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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
April 28, 2000
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 ("S&P 500
Index Equity Fund"), Munder Institutional S&P MidCap Index Equity Fund ("MidCap
Index Equity Fund"), Munder Institutional S&P SmallCap Index Equity Fund
("SmallCap Index Equity Fund"), (together, 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.
This Statement of Additional Information provided supplementary information
pertaining to all classes of shares representing interests in each of the
investment portfolios listed 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 April 28, 2000. 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 April 28,
2000.
An investment in a Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
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TABLE OF CONTENTS
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Page
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History and General Information..................................... 3
Fund Investments.................................................... 3
Risk Factors and Special Considerations............................. 15
Investment Limitations.............................................. 16
Temporary Defensive Position........................................ 18
Directors and Officers.............................................. 18
Investment Advisory and Other Service Arrangements.................. 21
Code of Ethics...................................................... 25
Portfolio Transactions.............................................. 25
Additional Purchase and Redemption Information...................... 27
Net Asset Value..................................................... 28
Performance Information............................................. 29
Taxes............................................................... 31
Additional Information Concerning Shares............................ 35
Miscellaneous....................................................... 36
Registration Statement.............................................. 37
Financial Statements................................................ 37
Appendix A.......................................................... A-1
Appendix B.......................................................... B-1
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No person has been authorized to give any information or to make any
representations not contained in this Statement of Additional Information or in
the Prospectus in connection with the offering made by the Prospectus and, if
given or made, such information or representations must not be relied upon as
having been authorized by the Funds or the Distributor. The Prospectus does not
constitute an offering by the Funds or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
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HISTORY AND GENERAL INFORMATION
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. 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.
Each of the Funds is a diversified mutual fund. The investment advisor of
the Short Term Treasury Fund and Money Market Fund is Munder Capital Management
(the "Advisor"). The investment advisor of the Index Funds is World Asset
Management ("World"). The principal partners of the Advisor are Munder Group
LLC, WAM Holdings, Inc. ("WAM") and WAM Holdings II, Inc. ("WAM II"). WAM and
WAM II are indirect, wholly owned subsidiaries of Comerica Incorporated, which
owns or controls approximately 95% of the partnership interests in the Advisor.
World is a wholly owned subsidiary of the Advisor. World is a wholly owned
subsidiary 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.
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. When 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.
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 or World 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.
Borrowing. Each Fund is authorized to borrow money in an amount up to 5%
of the value of its total assets at the time of such borrowings for temporary
purposes, and is authorized to borrow money in excess of the 5% limit as
permitted by the 1940 Act to meet redemption requests. This borrowing may be
unsecured. The 1940 Act requires a Fund to maintain continuous asset coverage
of 300% of the amount borrowed. If the 300% asset coverage should decline as a
result of market fluctuations or other reasons, a Fund may be required to sell
some of its portfolio holdings within three days to reduce the debt and restore
the 300% asset coverage, even though it may be disadvantageous from an
investment standpoint to sell securities at that time. Borrowed funds are
subject to interest costs that may or may not be offset by amounts earned on
borrowed funds. A Fund may also be required to maintain minimum average
balances in connection with such borrowing or to pay a commitment or other fees
to maintain a line of credit; either of these requirements would increase the
cost of borrowing over the stated interest rate. Each Fund may, in connection
with permissible borrowings, transfer, as collateral, securities owned by the
Fund. A Fund may not purchase portfolio securities while borrowings exceed 5%
of the Fund's total assets.
Commercial Paper. Investments by a Fund (other than the Short Term
Treasury Fund and Money Market Fund) in commercial paper will consist of issues
rated at the time in one of the highest four rating categories by at least one
nationally-recognized statistical rating organization ("NRSRO"). Investments by
the Money Market Fund will consist of 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 or World at the time of purchase to be of comparable
quality to rated instruments that may be acquired by such Fund as previously
described.
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.
Depositary Receipts. The Index Funds may purchase American Depositary
Receipts ("ADRs"), European Depositary Receipts ("EDRs") and Global Depositary
Receipts ("GDRs"). 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. EDRs and GDRs are issued by European financial
institutions. 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
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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.
Foreign Securities. Each Index Fund may invest up to 25% of its assets in
foreign securities and the Money Market Fund may invest its assets in U.S.
dollar-denominated securities of foreign issuers. 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 trading 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 less regulation of stock
exchanges, brokers, and listed companies than in the United States. Such
concerns are particularly heightened for emerging markets and Eastern European
countries.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interest; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
Investments in Eastern European countries may involve risks of
nationalization, expropriation and confiscatory taxation. The Communist
governments of a number of Eastern European countries expropriated large amounts
of private property in the past, in many cases without adequate compensation,
and there can be no assurance that such expropriation will not occur in the
future. In the event of such expropriation, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into United States
dollars, the conversion rates may be artificial rather than their actual market
values and they may be adverse to a Fund.
World endeavors to buy and sell foreign currencies on as favorable a basis
as practicable. Some price spread on currency exchange (to cover service
charges) may be incurred, particularly when the Fund changes investments from
one country to another or when proceeds of the sale of Fund shares in U.S.
dollars are used for the purchase of securities in foreign countries. Also,
some countries may adopt policies which would prevent the Fund from transferring
cash out of the country or withhold portions of interest and dividends at the
source. There is the possibility of expropriation, nationalization or
confiscatory taxation, withholding and other foreign taxes on income or other
amounts, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability or diplomatic developments that
could affect investments in securities of issuers in foreign nations.
Foreign securities markets have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Fund due to subsequent declines
in
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value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
A Fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Changes in foreign currency exchange rates will influence values
within a Fund from the perspective of U.S. investors, and may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. World will attempt to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places a Fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
Forward Foreign Currency Transactions. In order to protect against a
possible loss on investments resulting from a decline or appreciation in the
value of a particular foreign currency against the U.S. dollar or another
foreign currency, the Index Funds are authorized, but are not required, 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 World 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.
Cash or liquid securities equal to the amount of a Fund's assets that could
be required to consummate forward contracts will be designated on the records of
the Fund except to the extent the contracts are otherwise "covered." For the
purpose of determining the adequacy of the designated securities in the account,
the designated securities will be valued at market or fair value. If the market
or fair value of such securities declines, additional cash or securities will be
designated daily so that the value of the designated securities will equal the
amount of such commitments by the Fund. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or put option)
permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
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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 Directors. Generally, GICs are not assignable or transferable without
the permission of the issuing insurance companies, and an active secondary
market in GICs does not currently exist. Therefore, GICs will normally be
considered illiquid investments, and will be acquired subject to the limitation
on illiquid investments.
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 or World 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.
Investment Company Securities. The Funds (other than the Short Term
Treasury Fund) may invest in securities issued by other investment companies.
The Index Funds 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
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in securities of investment companies as a group; and (iii) not more than 3% of
the outstanding voting stock of any one investment company will be owned by the
Fund.
Lending of Portfolio Securities. To enhance the return on its portfolio,
each 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, high quality
money market instruments or short-term U.S. Government securities adjusted daily
to have a market value at least equal to the current market value of the
securities loaned. These loans are terminable at any time, and the 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 the possibility of loss to the Funds due to (i) the inability
of the borrower to return the securities, (ii) delay in recovery of the
securities or (iii) a loss of rights in the collateral should the borrower fail
financially. In determining whether a Fund will lend securities, the Advisor or
World 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 or World has determined are creditworthy under guidelines
established by the Board of Directors.
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. For risks associated with options on foreign currencies,
see Appendix B of this Statement of Additional Information ("SAI").
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer of the option the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell, and the writer of the option the obligation to buy,
the underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." The cost of such a closing purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
relevant Fund will have incurred a loss in the transaction. There is no
guarantee in any instance 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
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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 writing a call option on a security, the option is "covered"
if a Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount as are held in a segregated account by its custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if a Fund maintains with its custodian cash or cash
equivalents equal to the contract value. A call option is also covered if a
Fund holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the portfolio in cash or cash
equivalents in a segregated account with its custodian. The Index Funds may
write call options that are not covered for cross-hedging purposes. Each of the
Index Funds will limit its investment in uncovered put and call options
purchased or written by the Fund to 5% of the Fund's total assets. The Index
Funds will write put options only if they are "secured" by cash or cash
equivalents maintained in a segregated account by the Funds' custodian in an
amount not less than the exercise price of the option at all times during the
option period.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the relevant Fund's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Fund may elect to close the position
or take delivery of the security at the exercise price and the Fund's return
will be the premium received from the put option minus the amount by which the
market price of the security is below the exercise price.
Each of the Index Funds may purchase put options to hedge against a decline
in the value of its portfolio. By using put options in this way, a Fund will
reduce any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs.
Each of the Index Funds may purchase call options to hedge against an increase
in the price of securities that it anticipates purchasing in the future. The
premium paid for the call option plus any transaction costs will reduce the
benefit, if any, realized by the relevant Fund upon exercise of the option, and,
unless the price of the underlying security rises sufficiently, the option may
expire worthless to the Fund.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When a Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked to market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by a Fund expires unexercised the Fund realizes
a loss equal to the premium paid. If a Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by a
Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by a Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the segregated account (in the case of a secured put
option) until the option expires or the optioned security
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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 (an "Exchange"),
may be absent for reasons which include the following: there may be
insufficient trading interest in certain options; restrictions may be imposed by
an Exchange on opening transactions or closing transactions or both; trading
halts, suspensions or other restrictions may be imposed with respect to
particular classes or series of options or underlying securities; unusual or
unforeseen circumstances may interrupt normal operations on an Exchange; the
facilities of an Exchange or the Options Clearing Corporation may not at all
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
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 except with respect to repurchase agreements secured by
U.S. Government securities. 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 or less.
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 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").
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 cash, U.S.
Government securities or other liquid securities designated on the books of the
Fund in an amount at least equal to the market value of the securities, plus
accrued interest, subject to the agreement.
Rights and Warrants. 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
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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.
Stock Index Futures, Options on Stock Indices and Options on Stock Index
Futures Contracts. The Index Funds may purchase and sell stock index futures,
options on stock indices and options on stock index futures contracts as a hedge
against movements in the equity markets.
A stock index futures contract is an agreement in which one party agrees to
deliver to the other an amount of cash equal to a specific dollar amount times
the difference between the value of a specific stock index at the close of the
last trading day of the contract and the price at which the agreement is made.
No physical delivery of securities is made.
Options on stock indices are similar to options on specific securities,
described above, except that, rather than the right to take or make delivery of
the specific security at a specific price, an option on a stock index gives the
holder the right to receive, upon exercise of the option, an amount of cash if
the closing level of that stock index is greater than, in the case of a call
option, or less than, in the case of a put option, the exercise price of the
option. This amount of cash is equal to such difference between the closing
price of the index and the exercise price of the option expressed in dollars
times a specified multiple. The writer of the option is obligated, in return
for the premium received, to make delivery of this amount. Unlike options on
specific securities, all settlements of options on stock indices are in cash,
and gain or loss depends on general movements in the stocks included in the
index rather than price movements in particular stocks.
If World 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, World 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
SAI.
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
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at a deep discount because the buyer receives only the right to receive a future
fixed principal payment on the security and does not receive any rights to
periodic interest (cash) payments. The underlying U.S. Treasury bonds and notes
themselves are held in book-entry form at the Federal Reserve Bank or, in the
case of bearer securities (i.e., unregistered securities which are ostensibly
owned by the bearer or holder), in trust on behalf of the owners. Counsel to the
underwriters of these certificates or other evidences of ownership of U.S.
Treasury securities have stated that, in their opinion, purchasers of the
stripped securities most likely will be deemed the beneficial holders of the
underlying U.S. Government obligations for federal tax and securities purposes.
The Company is not aware of any binding legislative, judicial or administrative
authority on this issue.
Only instruments which are stripped by the issuing agency will be
considered U.S. Government obligations. Securities such as CATS and TIGRs which
are stripped by their holder do not qualify as U.S. Government obligations.
Within the past several years the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments or
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department
is known as "STRIPS" or "Separate Trading of Registered Interest and Principal
of Securities." Under the STRIPS program, the Money Market Fund is able to have
its beneficial ownership of zero coupon securities recorded directly in the
book-entry record-keeping system in lieu of having to hold certificates or other
evidences of ownership of the underlying U.S. Treasury securities.
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.
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 ("GNMA"), are supported by the full faith and
credit of the U.S. Treasury. Others, such as those of the Export-Import Bank of
the United States, are supported by the right of the issuer to borrow from the
U.S. Treasury; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law. Examples of the types of U.S.
Government obligations that may be acquired by the Funds include U.S. Treasury
Bills, U.S. Treasury Notes and U.S. Treasury Bonds and the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, Federal National Mortgage
Association, GNMA, 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 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
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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 ratio 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.
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
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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. STRIPS components will be maintained and transferred
in TRADES at their value based on the original par amount of the fully
constituted security.
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 an active 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 or
World deems the investment to involve minimal credit risk. 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.
When-Issued Purchases and Forward Commitments (Delayed-Delivery
Transactions). When-issued purchases and forward commitments (known as 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 securities equal
to the amount of the commitment in a separate account. Normally, the Custodian
will set aside portfolio securities to satisfy a purchase commitment, and in
such a case a Fund may be required subsequently to place additional assets in
the separate account in order to ensure that the value of the account remains
equal to the amount of the Fund's commitments. It may be expected that the
market value of a Fund's net assets will fluctuate to a greater degree when it
sets aside portfolio securities to cover such purchase commitments than when it
sets aside cash. Because a Fund's liquidity and ability to manage its portfolio
might be affected when it sets aside cash or portfolio securities to cover such
purchase commitments, the Advisor expects that its commitments to purchase when-
issued securities and forward commitments will not exceed 25% of the value of a
Fund's total assets absent unusual market conditions.
The Funds will purchase securities on a when-issued or forward commitment
basis only with the intention of completing the transaction and actually
purchasing the securities. If deemed advisable as a matter of investment
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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.
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, the Advisor or World, 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.
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, 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. World 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. World 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, World 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).
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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, World may be required to sell some or all of the
common stock of such issuer then held by the Fund. Such 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, the securities might not be sold. These sales may result in lower prices
for such securities than may have been realized or in losses that may not have
been incurred if World 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 World does not intend
to screen securities for investment by an Index Fund by traditional methods of
financial and market analysis, World will monitor each Index Fund's investment
with a view towards removing stocks of companies which may impair for any reason
the Fund's ability to achieve its investment objective.
The Index Funds will invest primarily in the common stocks that constitute
their corresponding indexes in accordance with their relative capitalization and
sector weightings as described above. It is possible, however, that a Fund will
from time to time receive, as part of a "spin-off" or other corporate
reorganization of an issuer included in a corresponding index, securities that
are themselves outside the corresponding index. Such securities will be
disposed of by the Fund in due course consistent with the Fund's investment
objective.
INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
section which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of the Fund's outstanding shares (as defined under
"Miscellaneous - Shareholder Approvals").
Each Fund may not:
1. With respect to 75% of the Fund's assets, invest more than 5% of the
Fund's assets (taken at market value at the time of purchase) in the
outstanding securities of any single issuer or own more than 10% of
the outstanding voting securities of any one issuer, in each case
other than securities issued or guaranteed by the United States
Government, its agencies or instrumentalities. However, as an
operating policy the Money Market Fund intends to adhere to the 5%
limitation (with respect to the Fund's investment in the outstanding
securities of any one issuer) with regard to 100% of its portfolio to
the extent required under applicable regulations under the 1940 Act;
2. Purchase securities if more than 25% of the value of the Fund's total
assets would be invested in the securities of issuers conducting their
principal business activities in the same industry; provided that: (i)
there is no limit on investments in U.S. Government Securities or,
with respect to the Money Market Fund, obligations of domestic
commercial banks (including U.S. branches of foreign banks subject to
regulations under U.S. laws applicable to domestic banks and, to the
extent that its parent is unconditionally liable for the obligation,
foreign branches of U.S. banks); (ii) there is no limit on investments
in issuers domiciled in a single country; (iii) financial service
companies are classified according to the end users of their services
(for example, automobile finance, bank finance and diversified finance
are each considered to be a separate industry); and (iv) utility
companies are classified according to their services (for example,
gas, gas transmission, electric, and telephone are each considered to
be a separate industry);
3. Borrow money or enter into reverse repurchase agreements except that
the Fund may (i) borrow money or enter into reverse repurchase
agreements for temporary purposes in amounts not
16
<PAGE>
exceeding 5% of its total assets and (ii) borrow money for the purpose
of meeting redemption requests, in amounts (when aggregated with
amounts borrowed under clause (i)) not exceeding 33 1/3% of its total
assets;
4. Pledge, mortgage or hypothecate its assets other than to secure
borrowings permitted by restriction 3 above (collateral arrangements
with respect to margin requirements for options and futures
transactions are not deemed to be pledges or hypothecations for this
purpose);
5. Make loans of securities to other persons in excess of 25% of the
Fund's total assets, provided the Fund may invest without limitation
in short-term debt obligations (including repurchase agreements) and
publicly distributed debt obligations;
6. Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Act in selling portfolio
securities;
7. Purchase or sell real estate or any interest therein, but not
including securities issued by companies (including real estate
investment trusts) that invest in real estate or interests therein;
8. Make investments for the purpose of exercising control of management;
9. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by a Fund of
financial futures and stock index futures contracts, options on
futures contracts, options on securities and securities indices, as
permitted by the Fund's Prospectus; or
10. Issue any senior securities (as such term is defined in Section 18(f)
of the 1940 Act) except to the extent the activities permitted by
other enumerated investment limitations may be deemed to give rise to
a senior security and as consistent with interpretations under the
1940 Act.
Although not a matter of fundamental policy, the Funds consider securities
which are issued or guaranteed by the same foreign government to be issued by
the same industry for purposes of the 25% asset limitation on investments in
securities of issuers conducting their principal business activity in the same
industry.
17
<PAGE>
Additional investment restrictions adopted by each Fund, which may be
changed by the Board of Directors, provide that a Fund may not:
1. Invest more than 15% of its net assets (10% of net assets for the
Money Market Fund) (taken at market value at the time of purchase) in
securities which cannot be readily resold because of legal or
contractual restrictions or which are not otherwise marketable;
2. Invest in other investment companies except as permitted under the
1940 Act; or
3. Purchase securities on margin, or make short sales of securities
except for the use of short-term credit necessary for the clearance of
purchase and sales of portfolio securities, but a Fund may make margin
deposits in connection with transactions in options, futures and
options on futures.
If a percentage limitation is satisfied at the time of investment, a later
increase or decrease in such percentage resulting from a change in the value of
a Fund's investments will not constitute a violation of such limitation, except
that any borrowing by a Fund that exceeds the fundamental investment limitations
stated above must be reduced to meet such limitations within the period required
by the 1940 Act (currently three days). In addition, if a Fund's holdings of
illiquid securities exceeds 15% (10% for the Money Market Fund) because of
changes in the value of the Fund's investments, the Fund will take action to
reduce its holdings of illiquid securities within a time frame deemed to be in
the best interest of the Fund. Otherwise, a Fund may continue to hold a
security even though it causes the Fund to exceed a percentage limitation
because of fluctuation in the value of the Fund's assets.
TEMPORARY DEFENSIVE POSITION
During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, each Fund may invest without limit in cash and
in U.S. dollar-denominated high quality money market and other short-term
instruments. These investments may result in a lower yield than would be
available from investments with a lower quality or longer term.
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 Occupation
Name, Address and Age Positions with Company /+/ During Past Five Years
- --------------------- -------------------------- ----------------------
<S> <C> <C>
Charles W. Elliott Director and Chairman of the Senior Advisor to the President,
1024 Essex Circle Board of Directors Western Michigan University (July
Kalamazoo, MI 49008 1995 through December 1998);
DOB: 1/7/32 Executive Vice President,
Administration & Chief Financial
Officer, Kellogg Company (January
1987 through June 1995). Board of
Directors, Steelcase Financial
Corporation.
John Rakolta, Jr. Director and Vice Chairman of the Chairman and Chief Executive
1876 Rathmor Board of Directors Officer, Walbridge Aldinger
Bloomfield Hills, MI 48304 Company (construction company).
DOB: 5/26/47
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
Thomas B. Bender Director Director, Disciplined Growth
5033 Wood Ridge Road Investors (investment management
Glen Arbor, MI 49636 firm since December 1999); Partner,
DOB: 7/14/33 Financial & Investment Management
Group, (April 1991 to December
1999).
David J. Brophy Director Professor, University of Michigan.
1025 Martin Place Director, River Place Financial
Ann Arbor, MI 48104 Corporation.
DOB: 8/7/36
Dr. Joseph E. Champagne Director Dean, University Center, Macomb
319 East Snell Road College (since September 1997);
Rochester, MI 48306 Corporate and Executive Consultant
DOB: 5/19/38 (since September 1993); Chancellor,
Lamar University (September 1994 to
September 1995); Chairman of Board
of Directors, Ross Controls of Troy,
Michigan.
Thomas D. Eckert Director President and Chief Executive
10726 Falls Pointe Drive Officer, Capital Automotive REIT
Great Falls, VA 22066 (real estate investment trust
DOB: 9/22/47 specializing in retail automotive
properties) (since November 1997);
President, Mid-Atlantic Region of
Pulte Home Corporation (developer of
residential land and construction of
housing units) (1983 to 1997);
Director, Celotex Corporation
(building products manufacturer).
Terry H. Gardner Vice President, Vice President and Chief Financial
480 Pierce Street Chief Financial Officer, Officer of the Advisor (since 1993),
Suite 300 Treasurer Vice President and Chief Financial
Birmingham, MI 48009 and Secretary Officer, Old MCM (since 1993);
DOB: 10/11/60 Secretary, LPM (since June 1993).
</TABLE>
19
<PAGE>
<TABLE>
<S> <C> <C>
Michael Monahan Vice President Chairman of the Advisor (January
480 Pierce Street 2000 to present); Vice President and
Suite 300 Chief Executive Officer of the
Birmingham, MI 48009 Advisor (October 1999 to December
DOB: 1/26/39 1999); President of Monahan
Enterprises, LLC (consulting
company) (June 1999 to present);
President of Comerica Incorporated
(1994 to June 1999); President of
Comerica Bank (1994 to June 1999).
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Communications and Client Services
Suite 300 of the Advisor (since January 1995).
Birmingham, MI 48009
DOB: 4/6/58
James C. Robinson Vice President Chief Executive Officer of the
480 Pierce Street Advisor (January 2000 to present);
Suite 300 Executive Vice President of the
Birmingham, MI 48009 Advisor (February 1998 to December
DOB: 4/24/61 1999); and Chief Investment
Officer/Fixed Income of the Advisor
(January 1995 to December 1999).
Leonard J. Barr Vice President Vice President and Director of Core
480 Pierce Street Equity Research of the Advisor (since
Suite 300 January 1995 ); Director and Senior
Birmingham, MI 48009 Vice President, Old MCM (since
DOB: 6/16/44 1988); Director of LPM (since June
1993).
Ann F. Putallaz Vice President Vice President and Director of
480 Pierce Street Retirement Services Group of the
Suite 300 Advisor (since January 1995).
Birmingham, MI 48009
DOB: 6/8/45
Therese Hogan Assistant Secretary Director, State Regulation
4400 Computer Drive Department, PFPC Inc. (formerly First
Westborough, MA 01581 Data Investor Services Group) (since
DOB: 2/27/62 June 1994).
Libby Wilson Assistant Secretary Director; Mutual Funds Operations of
480 Pierce Street and Assistant Treasurer the Advisor (since July 1999); Global
Suite 300 Portfolio Client Associate; Invesco
Birmingham, MI 48009 Global Asset Management
DOB: 2/24/69 (investment advisor) (March 1999 to
July 1999); Manager, Mutual Funds
Operations of the Advisor (May 1996
to March 1999); Mutual Funds
Operations Administrator, of the
Advisor (March 1993 to May 1996).
</TABLE>
20
<PAGE>
<TABLE>
<S> <C> <C>
Mary Ann Shumaker Assistant Secretary Associate General Counsel of the
480 Pierce Street Advisor (since July 1997); and
Suite 300 Counsel, Miro Weiner & Kramer
Birmingham, MI 48009 (law firm) (1991 to 1997).
DOB: 7/31/54
</TABLE>
______________
+ Individual holds same position with The Munder Funds, Inc., ("Munder"), The
Munder Funds Trust (the "Trust") and Munder Framlington Funds Trust
("Framlington Trust"), each a registered investment company.
Directors who are not interested persons of the Company and Munder, and
Trustees who are not interested persons of the Trust and Framlington, receive an
aggregate fee from the Company, the Trust, Munder and Framlington Trust for
service on those organizations' respective Boards, comprised of an annual
retainer fee of $35,000 and a fee of $3,500 for each Board meeting attended;
and are reimbursed for all out-of-pocket expenses relating to attendance at such
meetings.
The following table summarizes the compensation paid by the Company, the
Trust, Munder and Framlington Trust to their respective Directors/Trustees for
the year ended December 31, 1999.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Charles W. Elliot John Rakolta, Jr. Thomas B. David J. Dr. Joseph E. Thomas D.
Chairman, Vice Chairman, Bender Brophy Champagne Eckert
Trustee and Trustee and Trustee and Trustee and Trustee and Trustee and
Director Director Director Director Director Director
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Compensation
from Munder $14,688 $13,751 $13,751 $13,751 $13,751 $13,751
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from the Trust $29,967 $28,803 $28,803 $28,803 $28,803 $28,803
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation $ 733 $ 704 $ 704 $ 704 $ 704 $ 704
from Framlington Trust
- ---------------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from the Company $ 1,300 $ 1,242 $ 1,242 $ 1,242 $ 1,242 $ 1,242
- ---------------------------------------------------------------------------------------------------------------------------------
Pension Retirement
Benefits Accrued as Part
of Fund Expenses None None None None None None
- ---------------------------------------------------------------------------------------------------------------------------------
Estimated Annual Benefits
upon Retirement None None None None None None
- ---------------------------------------------------------------------------------------------------------------------------------
Total from the Fund
Complex $46,688 $44,500 $44,500 $44,500 $44,500 $44,500
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
No officer, director or employee of the Advisor, World, the Custodian, the
Distributor, the Administrator or the Transfer Agent currently receives any
compensation from the Trust, Framlington or the Company. As of April 3, 2000,
the Directors and officers of the Company, as a group, owned less than 1% of all
classes of outstanding shares of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
Investment Advisors. The Advisor of the Money Market Fund and the Short
Term Treasury Fund is Munder Capital Management, a Delaware general partnership.
The investment advisor of the Index Funds is World Asset Management. The
general partners of the Advisor are WAM, WAM II and Munder Group, LLC. WAM and
WAM II are wholly owned subsidiaries of Comerica Bank -- Ann Arbor, which, in
turn is a wholly owned subsidiary of Comerica Incorporated, a publicly held bank
holding company. World is a wholly owned subsidiary of the Advisor.
21
<PAGE>
The Investment Advisory Agreement between the Advisor or World with respect
to the Funds (the "Advisory Agreement") was approved by the Company's Board of
Directors and by the shareholders. Under the terms of the Advisory Agreement,
the Advisor or World 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 or World, 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 or World. The Advisor or World 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 .20% of
the average daily net assets of each of the Short Term Treasury Fund and Money
Market Fund.
For the advisory services provided and expenses assumed with regard to the
Funds, World 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 S&P 500 Index Equity Fund, .15% of the average
daily net assets of the MidCap Index Equity Fund and SmallCap Index Equity Fund.
For the period from commencement of operations on October 14, 1997 through
December 31, 1997, the Advisor received fees in the amounts of $7,005 for the
S&P 500 Index Equity 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 S&P 500 Index Equity Fund. For the period from
commencement of operations on August 7, 1997 through December 31, 1997, the
Advisor received fees in the amounts of $1,554 for the SmallCap Index Equity
Fund. For the period from commencement of operations through December 31, 1997,
the Advisor voluntarily reimbursed expenses in the amount of $38,346 for the S&P
SmallCap Index Equity Fund.
For the fiscal year ended December 31, 1998 (and for the period from
commencement of operations on February 13, 1998 through December 31, 1998 for
the MidCap Index Fund), the Advisor received fees in the amounts of $0 for
the S&P 500 Index Equity Fund, and $0 for the MidCap Index Equity Fund. For the
fiscal year ended December 31, 1998 (and for the period from commencement of
operations through December 31, 1998 for the MidCap Index Equity Fund), the
Advisor voluntarily waived fees and reimbursed expenses in the amounts of
$43,466 and $99,879, respectively for the 500 Index Equity Fund, and $12,831 and
$47,646, respectively for the MidCap Index Equity Fund. For the period ended May
18, 1998, the Advisor received fees in the amount of $0 for the SmallCap Index
Equity Fund. For the period ended May 18, 1998, the Advisor voluntarily waived
fees and reimbursed expenses in the amount of $1,528 and $52,785, respectively
for the SmallCap Index Equity Fund.
For the fiscal year ended December 31, 1999 (and for the period from
commencement of operations on October 27, 1999 for the SmallCap Index Equity
Fund and for the period from commencement of operations on January 4, 1999 for
the Money Market Fund), the Advisor received fee in the amount of $0 for the S&P
500 Index Equity Fund, $0 for the MidCap Index Equity Fund, $0 for the SmallCap
Index Equity Fund and $201,820 for the Money Market Fund. For the fiscal year
ended December 31, 1999 (and for the period from commencement of operations for
the SmallCap Index Equity Fund and for the period from commencement of
operations for the Money Market Fund), the Adviser voluntarily waived fees and
reimbursed expenses in the amounts of $54,165 and $126,963 for the 500 Index
Equity Fund, $14,079 and $67,886 for the MidCap Index Equity Fund, $7,203 and
$9,014 for the SmallCap Index Equity Fund and $0 and $177,469 for the Money
Market 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
22
<PAGE>
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). The Distributor's principal offices are located at 60 State Street,
Suite 1300, Boston, Massachusetts 02109.
Shareholder Servicing Arrangements - Class K Shares. As stated in the
Funds' Prospectus, Class K Shares are sold to investors through institutions
which enter into Shareholder Servicing Agreements with St. Clair to provide
support services to their Customers who beneficially own Class K Shares in
consideration of the Funds' payment of not more than 0.25% (on an annualized
basis) of the average daily net assets of the Class K Shares beneficially owned
by the Customers.
Services provided by institutions under their service agreements may
include: (i) aggregating and processing purchase and redemption requests for
Class K Shares from Customers and placing net purchase and redemption orders
with the Distributor; (ii) providing Customers with a service that invests the
assets of their accounts in Class K Shares pursuant to specific or pre-
authorized instructions; (iii) processing dividend payments on behalf of
Customers; (iv) providing information periodically to Customers showing their
positions in Class K Shares; (v) arranging for bank wires; (vi) responding to
Customer inquiries relating to the services performed by the institutions; (vii)
providing subaccounting with respect to Class K Shares beneficially owned by
Customers or the information necessary for subaccounting; (viii) if required by
law, forwarding shareholder communications from St. Clair (such as proxies,
shareholder reports, annual and semi-annual financial statements and dividend,
distribution and tax notices) to Customers; (ix) forwarding to Customers proxy
statements and proxies containing any proposals regarding St. Clair's
arrangements with institutions; and (x) providing such other similar services as
St. Clair may reasonably request to the extent the institutions are permitted to
do so under applicable statutes, rules and regulations.
Pursuant to St. Clair's agreements with such institutions, the Board of
Directors will review, at least quarterly, a written report of the amounts
expended under St. Clair's agreements with institutions and the purposes for
which the expenditures were made. In addition, the arrangements with
institutions must be approved annually by a majority of the Board of Directors,
including a majority of the Directors who are not "interested persons" as
defined in the 1940 Act, and have no direct or indirect financial interest in
such arrangements.
The Board of Directors have approved the arrangements with institutions
based on information provided by the service contractors that there is a
reasonable likelihood that the arrangements will benefit the Funds and their
shareholders by affording the Funds greater flexibility in connection with the
servicing of the accounts of the beneficial owners of their shares in an
efficient manner.
Comerica. As stated in the Funds' Class K Shares Prospectus, Class K
Shares of the Funds are sold to customers of banks and other institutions. Such
banks and institutions may include Comerica Incorporated (a publicly-held bank
holding company), its affiliates and subsidiaries and other institutions that
have entered into agreements with St. Clair for shareholder services for their
customers.
23
<PAGE>
Administration Agreement. State Street Bank and Trust Company ("State
Street" or the "Administrator") 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 for S&P
500 Index Equity Fund through December 31, 1997, the administration fees of
State Street accrued were $841. For the period from commencement of operations
on August 7, 1997 through December 31, 1997 for the SmallCap Index Equity Fund,
the administration fees of State Street accrued were $87.
For the fiscal year ended December 31, 1998 (and for the period from
commencement of operations on February 13, 1998 through December 31, 1998 for
the MidCap Index Equity Fund), the administration fees of State Street accrued
as follows: S&P 500 Index Equity Fund $7,340, MidCap Index Equity Fund $1,010
and SmallCap Index Equity Fund $121.
For the fiscal year ended December 31, 1999 (and for the period from
commencement of operations on October 27, 1999 through December 31, 1999 for the
SmallCap Index Equity Fund and for the period from commencement on January 4,
1999 through December 31, 1999 for the Money Market Fund), the administration
fees of State Street accrued as follows: S&P 500 Index Equity Fund $9,134,
MidCap Index Equity Fund $1,122, SmallCap Index Equity Fund $571 and Money
Market Fund $11,907.
Custodian. State Street serves as the custodian (the "Custodian") to the
Fund pursuant to a custodian agreement (the "Custodian Contract") between State
Street and the Company. State Street is also the 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 Custodian Contract, State Street (i) maintains a separate account in
the name of each 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
24
<PAGE>
distributions on account of the Fund's securities and (v) makes periodic reports
to the Board of Directors concerning the Fund's operations.
Transfer and Dividend Disbursing Agent. PFPC Inc. (formerly First Data
Investor Services Group, Inc.) (the "Transfer Agent") located at 4400 Computer
Drive, Westborough, Massachusetts 01581 serves as the transfer and dividend
disbursing agent for the Fund pursuant to the transfer agency agreement with the
Company, under which Investor Services Group (i) issues and redeems shares of
the Fund, (ii) addresses and mails all communications by each Fund to its record
owners, including reports to shareholders, dividend and distribution notices and
proxy materials for its meetings of shareholders, (iii) maintains shareholder
accounts, (iv) responds to correspondence by shareholders of the Fund and (v)
makes periodic reports to the Board of Directors concerning the operations of
the Fund.
Other Information Pertaining to Administration, Custodian and Transfer
Agency Agreements. Except as noted in this SAI the Fund's service contractors
bear all expenses in connection with the performance of their services and the
Fund bears the expenses incurred in their operations. These expenses include,
but are not limited to, fees paid to the Advisor, Administrator, Custodian, and
Transfer Agent; fees and expenses of officers and Board of Directors; taxes;
interest; legal and auditing fees; brokerage fees and commissions; certain fees
and expenses in registering and qualifying the Fund and its shares for
distribution under Federal and state securities laws; expenses of preparing
prospectuses and statements of additional information and of printing and
distributing prospectuses and statements of additional information to existing
shareholders; the expense of reports to shareholders, shareholders' meetings and
proxy solicitations; fidelity bond and directors' and officers' liability
insurance premiums; and the expense of using independent pricing services. Any
general expenses of the 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 determines to be fair and equitable. The
Advisor, Administrator, Custodian and Transfer Agent may voluntarily waive all
or a portion of their respective fees from time to time.
CODE OF ETHICS
The Company, the Advisor and the Distributor each have adopted a code of
ethics as required by applicable law, which is designed to prevent affiliated
persons of the Company, the Advisor and the Distributor from engaging in
deceptive, manipulative or fraudulent activities in connection with securities
held or to be acquired by the Fund (which may also be held by persons subject to
a code of ethics). There can be no assurance that the codes of ethics will be
effective in preventing such activities. Each code of ethics, filed as exhibits
to this registration statement, may be examined at the office of the SEC in
Washington, D.C. or on the Internet from the SEC's website at
http:/www.sec.gov.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board of Directors, the Advisor
makes decisions with respect to and places orders for all purchases and sales of
portfolio securities for each Fund.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers.
Over-the-counter issues, including corporate debt and government
securities, are normally traded through dealers on a "net" basis (i.e., without
commission), or directly with the issuer. With respect to over-the-counter
transactions, the Advisor will normally deal directly with dealers who make a
market in the instruments 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
25
<PAGE>
group. The Funds will engage in this practice, however, only when the Advisor
believes such practice to be in each Fund's interests.
The portfolio turnover rate of each Fund is calculated by dividing the
lesser of the Fund's annual sales or purchases of portfolio securities
(exclusive of purchases or sales of securities whose maturities at the time of
acquisition were one year or less) by the monthly average value of the
securities held by the Fund during the year. Each Fund may engage in short-term
trading to achieve its investment objective. Portfolio turnover may vary
greatly from year to year as well as within a particular year.
In the Advisory Agreement, the Advisor agrees to select broker-dealers in
accordance with guidelines established by the Company's Board of Directors from
time to time and in accordance with applicable law. In assessing the terms
available for any transaction, the Advisor shall consider all factors it deems
relevant, including the breadth of the market in the security, the price of the
security, the financial condition and execution capability of the broker-dealer,
and the reasonableness of the commission, if any, both for the specific
transaction and on a continuing basis. In addition, the Advisory Agreement
authorizes the Advisor, subject to the prior approval of the Company's Board of
Directors, to cause each Fund to pay a broker-dealer which furnishes brokerage
and research services a higher commission than that which might be charged by
another broker-dealer for effecting the same transaction, provided that the
Advisor determines in good faith that such commission is reasonable in relation
to the value of the brokerage and research services provided by such broker-
dealer, viewed in terms of either the particular transaction or the overall
responsibilities of the Advisor to the Fund. Such brokerage and research
services might consist of reports and statistics on specific companies or
industries, general summaries of groups of bonds and their comparative earnings
and yields, or broad overviews of the securities markets and the economy.
Supplementary research information so received is in addition to, and not
in lieu of, services required to be performed by the Advisor and does not reduce
the advisory fees payable to the Advisor by the Funds. It is possible that
certain of the supplementary research or other services received will primarily
benefit one or more other investment companies or other accounts for which
investment discretion is exercised. Conversely, the Funds may be the primary
beneficiary of the research or services received as a result of portfolio
transactions effected for such other account or investment company.
The table below shows information on brokerage commissions paid by the S&P
500 Index Equity Fund for the period of commencement of operations on October
14, 1997 through December 31, 1997 and by the SmallCap Index Equity Fund for the
period of commencement of operations on August 7, 1997 through December 31,
1997.
<TABLE>
<CAPTION>
% of Brokerage $ Amount of Transactions
$ Amount Brokerage Commission Representing Involving Research
Commission Research Services Services
-------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index Equity Fund $9,081 0% $0
SmallCap Index Equity Fund $1,241 0% $0
</TABLE>
The table below shows information on brokerage commissions paid by the S&P
500 Index Equity Fund and the SmallCap Index Equity Fund for the fiscal year
ended December 31, 1998 and by the MidCap Index Equity Fund from commencement of
operations on February 12, 1998 through December 31, 1998.
<TABLE>
<CAPTION>
% of Brokerage $ Amount of
$ Amount Brokerage Commission Representing Transactions Involving
Commission Research Services Research Services
------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index Equity Fund $6,395.12 0% $0
MidCap Index Equity Fund $5,062.15 0% $0
SmallCap Index Equity Fund $ 0 0% $0
</TABLE>
The table below shows information on brokerage commissions paid by the S&P
500 Index Equity Fund and the MidCap Index Equity Fund, for the fiscal year
ended December 31, 1999; and by the SmallCap Index Equity Fund from commencement
of operations on October 27, 1999 through December 31, 1999.
26
<PAGE>
<TABLE>
<CAPTION>
$ Amount % of Brokerage $ Amount of
Brokerage Commission Representing Transactions Involving
Commission Research Services Research Services
-----------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index Equity Fund $17,212 0% $0
MidCap Index Equity Fund $ 2,857 0% $0
SmallCap Index Equity Fund $41,900 0% $0
</TABLE>
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 any securities while the Advisor or any
affiliated person (as defined in the 1940 Act) is a member of any underwriting
or selling group for such securities 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, 1999, the S&P 500 Index
Equity Fund held securities of Morgan Stanley Dean Witter & Co. valued at
$770,850, Chase Securities valued at $637,037, Charles Schwab Corp. valued at
$310,837, Merrill Lynch & Co., Inc. valued at $300,600, J.P. Morgan & Co. valued
at $215,262, Lehman Brothers Holdings, Inc. valued at $101,625, Comerica, Inc.
valued at $63,028, Paine Webber Group, Inc. valued at $54,338, Citigroup Inc.
valued at $1,853,009 and Bear Stearns Companies, Inc. valued at $50,531; and the
MidCap Index Equity Fund held securities of E-Trade Group, Inc. valued at
$70,537, A.G. Edwards, Inc. valued at $28,856 and Legg Mason, Inc. valued at
$18,125. As of December 31, 1999, the SmallCap Index Equity Fund and the Money
Market Fund held no such securities.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases. As described in the Prospectuses, shares of the Funds may be
purchased in a number of different ways. Such alternative sales arrangements
permit an investor to choose the method of purchasing shares that is most
beneficial depending on the amount of the purchase, the length of time the
investor expects to hold shares and other relevant circumstances. An investor
may place orders directly through the Transfer Agent or the Distributor or
through arrangements with his/her authorized broker.
Retirement Plans. Shares of any of the Funds may be purchased in
connection with various types of tax deferred retirement plans, including
individual retirement accounts ("IRAs"), qualified plans, deferred compensation
for public schools and charitable organizations (403(b) plans) and simplified
employee pension IRAs. An individual or organization considering the
establishment of a retirement plan should consult with an attorney and/or an
accountant with respect to the terms and tax aspects of the plan. A $10.00
annual custodial fee is also charged on
27
<PAGE>
IRAs. This custodial fee is due by December 15 of each year and may be paid by
check or shares liquidated from a shareholder's account.
Redemptions. The redemption price for Fund shares is the net asset value
next determined after receipt of the redemption request in pro per order.
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.
Other Redemption Information. The Funds reserve the right to suspend or
postpone redemptions during any period when: (a) trading on the New York Stock
Exchange (the "NYSE") is restricted by applicable rules and regulations of the
SEC; (b) the NYSE is closed, other than for customary weekend and holiday
closings; (c) the SEC has by order permitted such suspension or postponement for
the protection of the shareholders or (d) for an emergency; as determined by the
SEC exists, making disposal of portfolio securities or valuation of net assets
of a fund not reasonably practicable. Upon the occurrence of any of the
foregoing conditions, the Funds may also suspend or postpone the recording 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.
In Kind Purchases. 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.
Exchanges. In addition to the method of exchanging shares described in the
Funds' Prospectuses, a shareholder exchanging at least $1,000 of shares (for
which certificates have not been issued) and who has authorized expedited
exchanges on the application form filed with the Transfer Agent may exchange
shares by telephoning the Funds at (800) 438-5789. Telephone exchange
instructions must be received by the Transfer Agent by 4:00 p.m., Eastern time.
The Funds, Distributor and Transfer Agent reserve the right at any time to
suspend or terminate the expedited exchange procedure or to impose a fee for
this service. During periods of unusual economic or market changes,
shareholders may experience difficulties or delays in effecting telephone
exchanges. Neither the Funds nor the Transfer Agent will be responsible for any
loss, damages, expense or cost arising out of any telephone exchanges effected
upon instructions believed by them to be genuine. The Transfer Agent has
instituted procedures that it believes are reasonably designed to insure that
exchange instructions communicated by telephone are genuine, and could be liable
for losses caused by unauthorized or fraudulent instructions in the absence of
such procedures.
The procedures currently include a recorded verification of the shareholder's
name, social security number and account number, followed by the mailing of a
statement confirming the transaction, which is sent to the address of record.
NET ASSET VALUE
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.
28
<PAGE>
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; (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.
29
<PAGE>
Based on the foregoing computations for the seven-day period ended December
31, 1999, the Money Market Fund's annualized yield was 5.56% and the effective
yield was 5.71%.
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 is calculated for the Fund in accordance with the method prescribed by the
SEC for mutual funds:
YIELD = 2 (a-b + 1)/6/ - 1]
---
cd
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of 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 that have a current market discount is calculated by using
the coupon rate of interest instead of the yield to maturity. In the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage- or other receivables-backed debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market value of such debt obligations. Expenses
accrued for the period (variable "b" in the formula) include all recurring fees
charged by a Fund to all shareholder accounts in proportion to the length of the
base period and the Fund's mean (or median) account size. Undeclared earned
income will be subtracted from the offering price per share (variable "d" in the
formula).
Average Annual Total Return
30
<PAGE>
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:
P = hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years and portion of a year
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);
Based on the foregoing calculation, the average annual total return figures
for the 12 month period ended December 31, 1999 were 20.56% for the S&P 500
Index Equity Fund Class Y Shares and 14.69% for the MidCap Index Equity Fund
Class Y Shares.
Aggregate Total Return
A Fund that advertises its "aggregate total return" computes 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.
Based on the foregoing calculation, the aggregate total return figure from
commencement of operations on October 27, 1999 through December 31, 1999 for the
S&P Small Cap Index Equity Fund Class Y Shares was 10.50%. The aggregate total
return figures from commencement of operations on November 4, 1999 through
December 31, 1999 were 8.36% for the S&P 500 Index Equity Fund Class K Shares
and 9.77% for the MidCap Index Equity Fund Class K Shares. The aggregate total
return figure from commencement of operations on October 28, 1999 through
December 31, 1999 for the Small Cap Index Equity Fund Class K Shares was
10.31%.
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 or compared 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
31
<PAGE>
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 Federal and state income 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 "Internal Revenue 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 Internal Revenue Code that are described below.
Distributions of investment company taxable income and net tax-exempt interest
income made during the taxable year or, under specified circumstances, within
twelve months after the close of the taxable year will satisfy the Distribution
Requirement.
In addition to satisfying 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 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 an "original issue
discount" or a "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.
32
<PAGE>
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 Internal Revenue
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 made. 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 Internal Revenue Code Section 1234.
Pursuant to Internal Revenue 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,
33
<PAGE>
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
Internal Revenue 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, and
may 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 more than or less than the distributions of a fund that did
not engage in such hedging transactions.
The diversification requirements applicable to each Fund's assets may limit
the extent to which each Fund will be able to engage in transactions in options
and futures contracts.
Currency Fluctuations - "Section 988" Gains or Losses. Under the Internal
Revenue 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 Internal Revenue 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
34
<PAGE>
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 Internal Revenue Code.
Passive Foreign Investment Companies. Certain Funds may invest in shares
of foreign corporations that may be classified under the Internal Revenue 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 shares, the Fund itself may be subject to a tax on a
portion of the excess distribution, whether or not the corresponding income is
distributed by the Fund to shareholders. In general, under the PFIC rules, an
excess distribution is treated as having been realized ratably over the period
during which the Fund held the PFIC shares. Each Fund will itself be subject to
tax on the portion, if any, of an excess distribution that is so allocated to
prior Fund taxable years and an interest factor will be added to the tax, as if
the tax had been payable in such prior taxable years. Certain distributions
from a PFIC as well as gain from the sale of PFIC shares are treated as excess
distributions. Excess distributions are characterized as ordinary income even
though, absent application of the PFIC rules, certain excess distributions might
have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election would
involve marking to market the Fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to-market losses and 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 Internal Revenue Code and the regulations issued thereunder as in
effect on the date of this SAI. 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.
35
<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 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. The shares of each Fund (other than the 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 and Liquidity Plus Money Market Fund) are offered in two separate
classes: Class K and Class Y Shares.
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 SAI,
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.
The Board of St. Clair has adopted plans pursuant to Rule 18f-3 under the
1940 Act ("Multi-Class Plans") on behalf of each Fund. The Multi-Class Plan
provides that shares of each class of a Fund are identical, except for one or
more expense variables, certain related rights, exchange privileges, class
designation and sales loads assessed due to differing distribution methods.
Holders of all outstanding shares of a particular Fund will vote together
in the aggregate and not by class on all matters, except that only Class K
Shares of a Fund will be entitled to vote on matters submitted to a vote of
shareholders pertaining to the Class K Plan. 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.
36
<PAGE>
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, D.C. 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 April 3, 2000
the following persons were beneficial owners of 5% or more of the outstanding
shares of a Fund because they possessed voting or investment power with respect
to such shares:
<TABLE>
<CAPTION>
Percentage of Total
Name of Fund Class Name and Address Shares Outstanding
- ------------ ----- ---------------- -------------------
<S> <C> <C> <C>
S&P 500 Index Equity Fund Class K Shares Calhoun & Co. 100%
MidCap Index Equity Fund c/o Comerica Bank
SmallCap Index Equity Fund Attn: Vicky Froehlich
Money Market Fund P.O. Box 75000
Detroit, MI 48275-3455
Short Term Treasury Fund Class K Shares City of Detroit Water 92.9%
1210 City County Building
Detroit, MI 48226
S&P 500 Index Equity Fund Class Y Shares Calhoun & Co. 100%
MidCap Index Equity Fund c/o Comerica Bank
SmallCap Index Equity Fund Attn: Vicky Froehlich
Money Market Fund P.O. Box 75000
Detroit, MI 48275-3455
</TABLE>
Shareholder Approvals. As used in this SAI and in the Prospectus, 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.
37
<PAGE>
REGISTRATION STATEMENT
This SAI 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. Text-only versions of fund
documents can be viewed online or downloaded from the SEC at http:/www.sec.gov.
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 of the Funds including the notes thereto, dated
December 31, 1999 have been audited by Ernst & Young LLP and are incorporated by
reference into this SAI from the Annual Report of the Company dated as of
December 31, 1999.
38
<PAGE>
APPENDIX A
----------
- - Rated Investments -
Corporate Bonds
- ---------------
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 edged." 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 appear 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 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>
From Standard & Poor's Corporation ("S&P") description of its bond ratings:
"AAA": Debt rated "AAA" has the highest rating assigned by S&P. Capacity
------
to pay interest and repay principal is extremely strong.
"AA": Debt rated "AA" has a very strong capacity to pay interest and repay
-----
principal and differs from "AAA" issues by a small degree.
"A": Debt rated "A" has a strong capacity to pay interest and repay
----
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB": Bonds rated "BBB" are regarded as having an adequate capacity to
------
pay interest and 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 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 issuers (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Instruments rated "Prime-2" are offered by issuers (or related supporting
institutions) which 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 susceptible 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."
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 Board of Directors.
A-2
<PAGE>
APPENDIX B
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
indexes, such as the Standard & Poor's 500 or the New York Stock Exchange
Composite Index. In contrast, certain exchanges offer futures contracts on
narrower market indexes, such as the Standard & Poor's 100 or indexes based on
an industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are cleared
through a clearing corporation, which guarantees the performance of the parties
to each contract.
A Fund will sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. A Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a
Fund will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Examples of Stock Index Futures Transactions. The following are examples
--------------------------------------------
of transactions in stock index futures (net of commissions and premiums, if
any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
- --------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate buying $62,500 in Equity Securities Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Securities with Actual Cost = $65,000 Sell 1 Index Futures at 130
Increase in Purchase Price = $2,500 Value of Futures = $65,000/Contract
Gain on Futures = $2,500
</TABLE>
B-1
<PAGE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 X $500 = $62,500
Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
- --------- -------
<S> <C>
-Day Hedge is Placed-
Anticipate Selling $1,000,000 in Equity Securities Sell 16 Index Futures at 125
Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
</TABLE>
II. Margin Payments
---------------
Unlike the purchase or sale 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 securities transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Advisor may elect
to close the position by taking an opposite position, subject to the
availability of a secondary market, which will operate to terminate the Fund's
position in the futures contract. A final determination of variation margin is
then made, additional cash is required to be paid by or released to the Fund,
and the Fund realizes a loss or gain.
III. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by the Funds
as hedging devices. One risk arises because of the imperfect correlation
between movements in the price of futures and movements in the price of the
instruments which are the subject of the hedge. The price of futures may move
more than or less than the price of the instruments being hedged. If the price
of 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
B-2
<PAGE>
buy or sell futures contracts in a greater dollar amount than the dollar amount
of instruments being hedged if the volatility over a particular time period of
the prices of such instruments has been greater than the volatility over such
time period of the futures, or if otherwise deemed to be appropriate by the
Advisor or World. Conversely, the Funds may buy or sell fewer futures contracts
if the volatility over a particular time period of the prices of the instruments
being hedged is less than the volatility over such time period of the futures
contract being used, or if otherwise deemed to be appropriate by the Advisor or
World. It is also possible that, when the Fund sells futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of the futures instruments held in the Fund may decline. If this occurs, 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 securities that were to be purchased.
In instances involving the purchase of futures contracts by the Funds, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Custodian and/or
in a margin account with a broker to collateralize the position and thereby
insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Advisor may still not result in
a successful hedging transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. When there is no liquid market, 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 commodities 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
B-3
<PAGE>
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 it 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 from (call) or sell to (put) the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer
or seller of a futures contract, the holder, or writer, of an option has the
right to terminate its position prior to the scheduled expiration of the option
by selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. A Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received
will be included as initial margin deposits.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in future contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
V. Other Matters
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Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
B-4
