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MUNDER ACCELERATING GROWTH FUND MUNDER VALUE FUND
MUNDER BALANCED FUND MUNDER BOND FUND
MUNDER EQUITY SELECTION FUND MUNDER INTERMEDIATE BOND FUND
MUNDER GROWTH & INCOME FUND MUNDER INTERNATIONAL BOND FUND
MUNDER INDEX 500 FUND MUNDER U.S. GOVERNMENT INCOME FUND
MUNDER INTERNATIONAL EQUITY FUND MUNDER MICHIGAN TRIPLE TAX-FREE BOND FUND
MUNDER MICRO-CAP EQUITY FUND MUNDER TAX-FREE BOND FUND
MUNDER MID-CAP GROWTH FUND MUNDER TAX-FREE INTERMEDIATE BOND FUND
MUNDER MULTI-SEASON GROWTH FUND MUNDER CASH INVESTMENT FUND
MUNDER REAL ESTATE EQUITY INVESTMENT FUND MUNDER MONEY MARKET FUND
MUNDER SMALL-CAP VALUE FUND MUNDER TAX-FREE MONEY MARKET FUND
MUNDER SMALL COMPANY GROWTH FUND MUNDER U.S. TREASURY MONEY MARKET FUND
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(collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information, which has been filed with the
Securities and Exchange Commission (the "SEC"), provides supplementary
information pertaining to all classes of shares representing interests in each
of the twenty-four investment portfolios listed above. The Munder Funds, Inc.
(the "Company") currently offers a selection of ten investment portfolios, nine
of which are offered in this Statement of Additional Information: the Munder
Equity Selection Fund (the "Equity Selection Fund"), Munder Micro-Cap Equity
Fund (the "Micro-Cap Equity Fund"), Munder Mid-Cap Growth Fund (the "Mid-Cap
Fund"), Munder Multi-Season Growth Fund (the "Multi-Season Fund"), Munder Real
Estate Equity Investment Fund (the "Real Estate Fund"), Munder Small-Cap Value
Fund (the "Small-Cap Value Fund"), Munder Value Fund (the "Value Fund"), Munder
International Bond Fund (the "International Bond Fund") and Munder Money Market
Fund (the "Money Market Fund"). The NetNet Fund is offered in a separate
prospectus and Statement of Additional Information. The Munder Funds Trust (the
"Trust") currently offers a selection of fifteen investment portfolios. This
Statement of Additional Information describes each of the investment portfolios
offered by the Trust. This Statement of Additional Information is not a
prospectus, and should be read only in conjunction with the Trust's and the
Company's Prospectuses dated October 28, 1996. A copy of each Prospectus may be
obtained through Funds Distributor, Inc. (the "Distributor"), or by calling
(800) 438-5789. This Statement of Additional Information is dated October 28,
1996.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY ANY BANK, AND ARE NOT INSURED OR GUARANTEED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. AN
INVESTMENT IN THE FUNDS INVOLVES INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS
OF PRINCIPAL.
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TABLE OF CONTENTS
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General............................................................ 3
Fund Investments................................................... 3
Risk Factors and Special Considerations -- Index 500 Fund.......... 20
Risk Factors and Special Considerations -- Michigan Bond Fund and
Tax-Free Intermediate Bond Fund.............................. 22
Investment Limitations............................................. 24
Trustees, Directors and Officers................................... 28
Investment Advisory and Other Service Arrangements................. 33
Portfolio Transactions............................................. 47
Purchase and Redemption Information................................ 50
Net Asset Value.................................................... 52
Performance Information............................................ 53
Taxes.............................................................. 62
Additional Information Concerning Shares........................... 69
Miscellaneous...................................................... 71
Registration Statement............................................. 81
Financial Statements............................................... 81
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
each Prospectus in connection with the offering made by each 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 Prospectuses do not
constitute an offering by the Funds or by the Distributor in any jurisdiction in
which such offering may not lawfully be made.
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GENERAL
The Trust was organized on August 30, 1989 under the name "PDB Fund,"
which was changed in November, 1989 to "Opportunity Funds", and in February,
1990 to "Ambassador Funds" and in June, 1995 to "The Munder Funds Trust." The
Tax-Free Intermediate Bond Fund originally commenced operations on February 9,
1987 as a separate portfolio of the St. Clair Tax-Free Fund, Inc. On November
20, 1992, the St. Clair Tax-Free Intermediate Bond Fund was reorganized as the
Ambassador Tax-Free Intermediate Bond Fund. The Company was organized as a
Maryland corporation on November 18, 1992.
As stated in each Prospectus, the investment advisor of each Fund is
Munder Capital Management (the "Advisor"). The principal partners of the Advisor
are Old MCM, Inc., Munder Group LLC, Woodbridge Capital Management, Inc. and WAM
Holdings, Inc. ("WAM"). Mr. Lee P. Munder, the Advisor's Chief Executive
Officer, indirectly owns or controls a majority of the partnership interests of
the Advisor. Capitalized terms used herein and not otherwise defined have the
same meanings as are given to them in each Prospectus.
FUND INVESTMENTS
The following supplements the information contained in each Prospectus
concerning the investment objectives and policies of the Funds. With the
exception of the policy to invest at least 80% of each of Tax-Free Bond Fund's
and Tax-Free Money Market Fund's assets in municipal obligations bearing tax-
exempt interest and the investment objectives of Multi-Season Fund and Real
Estate Fund, 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 a Fund will achieve
its objective. A description of applicable credit ratings is set forth in
Appendix A hereto. For purposes of this Statement of Additional Information, the
Munder Accelerating Growth Fund, Equity Selection Fund, Munder Growth & Income
Fund, Munder Index 500 Fund, Munder International Equity Fund, Micro-Cap Equity
Fund, Mid-Cap Fund, Multi-Season Fund, Real Estate Fund, Small-Cap Value Fund,
Munder Small Company Growth Fund and Value Fund, and are referred to as the
"Equity Funds." Munder Bond Fund, Munder Intermediate Bond Fund and Munder U.S.
Government Income Fund are referred to as the "Bond Funds"; and Munder Cash
Investment Fund, Money Market Fund, Munder Tax-Free Money Market Fund and Munder
U.S. Treasury Money Market Fund are referred to as the "Money Market
Funds."
BORROWING. The Funds are authorized to borrow money in amounts up to
5% of the value of their total assets at the time of such borrowings for
temporary purposes, and are authorized to borrow money in excess of the 5% limit
as permitted by the Investment Company Act of 1940, as amended (the "1940 Act"),
to meet redemption requests. This borrowing may be unsecured. The 1940 Act
requires the Funds 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, the Funds may be required to sell some of their
portfolio holdings within three days to reduce the debt and restore the 300%
asset coverage, even though it may be disadvantageous from an investment
standpoint to sell securities at that time. Borrowing may exaggerate the effect
on net asset value of any increase or decrease in the market value of the Funds.
Money borrowed will be subject to interest costs which may or may not be
recovered by an appreciation of the securities purchased. The Funds 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. The Funds may, in connection with permissible borrowings, transfer as
collateral, securities owned by the Funds.
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FOREIGN SECURITIES. Each Equity Fund (except the Real Estate Fund),
the Balanced Fund, each Bond Fund and the Cash Investment Fund may invest in the
securities of foreign issuers. The Mid-Cap Fund and the Multi-Season Fund
typically will only purchase foreign securities which are represented by
American Depositary Receipts ("ADRs") listed on a domestic securities exchange
or included in the NASDAQ National Market System, or foreign securities listed
directly on a domestic securities exchange or included in the NASDAQ National
Market System. ADRs are receipts typically issued by a United States bank or
trust company evidencing ownership of the underlying foreign securities. Certain
such institutions issuing ADRs may not be sponsored by the issuer. A non-
sponsored depositary may not provide the same shareholder information that a
sponsored depositary is required to provide under its contractual arrangements
with the issuer.
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.
Under normal market conditions, at least 65% of the International Bond
Fund's assets are invested in bonds of issuers located in at least three
countries other than the United States. The Fund will primarily invest in
foreign debt obligations denominated in foreign currencies, including the
European Currency Unit ("ECU"), which are issued by foreign governments and
governmental agencies, instrumentalities or political subdivisions; debt
securities issued or guaranteed by supranational organizations (as defined
below); corporate debt securities; bank or bank holding company debt securities
and other debt securities including those convertible into foreign stock. For
the purposes of the 65% limitation with respect to the International Bond Fund's
designation as an international bond fund, the securities described in this
paragraph are considered "international bonds."
Investors should consider carefully the substantial risks involved in
securities of companies and governments of foreign nations, which are in
addition to the usual risks inherent in domestic investments. There may be less
publicly available information about foreign companies comparable to the reports
and ratings published about companies in the United States. Foreign companies
are not generally subject to uniform accounting, auditing and financial
reporting standards, and auditing practices and requirements may not be
comparable to those applicable to United States companies. Foreign markets have
substantially less volume than the New York Stock Exchange and securities of
some foreign companies are less liquid and more volatile than securities of
comparable United States companies. Commission rates in foreign countries, which
are generally fixed rather than subject to negotiation as in the United States,
are likely to be higher. In many foreign countries there is less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the United States.
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.
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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, a Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into United States
dollars, the conversion rates may be artificial to the actual market values and
may be adverse to Fund shareholders.
The Advisor endeavors to buy and sell foreign currencies on as
favorable a basis as practicable. Some price spread on currency exchange (to
cover service charges) may be incurred, particularly when a 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 a 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.
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. The Advisor will attempt to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places 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 Equity Funds (excluding the Real Estate Fund), the
Balanced Fund, the Bond Funds and the International Bond Fund are authorized to
enter into forward foreign currency exchange contracts ("forward currency
contracts"). These contracts involve an obligation to purchase or sell a
specified currency at a future date at a price set at the time of the contract.
Forward currency contracts do not eliminate fluctuations in the values of
portfolio securities but rather allow a Fund to establish a rate of 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 foreign currency exchange contract for the
amount of the purchase or sale price to protect against variations,
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between the date the security is purchased or sold and the date on which payment
is made or received, in the value of the foreign currency relative to the U.S.
dollar or other foreign currency.
When the Advisor anticipates that a particular foreign currency may
decline substantially relative to the U.S. dollar or other leading currencies,
in order to reduce risk, a Fund may enter into a forward contract to sell, for a
fixed amount, the amount of foreign currency approximating the value of some or
all of the Fund's securities denominated in such foreign currency. Similarly,
when the obligations held by a Fund create a short position in a foreign
currency, the Fund may enter into a forward contract to buy, for a fixed amount,
an amount of foreign currency approximating the short position. With respect to
any forward foreign currency contract, it will not generally be possible to
match precisely the amount covered by that contract and the value of the
securities involved due to the changes in the values of such securities
resulting from market movements between the date the forward contract is entered
into and the date it matures. In addition, while forward contracts may offer
protection from losses resulting from declines or appreciation in the value of a
particular foreign currency, they also limit potential gains which might result
from changes in the value of such currency. A Fund will also incur costs in
connection with forward foreign currency exchange contracts and conversions of
foreign currencies and U.S. dollars.
A separate account consisting of cash or liquid securities equal to
the amount of a Fund's assets that could be required to consummate forward
contracts will be established with the Funds' Custodian except to the extent the
contracts are otherwise "covered." For the purpose of determining the adequacy
of the securities in the account, the deposited securities will be valued at
market or fair value. If the market or fair value of such securities declines,
additional cash or securities will be placed in the account daily so that the
value of the account will equal the amount of such commitments by the Fund. A
forward contract to sell a foreign currency is "covered" if a Fund owns the
currency (or securities denominated in the currency) underlying the contract, or
holds a forward contract (or call option) permitting the Fund to buy the same
currency at a price no higher than the Fund's price to sell the currency. A
forward contract to buy a foreign currency is "covered" if a Fund holds a
forward contract (or call 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.
FUTURES CONTRACTS AND RELATED OPTIONS. The Equity Funds, the Balanced
Fund, the Bond Funds and the International Bond Fund currently expect that they
may purchase and sell futures contracts on interest-bearing securities or
securities or bond indices, and may purchase and sell call and put options on
futures contracts. For a detailed description of futures contracts and related
options, see Appendix B to this Statement of Additional Information.
INTEREST RATE SWAP TRANSACTIONS. Each of the Bond Funds and the
International Bond Fund may enter into interest rate swap agreements for
purposes of attempting to obtain a particular desired return at a lower cost to
the Funds than if the Funds had invested directly in an instrument that yielded
that desired return. Interest rate swap transactions involve the exchange by a
Bond Fund or the International Bond Fund with another party of its commitments
to pay or receive interest, such as an exchange of fixed rate payments for
floating rate payments. Typically, the parties with which the Bond Funds and the
International Bond Fund will enter into interest rate swap transactions will be
brokers, dealers or other financial institutions known as "counterparties."
Certain Federal income tax requirements may, however, limit the Bond Funds' and
the International Bond Fund's ability to engage in certain interest rate
transactions. Gains from transaction in interest rate swaps distributed to
shareholders of the Bond Funds and the International Bond Fund will be taxable
as ordinary income or, in certain circumstances, as long-term capital gains to
the shareholders.
Each of the Bond Funds' and the International Bond Fund's obligations
(or rights) under a swap agreement will generally be equal only to the net
amount to be paid or received under the agreement based on
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the relative values of the positions held by each party to the agreement (the
"net amount"). Each of the Bond Funds' and the International Bond Fund's
obligations under a swap agreement will be accrued daily (offset against any
amounts owed to the Fund). Accrued but unpaid net amounts owed to a swap
counterparty will be covered by the maintenance of a segregated account
consisting of cash, U.S. Government securities or other high-grade debt
securities, to avoid any potential leveraging of each of the Bond Funds' and the
International Bond Fund's portfolio.
The Bond Funds and the International Bond Fund will not enter into any
interest rate swap transaction unless the credit quality of the unsecured senior
debt or the claims-paying ability of the other party to the transaction is rated
in one of the highest four rating categories by at least one nationally-
recognized statistical rating organization ("NRSRO") or is believed by the
Advisor to be equivalent to that rating. If the other party to a transaction
defaults, the Bond Funds and the International Bond Fund will have contractual
remedies pursuant to the agreements related to the transactions.
The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If the Advisor is incorrect in its
forecasts of market values, interest rates and other applicable factors, the
investment performance of each of the Bond Funds and the International Bond Fund
would be lower than it would have been if interest rate swaps were not used. The
swaps market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swaps market has
become relatively liquid in comparison with other similar instruments traded in
the interbank market. The swaps market is a relatively new market and is largely
unregulated. It is possible that developments in the swaps market, including
potential government regulation, could adversely affect the Bond Funds' and the
International Bond Fund's ability to terminate existing swap agreements or to
realize amounts to be received under such agreements.
INVESTMENT COMPANY SECURITIES. The Funds may invest in securities
issued by other investment companies. As a shareholder of another investment
company, a Fund (other than the Real Estate Fund) would bear its pro rata
portion of the other investment company's expenses, including advisory fees.
These expenses would be in addition to the expenses each Fund bears directly in
connection with its own operations. Each Fund currently intends to limit its
investments in securities issued by other investment companies so that, as
determined immediately after a purchase of such securities is made: (i) not more
than 5% of the value of the Fund's total assets will be invested in the
securities of any one investment company; (ii) not more than 10% of the value of
its total assets will be invested in the aggregate in securities of investment
companies as a group; and (iii) not more than 3% of the outstanding voting stock
of any one investment company will be owned by the Fund or by the Company or
Trust as a whole. It is the Funds' policy not to invest in securities issued by
other investment companies which pay asset-based fees to the Advisor, the Funds'
administrator (the "Administrator"), the Funds' custodian (the "Custodian"), the
Funds' Distributor or their affiliates.
LENDING OF PORTFOLIO SECURITIES. To enhance the return on its
portfolio, each of the Funds may lend securities in its portfolio (subject to a
limit of 25% of each Fund's, other than the Money Market Fund's, total assets;
and 33 1/3% of the Money Market Fund's 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 Funds will receive any interest or dividends
paid on the loaned securities. In addition, it is anticipated that a Fund may
share with the borrower some of the income received on the collateral for the
loan or the Fund will be paid a premium for the loan. The risk in lending
portfolio securities, as with other extensions of credit, consists of possible
delay in recovery of the securities or possible loss of rights in the collateral
should the borrower fail
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financially. In determining whether the Funds will lend securities, the Advisor
will consider all relevant facts and circumstances. The Funds will only enter
into loan arrangements with broker-dealers, banks or other institutions which
the Advisor has determined are creditworthy under guidelines established by the
Boards of Trustees and Directors.
LOWER-RATED DEBT SECURITIES. The Growth & Income Fund may invest up to
20% of the value of its total assets and each of the Real Estate and Value Funds
may invest up to 5% of the value of its total assets in securities that are
rated below investment grade by Standard & Poor's or Moody's. Such securities
are also known as junk bonds. The yields on lower-rated debt and comparable
unrated securities generally are higher than the yields available on higher-
rated securities. However, investments in lower-rated debt and comparable
unrated securities generally involve greater volatility of price and risk of
loss of income and principal, including the possibility of default by or
bankruptcy of the issuers of such securities. Lower-rated debt and comparable
unrated securities (a) will likely have some quality and protective
characteristics that, in the judgment of the rating organization, are outweighed
by large uncertainties or major risk exposures to adverse conditions and (b) are
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligation. Accordingly,
it is possible that these types of factors could, in certain instances, reduce
the value of securities held in each Fund's portfolio, with a commensurate
effect on the value of each of the Fund's shares. Therefore, an investment in
the Growth & Income, Real Estate or Value Funds should not be considered as a
complete investment program and may not be appropriate for all investors.
While the market values of lower-rated debt and comparable unrated
securities tend to react more to fluctuations in interest rate levels than the
market values of higher-rated securities, the market values of certain lower
rated debt and comparable unrated securities also tend to be more sensitive to
individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, lower-rated debt securities and comparable
unrated securities generally present a higher degree of credit risk. Issuers of
lower-rated debt and comparable unrated securities often are highly leveraged
and may not have more traditional methods of financing available to them so that
their ability to service their debt obligations during an economic downturn or
during sustained periods of rising interest rates may be impaired. The risk of
loss due to default by such issuers is significantly greater because lower-rated
debt and comparable unrated securities generally are unsecured and frequently
are subordinated to the prior payment of senior indebtedness. The Funds may
incur additional expenses to the extent that they are required to seek recovery
upon a default in the payment of principal or interest on their portfolio
holdings. The existence of limited markets for lower-rated debt and comparable
unrated securities may diminish each of the Fund's ability to (a) obtain
accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (b) sell the securities at fair value either
to meet redemption requests or to respond to changes in the economy or in
financial markets.
Lower-rated debt securities and comparable unrated securities may have
call or buy-back features that permit their issuers to call or repurchase the
securities from their holders. If an issuer exercises these rights during
periods of declining interest rates, the Funds may have to replace the security
with a lower yielding security, thus resulting in a decreased return to the
Funds.
MONEY MARKET INSTRUMENTS. As described in their Prospectuses, the
Equity Funds; the Balanced Fund; the Bond Funds; the International Bond Fund;
the Munder Michigan Triple Tax-Free Bond Fund (the "Michigan Bond Fund"), Munder
Tax-Free Bond Fund ("Tax-Free Bond Fund"), Munder Tax-Free Intermediate Bond
Fund ("Tax-Free Intermediate Bond Fund"); and the Money Market Funds may invest
from time to time in "money market instruments," a term that includes, among
other things, bank obligations, commercial paper, variable amount master demand
notes and corporate bonds with remaining maturities of 397 days or less.
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Bank obligations include bankers' acceptances, negotiable certificates
of deposit and non-negotiable time deposits, including U.S. dollar-denominated
instruments issued or supported by the credit of U.S. or foreign banks or
savings institutions. Although the Funds will invest in obligations of foreign
banks or foreign branches of U.S. banks only where the Advisor deems the
instrument to present minimal credit risks, such investments may nevertheless
entail risks that are different from those of investments in domestic
obligations of U.S. banks due to differences in political, regulatory and
economic systems and conditions. All investments in bank obligations are limited
to the obligations of financial institutions having more than $1 billion in
total assets at the time of purchase, and investments by a Fund in the
obligations of foreign banks and foreign branches of U.S. banks will not exceed
25% of such Fund's total assets at the time of purchase.
Investments by a Fund in commercial paper will consist of issues rated
at the time A-1 and/or P-1 by Standard & Poor's Rating Service, a division of
McGraw-Hill Companies, Inc. ("S&P"), or Moody's Investor Services, Inc.
("Moody's"). In addition, the Funds may acquire unrated commercial paper and
corporate bonds that are determined by the Advisor at the time of purchase to be
of comparable quality to rated instruments that may be acquired by such Fund as
previously described.
The Funds 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, a Fund
may demand payment of the principal of the instrument at any time. The notes are
not typically rated by credit rating agencies, but issuers of variable amount
master demand notes must satisfy the same criteria as set forth above for
issuers of commercial paper. If an issuer of a variable amount master demand
note defaulted on its payment obligation, a Fund might be unable to dispose of
the note because of the absence of a secondary market and might, for this or
other reasons, suffer a loss to the extent of the default. The Funds invest in
variable amount master notes only when the Advisor deems the investment to
involve minimal credit risk.
MORTGAGE-RELATED SECURITIES. There are a number of important
differences among the agencies and instrumentalities of the U.S. Government that
issue mortgage-related securities and among the securities that they issue.
Mortgage-related securities guaranteed by the Government National Mortgage
Association ("GNMA") include GNMA Mortgage Pass-Through Certificates (also known
as "Ginnie Maes") which are guaranteed as to the timely payment of principal and
interest by GNMA and such guarantee is backed by the full faith and credit of
the United States. GNMA is a wholly-owned U.S. Government corporation within the
Department of Housing and Urban Development. GNMA certificates also are
supported by the authority of GNMA to borrow funds from the U.S. Treasury to
make payments under its guarantee. Mortgage-related securities issued by the
Federal National Mortgage Association ("FNMA") include FNMA Guaranteed Mortgage
Pass-Through Certificates (also known as "Fannie Maes") which are solely the
obligations of the FNMA and are not backed by or entitled to the full faith and
credit of the United States, but are supported by the right of the issuer to
borrow from the Treasury. FNMA is a government-sponsored organization owned
entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Banks
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal, FHLMC
may
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remit the amount due on account of its guarantee of ultimate payment of
principal at any time after default on an underlying mortgage, but in no event
later than one year after it becomes payable.
MUNICIPAL OBLIGATIONS. Opinions relating to the validity of municipal
obligations and to the exemption of interest thereon from regular Federal income
tax are rendered by bond counsel or counsel to the respective issuers at the
time of issuance. Neither the Company nor the Advisor will review the
proceedings relating to the issuance of municipal obligations or the bases for
such opinions.
An issuer's obligations under its municipal obligations are subject to
the provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Code, and laws, if any,
which may be enacted by Federal or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations or upon the ability of municipalities to levy
taxes. The power or ability of an issuer to meet its obligations for the payment
of interest on and principal of its municipal obligations may be materially
adversely affected by litigation or other conditions.
From time to time proposals have been introduced before Congress for
the purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations. For example, under the Tax Reform Act of 1986
interest on certain private activity bonds must be included in an investor's
Federal alternative minimum taxable income, and corporate investors must include
all tax-exempt interest in their Federal alternative minimum taxable income. The
Trust cannot predict what legislation, if any, may be proposed in Congress in
the future as regards the Federal income tax status of interest on municipal
obligations in general, or which proposals, if any, might be enacted. Such
proposals, if enacted, might materially adversely affect the availability of
municipal obligations for investment by the Michigan Bond Fund, Tax-Free Bond
Fund, Tax-Free Intermediate Bond Fund and Tax-Free Money Market Fund
(collectively, the "Tax-Free Funds") and the liquidity and value of such Funds.
In such an event the Board of Trustees would reevaluate the Funds' investment
objective and policies and consider changes in its structure or possible
dissolution.
The Cash Investment Fund may, when deemed appropriate by the Advisor
in light of the Fund's investment objective, invest in high quality municipal
obligations issued by state and local governmental issuers, the interest on
which may be taxable or tax-exempt for Federal income tax purposes, provided
that such obligations carry yields that are competitive with those of other
types of money market instruments of comparable quality. The Cash Investment
Fund does not expect to invest more than 5% of its net assets in such municipal
obligations during its current fiscal year.
NON-DOMESTIC BANK OBLIGATIONS. 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.
OPTIONS. The Equity Funds, Balanced Fund, Bond Funds, International
Bond Fund, Michigan Bond Fund and Tax-Free Intermediate Bond Fund may write
covered call options, buy put options, buy call options
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and write secured put options in an amount not exceeding 5% of their net assets.
Such options may relate to particular securities and may or may not be listed on
a national securities exchange and issued by the Options Clearing Corporation.
Options trading is a highly specialized activity which entails greater than
ordinary investment risk. Options on particular securities may be more volatile
than the underlying securities, and therefore, on a percentage basis, an
investment in options may be subject to greater fluctuation than an investment
in the underlying securities themselves. For risks associated with options on
foreign currencies, see Appendix B to this Statement of Additional Information.
A call option for a particular security gives the purchaser of the
option the right to buy, and a writer the obligation to sell, the underlying
security at the stated exercise price at any time prior to the expiration of the
option, regardless of the market price of the security. The premium paid to the
writer is in consideration for undertaking the obligations under the option
contract. A put option for a particular security gives the purchaser the right
to sell the underlying security at the stated exercise price at any time prior
to the expiration date of the option, regardless of the market price of the
security.
The writer of an option that wished to terminate its obligation may
effect a "closing purchase transaction." This is accomplished by buying an
option of the same series as the option previously written. The effect of the
purchase is that the writer's position will be canceled by the clearing
corporation. However, a writer may not effect a closing purchase transaction
after being notified of the exercise of an option. Likewise, an investor who is
the holder of an option may liquidate its position by effecting a "closing sale
transaction." The cost of such a closing purchase plus transaction costs may be
greater than the premium received upon the original option, in which event each
Fund will have incurred a loss in the transaction. There is no guarantee that
either a closing purchase or a closing sale transaction can be effected.
Effecting a closing transaction in the case of a written call option
will permit the Funds to write another call option on the underlying security
with either a different exercise price or expiration date or both, or in the
case of a written put option, will permit the Funds to write another put option
to the extent that the exercise price thereof is secured by deposited cash or
short-term securities. Also, effecting a closing transaction will permit the
cash or proceeds from the concurrent sale of any securities subject to the
option to be used for other Fund investments. If a Fund desires to sell a
particular security from its portfolio on which it has written a call option, it
will effect a closing transaction prior to or concurrent with the sale of the
security.
The Multi-Season, Real Estate and International Bond Funds may write
options in connection with buy-and-write transactions; that is, the Funds may
purchase a security and then write a call option against that security. The
exercise price of the call the Funds determine to write will depend upon the
expected price movement of the underlying security. The exercise price of a call
option may be below ("in-the-money"), equal to ("at-the-money") or above ("out-
of-the-money") the current value of the underlying security at the time the
option is written. Buy-and-write transactions using in-the-money call options
may be used when it is expected that the price of the underlying security will
remain flat or decline moderately during the option period. Buy-and-write
transactions using out-of-the-money call options may be used when it is expected
that the premiums received from writing the call option plus the appreciation in
the market price of the underlying security up to the exercise price will be
greater than the appreciation in the price of the underlying security alone. If
the call options are exercised in such transactions, the maximum gain to the
relevant Fund will be the premium received by it for writing the option,
adjusted upwards or downwards by the difference between the Fund's purchase
price of the security and the exercise price. If the options are not exercised
and the price of the underlying security declines, the amount of such decline
will be offset in part, or entirely, by the premium received.
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The Funds (excluding the Mid-Cap, Multi-Season, Real Estate, Value,
and International Bond Funds) will write call options only if they are
"covered." In the case of a call option on a security, the option is "covered"
if a Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or cash equivalents in such
amount as are held in a segregated account by its custodian) upon conversion or
exchange of other securities held by it. For a call option on an index, the
option is covered if a Fund maintains with its Custodian cash or cash
equivalents equal to the contract value. A call option is also covered if a Fund
holds a call on the same security or index as the call written where the
exercise price of the call held is (i) equal to or less than the exercise price
of the call written, or (ii) greater than the exercise price of the call written
provided the difference is maintained by the portfolio in cash or cash
equivalents in a segregated account with its custodian. The Mid-Cap, Multi-
Season, Real Estate and Value Funds may write call options that are not covered
for cross-hedging purposes. Each of the Mid-Cap, Multi-Season, Real Estate and
Value 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
International Bond Fund will limit its investment in uncovered put and call
options purchased or written by the Fund to 25% of the Fund's total assets. The
Funds will write put options only if they are "secured" by cash or cash
equivalents maintained in a segregated account by the Funds' custodian in an
amount not less than the exercise price of the option at all times during the
option period.
The writing of covered put options is similar in terms of risk/return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the relevant Fund's gain will be limited to the
premium received. If the market price of the underlying security declines or
otherwise is below the exercise price, the Fund may elect to close the position
or take delivery of the security at the exercise price and the Fund's return
will be the premium received from the put option minus the amount by which the
market price of the security is below the exercise price.
Each of the Funds may purchase put options to hedge against a decline
in the value of its portfolio. By using put options in this way, the Funds will
reduce any profit it might otherwise have realized in the underlying security by
the amount of the premium paid for the put option and by transaction costs. Each
of the Funds may purchase call options to hedge against an increase in the price
of securities that it anticipates purchasing in the future. The premium paid for
the call option plus any transaction costs will reduce the benefit, if any,
realized by the Funds upon exercise of the option, and, unless the price of the
underlying security rises sufficiently, the option may expire worthless to the
Fund.
When a Fund purchases an option, the premium paid by it is recorded as
an asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked-to-market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by the Fund expires unexercised the Fund realizes
a loss equal to the premium paid. If the Fund enters into a closing sale
transaction on an option purchased by it, the Fund will realize a gain if the
premium received by the Fund on the closing transaction is more than the premium
paid to purchase the option, or a loss if it is less. If an option written by
the Fund expires on the stipulated expiration date or if the Fund enters into a
closing purchase transaction, it will realize a gain (or loss if the cost of a
closing purchase transaction exceeds the net premium received when the option is
sold) and the deferred credit related to such option will be eliminated. If an
option written by the Fund is exercised, the proceeds of the sale will be
increased by the net premium originally received and the Fund will realize a
gain or loss.
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There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer, unable to effect a closing purchase transaction,
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the segregated account (in the case of a secured put
option) until the option expires or the optioned security is delivered upon
exercise with the result that the writer in such circumstances will be subject
to the risk of market decline or appreciation in the security during such
period.
There is no assurance that a Fund will be able to close an unlisted
option position. Furthermore, unlisted options are not subject to the
protections afforded purchasers of listed options by the Options Clearing
Corporation, which performs the obligations of its members who fail to do so in
connection with the purchase or sale of options.
In addition, a liquid secondary market for particular options, whether
traded over-the-counter or on a national securities exchange ("Exchange") may be
absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all times be adequate
to handle current trading value; or one or more Exchanges could, for economic or
other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
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.
Currency transactions, including options on currencies and currency
futures, are subject to risks different from those of other portfolio
transactions. Because currency control is of great importance to the issuing
governments and influences economic planning and policy, purchases and sales of
currency and related instruments can be negatively affected by government
exchange controls, blockages, and manipulations or exchange restrictions imposed
by governments. These can result in losses to the Fund if it is unable to
deliver or receive currency or funds in settlement of obligations and could also
cause hedges it has entered into to be rendered useless, resulting in full
currency exposure as well as the incurring of transaction costs. Buyers and
sellers of currency futures are subject to the same risks that apply to the use
of futures generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures is relatively new, and the ability to
establish and close out positions on such options is subject to the maintenance
of a liquid market which may not always be available. Currency exchange rates
may fluctuate based on factors extrinsic to that country's economy.
The Mid-Cap Fund and Value Fund will not purchase put or call options
if aggregate premiums paid for such options would exceed 25% of the Fund's total
assets. The Multi-Season Fund will not purchase put or call options if aggregate
premiums paid for such options would exceed 20% of the Fund's total assets. The
Real Estate Fund will not hedge more than 30% of its total assets and will not
write covered call options against more than 15% of the value of the equity
securities held in its portfolio.
REAL ESTATE SECURITIES. The Real Estate Fund may invest without limit
in shares of real estate investment trusts ("REITs"). REITs pool investors'
funds for investment primarily in income producing real estate or real estate
loans or interests. A REIT is not taxed on income distributed to shareholders if
it complies with several requirements relating to its organization, ownership,
assets, and income and a requirement that it
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distribute to its shareholders at least 95% of it taxable income (other than net
capital gains) for each taxable year. REITs can generally be classified as
Equity REITs, Mortgage REITs and Hybrid REITs. Equity REITs, which invest the
majority of their assets directly in real property, derive their income
primarily from rents. Equity REITs can also realize capital gains by selling
properties that have appreciated in value. Mortgage REITs, which invest the
majority of their assets in real estate mortgages, derive their income primarily
from interest payments. Hybrid REITs combine the characteristics of both Equity
REITs and Mortgage REITs. The Fund will not invest in real estate directly, but
only in securities issued by real estate companies. However, the Real Estate
Fund may be subject to risks similar to those associated with the direct
ownership of real estate (in addition to securities markets risks) because of
its policy of concentration in the securities of companies in the real estate
industry. These include declines in the value of real estate, risks related to
general and local economic conditions, dependency on management skill, heavy
cash flow dependency, possible lack of availability of mortgage funds,
overbuilding, extended vacancies of properties, increased competition, increases
in property taxes and operating expenses, changes in zoning laws, losses due to
costs resulting from the clean-up of environmental problems, liability to third
parties for damages resulting from environmental problems, casualty or
condemnation losses, limitations on rents, changes in neighborhood values and
the appeal of properties to tenants and changes in interest rates.
In addition to these risks, Equity REITs may be affected by changes in
the value of the underlying property owned by the trusts, while Mortgage REITs
may be affected by the quality of any credit extended. Further, Equity and
Mortgage REITs are dependent upon management skills and generally may not be
diversified. Equity and Mortgage REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, Equity and
Mortgage REITs could possibly fail to qualify for the beneficial tax treatment
available to real estate investment trusts under the Internal Revenue Code of
1986, as amended (the "Code"), or to maintain their exemptions from registration
under the 1940 Act. The above factors may also adversely affect a borrower's or
a lessee's ability to meet its obligations to the REIT. In the event of a
default by a borrower or lessee, the REIT may experience delays in enforcing its
rights as a mortgagee or lessor and may incur substantial costs associated with
protecting investments.
REPURCHASE AGREEMENTS. The Funds may agree to enter into repurchase
agreements with financial institutions such as member banks of the Federal
Reserve System, any foreign bank or any domestic or foreign broker/dealer that
is recognized as a reporting government securities dealer, subject to the
seller's agreement to repurchase them at an agreed-upon time and price
("repurchase agreements"). The Advisor will review and continuously monitor the
creditworthiness of the seller under a repurchase agreement, and will require
the seller to maintain liquid assets in a segregated account in an amount that
is greater than the repurchase price. Default by, or bankruptcy of the seller
would, however, expose a Fund to possible loss because of adverse market action
or delays in connection with the disposition of underlying obligations except
with respect to repurchase agreements secured by U.S. Government securities.
With respect to the Money Market Funds, the securities held subject to a
repurchase agreement may have stated maturities exceeding thirteen months,
provided the repurchase agreement itself matures in one year.
The repurchase price under the repurchase agreements described in each
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
Trust's or Company's Custodian (or sub-custodian) in the Federal
Reserve/Treasury book-entry system or by another authorized securities
depositary. Repurchase agreements are considered to be loans by a Fund under the
1940 Act.
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REVERSE REPURCHASE AGREEMENTS. Each Fund (except the Multi-Season
Fund, Money Market Fund and Tax-Free 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 a
Fund may decline below the repurchase price. A Fund will pay interest on amounts
obtained pursuant to a reverse repurchase agreement. While reverse repurchase
agreements are outstanding, a Fund will maintain in a segregated account, cash,
U.S. Government securities or other liquid high-grade debt securities of an
amount at least equal to the market value of the securities, plus accrued
interest, subject to the agreement.
RIGHTS AND WARRANTS. As stated in their Prospectuses, the Equity
Funds and the Balanced Fund may purchase warrants, which are privileges issued
by corporations enabling the owners to subscribe to and purchase a specified
number of shares of the corporation at a specified price during a specified
period of time. Subscription rights normally have a short life span to
expiration. The purchase of warrants involves the risk that a Fund could lose
the purchase value of a warrant if the right to subscribe to additional shares
is not exercised prior to the warrant's expiration. Also, the purchase of
warrants involves the risk that the effective price paid for the warrant added
to the subscription price of the related security may exceed the value of the
subscribed security's market price such as when there is no movement in the
level of the underlying security. Each Equity Fund and the Balanced Fund will
not invest more than 5% of its total assets, taken at market value, in warrants,
or more than 2% of its total assets, taken at market value, in warrants not
listed on the New York or American Stock Exchanges. Warrants acquired by a Fund
in units or attached to other securities are not subject to this restriction.
STAND-BY COMMITMENTS. The Balanced Fund, the Cash Investment Fund,
the Tax-Free Funds may each enter into stand-by commitments with respect to
municipal obligations held by it. Under a stand-by commitment, a dealer agrees
to purchase at the Fund's option a specified municipal obligation at its
amortized cost value to the Fund plus accrued interest, if any. Stand-by
commitments may be exercisable by a Fund at any time before the maturity of the
underlying municipal obligations and may be sold, transferred or assigned only
with the instruments involved.
The Company expects that stand-by commitments will generally be
available without the payment of any direct or indirect consideration. However,
if necessary or advisable, a Fund may pay for a stand-by commitment either
separately in cash or by paying a higher price for municipal obligations which
are acquired subject to the commitment (thus reducing the yield to maturity
otherwise available for the same securities). The total amount paid in either
manner for outstanding stand-by commitments held by a Fund will not exceed 1/2
of 1% of the value of such Fund's total assets calculated immediately after each
stand-by commitment is acquired.
The Tax-Free Funds intend to enter into stand-by commitments only with
dealers, banks and broker/dealers which, in the Advisor's opinion, present
minimal credit risks. The Tax-Free Funds will acquire stand-by commitments
solely to facilitate portfolio liquidity and do not intend to exercise their
rights thereunder for trading purposes. The acquisition of a stand-by commitment
will not affect the valuation of the underlying municipal obligation. The actual
stand-by commitment will be valued at zero in determining net asset value.
Accordingly, where a Fund pays directly or indirectly for a stand-by commitment,
its cost will be reflected as an unrealized loss for the period during which the
commitment is held by such Fund and will be reflected in realized gain or loss
when the commitment is exercised or expires.
STOCK INDEX FUTURES, OPTIONS ON STOCK AND BOND INDICES AND OPTIONS ON
STOCK AND BOND INDEX FUTURES CONTRACTS. The Equity Funds, the Balanced Fund,
the Bond Funds, Michigan Triple Tax-Free Bond
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Fund and Tax-Free Intermediate Bond Fund may purchase and sell stock index
futures, options on stock and bond indices and options on stock index futures
contracts as a hedge against movements in the equity and bond markets. The
International Bond Fund may purchase and sell options on bond index futures
contracts as a hedge against movements in the bond 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 and bond indices are similar to options on specific
securities, described above, except that, rather than the right to take or make
delivery of the specific security at a specific price, an option on a stock or
bond index gives the holder the right to receive, upon exercise of the option,
an amount of cash if the closing level of that stock or bond index is greater
than, in the case of a call option, or less than, in the case of a put option,
the exercise price of the option. This amount of cash is equal to such
difference between the closing price of the index and the exercise price of the
option expressed in dollars times a specified multiple. The writer of the option
is obligated, in return for the premium received, to make delivery of this
amount. Unlike options on specific securities, all settlements of options on
stock or bond indices are in cash, and gain or loss depends on general movements
in the stocks included in the index rather than price movements in particular
stocks.
If the Advisor expects general stock or bond market prices to rise, it
might purchase a stock index futures contract, or a call option on that index,
as a hedge against an increase in prices of particular securities it ultimately
wants to buy. If in fact the index does rise, the price of the particular
securities intended to be purchased may also increase, but that increase would
be offset in part by the increase in the value of the Funds' futures contract or
index option resulting from the increase in the index. If, on the other hand,
the Advisor expects general stock or bond market prices to decline, it might
sell a futures contract, or purchase a put option, on the index. If that index
does in fact decline, the value of some or all of the securities in the Funds'
portfolio may also be expected to decline, but that decrease would be offset in
part by the increase in the value of the Funds' position in such futures
contract or put option.
The Equity Funds, the Balanced Fund, the Bond Funds and the Tax-Free
Bond Funds may purchase and write call and put options on stock index futures
contracts and each such Fund and the International Bond Fund may purchase and
write call and put options on bond index futures contracts. Each such 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,
such Funds may purchase put options or write call options on stock and bond
index futures (only bond index futures in the case of the International Bond
Fund), rather than selling futures contracts, in anticipation of a decline in
general stock or bond market prices or purchase call options or write put
options on stock or bond index futures, rather than purchasing such futures, to
hedge against possible increases in the price of securities which such Funds
intend to purchase.
In connection with transactions in stock or bond index futures, stock
or bond index options and options on stock index or bond futures, such 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 such 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.
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STRIPPED SECURITIES. The Balanced Fund, the Bond Funds, International
Bond Fund and the Money Market Funds may acquire U.S. Government obligations and
their unmatured interest coupons that have been separated ("stripped") by their
holder, typically a custodian bank or investment brokerage firm. Having
separated the interest coupons from the underlying principal of the U.S.
Government obligations, the holder will resell the stripped securities in
custodial receipt programs with a number of different names, including "Treasury
Income Growth Receipts" ("TIGRs") and "Certificate of Accrual on Treasury
Securities" ("CATS"). The stripped coupons are sold separately from the
underlying principal, which is usually sold at a deep discount because the buyer
receives only the right to receive a future fixed payment on the security and
does not receive any rights to periodic interest (cash) payments. The underlying
U.S. Treasury bonds and notes themselves are held in book-entry form at the
Federal Reserve Bank or, in the case of bearer securities (i.e., unregistered
securities which are ostensibly owned by the bearer or holder), in trust on
behalf of the owners. Counsel to the underwriters of these certificates or other
evidences of ownership of U.S. Treasury securities have stated that, in their
opinion, purchasers of the stripped securities most likely will be deemed the
beneficial holders of the underlying U.S. Government obligations for federal tax
and securities purposes. The Trust is not aware of any binding legislative,
judicial or administrative authority on this issue.
Only instruments which are stripped by the issuing agency will be
considered U.S. Government obligations. Securities such as CATS and TIGRs which
are stripped by their holder do not qualify as U.S. Government obligations.
Within the past several years the Treasury Department has facilitated
transfers of ownership of zero coupon securities by accounting separately for
the beneficial ownership of particular interest coupon and principal payments or
Treasury securities through the Federal Reserve book-entry record-keeping
system. The Federal Reserve program as established by the Treasury Department is
known as "STRIPS" or "Separate Trading of Registered Interest and Principal of
Securities." Under the STRIPS program, a Fund is able to have its beneficial
ownership of zero coupon securities recorded directly in the book-entry record-
keeping system in lieu of having to hold certificates or other evidences of
ownership of the underlying U.S. Treasury securities.
In addition, the Bond Fund, Intermediate Bond Fund, International Bond
Fund and U.S. Government Income Fund may invest in stripped mortgage-backed
securities ("SMBS"), which represent beneficial ownership interests in the
principal distributions and/or the interest distributions on mortgage assets.
SMBS are usually structured with two classes that receive different proportions
of the interest and principal distributions on a pool of mortgage assets. One
type of SMBS will have one class receiving some of the interest and most of the
principal from the mortgage assets, while the other class will receive most of
the interest and the remainder of the principal. In the most common case, one
class of SMBS will receive all of the interest (the interest-only or "IO"
class), while the other class will receive all of the principal (the principal-
only or "PO" class). SMBS may be issued by FNMA or FHLMC.
The original principal amount, if any, of each SMBS class represents
the amount payable to the holder thereof over the life of such SMBS class from
principal distributions of the underlying mortgage assets, which will be zero in
the case of an IO class. Interest distributions allocable to a class of SMBS, if
any, consist of interest at a specified rate on its principal amount, if any, or
its notional principal amount in the case of an IO class. The notional principal
amount is used solely for purposes of the determination of interest
distributions and certain other rights of holders of such IO class and does not
represent an interest in principal distributions of the mortgage assets.
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Yields on SMBS will be extremely sensitive to the prepayment
experience on the underlying mortgage loans, and there are other associated
risks. For IO classes of SMBS and SMBS that were purchased at prices exceeding
their principal amounts there is a risk that a Fund may not fully recover its
initial investment.
The determination of whether a particular government-issued IO or PO
backed by fixed-rate mortgages is liquid may be made under guidelines and
standards established by the Board of Trustees. Such securities may be deemed
liquid if they can be disposed of promptly in the ordinary course of business at
a value reasonably close to that used in the calculation of a Fund's net asset
value per share.
SUPRANATIONAL BANK OBLIGATIONS. Supranational banks are international
banking institutions designed or supported by national governments to promote
economic reconstruction, development or trade between nations (e.g., The World
Bank). Obligations of supranational banks may be supported by appropriated but
unpaid commitments of their member countries and there is no assurance these
commitments will be undertaken or met in the future.
U.S. GOVERNMENT OBLIGATIONS. The Funds may purchase obligations
issued or guaranteed by the U.S. Government and, except in the case of the U.S.
Treasury Money Market Fund, U.S. Government agencies and instrumentalities.
Obligations of certain agencies and instrumentalities of the U.S. Government,
such as those of the GNMA, are supported by the full faith and credit of the
U.S. Treasury. Others, such as those of the Export-Import Bank of the United
States, are supported by the right of the issuer to borrow from the U.S.
Treasury; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government would
provide financial support to U.S. government-sponsored instrumentalities if it
is not obligated to do so by law. Examples of the types of U.S. Government
obligations that may be acquired by the Funds include U.S. Treasury Bills,
Treasury Notes and Treasury Bonds and the obligations of Federal Home Loan
Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing
Administration, Farmers Home Administration, Export-Import Bank of the United
States, Small Business Administration, FNMA, Government National Mortgage
Association, General Services Administration, Student Loan Marketing
Association, Central Bank for Cooperatives, FHLMC, Federal Intermediate Credit
Banks and Maritime Administration.
VARIABLE AND FLOATING RATE INSTRUMENTS. Debt instruments may be
structured to have variable or floating interest rates. Variable and floating
rate obligations purchased by a Fund may have stated maturities in excess of a
Fund's maturity limitation if the Fund can demand payment of the principal of
the instrument at least once during such period on not more than thirty days'
notice (this demand feature is not required if the instrument is guaranteed by
the U.S. Government or an agency thereof). These instruments may include
variable amount master demand notes that permit the indebtedness to vary in
addition to providing for periodic adjustments in the interest rates. The
Advisor will consider the earning power, cash flows and other liquidity ratios
of the issuers and guarantors of such instruments and, if the instrument is
subject to a demand feature, will continuously monitor their financial ability
to meet payment on demand. Where necessary to ensure that a variable or floating
rate instrument is equivalent to the quality standards applicable to a Fund, the
issuer's obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
The Money Market Funds will invest in variable and floating rate instruments
only when the Advisor deems the investment to involve minimal credit risk.
In determining average weighted portfolio maturity of the Funds, an
instrument will usually be deemed to have a maturity equal to the longer of the
period remaining until the next interest rate adjustment or the time the Fund
involved can recover payment of principal as specified in the instrument.
Variable rate U.S.
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Government obligations held by the Funds, however, will be deemed to have
maturities equal to the period remaining until the next interest rate
adjustment.
The absence of an active secondary market for certain variable and
floating rate notes could make it difficult to dispose of the instruments, and a
Fund could suffer a loss if the issuer defaulted or during periods that a Fund
is not entitled to exercise its demand rights.
Variable and floating rate instruments held by a Fund will be subject
to the Fund's limitation on illiquid investments when the Fund may not demand
payment of the principal amount within seven days absent a reliable trading
market.
GUARANTEED INVESTMENT CONTRACTS. The Bond Funds, the International
Bond Fund and the Cash Investment Fund may make limited investments in
guaranteed investment contracts ("GICs") issued by U.S. insurance companies.
Pursuant to such contracts, a Fund makes cash contributions to a deposit fund of
the insurance company's general account. The insurance company then credits to
the Fund on a monthly basis interest which is based on an index (in most cases
this index is expected to be the Salomon Brothers CD Index), but is guaranteed
not to be less than a certain minimum rate. A GIC is normally a general
obligation of the issuing insurance company and not funded by a separate
account. The purchase price paid for a GIC becomes part of the general assets of
the insurance company, and the contract is paid from the company's general
assets. A Fund will only purchase GICs from insurance companies which, at the
time of purchase, have assets of $1 billion or more and meet quality and credit
standards established by the Advisor pursuant to guidelines approved by the
Board of Trustees. Generally, GICs are not assignable or transferable without
the permission of the issuing insurance companies, and an active secondary
market in GICs does not currently exist. Therefore, GICs will normally be
considered illiquid investments, and will be acquired subject to the limitation
on illiquid investments.
WHEN-ISSUED PURCHASES AND FORWARD COMMITMENTS (DELAYED-DELIVERY
TRANSACTIONS). When-issued purchases and forward commitments (delayed-delivery
transactions) are commitments by a Fund to purchase or sell particular
securities with payment and delivery to occur at a future date (perhaps one or
two months later). These transactions permit the Fund to lock-in a price or
yield on a security, regardless of future changes in interest rates.
When a Fund agrees to purchase securities on a when-issued or forward
commitment basis, the Custodian will set aside cash or liquid portfolio
securities equal to the amount of the commitment in a separate account.
Normally, the Custodian will set aside portfolio securities to satisfy a
purchase commitment, and in such a case the Fund may be required subsequently to
place additional assets in the separate account in order to ensure that the
value of the account remains equal to the amount of the Fund's commitments. It
may be expected that the market value of the Fund's net assets will fluctuate to
a greater degree when it sets aside portfolio securities to cover such purchase
commitments than when it sets aside cash. Because 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.
A Fund will purchase securities on a when-issued or forward commitment
basis only with the intention of completing the transaction and actually
purchasing the securities. If deemed advisable as a matter of investment
strategy, however, 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.
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When a Fund engages in when-issued and forward commitment
transactions, it relies on the other party to consummate the trade. Failure of
such party to do so may result in the Fund's incurring a loss or missing an
opportunity to obtain a price considered to be advantageous.
The market value of the securities underlying a when-issued purchase
or a forward commitment to purchase securities, and any subsequent fluctuations
in their market value, are taken into account when determining the market value
of a Fund starting on the day the Fund agrees to purchase the securities. The
Fund does not earn interest on the securities it has committed to purchase until
they are paid for and delivered on the settlement date.
YIELDS AND RATINGS. The yields on certain obligations, including the
money market instruments in which each Fund may invest (such as commercial paper
and bank obligations), are dependent on a variety of factors, including general
money market conditions, conditions in the particular market for the obligation,
the financial condition of the issuer, the size of the offering, the maturity of
the obligation and the ratings of the issue. The ratings of S&P, Moody's, Duff &
Phelps Credit Rating Co., Thomson Bank Watch, Inc., and other nationally
recognized statistical NRSROs represent their respective opinions as to the
quality of the obligations they undertake to rate. Ratings, however, are general
and are not absolute standards of quality. Consequently, obligations with the
same rating, maturity and interest rate may have different market prices.
With respect to each of the Money Market Funds, securities (other than
U.S. Government securities) must be rated (generally, by at least two NRSROs)
within the two highest rating categories assigned to short-term debt securities.
In addition, each of the Cash Investment Fund and the Money Market Fund (a) will
not invest more than 5% of its total assets in securities rated in the second
highest rating category by such NRSROs and will not invest more than 1% of its
total assets in such securities of any one issuer, and (b) intends to limit
investments in the securities of any single issuer (other than securities issued
or guaranteed by the U.S. Government, its agencies or instrumentalities) to not
more than 5% of the Fund's total assets at the time of purchase, provided that
the Fund may invest up to 25% of its total assets in the securities of any one
issuer for a period of up to three business days. Unrated and certain single
rated securities (other than U.S. Government securities) may be purchased by the
Money Market Funds, but are subject to a determination by the Advisor, in
accordance with procedures established by the Boards of Trustees and Directors,
that the unrated and single rated securities are of comparable quality to the
appropriate rated securities.
OTHER. Subsequent to its purchase by a Fund, a rated security may
cease to be rated or its rating may be reduced below the minimum rating required
for purchase by the Fund. The Boards of Trustees and Directors or the Advisor,
pursuant to guidelines established by the Boards, will consider such an event in
determining whether the Fund involved should continue to hold the security in
accordance with the interests of the Fund and applicable regulations of the SEC.
It is possible that unregistered securities purchased by a Fund in
reliance upon Rule 144A under the Securities Act of 1933, as amended, could have
the effect of increasing the level of the Fund's illiquidity to the extent that
qualified institutional buyers become, for a period, uninterested in purchasing
these securities.
RISK FACTORS AND SPECIAL CONSIDERATIONS -- INDEX 500 FUND
Traditional methods of fund investment management typically involve
relatively frequent changes in a portfolio of securities on the basis of
economic, financial and market analysis. Index funds such as the Index 500 Fund
are not managed in this manner. Instead, with the aid of a computer program, the
Advisor purchases and sells securities for the Fund in an attempt to produce
investment results that substantially
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duplicate the performance of the common stocks included in the S&P 500 Index
("S&P 500"), taking into account redemptions, sales of additional Fund shares,
and other adjustments as described below.
The Fund does not expect to hold at any particular time all of the
stocks included in the S&P 500. The Advisor believes, however, that through the
application of capitalization weighing and sector balancing techniques it will
be able to construct and maintain the Fund's investment portfolio so that it
reasonably tracks the performance of the S&P 500. The Advisor will compare the
industry sector diversification of the stocks the Fund would acquire solely on
the basis of their weighted capitalizations with the industry sector
diversification of all issuers included in the S&P 500. This comparison is made
because the Advisor believes that, unless the Fund holds all stocks included in
the S&P 500, 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 that are dominated by the larger
corporations, such as communications, automobile, oil and energy. As a result,
events disproportionately affecting such industries could affect the performance
of the Fund differently than the performance of the S&P 500. Conversely, if
smaller companies were not purchased by the Fund, the representation of
industries included in the S&P 500 that are not dominated by the most heavily
market-capitalized companies would be reduced or eliminated.
For these reasons, the Advisor will identify the sectors which are
(or, except for sector balancing, would be) most underrepresented in the Fund's
portfolio and will purchase balancing securities in these sectors until the
portfolio's sector weightings closely match those of the S&P 500. This process
continues until the portfolio is fully invested (except for cash holdings).
Redemptions of a substantial number of shares of the 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 S&P 500.
If an issuer drops in ranking, or is eliminated entirely from the S&P
500, the Advisor may be required to sell some or all of the common stock of such
issuer then held by the Fund. Sales of portfolio securities may be made at times
when, if the Advisor were not required to effect purchases and sales of
portfolio securities in accordance with the S&P 500, such securities might not
be sold. Such sales may result in lower prices for such securities than may been
realized or in losses that may not have been incurred if the Advisor were not
required to effect the purchases and sales. The failure of an issuer to declare
or pay dividends, the institution against an issuer of potentially materially
adverse legal proceedings, the existence or threat of defaults materially and
adversely affecting an issuer's future declaration and payment of dividends, or
the existence of other materially adverse credit factors will not necessarily be
the basis for the disposition of portfolio securities, unless such event causes
the issuer to be eliminated entirely from the S&P 500. However, although the
Advisor does not intend to screen securities for investment by the Fund by
traditional methods of financial and market analysis, the Advisor will monitor
the Fund's investment with a view towards removing stocks of companies which
exhibit extreme financial distress or which may impair for any reason the Fund's
ability to achieve its investment objective.
The Fund will invest primarily in the common stocks that constitute
the S&P 500 in accordance with their relative capitalization and sector
weightings as described above. It is possible, however, that the Fund will from
time to time receive, as part of a "spin-off" or other corporate reorganization
of an issuer included in the S&P 500, securities that are themselves outside the
S&P 500. Such securities will be disposed of by the Fund in due course
consistent with the Fund's investment objective.
In addition, the Index 500 Fund may invest in Standard & Poor's
Depository Receipts ("SPDRs"). SPDRs are securities that represent ownership in
the SPDR Trust, a long-term unit investment trust which is
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intended to provide investment results that generally correspond to the price
and yield performance of the S&P 500. 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 S&P 500. SPDRs are traded on the American Stock
Exchange.
The Fund may also purchase put and call options on the S&P 500 and S&P
100 stock indices, which are traded on national securities exchanges. In
addition, the Fund may enter into transactions involving futures contracts (and
futures options) on these two stock indices and may purchase securities of other
investment companies that are structured to seek a similar correlation to the
S&P 500. These transactions are effected in an effort to have fuller exposure to
price movements in the S&P 500 pending investment of purchase orders or while
maintaining liquidity to meet potential shareholder redemptions. Transactions in
option and stock index futures contracts may be desirable to hedge against a
price movement in the S&P 500 at times when the Fund is not fully invested in
stocks that are included in the S&P 500. For example, by purchasing a futures
contract, the Fund may be able to reduce the potential that cash inflows will
disrupt its ability to track the S&P 500, since the futures contracts may serve
as a temporary substitute for stocks which may then be purchased in an orderly
fashion. Similarly, because futures contracts only require a small initial
margin deposit, the Fund may be able, as an effective matter, to be fully
invested in the S&P 500 while keeping a cash reserve to meet potential
redemptions. See Appendix B to this Statement of Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS -- MICHIGAN BOND FUND AND TAX-FREE
INTERMEDIATE BOND FUND
The information set forth below is derived in substantial part from
the official statements prepared in connection with the issuance of Michigan
municipal bonds and similar obligations and other sources that are generally
available to investors. The information is provided as general information
intended to give a recent historical description and is not intended to indicate
future or continuing trends in the financial or other positions of the State of
Michigan (the "State"). The Company has not independently verified this
information.
The State's Constitution limits the amount of total State revenues
raised from taxes and other sources. State revenues (excluding federal aid and
revenues for payment of principal and interest on general obligation bonds) in
any fiscal year are limited to a specified percentage of State personal income
in the prior calendar year or average of the prior three calendar years,
whichever is greater. The percentage is based upon the ratio of the 1978-79
fiscal year revenues to total 1977 State personal income. If any fiscal year
revenues exceed the revenue limitation by 1%, the entire amount exceeding the
limitation must be rebated in the following fiscal year's personal income tax or
single business tax. Annual excesses of less than 1% may be transferred into the
State's Budget Stabilization Fund. The State may raise taxes in excess of the
limit in emergency situations.
The State Constitution limits the purposes for which State general
obligation debt may be issued. Such debt is limited to short-term debt for State
operating purposes, short and long-term debt for the purpose of making loans to
school districts and long-term debt for voter approved purposes. The State's
Constitution also directs or restricts the use of certain revenues.
The State finances its operations through the State's General Fund and
special revenue funds. The General Fund receives revenues of the State that are
not specifically required to be included in the special revenue funds. General
Fund revenues are obtained approximately 59% from the payment of State taxes and
41% from federal and non-tax revenue sources. Tax revenues credited to the
General Fund include the personal income tax, the single business tax and
approximately 15% of the sales tax collections.
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Expenditures are not permitted by the State Constitution to exceed
available revenues. The State Constitution requires that the Governor, with the
approval of the appropriating committees of the State House and Senate, reduce
expenditures whenever it appears that the actual revenues will be less than the
originally projected revenues upon which the budget was based.
In 1994, a ballot proposal ("Proposal A") to implement extensive
property tax and school finance reform measures was subject to voter approval
and in fact approved on March 15, 1994. Under Proposal A as approved, effective
May 1, 1994, the State sales and use tax increased from 4% to 6%, the State
income tax decreased from 4.6% to 4.4%, the cigarette tax increased from $.25 to
$.75 per pack, and an additional tax of 16% of the wholesale price is imposed on
certain other tobacco products. As of January 1, 1995, a 0.75% real estate
transfer tax also became effective. In 1994, a State education property tax of 6
mills was imposed on all real property and personal property currently subject
to the general property tax. In addition, all school boards can now, with voter
approval, levy up to the lesser of 18 mills or the number of mills levied in
1993 for school operating purposes, on non-homestead property. Proposal A
contained additional provisions regarding the ability of local school districts
to levy taxes as well as a limit on assessment increases for each parcel of
property, beginning in 1995 to the lesser of 5% or the rate of inflation. When
property is subsequently sold, its assessed value is adjusted equal to 50% of
true cash value. Under Proposal A, much of the additional revenue generated by
these taxes is dedicated to the State School Aid Fund.
Proposal A shifts significant portions of the cost of local school
operations from local school districts to the State and raises additional State
revenues to fund these additional State expenses. These additional revenues will
be included within the State's constitutional revenue limitations and may impact
the State's ability to raise additional revenues in the future.
The State is a party to various legal proceedings seeking damages or
injunctive or other relief. In addition to routine litigation, certain of these
proceedings could, if unfavorably resolved from the point of view of the State,
substantially affect State programs or finances. These lawsuits involve programs
generally in the areas of corrections, highway maintenance, social services, tax
collection, commerce and budgetary reductions to school districts and
governmental units and court funding.
The principal sectors of Michigan's diversified economy are
manufacturing of durable goods (including automobiles and components and office
equipment), tourism and agriculture. The health of the State's economy, and in
particular its durable goods manufacturing industry, is susceptible to a long-
term increase in the cost of energy and energy related products. As reflected in
historical employment figures, the State's economy has lessened its dependence
upon durable goods manufacturing. In 1960, employment in such industry accounted
for 33% of the State's work force. By 1994, this figure had fallen to 17%.
However, manufacturing (including auto-related manufacturing) continues to be an
important part of the State's economy. The particular industries are highly
cyclical and in the period 1996-1997 are expected to operate at somewhat less
than full capacity, but at higher levels than in the immediate prior years. This
factor can usually adversely affect the revenue streams of the State and its
political subdivisions because it adversely impacts tax sources, particularly
sales, income taxes and single business taxes.
As of the date of this Statement of Additional Information, the
State's general obligation bonds are rated "AA" by Moody's and "AA" by Fitch. To
the extent that either the Michigan Bond Fund or the Tax-Free Intermediate Bond
Fund is comprised of revenue or general obligations of local governments or
authorities, rather than general obligations of the State of Michigan itself,
ratings on such Michigan obligations will be different from those given to the
State of Michigan and their value may be independently affected by economic
matters not directly impacting the State.
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INVESTMENT LIMITATIONS
Each Fund is subject to the investment limitations enumerated in this
section which may be changed with respect to a particular Fund only by a vote of
the holders of a majority of such Fund's outstanding shares (as defined under
"Miscellaneous - Shareholder Approvals").
No Fund of the Trust may:
1. Purchase securities of any one issuer (other than securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities
or certificates of deposit for any such securities) if more than 5% of
the value of the Fund's total assets (taken at current value) would be
invested in the securities of such issuer, or more than 10% of the
issuer's outstanding voting securities would be owned by the Fund or
the Trust, except that (a) with respect to each Fund, other than the
Michigan Bond Fund and the Tax-Free Intermediate Bond Fund, up to 25%
of the value of the Fund's total assets (taken at current value) may
be invested without regard to these limitations and (b) with respect
to the Michigan Bond Fund and the Tax-Free Intermediate Bond Fund, up
to 50% of the value of the Fund's total assets may be invested without
regard to these limitations so long as no more than 25% of the value
of the Fund's total assets are invested in the securities of any one
issuer. For purposes of this limitation, a security is considered to
be issued by the entity (or entities) whose assets and revenues back
the security. A guarantee of a security is not deemed to be a security
issued by the guarantor when the value of all securities issued and
guaranteed by the guarantor, and owned by the Fund, does not exceed
10% of the value of the Fund's total assets.
2. Borrow money or issue senior securities except that each Fund may
borrow from banks and enter into reverse repurchase agreements for
temporary purposes in amounts up to one-third of the value of its
total assets at the time of such borrowing; or mortgage, pledge or
hypothecate any assets, except in connection with any such borrowing
and then in amounts not in excess of one-third of the value of the
Fund's total assets at the time of such borrowing. No Fund will
purchase securities while its aggregate borrowings (including reverse
repurchase agreements and borrowing from banks) in excess of 5% of its
total assets are outstanding. Securities held in escrow or separate
accounts in connection with a Fund's investment practices are not
deemed to be pledged for purposes of this limitation.
3. Purchase any securities which would cause 25% or more of the value of
the Fund's total assets at the time of purchase to be invested in the
securities of one or more issuers conducting their principal business
activities in the same industry, provided that (a) there is no
limitation with respect to (i) instruments that are issued (as defined
in Investment Limitation No. 1 above) or guaranteed by the United
States, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies,
instrumentalities or political subdivisions, (ii) with respect to the
Money Market Funds only, instruments issued by domestic branches of
U.S. banks and (iii) repurchase agreements secured by the instruments
described in clauses (i) and, with respect to the Money Market Funds,
(ii); (b) wholly-owned finance companies will be considered to be in
the industries of their parents if their activities are primarily
related to financing the activities of the parents; and (c) utilities
will be divided according to their services, for example, gas, gas
transmission, electric and gas, electric and telephone will each be
considered a separate industry.
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4. Purchase or sell real estate, except that each Fund may purchase
securities of issuers which deal in real estate and may purchase
securities which are secured by interests in real estate.
5. Acquire any other investment company or investment company security
except in connection with a merger, consolidation, reorganization or
acquisition of assets or where otherwise permitted by the 1940 Act.
6. Act as an underwriter of securities within the meaning of the
Securities Act of 1933, as amended, except to the extent that the
purchase of obligations directly from the issuer thereof, or the
disposition of securities, in accordance with the Fund's investment
objective, policies and limitations may be deemed to be underwriting.
7. Write or sell put options, call options, straddles, spreads, or any
combination thereof except for transactions in options on securities,
securities indices, futures contracts, options on futures contracts
and transactions in securities on a when-issued or forward commitment
basis, and except that each Equity and Bond Fund may enter into
forward currency contracts in accordance with its investment
objectives and policies. Notwithstanding the above, the Tax-Free
Intermediate Bond Fund may not write or purchase options, including
puts, calls, straddles, spreads, or any combination thereof.
8. Purchase securities of companies for the purpose of exercising
control.
9. Purchase securities on margin, make short sales of securities or
maintain a short position, except that (a) this investment limitation
shall not apply to a Fund's transactions in futures contracts and
related options, a Fund's sale of securities short against the box or
a Fund's transactions in securities on a when-issued or forward
commitment basis, and (b) a Fund may obtain short-term credit as may
be necessary for the clearance of purchases and sales of portfolio
securities.
10. Purchase or sell commodity contracts, or invest in oil, gas or mineral
exploration or development programs, except that each Fund may, to the
extent appropriate to its investment policies, purchase publicly
traded securities of companies engaging in whole or in part in such
activities, may enter into futures contracts and related options, and
may engage in transactions in securities on a when-issued or forward
commitment basis, and except that each Equity and Bond Fund may enter
into forward currency contracts in accordance with its investment
objectives and policies.
11. Make loans, except that each Fund may purchase and hold debt
instruments (whether such instruments are part of a public offering or
privately negotiated), may enter into repurchase agreements and may
lend portfolio securities in accordance with its investment objective
and policies.
In addition, the Tax-Free Intermediate Bond Fund may not:
1. Purchase or retain securities of any issuer if the officers or
trustees of the Trust or its Advisor own beneficially more than one-
half of 1% of the securities of such issuer together own beneficially
more than 5% of such securities.
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2. Invest more than 10% of its total assets in the securities of issuers
which together with any predecessors have a record of less than three
years continuous operation.
3. Participate on a joint or joint and several basis in any securities
trading account.
No Fund of the Company may:
1. Invest more than 25% of its total assets in any one industry
(securities issued or guaranteed by the United States Government, its
agencies or instrumentalities are not considered to represent
industries) (except that the Real Estate Fund will invest more than
25% of its assets in securities of issuers in the real estate
industry);
2. (For each Fund except the International Bond Fund) with respect to 75%
of the Fund's assets, invest more than 5% of the Fund's assets (taken
at a 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;
3. Borrow money or issue senior securities (as defined in the 1940 Act)
except that the Funds may borrow (i) for temporary purposes in amounts
not exceeding 5% of its total assets and (ii) to meet 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 a Fund's
total assets and 33 1/3% of the Money Market Fund's total assets;
provided the Funds 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 a Fund may
be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities;
7. (For each Fund except the Real Estate Fund) purchase or sell real
estate or any interest therein, including interests in real estate
limited partnerships, except securities issued by companies (including
real estate investment trusts) that invest in real estate or interests
therein. The Real Estate Fund may not buy or sell real estate;
however, this prohibition does not apply to the purchase or sale of
(i) securities which are secured by real estate, (ii) securities
representing interests in real estate, (iii) securities of companies
operating in the real estate industry including real estate investment
trusts, and (iv) the holding and sale of real estate acquired as a
result of the ownership of securities.
8. Purchase securities on margin, or make short sales of securities,
except for the use of short-term credit necessary for the clearance of
purchases and sales of portfolio securities, but the Funds (with the
exception of the Money Market Fund) may make margin deposits in
connection with transactions in options, futures and options on
futures;
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9. Make investments for the purpose of exercising control or management;
or
10. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by the Mid-
Cap, Multi-Season, Real Estate, Value and International Bond Funds of
forward foreign currency exchange contracts, financial futures
contracts and options on financial futures contracts, and options on
securities and on securities, foreign currencies and on securities
indices, as permitted by each Fund's prospectus.
Additional investment restrictions adopted by each Fund of the Company,
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 and (in the case of International Bond Fund
only) which are not otherwise marketable;
2. (For each Fund except the International Bond Fund) own more than 10%
(taken at market value at the time of purchase) of the outstanding
voting securities of any single issuer;
3. Purchase or sell interests in oil, gas or other mineral exploration or
development plans or leases;
4. Invest in warrants if at the time of acquisition more than 5% of its
total assets, taken at market value at the time of purchase, would be
invested in warrants, and if at the time of acquisition more than 2%
of its total assets, taken at market value at the time of purchase,
would be invested in warrants not traded on the New York Stock
Exchange or American Stock Exchange. For purposes of this
restriction, warrants acquired by a Fund in units or attached to
securities may be deemed to be without value;
5. Invest more than 5% of its total assets in securities of issuers which
together with any predecessors have a record of less than three years
of continuous operation. This restriction shall not apply with respect
to securities issued by a special purpose funding vehicle for a
company with a record of at least three years of continuous operation,
or to real estate investment trusts the sponsor of which has a record
of at least three years of continuous operation;
6. Invest in other investment companies except as permitted under the
1940 Act.
In addition, the International Bond Fund may not with respect to 50% of the
Fund's assets, invest more than 5% of the Fund's assets (taken at a 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, at the close of each quarter of
its taxable year.
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
27
<PAGE>
above must be reduced to meet such limitations within the period required by the
1940 Act (currently three days). 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.
In order to permit the sale of shares in certain states, the Trust and the
Company may make commitments more restrictive than the investment policies and
limitations described above. The Trust has committed to the State Securities
Board of the State of Texas that (i) each Fund's investments in warrants, valued
at the lower of cost or market, will not exceed 5% of the value of such Fund's
net assets (included within that amount, but not to exceed 2% of the value of
such Fund's net assets, may be warrants which are not listed on the New York or
the American Stock Exchanges, provided that warrants acquired by such Fund in
units or attached to securities may be deemed to be without value for purposes
of this commitment); and (ii) the Funds will not engage in arbitrage
transactions. Should the Trust determine that these commitments are no longer
in the best interests of the Trust, it will revoke the commitment by terminating
sales of its shares in Texas.
TRUSTEES, DIRECTORS AND OFFICERS
The trustees, directors and executive officers of the Trust and the
Company, and their business addresses and principal occupations during the past
five years, are:
<TABLE>
<CAPTION>
Positions Principal Occupation
Name, Address and Age With Trust and Company During Past Five Years
- --------------------- ---------------------- ----------------------
<S> <C> <C>
Charles W. Elliott/1/ Chairman of the Board of Senior Advisor to the President - Western
3338 Bronson Boulevard Trustees and Directors Michigan University since July 1995;
Kalamazoo, MI 49008 Executive Vice President -
Age: 64 Administration & Chief Financial Officer,
Kellogg Company from January 1987 through
June 1995; before that Price Waterhouse.
Board of Directors, Steelcase Financial
Corporation
John Rakolta, Jr. Trustee, Director and Vice Chairman, Walbridge Aldinger
1876 Rathmor Chairman of the Boards of Company
Bloomfield Hills, MI 48304 Trustees and Directors
Age: 49
Thomas B. Bender Trustee and Director Investment Advisor, Financial &
7 Wood Ridge Road Investment Management Group
Glen Arbor, MI 49636 (since April, 1991); Vice President
Age: 63 Institutional Sales, Kidder, Peabody & Co.
(Retired April, 1991).
David J. Brophy Trustee and Director Professor, University of Michigan;
1025 Martin Place Director, River Place Financial
Ann Arbor, MI 48104 Corp.; Trustee, Renaissance Assets
Age: 60 Trust.
</TABLE>
- ----------------------------
/1/Trustee/Director is an "interested person" of the Trust or the Company as
defined in the 1940 Act.
28
<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
Name, Address and Age With Trust and Company During Past Five Years
- --------------------- ---------------------- ----------------------
<S> <C> <C>
Dr. Joseph E. Champagne Trustee and Director Corporate and Executive Consultant since
319 Snell Road September 1995; prior to that Chancellor,
Rochester, MI 48306 Lamar University from September 1994
Age: 58 until September 1995; before that
Consultant to Management, Lamar University;
President and Chief Executive Officer, Crittenton
Corporation, Crittenton Development Corporation
until August 1993; before that President, Oakland
University of Rochester, MI, until August 1991;
Member, Board of Directors, Ross Operating Valve of
Troy, MI.
Thomas D. Eckert Trustee and Director President and COO, Mid-Atlantic
10726 Falls Pointe Drive Group of Pulte Home Corporation
Great Falls, VA 22066
Age: 49
Jack L. Otto Trustee and Director Retired; Director of Standard Federal Bank;
6532 W. Beech Tree Road Executive Director, McGregor Fund (a private
Glen Arbor, MI 49636 philanthropic foundation) 1981-1985;
Age: 70 Managing Partner, Detroit office of Ernst
& Young, until 1981.
Arthur DeRoy Rodecker Trustee and Director President, Rodecker & Company,
4000 Town Center Investment Brokers, Inc. since November
Suite 101 1976; President, RAC Advisors, Inc.,
Southfield, MI 48075 Registered Investment Advisors since
Age: 69 February 1979, President and Trustee,
Helen L. DeRoy Foundation, a charitable
foundation; Vice President and Trustee,
DeRoy Testamentary Foundation, a
charitable foundation, Trustee, Providence
Hospital Foundation.
Lee P. Munder President President and CEO of the Advisor; Chief
480 Pierce Street Executive Officer and President of Old
Suite 300 MCM; Chief Executive Officer of World
Birmingham, MI 48009 Asset Management; and Director, LPM
Age: 51 Investment Services, Inc. ("LPM").
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
Name, Address and Age With Trust and Company During Past Five Years
- --------------------- ---------------------- ----------------------
<S> <C> <C>
Terry H. Gardner Vice President, Vice President and Chief Financial
480 Pierce Street Chief Financial Officer Officer of the Advisor and World Asset
Suite 300 and Treasurer Management; Vice President and Chief
Birmingham, MI 48009 Financial Officer of Old MCM; Audit
Age: 36 Manager of Arthur Andersen & Co. (1991
to February 1993); Secretary of LPM.
Paul Tobias Vice President Executive Vice President and Chief
480 Pierce Street Operating Officer of the
Suite 300 Advisor (since April 1995) and
Birmingham, MI 48009 Executive Vice President of
Age: 43 Comerica, Inc.
Gerald Seizert Vice President Executive Vice President and Chief
480 Pierce Street Investment Officer/Equities of the
Suite 300 Advisor (since April 1995);
Birmingham, MI 48009 Managing Director (1991-1995),
Age: 44 Director (1992-1995) and Vice President
(1984-1991) of Loomis, Sayles and Company, L.P.
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Marketing for the Advisor;
Suite 300 Vice President and Director of
Birmingham, MI 48009 Client Services of Old MCM
Age: 38 (August 1988 to December 1994).
James C. Robinson Vice President Vice President and Chief Investment
480 Pierce Street Officer/Fixed Income for the Advisor;
Suite 300 Vice President and Director of Fixed
Birmingham, MI 48009 Income of Old MCM (1987-1994).
Age: 35
Leonard J. Barr, II Vice President Vice President and Director of Core
480 Pierce Street Equity Research of the Advisor;
Suite 300 Director and Senior Vice President
Birmingham, MI 48009 of Old MCM (since 1988);
Age: 52 Director of LPM.
Ann F. Putallaz Vice President Vice President and Director of
480 Pierce Street Fiduciary Services of the Advisor
Suite 300 (since January 1995); Director of
Birmingham, MI 48009 Client and Marketing Services of
Age: 51 Woodbridge.
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Positions Principal Occupation
Name, Address and Age With Trust and Company During Past Five Years
- --------------------- ---------------------- ----------------------
<S> <C> <C>
Richard H. Rose Assistant Treasurer Senior Vice President, First Data
First Data Investor Services Investor Services Group, Inc.
Group, Inc. (since May 6, 1994). Formerly,
One Exchange Place Senior Vice President, The Boston
8th Floor Company Advisors, Inc. since
Boston, MA 02109 November 1989.
Age: 41
Lisa A. Rosen Secretary, Assistant General Counsel of the Advisor since
480 Pierce Street Treasurer May, 1996; Formerly, Counsel, First Data
Suite 300 Investor Services Group, Inc.; Assistant
Birmingham, MI 48009 Vice President and Counsel with The Boston
Age: 29 Company Advisors, Inc; Associate
with Hutchins, Wheeler & Dittmar.
Teresa M.R. Hamlin Assistant Secretary Counsel, First Data Investor Services
First Data Investor Services Group, Inc. Formerly Paralegal Manager,
Group, Inc. The Boston Company Advisors, Inc.
One Exchange Place
8th Floor
Boston, MA 02109
Age: 32
</TABLE>
Trustees of the Trust and Directors of the Company receive an
aggregate fee from the Trust, the Company and St. Clair Funds, Inc. ("St.
Clair") comprised of an annual retainer fee, and a fee for each Board meeting
attended; and are reimbursed for all out-of-pocket expenses relating to
attendance at meetings.
The following table summarizes the compensation paid by the Trust and
the Company to the Trustees of the Trust and Directors of the Company and St.
Clair for the fiscal year ended June 30, 1996.
<TABLE>
<CAPTION>
Aggregate Com- Pension Estimated
pensation from Retirement Annual
the Trust, Benefits Accrued Benefits Total
Name of Person the Company as Part of upon from the
Position and St. Clair Fund Expenses Retirement Fund Complex
- -------------- -------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C>
Charles W. Elliott $14,000.00 None None $14,000.00
Chairman
John Rakolta, Jr. $14,000.00 None None $14,000.00
Vice Chairman
Thomas B. Bender $14,000.00 None None $14,000.00
Trustee and Director
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
Aggregate Com- Pension Estimated
pensation from Retirement Annual
the Trust, Benefits Accrued Benefits Total
Name of Person the Company as Part of upon from the
Position and St. Clair Fund Expenses Retirement Fund Complex
- -------------- -------------- ---------------- ---------- ------------
<S> <C> <C> <C> <C>
David J. Brophy $14,000.00 None None $14,000.00
Trustee and Director
Dr. Joseph E. Champagne $14,000.00 None None $14,000.00
Trustee and Director
Thomas D. Eckert $14,000.00 None None $14,000.00
Trustee and Director
Jack L. Otto $14,000.00 None None $14,000.00
Trustee and Director
Arthur DeRoy Rodecker $14,000.00 None None $14,000.00
Trustee and Director
</TABLE>
No officer, director or employee of the Advisor, Comerica Incorporated
("Comerica"), the Distributor, the Administrator or the Transfer Agent currently
receives any compensation from the Trust or the Company. As of October 1, 1996,
the Trustees and officers of the Trust as a group, owned less than 1% of the
outstanding shares of any Fund of the Trust and as a group, the Directors and
Officers of the Company owned less than 1% of the outstanding shares of any Fund
of the Company.
As of October 1, 1996, the Directors and officers of the Company, as a
group, owned 29,675.31 Class Y Shares of Multi-Season Growth Fund, 16,234.01
Class Y Shares of Value Fund, 44,641.36 Class Y Shares of Tax-Free Money Market
Fund, 3,620.69 Class Y Shares of Money Market Fund, 1,400.56 Class Y Shares of
International Equity Fund, 10,964.20 Class Y Shares of Real Estate Equity
Investment Fund, 9,483.16 Class Y Shares of Small Company Growth Fund, 3,641.40
Class Y Shares of Accelerating Growth Fund and 585.38 Class Y Shares of Mid-Cap
Growth Fund, which represented less than 1% of the outstanding Class Y Shares of
those Funds.
Lee P. Munder and Terry H. Gardner are administrators of a pension
plan for employees of Munder Capital Management, which as of October 1, 1996
owned 77,82 Class Y Shares of Multi-Season Growth Fund and 151,859.51 Class Y
Shares of Money Market Fund, which represented less than 1% of the outstanding
Class Y Shares of each of those Funds. As of the same date, such pension plan
owned 22,989 Class A Shares of Value Fund, 11,380 Class A Shares of
International Equity Fund, 20,000 Class Y Shares of Real Estate Equity
Investment Fund, 7,550 Class A Shares of Bond Fund, 10,135 Class A Shares of
Small Company Growth Fund, 12,682 Class A Shares of Accelerating Growth Fund,
16,122 Class A Shares of Mid-Cap Growth Fund and 31,399.02 Class Y Shares of
Bond Fund, which represented 36.638%, 3.650%, 1.153%, 8.683%, 4.343%, 3.380%,
90.507% and 36.113%, respectively, of the outstanding Class Y and Class A
Shares, as applicable, of those Funds.
Munder Capital Management and affiliates of Munder Capital Management,
through common ownership, owned beneficially 10,406.77 Class Y Shares of the
Multi-Season Growth Fund, 2,628,139.35 Class Y Shares of the Money Market Fund
and 1,201.27 Class Y Shares of Small Company Growth Fund,
32
<PAGE>
which represented 0.119%, 1.351% and 0.023% of the outstanding Class Y Shares of
those Funds, respectively.
The Trust and the Company will not employ Rodecker & Company,
Investment Brokers, Inc. to effect brokerage transactions for the Funds.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Massachusetts law,
shareholders of a business trust may, under certain circumstances, be held
personally liable as partners for the obligations of the trust. However, the
Trust's Declaration of Trust, as amended, provides that shareholders shall not
be subject to any personal liability in connection with the assets of the Trust
for the acts or obligations of the Trust, and that every note, bond, contract,
order or other undertaking made by the Trust shall contain a provision to the
effect that the shareholders are not personally liable thereunder. The
Declaration of Trust, as amended, provides for indemnification out of the trust
property of any shareholder held personally liable solely by reason of his or
her being or having been a shareholder and not because of his or her acts or
omissions or some other reason. The Declaration of Trust, as amended, also
provides that the Trust shall, upon request, assume the defense of any claim
made against any shareholder for any act or obligation of the Trust, and shall
satisfy any judgment thereon. Thus, the risk of a shareholder's incurring
financial loss on account of shareholder liability is limited to circumstances
in which the Trust itself would be unable to meet its obligations.
The Declaration of Trust, as amended, further provides that all
persons having any claim against the Trustees or the Trust shall look solely to
the trust property for payment; that no Trustee of the Trust shall be personally
liable for or on account of any contract, debt, tort, claim, damage, judgment or
decree arising out of or connected with the administration or preservation of
the trust property or the conduct of any business of the Trust; and that no
Trustee shall be personally liable to any person for any action or failure to
act except by reason of his own bad faith, willful misfeasance, gross negligence
or reckless disregard of his duties as a trustee. With the exception stated, the
Declaration of Trust, as amended, provides that a Trustee is entitled to be
indemnified against all liabilities and expenses reasonably incurred by him in
connection with the defense or disposition of any proceeding in which he may be
involved or with which he may be threatened by reason of being or having been a
Trustee, and that the Trustees will indemnify officers, representatives and
employees of the Trust to the same extent that Trustees are entitled to
indemnification.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
INVESTMENT ADVISOR. The Advisor of each Fund is Munder Capital
Management, a Delaware general partnership. The Advisor replaced Woodbridge
Capital Management, Inc. ("Woodbridge") as investment advisor to the investment
portfolios of the Trust and replaced Munder Capital Management, Inc. as
investment advisor to the investment portfolios of the Company on January 31,
1995, upon the closing of an agreement (the "Joint Venture Agreement") among Old
MCM, Inc., Comerica, Woodbridge and WAM, pursuant to which Old MCM, Inc.
contributed its investment advisory business and Comerica contributed the
investment advisory businesses of its indirect subsidiaries, Woodbridge and
World Asset Management, to the Advisor. The general partners of the Advisor are
Woodbridge, WAM, Old MCM, and Munder Group, LLC. Woodbridge and WAM are wholly-
owned subsidiaries of Comerica Bank -- Ann Arbor, which in turn is a wholly-
owned subsidiary of Comerica Incorporated, a publicly-held bank holding company.
New Investment Advisory Agreements ("Advisory Agreements") between the
Advisor and the Trust on behalf of each investment portfolio of the Trust were
approved by the Board of Trustees of the Trust on November 23, 1994 and by the
shareholders of those funds at a meeting on March 29, 1995. Advisory Agreements
between the Advisor and the Company on behalf of the Multi-Season Fund, Real
Estate Fund and
33
<PAGE>
Money Market Fund were approved by the Board of Directors of the Company on
November 9, 1994 and by the shareholders of those Funds at a meeting on February
24, 1995. The Advisory Agreements for the Mid-Cap Growth and Value Funds were
approved by the Board of Directors on July 31, 1995 and by shareholders on
August 14, 1995. The Advisory Agreement for the International Bond Fund was
approved by the Board of Directors on May 6, 1996 and by the shareholders on
October 1, 1996. The Advisory Agreements for the Equity Selection Fund, Micro-
Cap Equity Fund and Small-Cap Value Fund were approved by the Board of Directors
on August 6, 1996 and will be approved by shareholders prior to or upon
commencement of operations of each Fund.
Under the terms of the Advisory Agreements, the Advisor furnishes continuing
investment supervision to the Funds and is responsible for the management of the
Funds' portfolios. The responsibility for making decisions to buy, sell or hold
a particular security rests with the Advisor, subject to review by the Trust's
and the Company's Boards of Trustees and Directors.
The Company's Advisory Agreements will continue in effect for a period
of two years from their effective dates. The Trust's Advisory Agreement was
approved for an initial period from January 1, 1995 to July 31, 1995. On July
31, 1995, the continuance of the Trust's Advisory Agreement was approved and an
amendment to the Trust's Advisory Agreement was approved whereby the Advisor
reduced the annual investment advisory fees payable by certain portfolios of the
Trust effective October 28, 1995. If not sooner terminated, each 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 Trustees/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 affected
Fund, or (ii) the vote of a majority of the Board of Trustees/Directors. Each
Advisory Agreement is terminable with respect to a Fund by vote of the Board of
Trustees/Directors, or by the holders of a majority of the outstanding voting
securities of the Fund, at any time without penalty, on 60 days' written notice
to the Advisor. The Advisor may also terminate its advisory relationship with
respect to a Fund without penalty on 90 days' written notice to the Trust or the
Company, as applicable. Each Advisory Agreement terminates automatically in the
event of its assignment (as defined in the 1940 Act).
For its services, the Advisor earns a monthly fee as set forth below.
Advisory fees for each Fund are reflected in the following paragraphs.
For the advisory services provided and expenses assumed by it, 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 1.00% of the first $500
million of average daily net assets and .75% of net assets in excess of $500
million of the Multi-Season Fund; 1.00% of average daily net assets of the
Micro-Cap Equity Fund; .75% of average daily net assets of each of the
Accelerating Growth Fund, Equity Selection Fund, Growth & Income Fund,
International Equity Fund, Small-Cap Value Fund and Small Company Growth Fund;
.74% of average daily net assets of each of the Mid-Cap Fund, Real Estate Fund
and the Value Fund; .65% of average daily net assets of the Balanced Fund; 50%
of average daily net assets of each of the Bond Fund, Intermediate Bond Fund,
International Bond Fund, U.S. Government Income Fund, Michigan Bond Fund, Tax-
Free Bond Fund and Tax-Free Intermediate Bond Fund; .40% of average daily net
assets of the Money Market Fund; .35% of average daily net assets of each of the
Cash Investment Fund, Tax-Free Money Market Fund and U.S. Treasury Money Market
Fund; and .20% of the first $250 million of average daily net assets, .12% of
the next $250 million of net assets and .07% of average daily net assets in
excess of $500 million of the Index 500 Fund. The Advisor expects to receive,
after waivers, an advisory fee at the annual rate of .07% and .75% of the
average daily net assets of the Index 500 Fund and the Multi-Season Fund,
respectively, during the Trust's and the Company's current fiscal year. The
Advisor expects to voluntarily reimburse expenses during the
34
<PAGE>
Trust's and the Company's current fiscal year with respect to the Index 500,
Mid-Cap, Real Estate and Value Funds. The Advisor may discontinue such
fee waivers and/or expense reimbursements at anytime, in its sole discretion.
For the period February 1, 1995 through February 28, 1995, the Advisor
received fees, after waivers, of: $144,906 - Accelerating Growth Fund, $22,937-
Balanced Fund, $0 - Growth & Income Fund, $5,407 - Index 500 Fund, $75,502 -
International Equity Fund, $68,046 - Small Company Growth Fund, $67,126 - Bond
Fund, $172,014 - Intermediate Bond Fund, $67,252 - U.S. Government Income Fund,
$0 - Michigan Bond Fund, $96,599 - Tax-Free Bond Fund, $137,594 - Tax-Free
Intermediate Bond Fund, $246,455 - Cash Investment Fund, $62,910 - Tax-Free
Money Market Fund and $83,125 - U.S. Treasury Money Market Fund.
Net fees accrued to Old MCM, Inc., the Company's former investment
advisor, for services provided pursuant to the former advisory agreements (which
provided for the same fee rates as the Advisory Agreements) for the year ended
December 31, 1994 (and for the Real Estate Fund for the period from commencement
of operations to December 31, 1994) were $555,273 for the Multi-Season Fund,
$3,166 for the Real Estate Fund and $620,204 for the Money Market Fund. For such
periods, the Advisor voluntarily reimbursed expenses for the Multi-Season, Real
Estate and Money Market Funds in the following amounts of $285,571, $68,336 and
$218,109, respectively.
For the period March 1, 1995 through June 30, 1995, the Advisor
received fees after waivers of: $659,256 - Accelerating Growth Fund, $103,145 -
Balanced Fund, $243,681 - Growth & Income Fund, $27,024 - Index 500 Fund,
$357,460 - International Equity Fund, $316,025 - Small Company Growth Fund,
$300,222 - Bond Fund, $767,122 - Intermediate Bond Fund, $304,666 - U.S.
Government Income Fund, $0 - Michigan Bond Fund, $410,093 - Tax-Free Bond Fund,
$593,601 - Tax-Free Intermediate Bond Fund, $1,144,037 - Cash Investment Fund,
$273,285 - Tax-Free Money Market Fund and $373,285 - U.S. Treasury Money Market
Fund.
For the period from January 1, 1995 through June 30, 1995, the Advisor
received fees after waivers of $272,521 for the Multi-Season Fund, $0 for the
Real Estate Fund and $431,213 for the Money Market Fund. For such period, the
Advisor voluntarily reimbursed expenses for the Multi-Season and Real Estate
Funds, in the following amounts of $34,525 and $141,161, respectively.
For the period from July 1, 1995 through October 27, 1995, the Advisor
received fees after waivers of $709,799 for the Accelerating Growth Fund,
$107,536 for the Balanced Fund, $364,938 for the Growth & Income Fund, $31,087
for the Index 500 Fund, $379,355 for the International Equity Fund, $17,380 for
the Mid-Cap Fund, $358,622 for the Small Company Growth Fund, $31,762 for the
Value Fund, $300,502 for the Bond Fund, $771,815 for the Intermediate Bond Fund,
$290,956 for the U.S. Government Fund, $0 for the Michigan Bond Fund, $367,467
for the Tax-Free Bond Fund, $572,916 for the Tax-Free Intermediate Fund,
$1,159,247 for the Cash Investment Fund, $266,552 for the Tax-Free Money Market
Fund and $341,421 for the U.S. Treasury Money Market Fund.
For the period from October 28, 1995 through June 30, 1996, the
Advisor received fees after waivers of $1,411,737 for the Accelerating Growth
Fund, $246,967 for the Balanced Fund, $970,328 for the Growth & Income Fund,
$72,265 for the Index 500 Fund, $946,880 for the International Equity Fund,
$920,847 for the Small Company Growth Fund, $537,663 for the Bond Fund,
$1,809,598 for the Intermediate Bond Fund, $661,896 for the U.S. Government
Fund, $0.00 for the Michigan Bond Fund, $709,274 for the Tax-Free Bond Fund,
$1,185,441 for the Tax-Free Intermediate Fund, $2,478,073 for the Cash
Investment Fund, $660,687 for the Money Market Fund, $610,215 for the Tax-Free
Money Market Fund and $823,717 for the U.S. Treasury Money Market Fund.
35
<PAGE>
For the fiscal year ended June 30, 1996 (and for the period from
commencement of operations to June 30, 1996 for the Mid-Cap and Value Funds) the
Advisor received fees after waivers, if any, of $2,275,469 for the Multi-Season
Fund, $114,330 for the Real Estate Fund, $1,025,924 for the Money Market Fund,
$113,145 for the Mid-Cap Fund and $189,909 for the Value Fund.
For the fiscal year ended June 30, 1996 the Advisor voluntarily
reimbursed expenses for the Real Estate Fund, Mid-Cap Fund, Value Fund and Index
500 Fund, in the amounts of $34,671, $24,500, $70,016 and $21,376, respectively.
The Equity Selection, Micro-Cap Equity and Small-Cap Value Funds had
not commenced operations as of the date of this Statement of Additional
Information. The International Bond Fund did not commence operations until
October 2, 1996.
If the total expenses borne by any Fund in any fiscal year exceed the
expense limitations imposed by applicable state securities regulations, the
Advisor, Administrator, Custodian and Transfer Agent will bear the amount of
such excess to the extent required by such regulations in proportion to the fees
otherwise payable to them with respect to such Fund for such year. Such amount
borne will be limited to the amount of the fees paid to them for the applicable
period with respect to the Fund involved.
DISTRIBUTION AGREEMENTS. The Trust and the Company have entered into
distribution agreements, under which the Distributor, as agent, sells shares of
each Fund on a continuous basis. The Distributor has agreed to use appropriate
efforts to solicit orders for the purchase of shares of each Fund, although it
is not obligated to sell any particular amount of shares. The Distributor pays
the cost of printing and distributing prospectuses to persons who are not
holders of shares of the Funds (excluding preparation and printing expenses
necessary for the continued registration of the shares) and of printing and
distributing all sales literature. The Distributor's principal offices are
located at 60 State Street, Boston, Massachusetts 02109.
DISTRIBUTION SERVICES ARRANGEMENTS - CLASS A, CLASS B AND CLASS C
SHARES. Each Fund has adopted a Service and Distribution Plan with respect to
its Class A Shares pursuant to which it uses its assets to finance activities
relating to the provision of certain shareholder services. Under the Service and
Distribution Plans for Class A Shares, the Distributor is paid an annual service
fee at the rate of up to 0.25% of the value of average daily net assets of the
Class A Shares of each Fund. Each Fund has also adopted a Service and
Distribution Plan with respect to its Class B and Class C Shares, pursuant to
which it uses its assets to finance activities relating to the distribution of
its shares to investors and provision of certain shareholder services. Under the
Service and Distribution Plans for Class B and Class C Shares, the Distributor
is paid an annual service fee of up to 0.25% of the value of average daily net
assets of the Class B and Class C Shares of each Fund and an annual distribution
fee at the rate of up to 0.75% of the value of average daily net assets of the
Class B and Class C Shares of each Fund.
Under the terms of the Service and Distribution Plans (collectively,
the "Plans"), each Plan continues from year to year, provided such continuance
is approved annually by vote of the Board of Trustees/Directors, including a
majority of the Board of Trustees/Directors who are not interested persons of
the Trust or the Company, as applicable, and who have no direct or indirect
financial interest in the operation of that Plan (the "Non-Interested Plan
Directors"). The Plans may not be amended to increase the amount to be spent for
the services provided by the Distributor without shareholder approval, and all
amendments of the Plans also must be approved by the Trustees/Directors in the
manner described above. Each Plan may be terminated at any time, without
penalty, by vote of a majority of the Non-Interested Plan Directors or by a vote
of a majority of the outstanding voting securities of the relevant class of the
respective Fund (as defined in the 1940 Act) on not more than 30 days' written
notice to any other party to the Plan. Pursuant to each Plan, the Distributor
will
36
<PAGE>
provide the Boards of Trustees and Directors periodic reports of amounts
expended under the Plan and the purpose for which such expenditures were made.
The Trustees/Directors have determined that the Plans will benefit the Trust,
the Company and their respective shareholders by (i) providing an incentive for
broker or bank personnel to provide continuous shareholder servicing after the
time of sale; (ii) retention of existing accounts; (iii) facilitating portfolio
management flexibility through continued cash flow into the Funds; and (iv)
maintaining a competitive sales structure in the mutual fund industry.
With respect to Class B and Class C Shares of each Fund, the
Distributor expects to pay sales commissions to dealers authorized to sell a
Fund's Class B and Class C Shares at the time of sale. The Distributor will use
its own funds (which may be borrowed) to pay such commissions pending
reimbursement by the relevant Service and Distribution Plan. In addition, the
Advisor may use its own resources to make payments to the Distributor or dealers
authorized to sell the Funds' shares to support their sales efforts.
SHAREHOLDER SERVICING ARRANGEMENTS - CLASS K SHARES. As stated in
each Fund's Prospectus, Class K Shares are sold to investors through
institutions which enter into Shareholder Servicing Agreements with the Trust or
the Company to provide support services to their Customers who beneficially own
Class K Shares in consideration of the Funds' payment of not more than .25% (on
an annualized basis) of the average daily net asset value 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 the Trust or the Company (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 the
Trust's arrangements with institutions; and (x) providing such other similar
services as the Trust or the Company may reasonably request to the extent the
institutions are permitted to do so under applicable statutes, rules and
regulations.
Pursuant to the Trust's and the Company's agreements with such
institutions, the Boards of Trustees and Directors will review, at least
quarterly, a written report of the amounts expended under the Trust's and the
Company'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 Boards of Trustees and Directors,
including a majority of the Trustees/Directors who are not "interested persons"
as defined in the 1940 Act, and have no direct or indirect financial interest in
such arrangements.
The Boards of Trustees and 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.
ADMINISTRATION AGREEMENT. First Data Investor Services Group, Inc.
("First Data"), located at 53 State Street, Boston, Massachusetts 02109, serves
as administrator for the Trust and the Company pursuant to administration
agreements (each, an "Administration Agreement"). First Data has agreed to
maintain office
37
<PAGE>
facilities for the Trust and the Company; provide accounting and bookkeeping
services for the Funds, including the computation of each Fund's net asset
value, net income and realized capital gains, if any; furnish statistical and
research data, clerical services, and stationery and office supplies; prepare
and file various reports with the appropriate regulatory agencies; and prepare
various materials required by the SEC or any state securities commission having
jurisdiction over the Trust or the Company.
Each Administration Agreement provides that the Administrator
performing services thereunder shall not be liable under the Agreement except
for its willful misfeasance, bad faith or gross negligence in the performance of
its duties or from the reckless disregard by it of its duties and obligations
thereunder.
Regarding the Administrator's agreement to reimburse the Trust or the
Company in the event the expenses of a Fund exceed applicable state expense
limitations, see "Investment Advisory and Other Service Arrangements -Investment
Advisor."
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. Comerica Bank, whose
principal business address is One Detroit Center, 500 Woodward Avenue, Detroit,
MI 48226, maintains custody of the Funds' assets pursuant to custodian
agreements (each, a "Custody Agreement") with each of the Trust and the Company.
Under each Custody Agreement, the Custodian (i) maintains a separate account in
the name of each Fund, (ii) holds and transfers portfolio securities on account
of each Fund, (iii) accepts receipts and makes disbursements of money on behalf
of each Fund, (iv) collects and receives all income and other payments and
distributions on account of each Fund's securities and (v) makes periodic
reports to the Boards of Trustees and Directors concerning each Fund's
operations. The Custodian is authorized to select one or more domestic or
foreign banks or trust companies to serve as sub-custodian on behalf of the
Trust or the Company. In addition, the Trust and the Company and the Custodian
have entered into respective sub-custody agreements with Boston Safe Deposit and
Trust Company ("Boston Safe") relating to the custody of foreign securities held
by certain Funds of the Trust and each Fund of the Company (except the Real
Estate Fund), and Boston Safe, in turn, has entered into additional agreements
with financial institutions and depositories located in foreign countries with
respect to the custody of such securities. As of December 1996, Morgan Stanley
Trust Company ("Morgan Stanley") will replace Boston Safe as sub-custodian
relating to the custody of foreign securities held by the funds of the Trust and
the Company (except International Bond Fund). With respect to the International
Bond Fund, Morgan Stanley has provided sub-custody services to the Fund since
its commencement of operations on October 2, 1996.
First Data also serves as the transfer and dividend disbursing agent
for the Funds pursuant to transfer agency agreements (the "Transfer Agency
Agreement") with each of the Trust and the Company, under which First Data (i)
issues and redeems shares of each Fund, (ii) addresses and mails all
communications by each Fund to its record owners, including reports to
shareholders, dividend and distribution notices and proxy materials for its
meetings of shareholders, (iii) maintains shareholder accounts, (iv) responds to
correspondence by shareholders of the Funds and (v) makes periodic reports to
the Boards of Trustees and Directors concerning the operations of each Fund.
Regarding the Custodian's and Transfer Agent's agreement to reimburse
the Trust or the Company in the event the expenses of a Fund exceed applicable
state expense limitations, see "Investment Advisory and Other Service
Arrangements - Advisory Agreement."
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 ("Comerica") and other
institutions that have entered into agreements with the Trust providing for
shareholder services for their customers.
38
<PAGE>
Banking laws and regulations currently prohibit a bank holding company
registered under the Federal Bank Holding Company Act of 1956 or any bank or
non-bank affiliate thereof from sponsoring, organizing, controlling or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment advisor, administrator, transfer agent or custodian to such an
investment company, or from purchasing shares of such a company as agent for and
upon the order of customers.
It should be noted that future changes in either Federal or state
statutes and regulations relating to permissible activities of banks and their
subsidiaries or affiliates, as well as future judicial or administrative
decisions or interpretations of current and future statutes and regulations,
could prevent Comerica, its affiliates and subsidiaries and certain other
institutions from continuing to perform certain services for Class K Shares of
the Funds.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of Comerica, its affiliates and subsidiaries and/or
other institutions in connection with the provision of services on behalf of
Class K Shares of the Funds, the Trust or the Company might be required to alter
materially or discontinue its arrangements with the institutions and change its
method of operations with respect to Comerica, its affiliates and subsidiaries
and certain other institutions. It is not anticipated, however, that any change
in the Funds' method of operations would affect the net asset value per share of
the Funds or result in a financial loss to any holder of Class K Shares of the
Funds.
OTHER INFORMATION PERTAINING TO DISTRIBUTION, ADMINISTRATION,
CUSTODIAN AND TRANSFER AGENCY AGREEMENTS. As stated in each Prospectus, the
Administrator and Transfer Agent each receive, as compensation for its services,
fees from the Funds based on the aggregate average daily net assets of the Funds
and other investment portfolios advised by the Advisor. The Custodian receives a
separate fee for its services. In approving the Administration Agreements and
Transfer Agency Agreements, the Boards of Trustees and Directors did consider
the services that are to be provided under their respective agreements, the
experience and qualifications of the respective service contractors, the
reasonableness of the fees payable by the Trust and the Company in comparison to
the charges of competing vendors, the impact of the fees on the estimated total
ordinary operating expense ratio of each Fund and the fact that neither the
Administrator nor the Transfer Agent is affiliated with either the Trust, the
Company or the Advisor. The Boards also considered their responsibilities under
federal and state law in approving these agreements. In considering the
reasonableness of the fee, the Distributor's activities under its Distribution
Agreements were not considered by the Boards.
39
<PAGE>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS A SERVICE AND
DISTRIBUTION PLANS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FISCAL FISCAL
YEAR PERIOD YEAR
ENDED ENDED ENDED
2/28/95 6/30/95 6/30/96
- --------------------------------------------------------------------------------
<S> <C> <C> C>
Accelerating Growth Fund $1,339.97 $ 51.86 $ 1916.29
Balanced Fund $ 116.01 $ 0.17 $ 136.95
Growth & Income Fund $ 0.00 $ 76.92 $ 268.00
Index 500 Fund $ 176.46 $ 203.84 $23,640.46
International Equity Fund $ 617.32 $ 1.38 $ 1,946.82
Small Company Growth Fund $ 794.65 $ 10.80 $ 1,158.43
Bond Fund $ 17.48 $ 15.24 $ 29.40
Intermediate Bond Fund $ 230.93 $ 0.51 $ 345.66
Michigan Triple Tax-Free Bond Fund $ 663.53 $ 0.00 $ 23.32
Tax-Free Bond Fund $ 0.00 $ 0.00 $ 0.03
Tax-Free Intermediate Bond Fund $ 6.17 $ 10.80 $ 85.26
- --------------------------------------------------------------------------------
-----------------------
FISCAL
PERIOD YEAR
ENDED ENDED
6/30/95 6/30/96
- --------------------------------------------------------------
Multi-Season Growth Fund $ 427.88 $1,945.49
Real Estate Fund $ 422.10 $ 179.10
Mid-Cap Growth Fund N/A $ 51.87
Value Fund N/A $ 41.77
- --------------------------------------------------------------
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
-------------------------------------------------
DISTRIBUTION SERVICER CDSC's
FEES FEES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Accelerating Growth Fund $ 1,268.42 $ 422.83 $ 238.16
Balanced Fund $ 400.45 $ 133.48 $ 199.11
Growth & Income Fund $ 1,147.15 $ 382.37 $ 300.00
Index 500 Fund $ 15,750.66 $ 4,500.20 $ 1,207.75
International Equity Fund $ 3,131.06 $ 1,043.68 $ 1.008.01
Mid-Cap Growth Fund $ 88.71 $ 29.54 $ 0.00
Multi-Season Growth Fund $454,197.35 $151,399.12 $155,014.33
Real Estate Fund $ 12,014.27 $ 4,004.75 $ 4,278.33
Small Company Growth Fund $ 2,247.94 $ 749.31 $ 100.00
Value Fund $ 424.07 $ 141.36 $ 181.56
Bond Fund $ 590.01 $ 196.67 $ 861.49
Intermediate Bond Fund $ 206.34 $ 68.79 $ 0.00
U.S. Government Income Fund $ 3,656.37 $ 1,218.79 $ 199.27
Michigan Triple Tax Free Fund $ 1,923.70 $ 641.24 $ 405.63
Tax-Free Bond Fund $ 131.90 $ 43.96 $ 979.34
Tax-Free Intermediate Bond Fund $ 298.44 $ 99.48 $ 0.53
Money Market Fund $ 1,496.13 $ 498.72 $ 0.00
- --------------------------------------------------------------------------------
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE PERIOD ENDED JUNE 30, 1995*
-------------------------------------------------
DISTRIBUTION SERVICER CDSC's
FEES FEES
- --------------------------------------------------------------------------------
Accelerating Growth Fund $ 137.64 $ 45.26 $ 350.16
Balanced Fund $ 44.96 $ 15.16 $ 200.96
Growth & Income Fund $ 135.37 $ 44.52 $ 0.00
International Equity Fund $ 311.35 $ 103.16 $ 0.00
Multi-Season Growth Fund** $187,381.57 $ 62,460.53 $101,519.47
Real Estate Fund** $ 4,532.31 $ 1,510.77 $ 430.62
Small Company Growth Fund $ 107.62 $ 35.70 $ 0.00
Intermediate Bond Fund $ 19.61 $ 6.50 $ 0.00
Michigan Triple Tax Free Fund $ 631.87 $ 208.93 $ 361.42
Tax-Free Bond Fund $ 2.85 $ 0.95 $ 0.00
Money Market Fund** $ 1,774.98 $ 591.66 $ 0.00
- --------------------------------------------------------------------------------
</TABLE>
- -----------------------------
* As of June 30, 1995, the following funds had not commenced selling Class B
Shares: Index 500 Fund, Bond Fund, U.S. Government Income Fund, Tax Free
Intermediate Bond Fund.
** Figures reflect the period 01/01/95 - 06/30/95. All other funds reflect
the period 03/01/95 - 06/30/95.
41
<PAGE>
<TABLE>
<CAPTION>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS B SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED FEBRUARY 28, 1995
-------------------------------------------------
DISTRIBUTION SERVICER CDSC's
FEES FEES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Accelerating Growth Fund $ 113.37 $15.95 $ 0.00
Balanced Fund $ 66.05 $ 7.42 $ 0.00
Growth & Income Fund $ 117.51 $20.45 $ 0.00
International Equity Fund $ 315.98 $49.15 $ 0.00
Multi-Season Growth Fund* $481,834.00 $ 0.00 $159,185.00
Real Estate Fund** $ 1,064.00 $ 0.00 $ 0.00
Small Company Growth Fund $ 72.07 $14.30 $ 0.00
Intermediate Bond Fund $ 16.61 $ 2.96 $ 0.00
Michigan Triple Tax Free Fund $ 515.28 $91.47 $ 0.00
Tax-Free Bond Fund $ 0.12 $ 0.04 $ 0.00
Money Market Fund** $ 1,799 $ 0.00 $ 0.00
- -------------------------------------------------------------------------------
- ----------------------------
* Figures reflect period from 01/01/94 - 12/31/94. Such amounts were paid to
previous distributor.
** Figures reflect period from commencement of operations to 12/31/94. Such
amounts were paid to previous distributor.
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS C SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL YEAR ENDED JUNE 30, 1996*
-------------------------------------------------
DISTRIBUTION SERVICER CDSC's
FEES FEES
- --------------------------------------------------------------------------------
Accelerating Growth Fund $ 263.46 $ 87.82 $188.66
Balanced Fund $ 3.69 $ 1.21 $100.01
Growth & Income Fund $ 89.74 $ 29.90 $ 0.00
International Equity Fund $ 3,585.39 $ 1,195.13 $293.87
Mid-Cap Growth Fund $ 129.03 $ 43.00 $ 2.18
Multi-Season Growth Fund $ 32,127.47 $10,709.17 $798.25
Real Estate Fund $ 13.33 $ 4.43 $ 7.50
Small Company Growth Fund $ 171.21 $ 57.06 $149.87
Value Fund $ 855.88 $ 285.29 $ 0.00
Bond Fund $ 92.46 $ 30.80 $ 0.00
Intermediate Bond Fund $ 73.80 $ 24.58 $ 0.00
- --------------------------------------------------------------------------------
</TABLE>
- ----------------------------
* As of June 30, 1996, the following funds had not commenced selling Class C
Shares: Index 500 Fund, U.S. Government Income Fund, Michigan Triple Tax-
Free Bond Fund, Tax-Free Bond Fund, Tax-Free Intermediate Bond Fund and
Money Market Fund.
42
<PAGE>
<TABLE>
<CAPTION>
FEES PAID TO THE DISTRIBUTOR PURSUANT TO CLASS C SERVICE AND DISTRIBUTION PLANS
FOR THE FISCAL PERIOD ENDED JUNE 30, 1995*
DISTRIBUTION SERVICER CDSC's
FEES FEES
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Multi-Season Growth Fund** $9,464.61 $3,154.86 $256.15
Real Estate Fund** $ 1.28 $ 0.43 $ 0.00
- --------------------------------------------------------------------------------
</TABLE>
- ----------------------------
* As of June 30, 1995, the Funds of the Trust had not commenced selling Class
C Shares.
** Figures reflect period 01/01/95-06/30/95.
The following amounts were paid by the Accelerating Growth Fund under its
Class B Plan during the fiscal year ended June 30, 1996 and Class C Distribution
Plan, for the period ended June 30, 1996, respectively; advertising: $0 and $0,
respectively; printing and mailing of prospectuses to other than current
shareholders: $0 and $0, respectively; compensation to underwriters: $0 and $0,
respectively; compensation to dealers: $123 and $11, respectively; compensation
to sales personnel: $0 and $0, respectively; and interest, carrying or other
financing charges: $392 and $39, respectively.
The following amounts were paid by the Balanced Fund under its Class B and
Class C Distribution Plans, respectively, during the fiscal year ended June 30,
1996 and the period ended June 30, 1996, respectively; advertising: $0 and $0,
respectively; printing and mailing of prospectuses to other than current
shareholders: $0 and $0, respectively; compensation to underwriters: $0 and $0,
respectively; compensation to dealers: $42 and $0, respectively; compensation to
sales personnel: $0 and $0, respectively; and interest, carrying or other
financing charges: $115 and $1, respectively.
The following amounts were paid by the Growth & Income Fund under its Class
B and Class C Distribution Plans, respectively, during the fiscal year ended
June 30, 1996 and the period ended June 30, 1996, respectively; advertising: $0
and $0, respectively; printing and mailing of prospectuses to other than current
shareholders: $0 and $0, respectively; compensation to underwriters: $0 and $0,
respectively; compensation to dealers: $102 and $0, respectively; compensation
to sales personnel: $0 and $0, respectively; and interest, carrying or other
financing charges: $477 and $11, respectively.
The following amounts were paid by the Index 500 Fund under its Class B
Distribution Plan during the period ended June 30, 1996; advertising: $0;
printing and mailing of prospectuses to other than current shareholders: $0;
compensation to underwriters: $0; compensation to dealers: $0; compensation to
sales personnel: $0; and interest, carrying or other financing charges: $12,384.
The following amounts were paid by the International Equity Fund under its
Class B Plan during the fiscal year ended June 30, 1996 and Class C Distribution
Plan, for the period ended June 30, 1996, respectively; advertising: $0 and $0,
respectively; printing and mailing of prospectuses to other than current
shareholders: $0 and $0, respectively; compensation to underwriters: $0 and $0,
respectively; compensation to dealers: $241 and $55, respectively; compensation
to sales personnel: $0 and $0, respectively; and interest, carrying or other
financing charges: $1,584 and $495, respectively.
The following amounts were paid by the Mid-Cap Fund under its Class B and
Class C Distribution Plans, respectively, during the period ended June 30, 1996;
advertising: $0 and $0, respectively; printing and mailing of prospectuses to
other than current shareholders: $0 and $0, respectively; compensation to
43
<PAGE>
underwriters: $0 and $0, respectively; compensation to dealers: $17 and $0,
respectively; compensation to sales personnel: $0 and $0, respectively; and
interest, carrying or other financing charges: $29 and $16, respectively.
The following amounts were paid by the Multi-Season Fund under its Class B
and Class C Distribution Plans, respectively, during the fiscal year ended June
30, 1996; advertising: $0 and $0, respectively; printing and mailing of
prospectuses to other than current shareholders: $0 and $0, respectively;
compensation to underwriters: $0 and $0, respectively; compensation to dealers:
$130,116 and $11,976, respectively; compensation to sales personnel: $0 and $0,
respectively; and interest, carrying or other financing charges: $82,959 and $0,
respectively.
The following amounts were paid by the Real Estate Fund under its Class B
and Class C Distribution Plans, respectively, during the fiscal year ended June
30, 1996 and during the period ended June 30, 1996, respectively; advertising:
$0 and $0, respectively; printing and mailing of prospectuses to other than
current shareholders: $0 and $0, respectively; compensation to underwriters: $0
and $0, respectively; compensation to dealers: $1,789 and $0, respectively;
compensation to sales personnel: $0 and $0, respectively; and interest, carrying
or other financing charges: $4,381 and $4, respectively.
The following amounts were paid by the Small Company Growth Fund under its
Class B and Class C Distribution Plans, respectively, during the fiscal year
ended June 30, 1996 and during the period ended June 30, 1996, respectively;
advertising: $0 and $0, respectively; printing and mailing of prospectuses to
other than current shareholders: $0 and $0, respectively; compensation to
underwriters: $0 and $0, respectively; compensation to dealers: $77 and $10,
respectively; compensation to sales personnel: $0 and $0, respectively; and
interest, carrying or other financing charges: $739 and $13, respectively.
The following amounts were paid by the Value Fund under its Class B and
Class C Distribution Plans, respectively, during the period ended June 30, 1996;
advertising: $0 and $0, respectively; printing and mailing of prospectuses to
other than current shareholders: $0 and $0, respectively; compensation to
underwriters: $0 and $0, respectively; compensation to dealers: $20 and $0,
respectively; compensation to sales personnel: $0 and $0, respectively; and
interest, carrying or other financing charges: $229 and $125, respectively.
The following amounts were paid by the Bond Fund under its Class B and
Class C Distribution Plans, respectively, during the period ended June 30, 1996;
advertising: $0 and $0, respectively; printing and mailing of prospectuses to
other than current shareholders: $0 and $0, respectively; compensation to
underwriters: $0 and $0, respectively; compensation to dealers: $0 and $0,
respectively; compensation to sales personnel: $0 and $0, respectively; and
interest, carrying or other financing charges: $8 and $0, respectively.
The following amounts were paid by the Intermediate Bond Fund under its
Class B and Class C Distribution Plans, respectively, during the fiscal year
ended June 30, 1996 and the period ended June 30, 1996, respectively;
advertising: $0 and $0, respectively; printing and mailing of prospectuses to
other than current shareholders: $0 and $0, respectively; compensation to
underwriters: $0 and $0, respectively; compensation to dealers: $50 and $0,
respectively; compensation to sales personnel: $0 and $0, respectively; and
interest, carrying or other financing charges: $70 and $14, respectively.
The following amounts were paid by the U.S. Government Income Fund under
its Class B Distribution Plan, during the period ended June 30, 1996;
advertising: $0; printing and mailing of prospectuses to other than current
shareholders: $0; compensation to underwriters: $0; compensation to dealers: $9;
compensation to sales personnel: $0; and interest, carrying or other financing
charges: $54.
44
<PAGE>
The following amounts were paid by the Michigan Bond Fund under its Class B
Distribution Plan, during the fiscal year ended June 30, 1996: advertising: $0;
printing and mailing of prospectuses to other than current shareholders: $0;
compensation to underwriters: $0; compensation to dealers: $407 compensation to
sales personnel: $0; and interest, carrying or other financing charges: $360.
The following amounts were paid by the Tax-Free Bond Fund under its Class B
Distribution Plan, during the fiscal year ended June 30, 1996: advertising: $0;
printing and mailing of prospectuses to other than current shareholders: $0;
compensation to underwriters: $0; compensation to dealers: $6; compensation to
sales personnel: $0; and interest, carrying or other financing charges: $7.
The following amounts were paid by the Tax-Free Intermediate Bond Fund
under its Class B Distribution Plan during the period ended June 30, 1996:
advertising: $0; printing and mailing of prospectuses to other than current
shareholders: $0; compensation to underwriters: $0; compensation to dealers:
$14; compensation to sales personnel: $0; and interest, carrying or other
financing charges: $38.
The following amounts were paid by the Money Market Fund under its Class B
Distribution Plan during the year ended June 30, 1996: advertising: $0; printing
and mailing of prospectuses to other than current shareholders: $0; compensation
to underwriters: $0; compensation to dealers: $557; compensation to sales
personnel: $0; and interest, carrying or other financing charges: $0.
For the fiscal year ended February 28, 1994, each respective Fund bore
administration, transfer agency and custodian fees pursuant to the
administration, administration and accounting services, transfer agency and
custodian agreements then in effect. These fees were paid to The Boston Company
Advisors, Inc. ("TBCA") and PFPC, Inc. ("PFPC"), as the co-administrators, PNC
Bank, N.A. ("PNC") as custodian and PFPC, Inc. as transfer agent. The
administrators, custodian and transfer agent accrued fees for the fiscal year
ended February 28, 1994 of $808,657 for the Cash Investment Fund; $347,523 for
the Tax-Free Money Market Fund; and $452,202 for the U.S. Treasury Money Market
Fund, respectively (exclusive of out-of-pocket expenses). For the fiscal year
ended February 28, 1994, for the Accelerating Growth, Index 500, International
Equity, Small Company Growth, Bond and Intermediate Bond Funds, the
administrators, custodian and transfer agent accrued fees of $336,669; $111,867;
$120,447; $124,551; $241,597; and $416,803, respectively (exclusive of out-of-
pocket expenses).
For the fiscal year ended February 28, 1994 for the Balanced, Michigan Bond
and Tax-Free Intermediate Bond Funds, the administrators accrued fees of $45,845
(exclusive of out-of-pocket expenses). For the fiscal year ended February 28,
1994, the administrators, custodian and transfer agent voluntarily waived fees
of $26,318 for the Index 500.
On July 1, 1994, First Data became the Administrator and Transfer Agent for
the Growth & Income Fund, the U.S. Government Income Fund and the Tax-Free Bond
Fund (the "New Funds"). Prior to the close of business on July 31, 1994, First
Data and PFPC (together, the "Co-Administrators") served as the Co-
Administrators to the Trust, excluding the New Funds. Prior to the close of
business on August 5, 1994, PFPC also served as transfer agent to the Funds,
excluding the New Funds. As compensation for their services, the Co-
Administrators and PFPC as transfer agent received a single fee, based on the
aggregate average daily net assets of the Funds computed daily and payable
monthly, at an annual rate of 0.12% of the first $1.8 billion of net assets,
plus 0.115% of the next $1 billion of net assets, plus 0.100% of the next $1
billion of net assets, plus 0.095% of all net assets in excess of $3.8 billion.
45
<PAGE>
Prior to the close of business on May 6, 1994, TBCA and PFPC served as the
Trust's co-administrators and received a fee equivalent to the fee paid to First
Data and PFPC for their services as co-administrators and transfer agent.
For the period March 1, 1994 through July 31, 1994, the fees of the
Administrators accrued as follows: Accelerating Growth Fund - $24,031; Balanced
Fund - $16,978; Growth & Income Fund - $0; Index 500 Fund - $23,865;
International Equity Fund - $41,742; Small Company Growth Fund - $38,003; Bond
Fund - $71,113; Intermediate Bond Fund - $123,934; U.S. Government Income Fund -
$0; Michigan Bond Fund - $6,417; Tax-Free Bond Fund - $0; Tax-Free Intermediate
Bond Fund - $50; Cash Investment Fund - $267,499; Tax Free Money Market Fund-
$104,713; and U.S. Treasury Money Market Fund - $134,386.
For the period ended February 28, 1995, the fees of the Administrator
accrued as follows: Accelerating Growth Fund - $198,140; Balanced Fund -$34,625;
Growth & Income Fund - $41,047; Index 500 Fund - $69,871; International Equity
Fund - $94,485; Small Company Growth Fund - $83,027; Bond Fund -$133,388;
Intermediate Bond Fund - $335,642; U.S. Government Income Fund -$142,297;
Michigan Bond Fund - $17,168; Tax-Free Bond Fund - $217,868; Tax-Free
Intermediate Bond Fund - $272,285; Cash Investment Fund - $669,287; Tax-Free
Money Market Fund $179,189; and U.S. Treasury Money Market Fund - $212,383.
For the period ended June 30, 1995 and the fiscal year ended June 30, 1996,
the fees of the Administrator accrued as follows: Accelerating Growth Fund -
$101,130 and $322,120; Balanced Fund - $18,258 and $62,095; Growth & Income
Fund - $48,503 and $202,655; Index 500 Fund - $44,411 and $188,416;
International Equity Fund - $54,832 and $201,299; Small Company Growth Fund -
$48,480 and $194,176; Bond Fund - $69,084 and $190,967; Intermediate Bond Fund -
$176,525 and $587,790; U.S. Government Income Fund - $70,106 and $216,970;
Michigan Bond Fund - $10,784 and $31,899; Tax-Free Bond Fund - $94,378 and
$245,271; Tax-Free Intermediate Bond Fund - $136,609 and $400,485; Cash
Investment Fund - $376,101 and $1,183,419; Tax-Free Money Market Fund - $89,841
and $285,214; and U.S. Treasury Money Market Fund - $122,730 and $378,955,
respectively.
Prior to December 31, 1994, Old MCM, Inc. served as administrator to the
Company's Funds pursuant to administration agreements which provided for the
same fees as the current Administration Agreements. Net fees paid and accrued
for Old MCM, Inc. for services provided to the Money Market Fund pursuant to its
former administration agreement for the year ended December 31, 1994 were
$149,272. Net fees paid and accrued to Old MCM, Inc. for services provided to
the Multi-Season Fund pursuant to its former administration agreement for the
year ended December 31, 1994 were $89,099. Net fees paid and accrued to Old MCM,
Inc. for services provided to the Real Estate Fund pursuant to its former
administration agreement for the period from commencement of operations to
December 31, 1994 were $8,691.
From January 1, 1995 through May 1, 1995, State Street Bank and Trust
Company served as the Company's administrator. On May 1, 1995, First Data became
the Company's administrator.
For the period May 1, 1995 through June 30, 1995, fees of First Data
accrued were $17,266, $1,150 and $48,129, for the Multi-Season Fund, Real Estate
Fund and Money Market Fund, respectively.
For the fiscal year ended June 30, 1996, administration fees of First Data
accrued were: $345,388 - Multi-Season Fund, $19,100 - Real Estate Fund and
$292,172 - Money Market Fund.
For the period ended June 30, 1996, administration fees of First Data
accrued were: $18,006 - Mid-Cap Fund and $29,705 - Value Fund.
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Comerica Bank provides custodial services to the Funds. As compensation for
its services, Comerica Bank is entitled to receive fees, based on the aggregate
average daily net assets of the Funds and certain other Investment portfolios
for which Comerica Bank provides services, computed daily and payable monthly at
an annual rate of 0.03% of the first $100 million of average daily net assets,
plus 0.02% of the next $500 million of net assets, plus 0.01% of all net assets
in excess of $600 million. Comerica Bank also receives certain transaction based
fees. Comerica Bank earned $650,517 for its services to the Funds for the period
ended June 30, 1996.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Board Members, the Advisor makes
decisions with respect to and places orders for all purchases and sales of
portfolio securities for each Fund.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed.
For the fiscal year ended February 28, 1994 the Accelerating Growth Fund,
Balanced Fund, Index 500 Fund, International Equity Fund and Small Company
Growth Fund paid brokerage commissions in the following amounts: $281,465,
$89,315, $18,585, $169,977 and $94,291, respectively. The Accelerating Growth
Fund, Balanced Fund, Growth & Income Fund, Index 500 Fund, International Equity
Fund and Small Company Growth Fund paid in brokerage commissions $332,408,
$49,232, $185,181, $5,085, $116,312 and $70,561, respectively, for the fiscal
year ended February 28, 1995. During the year ended December 31, 1994 (and, for
the Real Estate Fund, for the period from the commencement of operations to
December 31, 1994), the Multi-Season Fund, the Real Estate Fund and the Money
Market Fund paid $94,803, $4,667 and $0, respectively, in brokerage commissions.
The other Funds did not pay any brokerage commissions during these years.
For the period from March 1, 1995 to June 30, 1995, the Accelerating Growth
Fund, Balanced Fund, Growth & Income Fund, Index 500 Fund, International Equity
Fund and Small Company Growth Fund paid in brokerage commissions $123,045,
$13,238, $62,706, $5,047, $127,871 and $65,661, respectively. The other Funds of
the Trust did not pay brokerage commissions for the period from March 1, 1995 to
June 30, 1995.
For the period from January 1, 1995 to June 30, 1995, the Multi-Season Fund
and the Real Estate Fund paid $62,889 and $14,627, respectively, in brokerage
commissions. The other Funds of the Company did not pay brokerage commissions
for the period from January 1, 1995 to June 30, 1995.
For the fiscal year ended June 30, 1996, the Funds paid brokerage
commissions as follows: $474,252 - Accelerating Growth Fund, $52,376-Balanced
Fund, $202,292 - Growth & Income Fund, $41,009 - Index 500 Fund, $428,699 -
International Equity Fund, $424,580 - Multi-Season Fund, $40,182 - Real Estate
Fund and $203,936 - Small Company Growth Fund. The other Funds did not pay
brokerage commissions during the fiscal year ended June 30, 1996.
For the period ended June 30, 1996, the Mid-Cap Fund and the Value Fund
paid brokerage commissions of $83,397 and $169,335, respectively.
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For the fiscal year ended June 30, 1996, the portfolio turnover rate
for the Bond Fund and the Intermediate Bond Fund was: 507% and 494%,
respectively. The portfolio turnover of the Bond Fund and the Intermediate Bond
Fund was affected by fluctuating interest rate conditions which at times
required increased dispositions and acquisitions of securities to maintain each
Fund's maturity structure. For the period ended June 30, 1996, the portfolio
turnover rate for the Mid-Cap Growth Fund and Value Fund was 247% and 223%,
respectively. The portfolio turnover for the Mid-Cap Growth and Value Funds was
higher than anticipated during the period as it was each Fund's initial year of
operations.
Over-the-counter issues, including corporate debt and government
securities, are normally traded on a "net" basis (i.e., without commission)
through dealers, or otherwise involve transactions directly with the issuer of
an instrument. With respect to over-the-counter transactions, the Advisor will
normally deal directly with dealers who make a market in the instruments
involved except in those circumstances where more favorable prices and execution
are available elsewhere. The cost of foreign and domestic securities purchased
from underwriters includes an underwriting commission or concession, and the
prices at which securities are purchased from and sold to dealers include a
dealer's mark-up or mark-down.
The Funds may participate, if and when practicable, in bidding for the
purchase of portfolio securities directly from an issuer in order to take
advantage of the lower purchase price available to members of a bidding group.
The Funds will engage in this practice, however, only when the Advisor believes
such practice to be in the Funds' interests.
Since the Money Market Funds will invest only in short-term debt
instruments, their annual portfolio turnover rates will be relatively high, but
brokerage commissions are normally not paid on money market instruments, and
portfolio turnover is not expected to have a material effect on the net
investment income of a Money Market Fund. The portfolio turnover rate of a Fund
is calculated by dividing the lesser of a Fund's annual sales or purchases of
portfolio securities (exclusive of purchases or sales of securities whose
maturities at the time of acquisition were thirteen months or less for the Money
Market Funds or one year or less for the Equity and Bond Funds) by the monthly
average value of the securities held by the Fund during the year. The Equity and
Bond Funds may engage in short-term trading to achieve their investment
objectives. Portfolio turnover may vary greatly from year to year as well as
within a particular year.
In its Advisory Agreements, the Advisor agrees to select broker-
dealers in accordance with guidelines established by the Trust's Board of
Trustees and 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 Agreements authorize the
Advisor, subject to the prior approval of the Trust's Board of Trustees and the
Company's Board of Directors, to cause the Funds 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 Funds. 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
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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, a Fund may be
the primary beneficiary of the research or services received as a result of
portfolio transactions effected for such other account or investment company.
Portfolio securities will not be purchased from or sold to the
Advisor, the Distributor or any affiliated person (as defined in the 1940 Act)
of the foregoing entities except to the extent permitted by SEC exemptive order
or by applicable law.
Investment decisions for each Fund and for other investment accounts
managed by the Advisor are made independently of each other in the light of
differing conditions. However, the same investment decision may be made for two
or more of such accounts. In such cases, simultaneous transactions are
inevitable. Purchases or sales are then averaged as to price and allocated as to
amount in a manner deemed equitable to each such account. While in some cases
this practice could have a detrimental effect on the price or value of the
security as far as a Fund is concerned, in other cases it is believed to be
beneficial to a Fund. To the extent permitted by law, the Advisor may aggregate
the securities to be sold or purchased for a Fund with those to be sold or
purchased for other investment companies or accounts in executing transactions.
A Fund will not purchase securities during the existence of any
underwriting or selling group relating to such securities of which the Advisor
or any affiliated person (as defined in the 1940 Act) thereof is a member except
pursuant to procedures adopted by the Trust's Board of Trustees and the
Company's Board of Directors in accordance with Rule 10f-3 under the 1940 Act.
The Trust and the Company are required to identify the securities of
their regular brokers or dealers (as defined in Rule 10b-1 under the 1940) Act
or their parents held by them as of the close of their most recent fiscal year.
As of June 30, 1996: the Index 500 Fund held 7,000 shares of Merrill Lynch &
Co., Inc., 4,300 shares of Salomon, Inc. and 5,600 shares of Mellon Bank; the
Cash Investment Fund held 40,000,000 shares of Bank of Nova Scotia, 10,000,000
shares of General Motors and 50,000,000 shares of Sanwa Business Credit Co.; and
the Money Market Fund held 10,000,000 shares of Bear Stearns.
Except as noted in the Prospectuses and this Statement of Additional
Information the Funds' service contractors bear all expenses in connection with
the performance of their services and the Funds bear 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 Trustees/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; the expense of using
independent pricing services; and other expenses which are not assumed by the
Administrators. Any general expenses of the Trust or the Company that are not
readily identifiable as belonging to a particular investment portfolio of the
Trust or the Company are allocated among all investment portfolios of the Trust
or the Company by or under the direction of the Boards of Trustees and Directors
in a manner that the Boards of Trustees and Directors determine 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.
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PURCHASE AND REDEMPTION INFORMATION
Purchases and redemptions are discussed in the Funds' Prospectuses and
such information is incorporated herein by reference.
PURCHASES. In addition to the methods of purchasing shares described
in the Prospectuses, the Funds also offer a pre-authorized checking plan by
which investors may accumulate shares of the Funds regularly each month by means
of automatic debits to their checking accounts. There is a $50 minimum on each
automatic debit. Shareholders may choose this option by checking the appropriate
part of the application form or by calling the Funds at (800) 438-5789. Such a
plan is voluntary and may be discontinued by the shareholder at any time or by
the Trust on 30 days' written notice to the shareholder.
LETTER OF INTENT. Purchasers who intend to invest $25,000 or more in
Class A Shares of the Funds of the Equity Funds or $100,000 or more in Class A
Shares of the Income Funds within 13 months (whether in one lump sum or in
installments the first of which may not be less than 5% of the total intended
amount and each subsequent installment not less than $100, including automatic
investment and payroll deduction plans), and to beneficially hold the total
amount of such shares fully paid for and outstanding simultaneously for at least
one full business day before the expiration of that period, should complete the
Letter of Intent ("LOI") section in the Application. Payment for not less than
5% of the total intended amount must accompany the executed LOI. Those shares
purchased with the first 5% of the intended amount stated in the LOI will be
held as "escrowed shares" for as long as the LOI remains unfulfilled. Although
the escrowed shares are registered in the investor's name, his full ownership of
them is conditional upon fulfillment of the LOI. No escrowed shares can be
redeemed by the investor for any purpose until the LOI is fulfilled or
terminated. If the LOI is terminated for any reason other than fulfillment, the
Transfer Agent will redeem that portion of the escrowed shares required and
apply the proceeds to pay any adjustment that may be appropriate to the sales
commission on all shares (including the escrowed shares) already purchased under
the LOI and apply any unused balance to the investor's account. The LOI is not a
binding obligation to purchase any amount of shares, but its execution will
result in the purchaser paying a lower sales charge at the appropriate quantity
purchase level. A purchase not originally made pursuant to an LOI may be
included under a subsequent LOI executed within 90 days of such purchase. In
this case, an adjustment will be made at the end of 13 months from the effective
date of the LOI at the net asset value per share then in effect, unless the
investor makes an earlier written request to the Funds' Distributor upon
fulfilling the purchase of Shares under the LOI. In addition, the aggregate
value of any shares purchased prior to the 90-day period referred to above may
be applied to purchases under a current LOI in fulfilling the total intended
purchases under the LOI. However, no adjustment of sales charges previously paid
on purchases prior to the 90-day period will be made. Shares acquired through
reinvestment of dividends and capital gain distributions are considered in
connection with an investor's fulfillment of the LOI.
RETIREMENT PLANS. Shares of any of the Funds may be purchased in
connection with various types of tax deferred retirement plans, including
individual retirement accounts ("IRAs"), qualified plans, deferred compensation
for public schools and charitable organizations (403(b) plans) and simplified
employee pension IRAs. An individual or organization considering the
establishment of a retirement plan should consult with an attorney and/or an
accountant with respect to the terms and tax aspects of the plan. A $10.00
annual custodial fee is also charged on IRAs. This custodial fee is due by
December 15 of each year and may be paid by check or shares liquidated from a
shareholder's account.
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REDEMPTIONS
SYSTEMATIC WITHDRAWALS. In addition to the methods of redemption
described in the Funds' Prospectuses, a systematic withdrawal plan is available
in which a shareholder of the Funds may elect to receive a fixed amount ($50
minimum), monthly, quarterly, semi-annually, or annually, for accounts with a
value of $2,500 or more. Checks are mailed on or about the 10th of each
designated month. All certified shares must be placed on deposit under the plan
and dividends and capital gain distributions, if any, are automatically
reinvested at net asset value for shareholders participating in the plan. If the
checks received by a shareholder through the systematic withdrawal plan exceed
the dividends and capital appreciation of the shareholder's account, the
systematic withdrawal plan will have the effect of reducing the value of the
account. Any gains and/or losses realized from redemptions through the
systematic withdrawal plan are considered a taxable event by the Internal
Revenue Service and must be reported on the shareholders' income tax return.
Shareholders should consult with a tax advisor for information on their specific
financial situations. At the time of initial investment, a shareholder may
request that the check for the systematic withdrawal be sent to an address other
than the address of record. The address to which the payment is mailed may be
changed by submitting a written request, signed by all registered owners, with
their signatures guaranteed. Shareholders may add this option after the account
is already established, change the amount on an existing account by calling the
Funds at (800) 438-5789. The Funds may terminate the plan on 30 days' written
notice to the shareholder.
Redemption proceeds are normally paid in cash; however, each Fund may
pay the redemption price in whole or part by a distribution in kind of
securities from 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 INFORMATION. The Funds reserve the right to suspend or postpone
redemptions during any period when: (i) trading on the New York Stock Exchange
is restricted, as determined by the SEC, or the New York Stock Exchange is
closed for other than customary weekend and holiday closings; (ii) the SEC has
by order permitted such suspension or postponement for the protection of
shareholders; or (iii) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of the fund not
reasonably practicable.
The Funds may involuntarily redeem an investor's shares if the net
asset value of such shares is less than $500; provided that involuntary
redemptions will not result from fluctuations in the value of an investor's
shares. A notice of redemption, sent by first-class mail to the investor's
address of record, will fix a date not less than 30 days after the mailing date,
and shares will be redeemed at the net asset value at the close of business on
that date unless sufficient additional shares are purchased to bring the
aggregate account value up to $500 or more. A check for the redemption proceeds
payable to the investor will be mailed to the investor at the address of record.
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., New York City
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,
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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
MONEY MARKET FUNDS. The value of the portfolio securities of the
Money Market Funds is calculated using the amortized cost method of valuation.
Under this method the market value of an instrument is approximated by
amortizing the difference between the acquisition cost and value at maturity of
the instrument on a straight-line basis over the remaining life of the
instrument. The effect of changes in the market value of a security as a result
of fluctuating interest rates is not taken into account. The market value of
debt securities usually reflects yields generally available on securities of
similar quality. When such yields decline, market values can be expected to
increase, and when yields increase, market values can be expected to decline.
As indicated, the amortized cost method of valuation may result in the
value of a security being higher or lower than its market price, the price a
Fund would receive if the security were sold prior to maturity. The Boards of
Trustees and Directors have established procedures reasonably designed, taking
into account current market conditions and the Funds' investment objectives, for
the purpose of maintaining a stable net asset value of $1.00 per share for each
Fund for purposes of sales and redemptions. These procedures include a review by
the Board of Trustees and Directors, at such intervals as they deem appropriate,
of the extent of any deviation of net asset value per share, based on available
market quotations, from the $1.00 amortized cost per share. Should that
deviation exceed 1/2 of 1% for a Fund, the Boards of Trustees and Directors will
promptly consider whether any and, if any, what action should be initiated. If
the Board of Trustees or Directors believes that the extent of any deviation
from a Fund's $1.00 amortized cost price per share may result in material
dilution of other unfair results to new or existing investors, it will take such
steps as it considers appropriate to eliminate or reduce any such dilution or
unfair results to the extent reasonably practicable. Such action may include
redeeming shares in kind, selling portfolio securities prior to maturity,
reducing or withholding dividends, shortening the average portfolio maturity,
reducing the number of outstanding shares without monetary consideration, and
utilizing a net asset value per share as determined by using available market
quotations.
Pursuant to Rule 2a-7, each of the Money Market Funds will maintain a
dollar-weighted average portfolio maturity appropriate to its objective of
maintaining a stable net asset value per share, provided that such Funds will
not purchase any security with a remaining maturity (within the meaning of Rule
2a-7 under the 1940 Act) greater than 397 days (securities subject to repurchase
agreements, variable and floating rate securities, and certain other securities
may bear longer maturities), nor maintain a dollar-weighted average portfolio
maturity which exceeds 90 days. In addition, the Funds may acquire only U.S.
dollar-denominated obligations that present minimal credit risks and that are
"First Tier Securities" at the time of investment. First Tier Securities are
those that are rated in the highest rating category by at least two nationally
recognized security rating organizations NRSROs or by one if it is the only
NRSRO rating such obligation or, if unrated, determined to be of comparable
quality. A security is deemed to be rated if the issuer has any security
outstanding of comparable priority and security which has received a short-term
rating by an NRSRO. The Advisor will determine that an obligation presents
minimal credit risks or that unrated investments are of comparable quality, in
accordance with guidelines established by the Board of Directors or Trustees.
There can be no assurance that a constant net asset value will be maintained for
each Money Market Fund.
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ALL FUNDS. In determining the approximate market value of portfolio
investments, the Trust or 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 Trust's or 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 Members.
IN-KIND PURCHASES
With the exception of the Real Estate Fund, 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 Prospectuses. Shares
of the Real Estate Fund will not be issued for consideration other than cash.
For further information about this form of payment please contact the Transfer
Agent. In connection with an in-kind securities payment, a Fund will require,
among other things, that the securities (a) meet the investment objectives and
policies of the Funds; (b) are acquired for investment and not for resale; (c)
are liquid securities that are not restricted as to transfer either by law or
liquidity of markets; (d) have a value that is readily ascertainable by a
listing on a nationally recognized securities exchange; and (e) are valued on
the day of purchase in accordance with the pricing methods used by the Fund and
that the Fund receive satisfactory assurances that (i) it will have good and
marketable title to the securities received by it; (ii) that the securities are
in proper form for transfer to the Fund; and (iii) adequate information will be
provided concerning the basis and other tax matters relating to the securities.
PERFORMANCE INFORMATION
YIELD OF THE MONEY MARKET FUNDS
The Money Market Funds' 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. Based on the foregoing computations,
the annualized yields for all share classes of the Cash Investment, Money
Market, Tax-Free Money Market and U.S. Treasury Money Market Funds for the
seven-day period ended June 30, 1996 were: 4.84% (Class Y) and 4.69% (Class K)
and 4.59% (Class A) for the Cash Investment Fund; 4.56% (Class A), 3.82% (Class
B), and 4.81% (Class Y) for the Money Market Fund; 2.83% (Class Y), 2.68% (Class
K) and 2.58% (Class A) for the Tax-Free Money Market Fund; and 4.70% (Class Y),
4.55% (Class K) and 4.45% (Class A) for the U.S. Treasury Money Market Fund.
The effective yields for all share classes of the Money Market, Cash
Investment, Tax-Free Money Market and U.S. Treasury Money Market Funds for the
seven-day period ended June 30, 1996 were: 4.66% (Class A), 3.88% (Class B) and
4.92% (Class Y) for the Money Market Fund; 4.94% (Class Y), 4.79% (Class K) and
4.68% (Class A) for the Cash Investment Fund; 2.86% (Class Y), 2.71% (Class K)
and 2.61% (Class A) for the Tax-Free Money Market Fund; and 4.80% (Class Y),
4.65% (Class K) and 4.54% (Class A) for the U.S. Treasury Money Market Fund.
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In addition, a standardized "tax-equivalent yield" may be quoted for the
Tax-Free Money Market Fund, which is computed by: (a) dividing the portion of
the Fund's yield (as calculated above) that is exempt from Federal income tax by
one minus a stated Federal income tax rate; and (b) adding the figure resulting
from (a) above to that portion, if any, of the yield that is not exempt from
Federal income tax. For the seven-day period ended June 30, 1996, the tax-
equivalent yield for Class Y, Class K and Class A Shares of the Tax-Free Money
Market Fund was 4.10% (Class Y), 3.88% (Class K) and 3.74% (Class A) calculated
for all share classes based on a stated tax rate of 31%. The fees which may be
imposed by institutions on their Customers are not reflected in the calculations
of yields for the Funds.
Yield may fluctuate daily and does not provide a basis for determining
future yields. Because the yields of each Fund will fluctuate, they 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 each 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 AND PERFORMANCE OF THE NON-MONEY MARKET FUNDS
The Bond Funds' and International Bond Fund's 30-day (or one month)
standard yield described in the applicable Prospectus is calculated for each
Fund in accordance with the method prescribed by the SEC for mutual funds:
a - b
YIELD = 2[(-----+1)/6/- 1]
cd
Where: a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of reimbursements);
c = average daily number of shares outstanding during the period
entitled to receive dividends; and
d = maximum offering price per share on the last day of the period.
For the purpose of determining interest earned on debt obligations
purchased by a Fund at a discount or premium (variable "a" in the formula), each
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 a 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.
54
<PAGE>
Interest earned on tax-exempt obligations that are issued without original
issue discount and have a current market discount is calculated by using the
coupon rate of interest instead of the yield to maturity. In the case of tax-
exempt obligations that are issued with original issue discount but which have
discounts based on current market value that exceed the then-remaining portion
of the original issue discount (market discount), the yield to maturity is the
imputed rate based on the original issue discount calculation. On the other
hand, in the case of tax-exempt obligations that are issued with original issue
discount but which have the discounts based on current market value that are
less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage or other receivables-backed debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market value of such debt obligations. Expenses
accrued for the period (variable "b" in the formula) include all recurring fees
charged by a Fund to all shareholder accounts in proportion to the length of the
base period and the Fund's mean (or median) account size. Undeclared earned
income will be subtracted from the offering price per share (variable "d" in the
formula). A Fund's maximum offering price per share for purposes of the formula
includes the maximum sales charge imposed -- currently 5.50% of the per share
offering price for Class A Shares of the Equity Funds (with the exception of the
Index 500 Fund) and 4.00% of the per share offering price for Class A Shares of
the Bond and Tax-Free Bond Funds. Effective September 20, 1995, the maximum
sales charge imposed by Class A Shares of the Index 500 Fund was reduced from
5.50% to 2.50% of the per share offering price of such shares. The tax-
equivalent yield for each Fund below is based on a stated federal tax rate of
31% and, with respect to Michigan Bond Fund, a Michigan state tax rate of
4%.
CLASS A SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class A Shares of
the following Funds for the 30-day period ended June 30, 1996 were:
<TABLE>
<CAPTION>
30-Day Tax-Equivalent
Yield 30-Day Yield
------- ---------------
<S> <C> <C>
Bond Fund 5.49% N/A
Intermediate Bond Fund 5.56% N/A
U.S. Government Income Fund 5.90% N/A
Michigan Bond Fund* 4.50% 6.92%
Tax-Free Bond Fund 4.45% 6.45%
Tax-Free Intermediate Bond Fund 3.76% 5.45%
</TABLE>
- ------------------------
* With waiver of fees by the Advisor, the standardized yields and tax equivalent
yields for the Michigan Bond Fund, Class A Shares, were 5.00% and 7.69%,
respectively.
55
<PAGE>
CLASS B SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class B Shares of
the following Funds for the 30-day period ended June 30, 1996 were:
<TABLE>
<CAPTION>
30-Day Tax-Equivalent
Yield 30-Day Yield
------- ---------------
<S> <C> <C>
Bond Fund 4.98% N/A
Intermediate Bond Fund 5.05% N/A
U.S. Government Income Fund 5.40% N/A
Michigan Bond Fund** 3.97% 6.11%
Tax-Free Bond Fund 3.86% 5.59%
Tax-Free Intermediate Bond Fund 3.17% 4.59%
</TABLE>
CLASS C SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class C Shares of
the following Funds for the 30-day period ended June 30, 1996 were:
<TABLE>
<CAPTION>
30-Day Tax-Equivalent
Yield 30-Day Yield
------- ---------------
<S> <C> <C>
Bond Fund 4.98% N/A
Intermediate Bond Fund 5.04% N/A
U.S. Government Income Fund N/A N/A
Michigan Bond Fund N/A N/A
Tax-Free Bond Fund N/A N/A
Tax-Free Intermediate Bond Fund N/A N/A
</TABLE>
CLASS K SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class K Shares of
the following Funds for the 30-day period ended June 30, 1996 were:
<TABLE>
<CAPTION>
30-Day Tax-Equivalent
Yield 30-Day Yield
------- ---------------
<S> <C> <C>
Bond Fund 5.73% N/A
Intermediate Bond Fund 5.79% N/A
U.S. Government Income Fund 6.15% N/A
Michigan Bond Fund** 4.72% 7.26%
Tax-Free Bond Fund 4.62% 6.70%
Tax-Free Intermediate Bond Fund 3.92% 5.68%
</TABLE>
- ----------------------
** With waiver of fees by the Advisor, the standardized yields and tax-
equivalent yields for the Michigan Bond Fund, Class B Shares were 4.47% and
6.88%, respectively and for Class K Shares, were 5.22% and 8.03%,
respectively.
56
<PAGE>
CLASS Y SHARES
- --------------
The standard yields and/or tax-equivalent yields of the Class Y Shares of
the following Funds for the 30-day period ended June 30, 1996 were:
<TABLE>
<CAPTION>
30-Day Tax-Equivalent
Yield 30-Day Yield
------- ---------------
<S> <C> <C>
Bond Fund 5.98% N/A
Intermediate Bond Fund 6.04% N/A
U.S. Government Income Fund 6.40% N/A
Michigan Bond Fund*** 4.96% 7.63%
Tax-Free Bond Fund 4.88% 7.07%
Tax-Free Intermediate Bond Fund 4.17% 6.04%
</TABLE>
Each Fund that advertises its "average annual total return" computes 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:
T = (ERV)/1/n -1
---
P
Where: T = average annual total return;
ERV = ending redeemable value of a hypothetical $1,000 payment
made at the beginning of the 1, 5 or 10 year (or other)
periods at the end of the applicable period (or a
fractional portion thereof);
P = hypothetical initial payment of $1,000; and
n = period covered by the computation, expressed in years.
Each Fund that advertises its "aggregate total return" computes such
returns by determining the aggregate compounded rates of return during specified
periods that likewise equate the initial amount invested to the ending
redeemable value of such investment. The formula for calculating aggregate total
return is as follows:
(ERV) - 1
-----
Aggregate Total Return = P
The calculations are made assuming that (1) all dividends and capital gain
distributions are reinvested on the reinvestment dates at the price per share
existing on the reinvestment date, (2) all recurring fees charged to all
shareholder accounts are included, and (3) for any account fees that vary with
the size of the account, a mean (or median) account size in the Fund during the
periods is reflected. The ending redeemable value (variable "ERV" in the
formula) is determined by assuming complete redemption of the hypothetical
investment after deduction of all non-recurring charges at the end of the
measuring period. The Funds' average
- -----------------------
*** With waiver of fees by the Advisor, the standardized yields and tax-
equivalent yields for the Michigan Bond Fund, Class Y Shares, were 5.46% and
8.40%, respectively.
57
<PAGE>
annual total return and aggregate total return quotations for Class A Shares
will reflect the deduction of the maximum sales charge charged in connection
with the purchase of such shares; and the Funds' average annual total return and
aggregate total return quotations for Class B Shares will reflect any applicable
CDSC; provided that the Funds may also advertise total return data without
reflecting any applicable or CDSC sales charge imposed on the purchase of Class
A Shares or Class B Shares in accordance with the views of the SEC. Quotations
which do not reflect the sales charge will, of course, be higher than quotations
which do.
Based on the foregoing calculation, set forth below are the average annual
total return figures for the Class A, B, C, K and Y Shares of each of the
following Funds for the period ended June 30, 1996 and since commencement of
operations.
<TABLE>
<CAPTION>
FUND-INCEPTION DATE
- -------------------
12 Month Inception 12 Month Inception
ACCELERATING Period Ended through Period Ended through
GROWTH FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ----------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Class A-11/23/92 22.03% 14.98% 15.32% 13.19%
Class B-4/25/94 21.05% 17.43% 16.05% 16.29%
Class C-9/26/95 N/A 10.22%++ N/A 9.28%++
Class K-11/23/92 22.03% 14.98% N/A N/A
Class Y-12/1/91 22.31% 15.90% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
BALANCED FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------- -------- -------- --------- ---------
Class A-4/30/93 17.06% 9.48% 10.62% 7.55%
Class B-6/21/94 16.24% 15.01% 11.24% 13.72%
Class C-1/24/96 N/A 6.20%++ N/A 5.20%++
Class K-4/16/93 17.17% 9.03% N/A N/A
Class Y-4/13/93 17.35% 9.07% N/A N/A
12 Month Inception 12 Month Inception
GROWTH & Period Ended through Period Ended through
INCOME FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ----------- -------- -------- --------- ---------
Class A-8/8/94 20.90% 18.38% 14.25% 14.90%
Class B-8/9/94 20.09% 17.58% 15.09% 15.74%
Class C-12/5/95 N/A 5.57%++ N/A 4.57%++
Class K-7/5/94 20.97% 18.09% N/A N/A
Class Y-7/5/94 21.25% 18.34% N/A N/A
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
INDEX 500 FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- -------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Class A+-12/9/92 25.51% 15.43% 22.38% 14.61%
Class B-11/1/95 N/A 16.51%++ N/A 13.51%++
Class K-12/7/92 25.37% 15.40% N/A N/A
Class Y-12/1/91 25.61% 16.24% N/A N/A
12 Month Inception 12 Month Inception
INTERNATIONAL Period Ended through Period Ended through
EQUITY FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------- -------- -------- --------- ---------
Class A-11/30/92 13.37% 11.18% 7.13% 9.44%
Class B-3/9/94 12.53% 5.14% 7.53% 3.91%
Class C-9/29/95 N/A 7.06%++ N/A 6.06%++
Class K-11/23/92 13.29% 11.53% N/A N/A
Class Y-12/1/91 13.63% 10.23% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
MID-CAP FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------ -------- -------- --------- ---------
Class A-12/22/95 N/A 9.57%++ N/A 3.55%++
Class B-1/26/96 N/A 9.08%++ N/A 4.08%++
Class C-11/9/95 N/A 10.67%++ N/A 9.67%++
Class K-10/2/95 N/A 9.78%++ N/A N/A
Class Y-8/14/95 N/A 15.80%++ N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
MULTI-SEASON FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ----------------- -------- -------- --------- ---------
Class A-8/4/93 27.56% 15.36% 20.54% 13.13%
Class B-4/29/93 26.66% 13.80% 21.66% 13.08%
Class C-9/20/93 26.64% 15.14% 25.64% 15.14%
Class K-6/23/95 27.56% 25.13% N/A N/A
Class Y-8/16/93 27.85% 15.74% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
REAL ESTATE FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ---------------- -------- -------- --------- ---------
Class A-9/30/94 15.92% 11.54% 9.54% 8.00%
Class B-10/3/94 15.05% 10.76% 10.05% 8.62%
Class C-1/5/96 N/A 6.08%++ N/A 5.08%++
Class Y-10/3/94 16.20% 11.88% N/A N/A
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
12 Month Inception 12 Month Inception
SMALL COMPANY Period Ended through Period Ended through
GROWTH FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------- -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Class A-11/23/92 48.28% 19.09% 40.12% 17.23%
Class B-4/28/94 47.26% 25.92% 42.26% 24.86%
Class C-9/26/95 N/A 31.97%++ N/A 30.97%++
Class K-11/23/92 48.28% 19.09% N/A N/A
Class Y-12/1/91 48.65% 20.35% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
VALUE FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ---------- -------- -------- --------- ---------
Class A-9/14/95 N/A 11.95%++ N/A 5.79%++
Class B-9/19/95 N/A 11.09%++ N/A 6.09%++
Class C-2/9/96 N/A 1.90%++ N/A .90%++
Class K-11/30/95 N/A 7.33%++ N/A N/A
Class Y-8/18/95 N/A 16.52%++ N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
BOND FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- --------- -------- -------- --------- ---------
Class A-12/9/92 4.24% 6.17% .07% 4.96%
Class B-3/13/96 N/A .22%++ N/A (4.70)%++
Class C-3/25/96 N/A (.49)%++ N/A (1.49)%++
Class K-11/23/92 4.35% 6.11% N/A N/A
Class Y-12/1/91 4.50% 5.85% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
INTERMEDIATE BOND FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ---------------------- -------- -------- --------- ---------
Class A-11/24/92 3.92% 4.88% (.23)% 3.70%
Class B-10/25/94 3.22% 6.83% (1.67)% 4.54%
Class C-4/19/96 N/A .39%++ N/A (.61)%++
Class K-11/20/92 4.04% 4.87% N/A N/A
Class Y-12/1/91 4.29% 5.70% N/A N/A
12 Month Inception 12 Month Inception
U.S. GOVERNMENT Period Ended through Period Ended through
INCOME FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- --------------- -------- -------- --------- ---------
Class A-7/28/94 4.34% 7.51% .16% 5.26%
Class B-9/6/95 N/A 2.42%++ N/A (2.42)%++
Class K-7/5/94 4.32% 7.41% N/A N/A
Class Y-7/5/94 4.58% 7.67% N/A N/A
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
MICHIGAN BOND FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------------ -------- -------- --------- ---------
<S> <C> <C> <C> <C>
Class A-2/15/94 5.25% 2.44% 1.04% .70%
Class B-7/5/94 4.46% 5.51% (.54)% 3.58%
Class K-1/3/94 5.14% 2.08% N/A N/A
Class Y-1/3/94 5.51% 2.37% N/A N/A
12 Month Inception 12 Month Inception
Period Ended through Period Ended through
TAX-FREE BOND FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------------ -------- -------- --------- ---------
Class A-10/9/95 N/A 1.87%++ N/A (2.20)%++
Class B-12/6/94 4.36% 8.15% (.64)% 5.69%
Class K-7/5/94 5.12% 6.53% N/A N/A
Class Y-7/21/94 5.38% 6.57% N/A N/A
TAX-FREE 12 Month Inception 12 Month Inception
INTERMEDIATE Period Ended through Period Ended through
BOND FUND 6/30/96* 6/30/96* 6/30/96** 6/30/96**
- ------------ -------- -------- --------- ---------
Class A-11/30/92 3.79% 4.38% (.36)% 3.20%
Class B-5/16/96 N/A .39%++ N/A (4.60)%++
Class K-2/9/87 3.69% 5.64% N/A N/A
Class Y-12/17/92 3.95% 4.56% N/A N/A
</TABLE>
* Figures do not include the effect of the sales charge.
** Figures include the effect of the applicable sales charge.
+ Effective September 20, 1995, the maximum front-end sales charge applicable
to Class A Shares of the Index 500 Fund was reduced from 5.50% to 2.50%.
++ Aggregate total return.
As of June 30, 1996, the following Classes had not commenced operations:
Class C Shares of each of U.S. Government Income, Michigan Bond, Tax-Free Bond
and Tax-Free Intermediate Bond Funds and the Class K Shares of the Real Estate
Fund.
The Equity Selection Fund, Micro-Cap Equity Fund and Small-Cap Value Fund
had not commenced operations as of the date of this Statement of Additional
Information. The International Bond Fund did not commence operations until
October 2, 1996.
ALL FUNDS. The performance of any investment is generally a function of
portfolio quality and maturity, type of investment and operating expenses.
61
<PAGE>
From time to time, in advertisements or in reports to shareholders, a
Fund's yields or total returns may be quoted and compared to those of other
mutual funds with similar investment objectives and to stock or other relevant
indices. For example, a Fund's yield may be compared to the IBC/Donoghue's Money
Fund Average, which is an average compiled by Donoghue's MONEY FUND REPORT of
Holliston, MA 01746, a widely recognized independent publication that monitors
the performance of money market funds, or to the data prepared by Lipper
Analytical Services, Inc., a widely recognized independent service that monitors
the performance of mutual funds. In addition, as stated in the Funds'
Prospectuses, the tax-equivalent yield (and hypothetical examples illustrating
the effect of tax-equivalent yields) of a Fund may be quoted in advertisements
or reports to shareholders. Hypothetical examples showing the difference between
a taxable and a tax-free investment may also be provided to shareholders.
The foregoing performance data reflects the imposition of the maximum sales
load on Class A Shares but does not reflect payments under the Trust's Class K
Plan or Class A Plan, which were not imposed before December 31, 1993.
TAXES
The following summarizes certain additional tax considerations generally
affecting the Funds and their shareholders that are not described in the Funds'
Prospectuses. No attempt is made to present a detailed explanation of the tax
treatment of the Funds or their shareholders, and the discussion here and in the
applicable 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 to be taxed separately as
a regulated investment company under the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, each Fund generally is
exempt from Federal income tax on its net investment income and realized capital
gains which it distributes to shareholders, provided that it distributes an
amount equal to the sum of (a) at least 90% of its investment company taxable
income (net investment income and the excess of net short-term capital gain over
net long-term capital loss), if any, for the year and (b) at least 90% of its
net tax-exempt interest income, if any, for the year (the "Distribution
Requirement") and satisfies certain other requirements of the Code that are
described below. Distributions of investment company taxable income and net tax-
exempt interest income made during the taxable year or, under specified
circumstances, within twelve months after the close of the taxable year will
satisfy the Distribution Requirement.
In addition to satisfaction of the Distribution Requirement, each Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement") and derive less than
30% of its gross income from the sale or other disposition of securities and
certain other investments held for less than three months (the "Short-Short
Test").
In addition to the foregoing requirements, at the close of each quarter of
its taxable year, at least 50% of the value of each Fund's assets must consist
of cash and cash items, U.S. Government securities, securities of other
regulated investment companies, and securities of other issuers (as to which a
Fund has not invested more than 5% of the value of its total assets in
securities of such issuer and as to which a 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 such Fund controls and
which are engaged in the same or similar trades or businesses.
62
<PAGE>
Distributions of net investment income received by a Fund from investments
in debt securities (other than interest on tax-exempt municipal obligations held
by the Michigan Bond Fund, Tax-Free Bond Fund, Tax-Free Intermediate Bond Fund
and Tax-Free Money Market Fund) and any net realized short-term capital gains
distributed by a Fund will be taxable to shareholders as ordinary income and
will not be eligible for the dividends received deduction for corporations.
Each Fund intends to distribute to shareholders any excess of net long-term
capital gain over net short-term capital loss ("net capital gain") for each
taxable year. Such gain is distributed as a capital gain dividend and is taxable
to shareholders as long-term capital gain, regardless of the length of time the
shareholder has held the shares. In addition, investors should be aware that any
loss realized upon the sale, exchange or redemption of shares held for six
months or less will be treated as a long-term capital loss to the extent any
capital gain dividends have been paid with respect to such shares. Capital gains
dividends are not eligible for the dividends received deduction for
corporations.
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 any 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 such 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 Funds each year.
The Code imposes a non-deductible 4% excise tax on regulated investment
companies that fail to currently distribute an amount equal to specified
percentages of their ordinary taxable income and capital gain net income (excess
of capital gains over capital losses). Each Fund intends to make sufficient
distributions or deemed distributions of its ordinary taxable income and capital
gain net income each calendar year to avoid liability for this excise tax.
The Trust and the Company will be required in certain cases to withhold and
remit to the United States Treasury 31% of taxable distributions, including
gross proceeds realized upon sale or other dispositions paid to any shareholder
(i) who has provided either an uncertified or 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 Trust
that he is not subject to backup withholding or that he is an "exempt
recipient."
DISPOSITION OF SHARES. Upon a redemption, sale or exchange of his or her
shares, a shareholder will realize a taxable 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
through reinvestment of dividends) within a period of 61 days beginning 30 days
before and ending 30 days after the shares are disposed of. In such a case, the
basis of the shares acquired will be adjusted to reflect the
63
<PAGE>
disallowed loss. Any loss realized by a shareholder on the sale 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 or
treated as having been received by the shareholder with respect to such shares.
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 have been
paid will, to the extent of such exempt-interest dividends, be disallowed if
such shares have been held by the shareholder for less than six months.
In some cases, shareholders will not be permitted to take sales charges
into account for purposes of determining the amount of gain or loss realized on
the disposition of their stock. This prohibition generally applies where (1) the
shareholder incurs a sales charge in acquiring the stock of a Fund, (2) the
stock is disposed of before the 91st day after the date on which it was
acquired, and (3) the shareholder subsequently acquires the stock of the same or
another fund and the otherwise applicable sales charge is reduced under a
"reinvestment right" received upon the initial purchase of regulated investment
company shares. The term "reinvestment right" means any right to acquire stock
of one or more funds without the payment of a sales charge or with the payment
of a reduced sales charge. Sales charges affected by this rule are treated as if
they were incurred with respect to the stock acquired under the reinvestment
right. This provision may be applied to successive acquisitions of Fund shares.
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, each Fund may be subject
to the tax laws of such states or localities.
MICHIGAN BOND FUND, TAX-FREE BOND FUND, TAX-FREE INTERMEDIATE BOND FUND,
AND TAX-FREE MONEY MARKET FUND. The Michigan Bond Fund, Tax-Free Bond Fund, Tax-
Free Intermediate Bond Fund, and Tax-Free Money Market Fund are designed to
provide investors with current tax-exempt interest income. Shares of the Funds
would not be suitable for tax-exempt institutions and may not be suitable for
retirement plans qualified under Section 401 of the Code, H.R. 10 plans and
individual retirement accounts since such plans and accounts are generally tax-
exempt and, therefore, not only would not gain any additional benefit from the
Funds' dividends being tax-exempt but also such dividends would be taxable when
distributed to the beneficiary. In addition, the Funds may not be an appropriate
investment for entities which are "substantial users" of facilities financed by
private activity bonds or "related persons" thereof. "Substantial user" is
defined under U.S. Treasury Regulations to include a non-exempt person who
regularly uses a part of such facilities in his trade or business and (a) whose
gross revenues derived with respect to the facilities financed by the issuance
of bonds are more than 5% of the total revenues derived by all users of such
facilities, (b) who occupies more than 5% of the entire usable area of such
facilities, or (c) for whom such facilities or a part thereof were specifically
constructed, reconstructed or acquired. "Related persons" include certain
related natural persons, affiliated corporations, a partnership and its partners
and an S corporation and its shareholders.
In order for the Funds to pay exempt-interest dividends with respect to any
taxable year, at the close of each quarter of each Fund's taxable year at least
50% of the value of the Fund's assets must consist of tax-exempt municipal
obligations. Exempt-interest dividends distributed to shareholders are not
included in the shareholder's gross income for regular Federal income tax
purposes. However, all shareholders required to file a Federal income tax return
are required to report the receipt of exempt-interest dividends and other tax-
exempt interest on their returns. Moreover, while such dividends and interest
are exempt from regular Federal income tax, they may be subject to alternative
minimum tax in two circumstances. First, exempt-interest
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<PAGE>
dividends derived from certain "private activity" bonds issued after August 7,
1986 will generally constitute an item of tax preference for both corporate and
non-corporate taxpayers. Second, exempt-interest dividends derived from all
bonds, regardless of the date of issue, must be taken into account by corporate
taxpayers in determining the amount of certain adjustments for alternative
minimum tax purposes. Receipt of exempt-interest dividends may result in
collateral Federal income tax consequences to certain other taxpayers, including
financial institutions, property and casualty insurance companies, individual
recipients of Social Security or Railroad Retirement benefits, and foreign
corporations engaged in a trade or business in the United States. Prospective
investors should consult their own tax advisors as to such consequences.
The percentage of total dividends paid by the Fund with respect to any
taxable year which qualifies as Federal exempt-interest dividends will be the
same for all shareholders receiving dividends during such year. If a shareholder
receives an exempt-interest dividend with respect to any share and such share is
held for six months or less, any loss on the sale or exchange of such share will
be disallowed to the extent of the amount of such dividends.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Funds generally is not deductible for Federal income tax purposes
if the Funds distribute exempt-interest dividends during the shareholder's
taxable year.
Investors may be subject to state and local taxes on income derived from an
investment in a Fund. In certain states, income derived from a Fund which is
attributable to interest on obligations of that state or any municipality or
political subdivision thereof may be exempt from taxation.
Shareholders are advised to consult their own tax advisers with respect to
the particular tax consequences to them of an investment in a Fund. Persons who
may be "substantial users" (or "related persons" of substantial users) of
facilities financed by industrial development bonds should consult their tax
advisers before investing in a Fund. The term "substantial user" generally
includes any "non-exempt person" who regularly uses in his or her trade or
business a part of a facility financed by industrial development bonds.
Generally, an individual will not be a "related person" of a substantial user
under the Code unless the person or his or her immediate family owns directly or
indirectly in the aggregate more than a 50% equity interest in the substantial
user.
MICHIGAN TAX CONSIDERATIONS - MICHIGAN BOND FUND AND TAX-FREE INTERMEDIATE
BOND FUND. As stated in the Michigan Bond Fund Prospectus and the Tax-Free
Intermediate Bond Fund Prospectus, dividends paid by the Fund that are derived
from interest attributable to tax-exempt Michigan Municipal Obligations will be
exempt from Michigan Income Tax, Michigan Intangibles Tax and Michigan Single
Business Tax. Conversely, to the extent that the Fund's dividends are derived
from interest on obligations other than Michigan Municipal Obligations, such
dividends will be subject to Michigan Income, Intangibles and Michigan Single
Business Taxes, even though the dividends may be exempt for Federal Income Tax
purposes.
In particular, gross interest income and dividends derived from obligations
or securities of the State of Michigan and its political subdivisions, exempt
from Federal Income Tax, are exempt from Michigan Income Tax under Act No. 281,
Public Acts of Michigan, 1967, as amended, and are exempt from Michigan Single
Business Tax under Act No. 228, Public Acts of Michigan, 1975, as amended. The
Michigan Income Tax act levies a flat-rate income tax on individuals, estates,
and trusts. The Single Business Tax Act levies a tax upon the "adjusted tax
base" of most individuals, corporations, financial organizations, partnerships,
joint ventures, estates, and trusts with "business activity" in Michigan.
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<PAGE>
Bonds or other similar obligations of the State of Michigan or of a
political subdivision of the State of Michigan are exempt from Michigan
Intangibles Tax under Act No. 301, Public Acts of Michigan, 1939, as amended. In
1986, the Michigan Department of Treasury issued a Bulletin stating that holders
of interests in investment companies who are subject to the Michigan intangibles
tax will be exempt from the tax to the extent that the investment portfolio
consists of items such as Michigan Municipal Obligations.
The transfer of obligations or securities of the State of Michigan and its
political subdivisions by the Fund, as well as the transfer of Fund shares by a
shareholder, is subject to Michigan taxes measured by gain on the sale, payment,
or other disposition thereof.
INTERNATIONAL EQUITY FUND AND INTERNATIONAL BOND FUND. Income received by
the International Equity Fund and the International Bond Fund from sources
within foreign countries may be subject to withholding and other foreign taxes.
The payment of such taxes will reduce the amount of dividends and distributions
paid to the Funds' shareholders. So long as the Funds qualify as regulated
investment companies, certain distribution requirements are satisfied, and more
than 50% of the value of the Funds' assets at the close of the taxable year
consists of securities of foreign corporations, the Funds may elect, for U.S.
Federal income tax purposes, to treat foreign income taxes paid by the Funds
that can be treated as income taxes under U.S. income tax principles as paid by
its shareholders. The Funds may qualify for and make this election in some, but
not necessarily all, of its taxable years. If the Funds were to make an
election, an amount equal to the foreign income taxes paid by the Funds would be
included in the income of its shareholders and the shareholders would be
entitled to credit their portions of this amount against their U.S. tax due, if
any, or to deduct such portions from their U.S taxable income, if any. Shortly
after any year for which it makes such an election, the Funds will report to its
shareholders, in writing, the amount per share of such foreign tax that must be
included in each shareholder's gross income and the amount which will be
available for deduction or credit. No deduction for foreign taxes may be claimed
by a shareholder who does not itemize deductions. Certain limitations are
imposed on the extent to which the credit (but not the deduction) for foreign
taxes may be claimed.
Shareholders who choose to utilize a credit (rather than a deduction) for
foreign taxes will be subject to the limitation that the credit may not exceed
the shareholder's United States tax (determined without regard to the
availability of the credit) attributable to his or her total foreign source
taxable income. For this purpose, the portion of dividends and distributions
paid by the Fund from its foreign source income will be treated as foreign
source income. The Fund's gains and losses from the sale of securities will
generally be treated as derived from United States sources and certain foreign
currency gains and losses likewise will be treated as derived from United States
sources. The limitation on the foreign tax credit is applied separately to
foreign source "passive income", such as the portion of dividends received from
the Fund which qualifies as foreign source income. In addition, only a portion
of the foreign tax credit will be allowed to offset any alternative minimum tax
imposed on corporations and individuals. Because of these limitations,
shareholders may be unable to claim a credit for the full amount of their
proportionate shares of the foreign income taxes paid by the Fund.
TAXATION OF CERTAIN FINANCIAL INSTRUMENTS. Special rules govern the
Federal income tax treatment of financial instruments that may be held by some
of the Funds. These rules may have a particular impact on the amount of income
or gain that the Funds must distribute to their respective shareholders to
comply with the Distribution Requirement, on the income or gain qualifying under
the Income Requirement and on their ability to comply with the Short-Short Test,
all described above.
HEDGING TRANSACTIONS. The taxation of equity options and over-the-counter
options on debt securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by a Fund for selling
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<PAGE>
a put or call option is not included in income at the time of receipt. If the
option expires, the premium is short-term capital gain to the Fund. If the Fund
enters into a closing transaction, the difference between the amount paid to
close out its position and the premium received is short-term capital gain or
loss. If a call option written by a Fund is exercised, thereby requiring the
Fund to sell the underlying security, the premium will increase the amount
realized upon the sale of such security and any resulting gain or loss will be a
capital gain or loss, and will be long-term or short-term depending upon the
holding period of the security. With respect to a put or call option that is
purchased by a Fund, if the option is sold, any resulting gain or loss will be a
capital gain or loss, and will be long-term or short-term, depending upon the
holding period of the option. If the option expires, the resulting loss is a
capital loss and is long-term or short-term, depending upon the holding period
of the option. If the option is exercised, the cost of the option, in the case
of a call option, is added to the basis of the purchased security and, in the
case of a put option, reduces the amount realized on the underlying security in
determining gain or loss.
Certain options, futures and forward contracts in which a Fund may invest
may be "section 1256 contracts." Gains or losses on section 1256 contracts are
generally considered 60% long-term and 40% short-term capital gains or losses;
however, foreign currency gains or losses arising from certain section 1256
contracts may be treated as ordinary income or loss. Also, section, 1256
contracts held by a Fund 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" with the result that unrealized gains or losses are treated as though
they were realized.
Generally, hedging transactions, if any, undertaken by a Fund may result in
"straddles" for federal income tax purposes. The straddle rules may affect the
character of gains (or losses) realized by the Funds. 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 such losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences of hedging transactions to the Funds are not
entirely clear. The 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.
The Funds may make one or more of the elections available under the Code
which are applicable to straddles. If a Fund makes any of the elections, the
amount, character and timing of the recognition of gains or losses from the
affected straddle positions will be determined under rules that vary according
to the election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because application of the straddle rules may affect the character of gains
or losses, defer losses and/or accelerate the recognition of gains or losses
from the affected straddle positions, the amount which must be distributed to
shareholders, and which will be taxed to shareholders as ordinary income or
long-term capital gain, may be increased or decreased substantially as compared
to a fund that did not engage in such hedging transactions.
The Short-Short Test and the diversification requirements applicable to the
Funds' assets may limit the extent to which the Funds will be able to engage in
transactions in options, futures or forward contracts.
CURRENCY FLUCTUATIONS-"SECTION 988" GAINS OR LOSSES. Under the Code, gains
or losses attributable to fluctuations in exchange rates which occur between the
time a Fund accrues receivables or liabilities denominated in a foreign currency
and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income and loss. Similarly, on
disposition of debt securities denominated in a foreign currency and on
disposition of certain futures, forward contracts and options, gains
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<PAGE>
or losses attributable to fluctuations in the value of the foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "Section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
DISCOUNT. Certain of the bonds purchased by a Fund may be treated as bonds
that were originally issued at a discount., Original issue discount represents
interest for federal income tax purposes and can generally be defined as the
difference between the price at which a security was issued and its stated
redemption price at maturity. Original issue discount is treated for federal
income tax purposes as income earned by a Fund even though the Fund doesn't
actually receive any cash, and therefore is subject to the distribution
requirements of the Code. The amount of income earned by the Fund generally is
determined on the basis of a constant yield to maturity which takes into account
the semi-annual compounding of accrued interest.
If a Fund invests in certain high yield original issue discount obligations
issued by corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income
received from the Fund by its corporate shareholders, to the extent attributable
to such portion of accrued original issue discount, may be eligible for this
deduction for dividends received by corporations if so designated by the Fund in
a written notice to shareholders.
In addition, some of the bonds may be purchased by a Fund at a discount
which exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount will be treated
as ordinary income to the extent it does not exceed the accrued market discount
on such bond (unless the Fund elects for all its debt securities acquired after
the first day of the first taxable year to which the election applies having a
fixed maturity date of more than one year from the date of issue to include
market discount in income in tax years to which it is attributable). Generally,
market discount accrues on a daily basis for each day the bond is held by a Fund
at a constant rate over the time remaining to the bond's maturity.
INVESTMENT IN PASSIVE FOREIGN INVESTMENT COMPANIES
Certain Funds may invest in shares of foreign corporations which may be
classified under the Code as passive foreign investment companies ("PFIC's"). 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 is investment-type income. If a Fund receives a so-called "excess
distribution" with respect to PFIC stock, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. The Fund itself will 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 are received from the PFIC in a given year. If this election were
made, the special rules, discussed above, relating
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<PAGE>
to the taxation of excess distributions, would not apply. In addition, other
elections may become available that would affect the tax treatment of PFIC
shares held by the Funds.
OTHER TAXATION
The foregoing discussion relates only to US. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens and residents and domestic
corporations, partnerships, trusts and estates). Distributions by the Fund also
may be subject to state and local taxes, and their treatment under state and
local income tax laws may differ from the U.S. Federal income tax treatment.
Shareholders should consult their tax advisers with respect to particular
questions of U.S. Federal, state and local taxation. Shareholders who are not
U.S. persons should consult their tax advisers regarding U.S. and foreign tax
consequences of ownership of shares of the Fund, including the likelihood that
distributions to them would be subject to withholding of U.S. Federal income tax
at a rate of 30% (or at a lower rate under a tax treaty).
ADDITIONAL INFORMATION CONCERNING SHARES
The Trust is a Massachusetts business trust. Under the Trust's Declaration
of Trust, the beneficial interest in the Trust may be divided into an unlimited
number of full and fractional transferable shares. The Company is a Maryland
corporation. The Trust's Declaration of Trust and the Company's Articles of
Incorporation authorize the Boards of Trustees and Directors to classify or
reclassify any unissued shares of the Trust and the Company into one or more
classes by setting or changing, in any one or more respects, their respective
designations, preferences, conversion or other rights, voting powers,
restrictions, limitations, qualifications and terms and conditions of
redemption. Pursuant to such authority, the Trust's Board of Trustees has
authorized the issuance of an unlimited number of shares of beneficial interest
in the Trust, representing interests in the Accelerating Growth, Balanced,
Growth & Income, Index 500, International Equity, Small Company Growth, Bond,
Intermediate Bond, U.S. Government Income, Michigan Bond, Tax-Free Bond, Tax-
Free Intermediate Bond, Cash Investment, Tax-Free Money Market and U.S. Treasury
Money Market Funds. The shares of each Fund (other than the Cash Investment
Fund, Tax-Free Money Market Fund and U.S. Treasury Money Market Fund) are
offered in five separate classes: Class A, Class B, Class C, Class K and Class Y
Shares. Class C Shares of the Index 500 Fund are not currently available for
purchase. The Cash Investment Fund, Tax-Free Money Market Fund and U.S. Treasury
Money Market Fund offer only Class Y Shares, Class K Shares and Class A Shares.
Pursuant to the authority of the Company's Articles of Incorporation, the
Directors have authorized the issuance of shares of common stock representing
interests in the Equity Selection Fund, Micro-Cap Equity Fund, Mid-Cap Fund,
Multi-Season Fund, Real Estate Fund, Small-Cap Value Fund, Value Fund,
International Bond Fund, Money Market Fund and NetNet Fund, respectively. The
Shares of each Fund (other than the Money Market Fund and the NetNet Fund) are
offered in five separate classes: Class A, Class B, Class C, Class K and Class Y
Shares. The Money Market Fund offers only Class A, Class B and Class C Shares
(which may be acquired only through an exchange of shares from the corresponding
classes of other funds of the Trust and the Company) and Class Y Shares. The
NetNet Fund offers only one class of shares.
At a board meeting on April 25 and 26, 1995, the Trustees/Directors adopted
plans pursuant to Rule 18f-3 under the 1940 Act ("Multi-Class Plans") on behalf
of each Fund. Each 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.
In the event of a liquidation or dissolution of each of the Trust or 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 Trust's respective
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<PAGE>
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 on liquidation,
based on the number of shares of the Fund that are held by each shareholder.
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 A Shares of a Fund will be entitled to vote on matters submitted to a vote
of shareholders pertaining to the Fund's Class A Plan, only Class B Shares will
be entitled to vote on matters submitted to a vote of shareholders pertaining to
the Fund's Class B Plan, only Class C Shares of a Fund will be entitled to vote
on matters submitted to a vote of shareholders pertaining to the Fund's Class C
Plan, and 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. Further,
shareholders of all of the Funds, as well as those of any other investment
portfolio now or hereafter offered by the Trust or 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 Boards of Trustees and
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 Trust or 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 each Fund in the matter are
substantially identical or that the matter does not affect any interest of the
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 trustees may be effectively acted upon by
shareholders of the Trust or the Company voting together in the aggregate
without regard to a particular Fund.
Shares of each of the Trust and the Company have noncumulative voting
rights and, accordingly, the holders of more than 50% of each of the Trust's and
the Company's outstanding shares (irrespective of class) may elect all of the
trustees or directors. Shares have no preemptive rights and only such conversion
and exchange rights as the Board may grant in its discretion. When issued for
payment as described in the applicable Prospectus, shares will be fully paid and
non-assessable by each of the Trust and the Company.
Shareholder meetings to elect trustees or directors will not be held
unless and until such time as required by law. At that time, the trustees then
in office will call a shareholders' meeting to elect trustees. Except as set
forth above, the trustees will continue to hold office and may appoint successor
trustees. Meetings of the shareholders of the Trust or the Company shall be
called by the trustees or directors upon the written request of shareholders
owning at least 10% of the outstanding shares entitled to vote.
The Trust's Declaration of Trust, as amended, authorizes the Trust's
Board of Trustees, without shareholder approval (unless otherwise required by
applicable law), to: (i) sell and convey the assets belonging to a class of
shares to another management investment company for consideration which may
include securities issued by the purchaser and, in connection therewith, to
cause all outstanding shares of such class to be redeemed at a price which is
equal to their net asset value and which may be paid in cash or by distribution
of the securities or other consideration received from the sale and conveyance;
(ii) sell and convert the assets belonging to one or more classes of shares into
money and, in connection therewith, to cause all outstanding shares of such
class to be redeemed at their net asset value; or (iii) combine the assets
belonging to a class of shares with the assets belonging to one or more other
classes of shares if the Board of Trustees reasonably determines that such
combination will not have a material adverse effect on the shareholders of any
class participating in such combination and, in connection therewith, to cause
all outstanding shares of any such class to be redeemed or converted into shares
of another class of shares at their net asset value. However,
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the exercise of such authority may be subject to certain restrictions under the
1940 Act. The Trust's Board of Trustees may authorize the termination of any
class of shares after the assets belonging to such class have been distributed
to its shareholders.
MISCELLANEOUS
COUNSEL. The law firm of Dechert Price & Rhoads, 1500 K Street, N.W.,
Washington, DC 20005, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Trust and Company.
INDEPENDENT AUDITORS. Ernst & Young LLP, serves as the Trust's and the
Company's independent auditors. The Trust's financial statements of the
Accelerating Growth Fund, Balanced Fund, Growth & Income Fund, Index 500 Fund,
International Equity Fund, Small Company Growth Fund, Bond Fund, Intermediate
Bond Fund, U.S. Government Income Fund, Michigan Bond Fund, Tax-Free Bond Fund,
Tax-Free
Intermediate Bond Fund, Cash Investment Fund, Tax-Free Money Market Fund and
U.S. Treasury Money Market Fund and the Company's financial statements of the
Multi-Season Fund, Real Estate Fund and Money Market Fund for the fiscal year
ended June 30, 1996, and Mid-Cap Growth Fund and Value Fund for the period ended
June 30, 1996, incorporated by reference in this Statement of Additional
Information, have been audited by Ernst & Young LLP, independent auditors. The
information under the caption "Financial Highlights" of the Funds for the period
from commencement of operations through June 30, 1996, appearing in the related
Prospectuses dated October 28, 1996 has been derived from the financial
statements audited by Ernst & Young LLP except for periods ended prior to June
30, 1995 for the Multi-Season Fund and Money Market Fund, which have been
derived from the financial statements audited by other independent auditors.
Such financial statements and financial highlights are included or incorporated
by reference herein in reliance upon their reports given upon the authority of
such firms as experts in accounting and auditing.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES. As of October 1, 1996,
Comerica Bank, One Detroit Center, 500 Woodward Ave., Detroit, Michigan 48226,
held of record substantially all of the outstanding shares of the Funds as
agent, custodian or trustee for its customers. As of such date, 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>
Percent of
Name of Name and Total Shares
Fund Address Outstanding
------- -------- ------------
<S> <C> <C>
Tax-Free Money Market Fund--Class Y Lasalle National Trust, N.A.
Omnibus Account
P.O. Box 1443
Chicago, IL 60690-1443 14.0558%
Cash Investment Fund--Class A National Financial Services Corp.
P.O. Box 3908
Church Street Station
New York, NY 10008-3908 99.5951%
Tax-Free Money Market Fund--Class A National Financial Services Corp.
P.O. Box 3908
Church Street Station
New York, NY 10008-3908 85.4317%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Tax-Free Money Market Fund--Class A Paxton Mendelssohn II
100 Renaissance Ctr. Ste. 2750
Detroit, MI 48243-1102 9.5550%
U.S. Treasury Money Market Fund--Class A National Financial Services Corp.
P.O. Box 3908
Church Street Station
New York, NY 10038-3908 99.8543%
Accelerating Growth Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 5.8487%
Small Company Growth Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 8.2102%
Index 500 Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 65.8530%
Index 500 Fund--Class A Rose Acre Farms Inc. IRA
c/o Merrill Lynch
11555 N. Meridian Street
Carmel, IN 46032 5.5191%
International Equity Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 57.4016%
Bond Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 8.6834%
Bond Fund--Class A Tulio Carlesimo
20941 Lujon
Northville, MI 48167 7.8433%
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Bond Fund - Class A Leon A. Dickson
18200 Wyoming Avenue
Detroit, MI 48221 6.5428%
Tax-Free Intermediate Bond Fund - Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 7.2237%
Balanced Fund - Class A Carl Ottman
10627 S. Grayling Road
Roscommon, MI 48653 14.5957%
Balanced Fund - Class A Duayne C. & Helen L. Showerman
P.O. Box 366
Michigan Center, MI 49254 8.7520%
Balanced Fund - Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 7.6028%
Balanced Fund - Class A Julie A. Prince
124 Cuarton Drive
Orange Park, FL 32073 7.3597%
Balanced Fund - Class A Paul Ochmanek
732 Dover
Dearborn Heights, MI 48127 5.8120%
Balanced Fund - Class A Kaye J. Clark
31821 Hickory Lane
Warren, MI 48093 5.3125%
Balanced Fund - Class A John B & Joan F Baum
3340-F Devonwood Hills N.E.
Grand Rapids, MI 49505 5.1890%
Michigan Triple Tax-Free Gayle M Miller
Bond Fund - Class A 1285 Brockley Avenue
Lakewood, OH 44107 10.4753%
Michigan Triple Tax-Free Reino Kellman
Bond Fund - Class A 27095 Bennett
Redford, MI 48240 9.9455%
</TABLE>
73
<PAGE>
<TABLE>
<S> <C> <C>
Michigan Triple Tax-Free Donald A. & Catherine L. Dick
Bond Fund - Class A Deborah L. Evans
15810 Stout Street
Detroit, MI 48223 9.3431%
Michigan Triple Tax-Free Merrill Lynch Pierce Fenner & Smith
Bond Fund - Class A Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 5.9595%
Michigan Triple Tax-Free MLPF&S
Bond Fund - Class A 4800 Deer Lake Dr. East 3rd Floor
Jacksonville, FL 32246 5.8100%
Tax-Free Bond Fund - Class A Miaz & Co.
1000 N. Water Street, 14th Floor
Milwaukee, WI 53202 35.2900%
Tax-Free Bond Fund - Class A Barnett Banks Trust Co.
P.O. Box 40200
Jacksonville, FL32203-0200 17.1805%
Tax-Free Bond Fund - Class A MLPF&S
4800 Deer Lake Drive East 3rd Floor
Jacksonville, FL 32248 9.6415%
Tax-Free Bond Fund - Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Drive E 3rd Floor
Jacksonville, FL 32246-6484 9.1706%
Tax-Free Bond Fund - Class A Charles W. Macleod
15901 W 9 Mile Rd., Suite 306
Southfield, MI 48075-4866 6.8762%
Tax-Free Bond Fund - Class A William C. Torrey
4250 East Camelback, Suite 115-K
Phoenix, AZ 85018 5.0416%
Tax-Free Bond Fund - Class A Lyle B. Torrey, Jr.
Hotchkiss School
Lakeville, CT 06039 5.0416%
</TABLE>
74
<PAGE>
<TABLE>
<S> <C> <C>
Growth & Income Fund - Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 14.7192%
Growth & Income Fund - Class A Robert R. Van Dongen &
Colleen J. Blayden
630 McKay Tower
Grand Rapids, MI 49503 12.6969%
Growth & Income Fund - Class A Bowen & David Co.
P.O. Box 1647
Boston, MA 02109-1647 6.2058%
Growth & Income Fund - Class A Doris A. Bradshaw
1701 NE Ocean Blvd., Apt. 202
Stuart, FL 34996-2928 5.8286%
U.S. Government Income Fund - Class A Doris A. Bradshaw
1701 NE Ocean Blvd., Apt. 202
Stuart, FL 34996-2928 14.1526%
U.S. Government Income Fund - Class A Dolores L. Evans Living Trust
109 Hanover
Gary, NC 27511 7.9069%
U.S. Government Income Fund - Class A George D. Ruttinger
4619 Elliott Street NW
Washington, DC 20016 6.4225%
U.S. Government Income Fund - Class A Grant C. & Stephanie Ruttinger
1745 Stanhope Avenue
Grosse Pointe Woods, MI 48236 6.3549%
U.S. Government Income Fund - Class A Ernistine K. Mitchell
1760 N. Woodward, Apt. 6
Bloomfield Hills, MI 48304 5.8297%
Multi-Season Growth Fund - Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 18.6875%
</TABLE>
75
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Real Estate Equity Investment Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 55.7606%
Real Estate Equity Investment Fund--Class A Raymond James & Assoc. Inc.
570 E. Benson Blvd. Ste 17
Anchorage, AK 99503-4100 11.9657%
Real Estate Equity Investment Fund--Class A Harry Harden
15063 Marl Drive
Linden, MI 48423 5.6719%
Money Market Fund--Class A Lyle J & Deedra R. Wolas
43299 Stonington Ct.
Canton, MI 48188-0000 49.0838%
Money Market Fund--Class A Rhondan Inc.
8032 Spring Arbor Rd.
P.O. Box 397
Spring Arbor, MI 49283 15.2347%
Mid-Cap Growth Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 94.0887%
Value Fund--Class A Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 58.7072%
Value Fund--Class A Piedmont Trust Bank
1 Ellsworth Street
Martinsville, VA 24112-2811 40.0763%
Accelerating Growth Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 42.9279%
Accelerating Growth Fund--Class B Eugene Ramsey
6203 Wabash
Detroit, MI 48208 9.1847%
</TABLE>
76
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Small Company Growth Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 86.7606%
Index 500 Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 83.9917%
International Equity Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 83.0486%
Intermediate Bond Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 69.3711%
Intermediate Bond Fund--Class B Bear Sterns Securities Corp.
1 Metrotech Center North
Brooklyn, NY 11201-3872 21.5048%
Bond Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 95.9988%
Balanced Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 61.5247%
Balanced Fund--Class B Eugene Ramsey
6203 Wabash
Detroit, MI 48208 30.2083%
Michigan Bond Fund--Class B Martin G. and Rena A. Janower
6216 Cromwell
West Bloomfield, MI 48322 29.3611%
</TABLE>
77
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Michigan Bond Fund--Class B Henry and Adeline Oelkers
3004 Geneva
Dearborn, MI 48124 20.8942%
Michigan Bond Fund--Class B Sophie P. Czerwinski
36 N 26th Street
Battle Creek, MI 49015 15.2684%
Michigan Bond Fund--Class B Sam and Ethel Weiner
22160 Cloverlawn
Oak Park, MI 48237 14.9427%
Tax-Free Bond Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 92.3915%
Tax-Free Bond Fund--Class B Robert Heard
PO Box 19543
Detroit, MI 48219 7.6085%
Growth & Income Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 36.5746%
Growth & Income Fund--Class B William F. Dueweke
24315 Cottage Lane
Warren, MI 48089 10.9258%
Growth & Income Fund--Class B Roxie W. Kinney
5757 Martin Road
Muskegon, MI 49441 6.2474%
Growth & Income Fund--Class B Elisha and Mary L. Swift
18811 Gainborough
Detroit, MI 48223 5.8611%
Growth & Income Fund--Class B Angeline and Francis J. Mikula Jr.
29201 Telegraph Road
Southfield, MI 48034 5.7018%
Growth & Income Fund--Class B William F. Dueweke
24315 Cottage Lane
Warren, MI 48089 10.9258%
</TABLE>
78
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Growth & Income Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 62.0752%
Growth & Income Fund--Class B Merrill Lynch Pierce Fenner & Smith
Mutual Fund Operations
on behalf of their clients
4800 Deer Lake Dr. E 3rd Floor
Jacksonville, FL 32246-6484 94.2101%
Money Market Fund--Class B Prudential Securities on behalf
of their clients
5131 W. Cullom
Chicago, IL 60641-1446 56.0707%
Money Market Fund--Class B Smith Barney Inc. on behalf
of their clients
388 Greenwich Street
New York, NY 10013 22.6127%
Money Market Fund--Class B Gruntal & Co. on behalf
of their clients
14 Wall Street
New York, NY 10005 22.3079%
Mid-Cap Growth Fund--Class B Merrill Lynch Pierce on behalf
of their clients
4800 Deer Lake Dr. E. 3rd Fl.
Jacksonville, FL 32246-6484 21.5231%
Mid-Cap Growth Fund--Class B Smith Barney Inc. on behalf
of their clients
388 Greenwich Street
New York, NY 10013 53.1863%
Mid-Cap Growth Fund--Class B Richard M. Cremins
3 Twinbrook Road
Saddle River, NJ 07458 5.1415%
Value Fund--Class B Merrill Lynch Pierce on behalf
of their clients
4800 Deer Lake Dr. E. 3rd Fl.
Jacksonville, FL 32246-6484 72.6927%
Small Company Growth Fund--Class C Appel Equity Group
150 Great Neck Road
Great Neck, NY 11021 82.0272%
</TABLE>
79
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Real Estate Equity Investment Fund--Class C Marion L. Brown
4233 Vance Drive
Anchorage, AK 99508 50.2045%
Real Estate Equity Investment Fund--Class C Raymond James & Assoc Inc.
CSDN Brock Steller
3430 Corona Circle
Anchorage, AK 99517 41.8765%
Real Estate Equity Investment Fund--Class C Raymond James & Assoc Inc.
CSDN Rene C. Kennicott
1001 Boniface Parkway Lot 14E1
Anchorage, AK 99504 7.6349%
Mid-Cap Growth Fund--Class C Raymond James & Assoc Inc.
CSDN Thomas D. Harkreader
7400 Clairborne Circle
Anchorage, AK 99502 5.7022%
</TABLE>
As of October 1, 1996, Munder Capital Management, Inc., on behalf of their
clients owned 45% of the Accelerating Growth Fund Class Y Shares; 9% of the Bond
Fund Class A Shares; 81% of the Bond Fund Class Y Shares; 37% of the Growth &
Income Fund Class Y Shares; 24% of the Index 500 Fund Class Y Shares,; 69% of
the International Equity Fund Class Y Shares; 49% of the Intermediate Bond Fund
Class Y Shares; 27% of the Michigan Bond Fund Class Y Shares; 43% of the Multi-
Season Fund Class Y Shares; 28% of the Real Estate Fund Class A Shares; 97% of
the Real Estate Fund Class Y Shares; 6% of the Small Company Value Fund Class A
Shares; 41% of the Small Company Value Fund Class Y Shares; 93% of the U.S.
Government Income Fund Class Y Shares; 28% of the Value Fund Class K Shares; 94%
of the Value Fund Class Y Shares; 100% of the Money Market Fund Class Y Shares.
As of October 1, 1996, Funds Distributor Inc. on behalf of their clients
owned 100% of the outstanding Class A Shares, Class B Shares, Class Y Shares and
Class K Shares of International Bond Fund as well as Class K Shares of Real
Estate Equity Investment Fund.
As of October 1, 1996, Merrill Lynch Pierce on behalf of their clients
owned approximately 100% of the outstanding Class C Shares of Accelerating
Growth Fund, International Equity Fund, Intermediate Bond Fund, Bond Fund, Tax-
Free Intermediate Bond Fund, Balanced Fund, Michigan Triple Tax-Free Bond Fund,
Tax-Free Bond Fund, Growth & Income Fund, U.S. Government Income Fund, Multi-
Season Growth Fund, Value Fund and International Bond Fund as well as Class B
Shares of Tax-Free Intermediate Bond Fund and Growth & Income Fund,
respectively.
BANKING LAWS. Banking laws and regulations currently prohibit a bank
holding company registered under the Federal Bank Holding Company Act of 1956 or
any bank or non-bank affiliate thereof from sponsoring, organizing, controlling
or distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from underwriting securities, but such banking laws and regulations do not
prohibit such a holding company or affiliate or banks generally from acting as
investment advisor, administrator, transfer agent or custodian to such an
investment company,
80
<PAGE>
or from purchasing shares of such a company as agent for and upon the order of
customers. The Advisor and the Custodian are subject to such banking laws and
regulations.
The Advisor and the Custodian believe they may perform the services
for the Trust and the Company contemplated by their respective agreements with
the Trust and the Company without violation of applicable banking laws or
regulations. It should be noted, however, that there have been no cases deciding
whether bank and non-bank subsidiaries of a registered bank holding company may
perform services comparable to those that are to be performed by these
companies, and future changes in either Federal or state statutes and
regulations relating to permissible activities of banks and their subsidiaries
or affiliates, as well as future judicial or administrative decisions or
interpretations of current and future statutes and regulations, could prevent
these companies from continuing to perform such service for the Trust and the
Company.
Should future legislative, judicial or administrative action prohibit
or restrict the activities of such companies in connection with the provision of
services on behalf of the Trust and the Company, the Trust and the Company might
be required to alter materially or discontinue its arrangements with such
companies and change its method of operations. It is not anticipated, however,
that any change in the Trust's or the Company's method of operations would
affect the net asset value per share of any Fund or result in a financial loss
to any Customer.
SHAREHOLDER APPROVALS. As used in this Statement of Additional
Information and in each Prospectus, a "majority of the outstanding shares" of a
Fund or investment portfolio means the lesser of (a) 67% of the shares of the
particular Fund or portfolio represented at a meeting at which the holders of
more than 50% of the outstanding shares of such Fund or portfolio are present in
person or by proxy, or (b) more than 50% of the outstanding shares of such Fund
or portfolio.
REGISTRATION STATEMENT
This Statement of Additional Information and each of the Fund's
Prospectuses do not contain all the information included in the Fund's
registration statement filed with the SEC under the 1933 Act with respect to the
securities offered hereby, certain portions of which have been omitted pursuant
to the rules and regulations of the SEC. The registration statement, including
the exhibits filed therewith, may be examined at the offices of the SEC in
Washington, D.C.
Statements contained herein and in each of the Fund's Prospectuses as
to the contents of any contract of other documents referred to are not
necessarily complete, and, in such instance, reference is made to the copy of
such contract or other documents filed as an exhibit to the Fund's registration
statement, each such statement being qualified in all respects by such
reference.
FINANCIAL STATEMENTS
The financial statements for the Trust and the Company including the
notes thereto, dated June 30, 1996 have been audited by Ernst & Young LLP and
are incorporated by reference in this Statement of Additional Information from
the Annual Reports of the Trust and the Company dated as of June 30, 1996.
81
<PAGE>
APPENDIX A
----------
- RATED INVESTMENTS -
CORPORATE BONDS
- ---------------
Excerpts from MOODY'S INVESTORS SERVICES, INC. ("MOODY'S") description of its
bond ratings:
"Aaa": Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
"Aa": Bonds that are rated "Aa" are judged to be of high-quality by all
standards. Together with the "Aaa" group they comprise what are generally known
as "high-grade" bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in "Aaa" securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in "Aaa"
securities.
"A": Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
"Baa": Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appears adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics as well.
"Ba": Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
"B": Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
"Caa": Bonds that are rated "Caa" are of poor standing. These issues
may be in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
A-1
<PAGE>
Excerpts from STANDARD & POOR'S CORPORATION ("S&P") description of its bond
ratings:
"AAA": Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
"AA": Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from "AAA" issues by a small degree.
"A": Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
"BBB": Bonds rated "BBB" are regarded as having an adequate capacity to
pay interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
"BB", "B" AND "CCC": Bonds rated "BB" and "B" are regarded, on balance,
as predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. "BB" represents a
lower degree of speculation than "B" and "CCC" the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
To provide more detailed indications of credit quality, the "AA" or "A"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
COMMERCIAL PAPER
- ----------------
The rating "PRIME-1" is the highest commercial paper rating assigned by
MOODY'S. These issues (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issues rated "PRIME-2" (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics of "Prime-1" rated issues, but to a
lesser degree. Earnings trends and coverage ratios, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
Commercial paper ratings of S&P are current assessments of the likelihood
of timely payment of debt having original maturities of no more than 365 days.
Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted "A-1+."
Commercial paper rated "A-2" by S&P indicates that capacity for timely payment
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
A-2
<PAGE>
APPENDIX A
----------
- RATED INVESTMENTS -
COMMERCIAL PAPER
- ----------------
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors. Highest quality ratings for commercial paper for Moody's and S&P are
as follows:
MOODY'S: The rating "PRIME-1" is the highest commercial paper rating
category assigned by Moody's. These issues (or related supporting institutions)
are considered to have a superior capacity for repayment of short-term
promissory obligations.
S&P: Commercial paper ratings of S&P are current assessments of the
likelihood of timely payment of debts having original maturities of no more than
365 days. Commercial paper rated in the "A-1" category by S&P indicates that the
degree of safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics are
denoted "A-1+".
A-3
<PAGE>
APPENDIX B
As stated in the applicable Prospectuses, the Equity Funds, the Balanced
Fund and the Bond Funds may enter into certain futures transactions and options
for hedging purposes. Such transactions are described in this Appendix.
I. Interest Rate Futures Contracts
-------------------------------
Use of Interest Rate Futures Contracts. Bond prices are established in both
the cash market and the futures market. In the cash market, bonds are purchased
and sold with payment for the full purchase price of the bond being made in
cash, generally within five business days after the trade. In the futures
market, only a contract is made to purchase or sell a bond in the future for a
set price on a certain date. Historically, the prices for bonds established in
the futures markets have tended to move generally in the aggregate in concert
with the cash market prices and have maintained fairly predictable
relationships. Accordingly, the Funds may use interest rate futures contracts as
a defense, or hedge, against anticipated interest rate changes and not for
speculation. As described below, this would include the use of futures contract
sales to protect against expected increases in interest rates and futures
contract purchases to offset the impact of interest rate declines.
The Funds presently could accomplish a similar result to that which it
hopes to achieve through the use of futures contracts by selling bonds with long
maturities and investing in bonds with short maturities when interest rates are
expected to increase, or conversely, selling short-term bonds and investing in
long-term bonds when interest rates are expected to decline. However, because of
the liquidity that is often available in the futures market, the protection is
more likely to be achieved, perhaps at a lower cost and without changing the
rate of interest being earned by the Funds, through using futures contracts.
Description of Interest Rate Futures Contracts. An interest rate futures
contract sale would create an obligation by a Fund, as seller, to deliver the
specific type of financial instrument called for in the contract at a specific
future time for a specified price. A futures contract purchase would create an
obligation by the Fund, as purchaser, to take delivery of the specific type of
financial instrument at a specific future time at a specific price. The specific
securities delivered or taken, respectively, at settlement date, would not be
determined until or at near that date. The determination would be in accordance
with the rules of the exchange on which the futures contract sale or purchase
was made.
Although interest rate futures contracts by their terms call for actual
delivery or acceptance of securities, in most cases the contracts are closed out
before the settlement date without making or taking of delivery of securities.
Closing out a futures contract sale is effected by the Fund's entering into a
futures contract purchase for the same aggregate amount of the specific type of
financial instrument and the same delivery date. If the price of the sale
exceeds the price of the offsetting purchase, the Fund is immediately paid the
difference and thus realizes a gain. If the offsetting purchase price exceeds
the sale price, the Fund pays the difference and realizes a loss. Similarly, the
closing out of a futures contract purchase is effected by the Fund entering into
a futures contract sale. If the offsetting sale price exceeds the purchase
price, the Fund realizes a gain, and if the purchase price exceeds the
offsetting sale price, the Fund realizes a loss.
Interest rate futures contracts are traded in an auction environment on the
floors of several exchanges -- principally, the Chicago Board of Trade, the
Chicago Mercantile Exchange and the New York Futures Exchange. The Funds would
deal only in standardized contracts on recognized exchanges. Each exchange
guarantees performance under contract provisions through a clearing corporation,
a nonprofit organization managed by the exchange membership.
B-1
<PAGE>
A public market now exists in futures contracts covering various financial
instruments including long-term United States Treasury Bonds and Notes;
Government National Mortgage Association (GNMA) modified pass-through mortgage
backed securities; three-month United States Treasury Bills; and ninety-day
commercial paper. The Funds may trade in any interest rate futures contracts for
which there exists a public market, including, without limitation, the foregoing
instruments.
Example of Futures Contract Sale. The Funds would engage in an interest
rate futures contract sale to maintain the income advantage from continued
holding of a long-term bond while endeavoring to avoid part or all of the loss
in market value that would otherwise accompany a decline in long-term securities
prices. Assume that the market value of a certain security held by a particular
Fund tends to move in concert with the futures market prices of long-term United
States Treasury bonds ("Treasury Bonds"). The adviser wishes to fix the current
market value of the portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the adviser believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 100 to 95, the equivalent futures market price for the Treasury
bonds might also decline from 98 to 93.
In that case, the five point loss in the market value of the portfolio
security would be offset by the five point gain realized by closing out the
futures contract sale. Of course, the futures market price of Treasury bonds
might well decline to more than 93 or to less than 93 because of the imperfect
correlation between cash and futures prices mentioned below.
The adviser could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Example of Futures Contract Purchase. The Funds would engage in an interest
rate futures contract purchase when they are not fully invested in long-term
bonds but wish to defer for a time the purchase of long-term bonds in light of
the availability of advantageous interim investments, e.g., shorter term
securities whose yields are greater than those available on long-term bonds. A
Fund's basic motivation would be to maintain for a time the income advantage
from investing in the short-term securities; the Fund would be endeavoring at
the same time to eliminate the effect of all or part of an expected increase in
market price of the long-term bonds that the Fund may purchase.
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10% , tends to move in concert with futures
market prices of Treasury bonds. The adviser wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the adviser believes that, because of an
anticipated fall in interest rates, the price will have risen to 105 (and the
yield will have dropped to about 91/2%) in four months. The Fund might enter
into futures contracts purchases of Treasury bonds for an equivalent price of
98. At the same time, the Fund would assign a pool of investments in short-term
securities that are either maturing in four months or earmarked for sale in four
months, for purchase of the long-term bond at an assumed market price of 100.
Assume these short-term securities are yielding 15%. If the market price of the
long-term bond does indeed rise from 100 to 105, the equivalent futures market
price for Treasury bonds might also rise from 98 to 103. In that case, the 5
point
B-2
<PAGE>
increase in the price that the Fund pays for the long-term bond would be offset
by the 5 point gain realized by closing out the futures contract purchase.
The adviser could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for long-
term bonds. The market price of available long-term bonds would have decreased.
The benefit of this price decrease, and thus yield increase, will be reduced by
the loss realized on closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rated, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued incremental
income will be reduced by the loss realized on closing out the futures contract
purchase. In each transaction, expenses would also be incurred.
II. Index Futures Contracts
-----------------------
General. A bond index assigns relative values of the bonds included in the
index bind the index fluctuates with changes in the market values of the bonds
included. The Chicago Board of Trade has designed a futures contract based on
the Bond Buyer Municipal Bond Index. This Index is composed of 40 term revenue
and general obligation bonds and its composition is updated regularly as new
bonds meeting the criteria of the Index are issued and existing bonds mature.
The Index is intended to provide an accurate indicator of trends and changes in
the municipal bond market. Each bond in the Index is independently priced by six
dealer-to-dealer municipal bond brokers daily. The 40 prices then are averaged
and multiplied by a coefficient. The coefficient is used to maintain the
continuity of the Index when its composition changes.
A stock index assigns relative values to the stocks included in the index
and the index fluctuates with changes in the market values of the stocks
included. Some stock index futures contracts are based on broad market indexed,
such as the Standard & Poor's 500 or the New York Stock Exchange Composite
Index. In contrast, certain exchanges offer futures contracts on narrower market
indexes, such as the Standard & Poor's 100 or indexes based on an industry or
market segment, such as oil and gas stocks.
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.
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Examples of Stock Index Futures Transactions. The following are examples of
transactions in stock index futures (net of commissions and premiums, if any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate buying $62,500 in Equity Buying 1 Index Futures at 125
Securities Value of Futures = $62,500/Contract
-Day Hedge is Lifted-
Buy Equity Securities with Actual Sell 16 Index Futures at 130
Cost = $65,000 Value of Futures = $65,000/Contract
Increase in Purchase Price = $2,500 Gain on Futures = $2,500
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Portfolio Beta Relative to the Index = 1.0
Portfolio Futures
--------- -------
-Day Hedge is Placed-
Anticipate Selling $1,000,000 in Equity Sell 16 Index Futures at 125
Securities Value of Futures = $1,000,000
-Day Hedge is Lifted-
Equity Securities - Own Stock Buy 16 Index Futures at 120
with Value = $960,000 Value of Futures = $960,000
Loss in Portfolio Value = $40,000 Gain on Futures = $40,000
III. Margin Payments
---------------
Unlike purchase or sales of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Custodian an amount of cash or cash equivalents, known as initial
margin, based on the value of the contract. The nature of initial margin in
futures transactions is different from that of margin in security transactions
in that futures contract margin does not involve the borrowing of funds by the
customer to finance the transactions. Rather, the initial margin is in the
nature of a performance bond or good faith deposit on the contract which is
returned to the Fund upon termination of the futures contract assuming all
contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking-to-the-market. For
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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 adviser 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.
IV. Risks of Transactions in Futures Contracts
------------------------------------------
There are several risks in connection with the use of futures by the Funds
as hedging devices. One risk arises because of the imperfect correlation between
movements in the price of the futures and movements in the price of the
instruments which are the subject of the hedge. The price of the future may move
more than or less than the price of the instruments being hedged. If the price
of the futures moves less than the price of the instruments which are the
subject of the hedge, the hedge will not be fully effective but, if the price of
the instruments being hedged has moved in an unfavorable direction, the Fund
would be in a better position than if it had not hedged at all. If the price of
the instruments being hedged has moved in a favorable direction, this advantage
will be partially offset by the loss on the futures. If the price of the futures
moves more than the price of the hedged instruments, the Fund involved will
experience either a loss or gain on the futures which will not be completely
offset by movements in the price of the instruments which are the subject of the
hedge. To compensate for the imperfect correlation of movements in the price of
instruments being hedged and movements in the price of futures contracts, the
Fund may buy or sell futures contracts in a greater dollar amount than the
dollar amount of instruments being hedged if the volatility over a particular
time period of the prices of such instruments has been greater than the
volatility over such time period of the futures, or if otherwise deemed to be
appropriate by the Adviser. 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
Adviser. It is also possible that, when the Fund had sold futures to hedge its
portfolio against a decline in the market, the market may advance and the value
of instruments held in the Fund may decline. If this occurred, the Fund would
lose money on the futures and also experience a decline in value in its
portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Funds
will realize a loss on the futures contract that is not offset by a reduction in
the price of the instruments that were to be purchased.
In instances involving the purchase of futures contracts by the Funds, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Custodian and/or
in a margin account with a broker to collateralize the position and thereby
insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which
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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 adviser may still not result in a successful hedging
transaction over a short time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. In such event, it may not be possible to
close a futures investment position, and in the event of adverse price
movements, the Funds would continue to be required to make daily cash payments
of variation margin. However, in the event futures contracts have been used to
hedge portfolio securities, such securities will not be sold until the futures
contract can be terminated. In such circumstances, an increase in the price of
the securities, if any, may partially or completely offset losses on the futures
contract. However, as described above, there is no guarantee that the price of
the securities will in fact correlate with the price movements in the futures
contract and thus provide an offset on a futures contract.
Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodity exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Funds is also subject to the adviser's
ability to predict correctly movements in the direction of the market. For
example, if a particular Fund has hedged against the possibility of a decline in
the market adversely affecting securities held by it and securities prices
increase instead, the Fund will lose part or all of the benefit to the increased
value of its securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if the Fund
has insufficient cash, it may have to sell securities to meet daily variation
margin requirements. Such sales of securities may be, but will not necessarily
be, at increased prices which reflect the rising market. The Funds may have to
sell securities at a time when they may be disadvantageous to do so.
V. Options on Futures Contracts
----------------------------
The Funds may purchase and write options on the futures contracts described
above. A futures option gives the holder, in return for the premium paid, the
right to buy (call) from or sell (put) to the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of, the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. A Fund
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<PAGE>
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.
VI. Currency Transactions
---------------------
The Fund may engage in currency transactions in order to hedge the value of
portfolio holdings denominated in particular currencies against fluctuations in
relative value. Currency transactions include forward currency contracts,
currency futures, options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap as described in
the Statement of Additional Information. The Fund may enter into currency
transactions with counterparties which have received (or the guarantors of the
obligations which have received) a credit rating of A-1 or P-1 by S&P or
Moody's, respectively, or that have an equivalent rating from a NRSRO or are
determined to be of equivalent credit quality by the Advisor.
The Fund's dealings in forward currency contracts and other currency
transactions such as futures, options, options on futures and swaps will be
limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is entering into a currency transaction with
respect to specific assets or liabilities of the Fund, which will generally
arise in connection with the purchase or sale of its portfolio securities or the
receipt of income therefrom. Position hedging is entering into a currency
transaction with respect to portfolio security positions denominated or
generally quoted in that currency.
The Fund will not enter into a transaction to hedge currency exposure to an
extent greater after netting all transactions intended wholly or partially to
offset other transactions, than the aggregate market value (at the time of
entering into the transaction) of the securities held in its portfolio that are
denominated or generally quoted in or currently convertible into such currency,
other than with respect to proxy hedging as described below.
The Fund may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have portfolio exposure.
To reduce the effect of currency fluctuations on the value of existing or
anticipated holdings of portfolio securities, the Fund may also engage proxy
hedging. Proxy hedging is often used when the currency to which the Fund's
portfolio is exposed is difficult to hedge or to hedge against the dollar. Proxy
hedging
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<PAGE>
entails entering into a commitment or option to sell a currency whose changes in
value are generally considered to be correlated to a currency or currencies in
which some or all of the Fund's portfolio securities are or are expected to be
denominated, in exchange for U.S. dollars. The amount of the commitment or
option would not exceed the value of the Fund's securities denominated in
correlated currencies. For example, if the Advisor considers that the Austrian
schilling is correlated to the German deutschemark (the "D-mark"), the Fund
holds securities denominated in shillings and the Advisor believes that the
value of the schillings will decline against the U.S. dollar, the Advisor may
enter into a commitment or option to sell D-marks and buy dollars. Currency
hedging involves some of the same risks and considerations as other transactions
with similar instruments. Currency transactions can result in losses to the Fund
if the currency being hedged fluctuates in value to a degree or in a direction
that is not anticipated. Further, there is the risk that the perceived
correlation between various currencies may not be present or may not be present
during the particular time that the Fund is engaging in proxy hedging. If a Fund
enters into a currency hedging transaction, the Fund will comply with the asset
segregation requirements. Under such requirements, the Fund will segregate
liquid, high grade assets with the custodian to the extent the Fund's
obligations are not otherwise "covered" through ownership of the underlying
currency.
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages, and manipulations or exchange
restrictions imposed by governments. These can result in losses to the Fund if
it is unable to deliver or receive currency or funds in settlement of
obligations and could also cause hedges it has entered into to be rendered
useless, resulting in full currency exposure as well as incurring transaction
costs. Buyers and sellers of currency futures are subject to the same risks that
apply to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures is relatively new, and the
ability to establish and close to positions on such options is subject to the
maintenance of a liquid market which may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
VII. Other Matters
-------------
Accounting for futures contracts will be in accordance with generally
accepted accounting principles.
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