margin in futures transactions is different from that of margin in
security transactions in that futures contract margin does not involve the
borrowing of funds by the customer to finance the transactions. Rather, the
initial margin is in the nature of a performance bond or good faith deposit
on the contract which is returned to the Fund upon termination of the futures
contract assuming all contractual obligations have been satisfied.
Subsequent payments, called variation margin, to and from the broker, will be
made on a daily basis as the price of the underlying instruments fluctuates
making the long and short positions in the futures contract more or less
valuable, a process known as marking-to-the-market. For example, when a
particular Fund has purchased a futures contract and the price of the
contract has risen in response to a rise in the underlying instruments, that
position will have increased in value and the Fund will be entitled to
receive from the broker a variation margin payment equal to that increase in
value. Conversely, where the Fund has purchased a futures contract and the
price of the futures contract has declined in response to a decrease in the
underlying instruments, the position would be less valuable and the Fund
would be required to make a variation margin payment to the broker. At any
time prior to expiration of the futures contract, the Advisor may elect to
close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the
Fund's position in the futures contract. A final determination of variation
margin is then made, additional cash is required to be paid by or released to
the Fund, and the Fund realizes a loss or gain.
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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
44
<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> <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
1
<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)
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
2
<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)
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
3
<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)
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
4
<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)
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
5
<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)
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
6
<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)
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
7
<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
Page
General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Fund Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
Additional Investment Limitations . . . . . . . . . . . . . . . . . . . 12
Directors and Officers. . . . . . . . . . . . . . . . . . . . . . . . . 14
Investment Advisory and Other Service Arrangements. . . . . . . . . . . 18
Portfolio Transactions. . . . . . . . . . . . . . . . . . . . . . . . . 21
Additional Purchase and Redemption Information. . . . . . . . . . . . . 22
Net Asset Value . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Additional Information Concerning Shares. . . . . . . . . . . . . . . . 27
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Registration Statement. . . . . . . . . . . . . . . . . . . . . . . . . 29
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . 29
Appendix. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
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, Woodbridge Capital Management, Inc.
("Woodbridge") 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.
2
<PAGE>
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.
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 Sub-Custodian,
the Distributor or their affiliates.
3
<PAGE>
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 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.
4
<PAGE>
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 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.
5
<PAGE>
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 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
6
<PAGE>
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.
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
7
<PAGE>
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
8
<PAGE>
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
9
<PAGE>
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.
10
<PAGE>
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
11
<PAGE>
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 (as defined under "Miscellaneous-Shareholder
Approvals").
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;
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;
12
<PAGE>
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; or
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; or
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.
13
<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:
<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
1024 Essex Circle 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
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Executive Officer,
Drive Capital Automotive REIT
Great Falls, VA 22066 from November 1997 to
Age: 50 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 Management
Age: 52 since January 1995; Chief
Executive Officer of Old
MCM, Inc. (predecessor to
Advisor) since 1985; and
Director, LPM Investment
Services, Inc. ("LPM").
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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); Chief
Birmingham, MI 48009 Operating Officer of the
Age: 46 Advisor (since April
1995); Executive Vice
President of the Advisor
(April 1995 to 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); Chief
Birmingham, MI 48009 Investment
Age: 45 Officer/Equities of the
Advisor (since April
1995); Executive Vice
President of the Advisor
(April 1995 to 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.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
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
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).
</TABLE>
* "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 Total from
Name of from the Company, Benefits Annual the Fund
Person the Trust, Munder and Accrued Benefits Complex
and Position Framlington Trust as Part of upon -------
------------ ----------------- Fund Expenses Retirement
------------- ----------
<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
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <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. Champagne $26,000 None None $26,000
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 Woodbridge, WAM, Old MCM, and Munder Group, LLC. Woodbridge and
WAM are wholly-owned subsidiaries of Comerica Bank -- Ann Arbor, which in
turn is a wholly-owned subsidiary of Comerica Incorporated, a publicly held
bank holding company.
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.
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 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 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.
18
<PAGE>
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 Distributor'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 the 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
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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.
For the period of June 4, 1997 (commencement of operations) through
October 31, 1997, First Data Investor Services Group, Inc. served as the
administrator for the Fund. For the period June 4, 1997 through October 31,
1997, the Fund paid First Data Investor Services Group, Inc. administrative
fees in the amount of $2,016.53. For the period from November 1, 1997
through December 31, 1997, State Street received administrative fees in the
amount $5,427.79.
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 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.
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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 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.
Except as noted in the Prospectus and this Statement of Additional
Information the Fund's service contractors bear all expenses in connection
with the performance of their services and the Fund bears the expenses
incurred in its operations. These expenses include, but are not limited to,
fees paid to the Advisor, Administrator, Sub-Custodian and Transfer Agent;
fees and expenses of officers and Directors; taxes; interest; legal and
auditing fees; 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;
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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 Fund 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 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.
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
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<PAGE>
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
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.
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<PAGE>
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'
sProspectus. 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.
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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 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
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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.
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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.
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
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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 Portfolio.
However, Rule 18f-2 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 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 Services 100%
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
28
<PAGE>
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 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.
29
<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 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:
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<PAGE>
"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."
31
<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+".
32
<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
Page
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 .......................................... 26
Performance Information .................................. 27
Taxes ................................................... 28
Additional Information Concerning Shares ................ 31
Miscellaneous ............................................ 32
Appendix A ............................................... A-1
Appendix B ............................................... B-1
No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or
in the Prospectus in connection with the offering made by the Prospectus and,
if given or made, such information or representations must not be relied upon
as having been authorized by the Funds or the Distributor. The Prospectus
does not constitute an offering by the Funds or by the Distributor, in any
jurisdiction in which such offering may not lawfully be made.
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, Woodbridge Capital
Management, Inc. ("Woodbridge") 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.
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
3
<PAGE>
(i) authoritarian governments or military involvement in political and
economic decision-making; (ii) 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
4
<PAGE>
adversely affect the Fund's ability to terminate existing swap agreements or
to realize amounts to be received under such agreements.
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
5
<PAGE>
securities that they issue. Mortgage-related securities guaranteed by the
Government National Mortgage Association ("GNMA") include GNMA Mortgage
Pass-Through Certificates (also known as "Ginnie Maes") which are guaranteed
as to the timely payment of principal and interest by GNMA and such guarantee
is backed by the full faith and credit of the United States. GNMA is a
wholly-owned U.S. Government corporation within the Department of Housing and
Urban Development. GNMA certificates also are supported by the authority of
GNMA to borrow funds from the U.S. Treasury to make payments under its
guarantee. Mortgage-related securities issued by the Federal National
Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage Pass-Through
Certificates (also known as "Fannie Maes") which are solely the obligations
of the FNMA and are not backed by or entitled to the full faith and credit of
the United States, but are supported by the right of the issuer to borrow
from the 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.
6
<PAGE>
Effecting a closing transaction in the case of a written call option
will permit the Funds to write another call option on the underlying, security
with either a different exercise price or expiration date or both, or in the
case of a written put option, will permit the Funds to write another put
option to the extent that the exercise price thereof is secured by deposited
cash or short-term securities. Also, effecting a closing transaction will
permit the cash or proceeds from the concurrent sale of any securities
subject to the option to be used for other Fund investments. If a Fund
desires to sell a particular security from its portfolio on which it has
written a call option, it will effect a closing transaction prior to or
concurrent with the sale of the security.
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.
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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 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.
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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 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
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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 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
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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.
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.
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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.
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
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amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
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,
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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 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.
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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.
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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;
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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 Senior Advisor to
1024 Essex Circle Board of Directors the President -
Kalamazoo, MI Western Michigan
49008 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.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
John Rakolta, Jr. Director and Vice Chairman and Chief
1876 Rathmor Chairman of the Executive Officer,
Bloomfield Hills, Board of Directors Walbridge Aldinger
MI 48304 Company
Age: 50 (construction
company).
Thomas B. Bender Director Investment Advisor,
7 Wood Ridge Road Financial &
Glen Arbor, MI Investment
49636 Management Group
Age: 64 (since April, 1991);
Vice President
Institutional Sales,
Kidder, Peabody &
Co. (Retired April,
1991); Trustee,
Vining Real Estate
Investment Trust.
David J. Brophy Director Professor,
1025 Martin Place University of
Ann Arbor, MI Michigan; Director,
48104 River Place
Age: 61 Financial Corp.
Dr. Joseph E. Director Dean, University
Champagne Center, Macomb
319 East Snell Road College since
Rochester, MI September 1997;
48306 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>
<CAPTION>
<S> <C> <C>
Thomas D. Eckert Director President and Chief
10726 Falls Pointe Executive Officer,
Drive Capital Automotive
Great Falls, VA REIT from November
22066 1997 to present
Age: 50 (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 Chairman of the
480 Pierce Street President Advisor since
Suite 300 February 1998; Chief
Birmingham, MI Executive Officer of
48009 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").
Terry H. Gardner Vice President, Vice President and
480 Pierce Street Chief Financial Chief Financial
Suite 300 Officer and Officer of the
Birmingham, MI Treasurer Advisor; Vice
48009 President and Chief
Age: 37 Financial Officer of
Old MCM, Inc.
(February 1993 to
present) and;
Secretary of LPM.
Paul Tobias Vice President Chief Executive
480 Pierce Street Officer of the
Suite 300 Advisor (since
Birmingham, MI February 1998);
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.
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Gerald Seizert Vice President Chief Executive
480 Pierce Street Officer of the
Suite 300 Advisor (since
Birmingham, MI February 1998);
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
Suite 300 Marketing for the
Birmingham, MI Advisor; Vice
48009 President and
Age: 40 Director of Client
Services of Old MCM,
Inc. (August 1988 to
December 1994).
James C. Robinson Vice President Vice President and
480 Pierce Street Chief Investment
Suite 300 Officer/Fixed Income
Birmingham, MI for the Advisor;
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
Suite 300 Equity Research of
Birmingham, MI the Advisor;
48009 Director and Senior
Age: 53 Vice President of
Old MCM, Inc. (since
1988); Director of LPM.
Ann F. Putallaz Vice President Vice President and
480 Pierce Street Director of
Suite 300 Fiduciary Services
Birmingham, MI of the Advisor
48009 (since January
Age: 52 1995); Director of
Client and Marketing
Services of
Woodbridge Capital
Management, Inc.
Lisa A. Rosen Secretary, Assistant General Counsel of
480 Pierce Street Treasurer the Advisor (since
Suite 300 May 1996); formerly
Birmingham, MI Counsel, First Data
48009 Investor Services
Age: 30 Group, Inc.; Assistant
Vice President and
Counsel with The
Boston Company
Advisors, Inc.;
Associate with Hutchins,
Wheeler & Dittmar.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Therese Hogan Assistant Secretary Director, State Regulation
53 State Street Department, First
Boston, MA 02109 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).
</TABLE>
* "Interested person" of the Company, as defined in the 1940 Act.
Directors of the Company receive an aggregate fee from the Company, The
Munder Funds Trust (the "Trust"), The Munder Funds, Inc. ("Munder") and The
Munder Framlington Funds Trust ("Framlington Trust") comprised of an annual
retainer fee and a fee for each Board meeting attended, and are reimbursed
for all out-of-pocket expenses relating to attendance at meetings.
The following table summarizes the compensation paid by the Company,
Munder, the Trust and Framlington Trust to their respective
Directors/Trustees for the fiscal year ended December 31, 1997.
<TABLE>
<CAPTION>
Aggregate Pension
Compensation Retirement Estimated
Name of from the Company, the Benefits Accrued Annual 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
Chairman $26,000 None None $26,000
John Rakolta, Jr.
Vice Chairman $23,000 None None $23,000
Thomas B. Bender
Trustee and Director $26,000 None None $26,000
David J. Brophy
Trustee and Director $26,000 None None $26,000
Dr. Joseph E. Champagne
Trustee and Director $26,000 None None $26,000
Thomas D. Eckert
Trustee and Director $22,500 None None $22,500
</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.
21
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
INVESTMENT ADVISOR. The Advisor of the Fund is Munder Capital
Management, a Delaware general partnership. The general partners of the
Advisor are Woodbridge, WAM, Old MCM and Munder Group, LLC. Woodbridge and
WAM are wholly-owned subsidiaries of Comerica Bank -- Ann Arbor, which, in
turn is a wholly-owned subsidiary of Comerica Incorporated, a publicly-held
bank holding company.
Under the terms of the Investment Advisory Agreement between the Company
and the Advisor with respect to the Funds (the "Advisory Agreement"), the
Advisor furnishes continuing investment supervision to the Funds and is
responsible for the management of each Fund's portfolio. The responsibility for
making decisions to buy, sell or hold a particular security rests with the
Advisor, subject to review by the Company's Board of Directors.
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.
22
<PAGE>
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.
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.
23
<PAGE>
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.
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
24
<PAGE>
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 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
25
<PAGE>
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.
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.
26
<PAGE>
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:
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, 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.
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:
27
<PAGE>
P (1+ T)n = ERV
Where T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000
payment made at the beginning of the 1, 5, or 10 year (or
other) periods at the end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation expressed in years.
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 rates 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
28
<PAGE>
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, 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
29
<PAGE>
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 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.
30
<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 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
31
<PAGE>
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.
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.
32
<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 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-1" rated issues, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate
may be more affected by external conditions. Ample alternate liquidity, is
maintained.
Commercial paper ratings of S&P are current assessments of the likelihood
of timely payment of debt having original maturities of no more than 365 days.
Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted "A-1+."
Commercial paper rated "A-2" by S&P indicates that capacity for timely payment
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
A-2
<PAGE>
APPENDIX A
- Rated Investments -
COMMERCIAL PAPER
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality, pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
MOODY'S: The rating "Prime-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of
the likelihood of timely payment of debts having original maturities of no more
than 365 days. Commercial paper rated in the "A-1" category by S&P indicates
that the degree of safety regarding timely-payment is either overwhelming or
very strong. Those issues determined to possess overwhelming safety
characteristics are denoted "A-1+".
A-3
<PAGE>
APPENDIX B
As stated in the 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 and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because
of the liquidity that is often available in the futures market, the protection
is more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
DESCRIPTION OF INTEREST RATE FUTURES CONTRACTS. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
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
<TABLE>
<CAPTION>
PORTFOLIO FUTURES
--------- -------
<S> <C>
Anticipate buying $62,500 in Equity Securities -Day Hedge is Placed-
Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
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
</TABLE>
B-4
<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>
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
</TABLE>
III. MARGIN PAYMENTS
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the 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 offsetting 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