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THE MUNDER FUNDS, INC., THE MUNDER FUNDS TRUST
AND THE MUNDER FRAMLINGTON FUNDS TRUST
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Munder Balanced Fund Munder Framlington Global Financial Services Fund
Munder Focus Growth Fund Munder Framlington Healthcare Fund
(formerly Munder Equity Selection Fund)
Munder Future Technology Fund Munder Framlington International Growth Fund
Munder Index 500 Fund Munder Bond Fund
Munder Growth Opportunities Fund Munder Intermediate Bond Fund
Munder Equity Income Fund (formerly Munder Munder International Bond Fund
Growth & Income Fund)
Munder International Equity Fund Munder U.S. Government Income Fund
Munder Micro-Cap Equity Fund Munder Michigan Tax-Free Bond Fund
Munder Multi-Season Growth Fund Munder Tax-Free Bond Fund
Munder NetNet Fund Munder Tax-Free Short-Intermediate Bond Fund (formerly
Munder Tax-Free Intermediate Bond Fund)
Munder Real Estate Equity Investment Fund Munder Cash Investment Fund
Munder Small-Cap Value Fund Munder Money Market Fund
Munder Small Company Growth Fund Munder Tax-Free Money Market Fund
Munder Value Fund Munder U.S. Treasury Money Market Fund
Munder Framlington Emerging Markets Fund
</TABLE>
(collectively, the "Funds")
STATEMENT OF ADDITIONAL INFORMATION
October 26, 1999
As Revised May 22, 2000
This Statement of Additional Information ("SAI"), 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 investment portfolios listed above. The Munder Funds, Inc. (the
"Company") currently offers a selection of fifteen investment portfolios, eleven
of which are described in this SAI; The Munder Funds Trust (the "Trust")
currently offers a selection of fourteen investment portfolios, each of which is
described in this SAI; and The Munder Framlington Funds Trust ("Framlington")
currently offers a selection of four investment portfolios, each of which is
described in this SAI. This SAI is not a prospectus, and should be read only in
conjunction with the Company's, the Trust's, and Framlington's Prospectuses
dated October 26, 1999 and May 22, 2000. A copy of each Prospectus may be
obtained through Funds Distributor, Inc. (the "Distributor"), or by calling
(800) 438-5789. The financial statements for the Company, the Trust and
Framlington including notes thereto, dated June 30, 1999 are incorporated by
reference into this SAI from the annual reports of the Company, the Trust and
Framlington.
An investment in a Fund is not a bank deposit and is not insured or guaranteed
by the Federal Deposit Insurance Corporation or any other governmental agency.
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TABLE OF CONTENTS
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Page
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History and General Information......................................... 3
Fund Investments........................................................ 4
Risk Factors and Special Considerations -- Index 500 Fund............... 18
Risk Factors and Special Considerations -- Michigan Tax-Free Bond Fund
and Tax-Free Short-Intermediate Bond Fund............................... 20
Investment Limitations.................................................. 23
Temporary Defensive Position............................................ 27
Management of the Fund.................................................. 28
Investment Advisory and Other Service Arrangements...................... 32
Code of Ethics.......................................................... 44
Portfolio Transactions.................................................. 44
Additional Purchase and Redemption Information.......................... 47
Net Asset Value......................................................... 50
Performance Information................................................. 51
Taxes................................................................... 59
Additional Information Concerning Shares................................ 65
Other Information....................................................... 67
Registration Statement.................................................. 83
Financial Statements.................................................... 83
Appendix A.............................................................. A-1
Appendix B.............................................................. B-1
</TABLE>
No person has been authorized to give any information or to make any
representations not contained in this SAI 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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HISTORY AND GENERAL INFORMATION
The following Funds are described in this SAI:
The Munder Funds Trust
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Munder Balanced Fund ("Balanced Fund")
Munder Equity Income Fund ("Equity Income Fund") (formerly Munder Growth &
Income Fund)
Munder Index 500 Fund ("Index 500 Fund")
Munder International Equity Fund ("International Equity Fund")
Munder Small Company Growth Fund ("Small Company Growth Fund")
Munder Bond Fund ("Bond Fund")
Munder Intermediate Bond Fund ("Intermediate Bond Fund")
Munder U.S. Government Income Fund ("U.S. Income Fund")
Munder Michigan Tax-Free Bond Fund ("Michigan Bond Fund")
Munder Tax-Free Bond Fund ("Tax-Free Bond Fund")
Munder Tax-Free Short-Intermediate Bond Fund ("Tax-Free Short-Intermediate Bond
Fund")
Munder Cash Investment Fund ("Cash Investment Fund")
Munder Tax-Free Money Market Fund ("Tax-Free Money Market Fund")
Munder U.S. Treasury Money Market Fund ("U.S. Treasury Money Market Fund")
The Munder Funds, Inc.
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Munder Focus Growth Fund ("Focus Growth Fund") (formerly Munder Equity Selection
Fund)
Munder Future Technology Fund ("Future Technology Fund")
Munder Growth Opportunities Fund ("Growth Opportunities Fund")
Munder Micro-Cap Equity Fund ("Micro-Cap Fund")
Munder Multi-Season Growth Fund ("Multi-Season Fund")
Munder NetNet Fund ("NetNet Fund")
Munder Real Estate Equity Investment Fund ("Real Estate Fund")
Munder Small-Cap Value Fund ("Small-Cap Value Fund")
Munder Value Fund ("Value Fund")
Munder International Bond Fund ("International Bond Fund")
Munder Money Market Fund ("Money Market Fund")
The Munder Framlington Funds Trust
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Munder Framlington Emerging Markets Fund ("Emerging Markets Fund")
Munder Framlington Global Financial Services Fund ("Global Financial Services
Fund")
Munder Framlington Healthcare Fund ("Healthcare Fund")
Munder Framlington International Growth Fund ("International Growth Fund")
The Company, the Trust and Framlington are each open-end investment
management companies. All of the Funds are diversified except for the
International Bond Fund, the Michigan Bond Fund, the Tax-Free Short-Intermediate
Bond Fund and the Future Technology Fund.
The Trust was organized on August 30, 1989 under the name "PDB Fund," which
was changed in November 1989 to "Opportunity Funds," in February 1990 to
"Ambassador Funds" and in June 1995 to "The Munder Funds Trust." The Tax-Free
Short-Intermediate Bond Fund originally commenced operations on February 9, 1987
under the name Tax-Free Intermediate Bond Fund 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. Framlington was organized as a Massachusetts business trust on October
30, 1996.
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As stated in each Prospectus, the investment advisor of each Fund (other
than the Index 500 Fund and the International Equity Fund) is Munder Capital
Management (the "Advisor"). The principal partners of the Advisor are Munder
Group LLC, WAM Holdings, Inc. ("WAM") and WAM Holdings II, Inc. ("WAM II"). WAM
and WAM II are indirect, wholly-owned subsidiaries of Comerica Incorporated
which owns or controls approximately 95% of the partnership interests in the
Advisor.
World Asset Management ("World"), a Delaware limited liability company, is
the investment advisor for the Index 500 Fund and the International Equity Fund.
World is a wholly-owned subsidiary of the Advisor.
Framlington Overseas Investment Management Limited (the "Sub-Advisor")
serves as sub-advisor for the Emerging Markets, Global Financial Services,
Healthcare and International Growth Funds (the "Framlington Funds"). The Sub-
Advisor is a subsidiary of Framlington Group Limited, incorporated in England
and Wales which, through its subsidiaries, provides a wide range of investment
services. Framlington Group Limited is a wholly-owned subsidiary of Framlington
Holdings Limited which is, in turn, owned 49% by the Advisor and 51% by Credit
Commercial de France S.A., a French banking corporation listed on the Societe
des Bourses Francaises.
Capitalized terms used in this SAI 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 investment objectives of Multi-Season Fund, Real Estate Fund
and Money Market 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. The Tax-Free Bond Fund and Tax-Free Money
Market Fund each have a fundamental policy to invest at least 80% of its
respective assets in municipal obligations bearing tax-exempt interest; all
other investment policies, other than those specifically designated as
fundamental, are non-fundamental policies and may be changed without the
authorization of the holders of a majority of a 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 to
this SAI.
For purposes of this SAI, the Focus Growth Fund, Future Technology Fund,
Global Financial Services Fund, Equity Income Fund, Growth Opportunities Fund,
Index 500 Fund, International Equity Fund, Micro-Cap Fund, Multi-Season Fund,
NetNet Fund, Real Estate Fund, Small-Cap Value Fund, Small Company Growth Fund,
Value Fund, International Growth Fund, Emerging Markets Fund and Healthcare Fund
are referred to as the "Equity Funds"; the Bond Fund, Intermediate Bond Fund and
U.S. Income Fund are referred to as the "Bond Funds"; the Michigan Bond Fund,
Tax-Free Bond Fund and Tax-Free Short-Intermediate Bond Fund are referred to as
the "Tax-Free Bond Funds" and Cash Investment Fund, Money Market Fund, Tax-Free
Money Fund and U.S. Treasury Money Market Fund are referred to as the "Money
Market Funds."
Borrowing. Each of the Funds is authorized to borrow money in amounts up
to 5% of the value of its 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. Borrowed funds are subject to
interest costs that may or may not be offset by amounts earned on the borrowed
funds. A Fund may also be required to maintain minimum average balances in
connection with such borrowing or to pay a commitment or other fees to maintain
a line of credit; either of these requirements would increase the cost of
borrowing over the stated interest rate. Each Fund may, in connection with
permissible borrowings, transfer as collateral securities owned by the Fund.
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Foreign Securities. Each Equity Fund (except Global Financial Services
Fund, Real Estate Fund, International Equity Fund, International Growth Fund,
Emerging Markets Fund and Healthcare Fund), each Bond Fund, each Tax-Free Bond
Fund, the Balanced Fund, the Cash Investment Fund and the Money Market Fund may
invest up to 25% of its assets in foreign securities. Under normal market
conditions, the International Equity Fund, International Bond Fund and
International Growth Fund will each invest at least 65% of its assets in
securities of issuers located in at least three countries other than the United
States. The Global Financial Services Fund will invest at least 65% of its
assets in securities of issuers located in at least three countries, one of
which may be the United States. The Emerging Markets Fund will invest at least
65% of its assets in emerging market countries. There is no limit on the
Healthcare Fund's investments in foreign securities. The Future Technology
Fund, Multi-Season Fund and NetNet 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 institutions issuing ADRs may not be
sponsored by the issuer. A non-sponsored depositary may not provide the same
shareholder information that a sponsored depositary is required to provide under
its contractual arrangements with the issuer.
The International Bond 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. Certain European
currencies are being converted into the Euro. This conversion, which is under
way, is scheduled to be completed in the year 2002. However, problems with the
conversion process and delays could increase volatility in world markets and
affect European markets in particular. For the purposes of the 65% minimum with
respect to the International Bond Fund's designation as an international bond
fund, the securities described in this paragraph are considered "international
bonds."
Income and gains on foreign securities may be subject to foreign
withholding taxes. Investors should consider carefully the substantial risks
involved in securities of companies and governments of foreign nations, which
are in addition to the usual risks inherent in domestic investments. There may
be less publicly available information about foreign companies comparable to the
reports and ratings published about companies in the United States. Foreign
companies are not generally subject to uniform accounting, auditing and
financial reporting standards, and auditing practices and requirements may not
be comparable to those applicable to United States companies. Foreign markets
have substantially less trading volume than the New York Stock Exchange and
securities of some foreign companies are less liquid and more volatile than
securities of comparable United States companies. Commission rates in foreign
countries, which are generally fixed rather than subject to negotiation as in
the United States, are likely to be higher. In many foreign countries there is
less government supervision and regulation of stock exchanges, brokers, and
listed companies than in the United States. Such concerns are particularly
heightened for emerging markets and Eastern European countries.
Investments in companies domiciled in developing countries may be subject
to potentially higher risks than investments in developed countries. These
risks include (i) less social, political and economic stability; (ii) the small
current size of the markets for such securities and the currently low or
nonexistent volume of trading, which result in a lack of liquidity and in
greater price volatility; (iii) certain national policies which may restrict a
Fund's investment opportunities, including restrictions on investment in issuers
or industries deemed sensitive to national interest; (iv) foreign taxation; (v)
the absence of developed legal structures governing private or foreign
investment or allowing for judicial redress for injury to private property; (vi)
the absence, until recently in certain Eastern European countries, of a capital
market structure or market-oriented economy; and (vii) the possibility that
recent favorable economic developments in Eastern Europe may be slowed or
reversed by unanticipated political or social events in such countries.
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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, the Fund could lose a substantial
portion of any investments it has made in the affected countries. Further, no
accounting standards exist in Eastern European countries. Finally, even though
certain Eastern European currencies may be convertible into United States
dollars, the conversion rates may be artificial rather than their actual market
values and they may be adverse to a Fund.
The Advisor, World or the Sub-Advisor endeavors to buy and sell foreign
currencies on as favorable a basis as practicable. Some price spread on
currency exchange (to cover service charges) may be incurred, particularly when
the Fund changes investments from one country to another or when proceeds of the
sale of Fund shares in U.S. dollars are used for the purchase of securities in
foreign countries. Also, some countries may adopt policies which would prevent
the Fund from transferring cash out of the country or withhold portions of
interest and dividends at the source. There is the possibility of
expropriation, nationalization or confiscatory taxation, withholding and other
foreign taxes on income or other amounts, foreign exchange controls (which may
include suspension of the ability to transfer currency from a given country),
default in foreign government securities, political or social instability or
diplomatic developments that could affect investments in securities of issuers
in foreign nations.
Foreign securities markets have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Delays in settlement could result in
temporary periods when assets of a Fund are uninvested and no return is earned
thereon. The inability of a Fund to make intended security purchases due to
settlement problems could cause the Fund to miss attractive investment
opportunities. Inability to dispose of portfolio securities due to settlement
problems could result either in losses to a Fund due to subsequent declines in
value of the portfolio security or, if the fund has entered into a contract to
sell the security, could result in possible liability to the purchaser.
A Fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Changes in foreign currency exchange rates will influence values
within a Fund from the perspective of U.S. investors, and may also affect the
value of dividends and interest earned, gains and losses realized on the sale of
securities, and net investment income and gains, if any, to be distributed to
shareholders by a Fund. The rate of exchange between the U.S. dollar and other
currencies is determined by the forces of supply and demand in the foreign
exchange markets. These forces are affected by the international balance of
payments and other economic and financial conditions, government intervention,
speculation and other factors. The Advisor, World or the Sub-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 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
currency exchange contracts ("forward currency contracts"). These contracts
involve an obligation to purchase or sell a specified currency at a future date
at a price set at the time of the contract. Forward currency contracts do not
eliminate fluctuations in the values of portfolio securities but rather allow a
Fund to establish a rate of currency exchange for a future point in time.
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When entering into a contract for the purchase or sale of a security, a
Fund may enter into a forward currency contract for the amount of the purchase
or sale price to protect against variations, between the date the security is
purchased or sold and the date on which payment is made or received, in the
value of the foreign currency relative to the U.S. dollar or other foreign
currency.
When the Advisor, World or the Sub-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 currency contract, it will not
generally be possible to match precisely the amount covered by that contract and
the value of the securities involved due to the changes in the values of such
securities resulting from market movements between the date the forward contract
is entered into and the date it matures. In addition, while forward contracts
may offer protection from losses resulting from declines or appreciation in the
value of a particular foreign currency, they also limit potential gains which
might result from changes in the value of such currency. A Fund will also incur
costs in connection with forward currency contracts and conversions of foreign
currencies and U.S. dollars.
Cash or liquid securities equal to the amount of a Fund's assets that could
be required to consummate forward contracts will be designated on the records of
the Funds' custodian except to the extent the contracts are otherwise "covered."
For the purpose of determining the adequacy of the designated securities, the
designated securities will be valued at market or fair value. If the market or
fair value of such securities declines, additional cash or securities will be
designated daily so that the value of the designated securities will equal the
amount of such commitments by the Fund. A forward contract to sell a foreign
currency is "covered" if a Fund owns the currency (or securities denominated in
the currency) underlying the contract, or holds a forward contract (or call
option) permitting the Fund to buy the same currency at a price no higher than
the Fund's price to sell the currency. A forward contract to buy a foreign
currency is "covered" if a Fund holds a forward contract (or put option)
permitting the Fund to sell the same currency at a price as high as or higher
than the Fund's price to buy the currency.
Futures Contracts and Related Options. The Equity Funds, the Balanced
Fund, the Bond Funds, the Tax-Free Bond Funds and the International Bond Fund
may purchase and sell futures contracts on interest-bearing securities or
securities 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 SAI.
Illiquid Securities. The Equity Funds, Balanced Fund, Tax-Free Bond Funds,
International Bond Fund and the Bond Funds may invest up to 15%, and each of the
Money Market Funds may invest up to 10%, of the value of its net assets
(determined at time of acquisition) in securities that are illiquid. Illiquid
securities would generally include securities for which there is a limited
trading market, repurchase agreements and time deposits with notice/termination
dates in excess of seven days, and certain securities that are subject to
trading restrictions because they are not registered under the Securities Act of
1933, as amended (the "Act"). If, after the time of acquisition, events cause
this limit to be exceeded, the Fund will take steps to reduce the aggregate
amount of illiquid securities as soon as reasonably practicable in accordance
with the policies of the SEC.
Each Fund (except U.S. Treasury Money Market Fund) may invest in commercial
obligations issued in reliance on the "private placement" exemption from
registration afforded by Section 4(2) of the Act ("Section 4(2) paper"). A Fund
may also purchase securities that are not registered under the Act, but which
can be sold to qualified institutional buyers in accordance with Rule 144A under
the Act, ("Rule 144A securities"). Section 4(2) paper is restricted as to
disposition under the Federal securities laws, and generally is sold to
institutional investors who agree that they are purchasing the paper for
investment and not with a view to public distribution. Any resale by the
purchaser must be in an exempt transaction. Section 4(2) paper normally is
resold to other institutional investors through or with the assistance of the
issuer or investment dealers which make a market in the Section 4(2) paper, thus
providing liquidity. Rule 144A securities generally must be sold only to other
qualified institutional buyers. If a particular investment in Section 4(2)
paper or Rule 144A securities is not determined to be liquid, that investment
will be included within the Fund's limitation on investment in illiquid
securities. The Advisor, World or
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the Sub-Advisor will determine the liquidity of such investments pursuant to
guidelines established by the Boards of Directors/Trustees. It is possible that
unregistered securities purchased by the Fund in reliance upon Rule 144A 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.
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
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 Funds 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 Funds' ability to engage in certain interest rate transactions. Gains from
transaction in interest rate swaps distributed to shareholders of the Funds will
be taxable as ordinary income or, in certain circumstances, as long-term capital
gains to the shareholders.
Each of the Funds' obligations (or rights) under a swap agreement will
generally be equal only to the net amount to be paid or received under the
agreement based on the relative values of the positions held by each party to
the agreement (the "net amount"). Each of the Funds' 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
designating cash, U.S. Government securities or other high-grade liquid
securities on the books of the Fund's custodian, to avoid any potential
leveraging of a Fund's portfolio.
The Funds 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 Funds 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 Funds 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 Funds' ability to terminate existing swap
agreements or to realize amounts to be received under such agreements.
Investment Company Securities. Each of the Funds may invest in securities
issued by other investment companies. As a shareholder of another investment
company, a Fund would bear its pro rata portion of the other investment
company's expenses, including advisory fees. These expenses would be in
addition to the expenses each Fund bears directly in connection with its own
operations. Each Fund currently intends to limit its investments in securities
issued by other investment companies so that, as determined immediately after a
purchase of such securities is made: (i) not more than 5% of the value of the
Fund's total assets will be invested in the securities of any one investment
company; (ii) not more than 10% of the value of its total assets will be
invested in the aggregate in securities of investment companies as a group; and
(iii) not more than 3% of the outstanding voting stock of any one investment
company will be owned by the Fund.
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
8
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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 the possibility of loss to the Funds due to
(i) the inability of the borrower to return securities, (ii) a delay in recovery
of the securities, or (iii) loss of rights in the collateral should the borrower
fail financially. In determining whether the Funds will lend securities, the
Advisor, World (with respect to the Index 500 Fund or International Equity Fund)
or the Sub-Advisor (with respect to the Framlington Funds) 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,
World or the Sub-Advisor has determined are creditworthy under guidelines
established by the Boards of Directors/Trustees.
Lower-Rated Debt Securities. It is expected that each Fund (other than the
Money Market Funds, Index 500 Fund and Equity Income Fund) will invest not more
than 5% of its total assets in securities that are rated below investment grade
by Standard & Poor's Rating Service, a division of McGraw-Hill Companies, Inc.
("S&P"), or Moody's Investors Service, Inc. ("Moody's"), or in comparable
unrated securities. The Equity Income Fund may invest up to 20% of the value of
its total assets in such securities. The Money Market Funds and the Index 500
Fund may not invest in such securities. 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 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. A description of applicable credit ratings is set forth in Appendix A of
this SAI.
Money Market Instruments. Each of the Funds may invest from time to time
in "money market instruments," a term that includes, among other things, bank
obligations, commercial paper, variable amount master demand notes and corporate
bonds with remaining maturities of 397 days or less.
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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, World or the
Sub-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.
Investments by a Fund in commercial paper will consist of issues rated at
the time of purchase A-1 and/or P-1 by S&P or Moody's. In addition, the Funds
may acquire unrated commercial paper and corporate bonds that are determined by
the Advisor, World (with respect to the Index 500 Fund or International Equity
Fund) or the Sub-Advisor (with respect to the Framlington Funds) 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, World or the Sub-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 U.S. Treasury. FNMA is a government-sponsored organization
owned entirely by private stockholders. Fannie Maes are guaranteed as to timely
payment of the principal and interest by FNMA. Mortgage-related securities
issued by the Federal Home Loan Mortgage Corporation ("FHLMC") include FHLMC
Mortgage Participation Certificates (also known as "Freddie Macs" or "PCs").
FHLMC is a corporate instrumentality of the United States, created pursuant to
an Act of Congress, which is owned entirely by Federal Home Loan Banks. Freddie
Macs are not guaranteed by the United States or by any Federal Home Loan Banks
and do not constitute a debt or obligation of the United States or of any
Federal Home Loan Bank. Freddie Macs entitle the holder to timely payment of
interest, which is guaranteed by the FHLMC. FHLMC guarantees either ultimate
collection or timely payment of all principal payments on the underlying
mortgage loans. When FHLMC does not guarantee timely payment of principal,
FHLMC may remit the amount due on account of its guarantee of ultimate payment
of principal at any time after default on an underlying mortgage, but in no
event later than one year after it becomes payable.
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, the Trust nor the Advisor will review
the proceedings relating to the issuance of municipal obligations or the bases
for such opinions.
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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 Tax-Free Bond Funds
and the Tax-Free Money Market Fund and the liquidity and value of such Funds.
In such an event the Board of Trustees would reevaluate the Fund's investment
objective and policies and consider changes in its structure or possible
dissolution.
The Cash Investment Fund and the Money Market Fund each 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.
Neither the Cash Investment Fund nor the Money Market Fund expects to invest
more than 5% of its net assets in such municipal obligations during the 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. Each of the Equity Funds, Balanced Fund, Bond Funds,
International Bond Fund and Tax-Free Bond Funds (other than Tax-Free Short-
Intermediate Bond Fund) may write covered call options, buy put options, buy
call options and write secured put options. For a detailed description on
options, see Appendix B to this SAI.
Real Estate Securities. The Real Estate Fund may invest without limit in
shares of real estate investment trusts ("REITs"). The Equity Funds and the
Balanced Fund may also invest in 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 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 Funds
will not invest in real estate directly, but only in securities issued by real
estate companies. However, the Funds 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
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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, 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 REITs under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue 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. Each of the Funds may agree to purchase securities
from financial institutions such as member banks of the Federal Reserve System,
any foreign bank or any domestic or foreign broker/dealer that is recognized as
a reporting government securities dealer, subject to the seller's agreement to
repurchase the securities at an agreed-upon time and price ("repurchase
agreements"). The Advisor, World or the Sub-Advisor will review and
continuously monitor the creditworthiness of the seller under a repurchase
agreement, and will require the seller to maintain collateral 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 397 days or less.
The repurchase price under repurchase agreements 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, as applicable, by
the Trust's, Framlington's or the Company's 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.
Reverse Repurchase Agreements. Each Fund may borrow funds for temporary or
emergency purposes by selling portfolio securities to financial institutions
such as banks and broker/dealers and agreeing to repurchase them at a mutually
specified date and price ("reverse repurchase agreements"). Reverse repurchase
agreements involve the risk that the market value of the securities sold by 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 cash, U.S.
Government securities or other liquid securities designated on the books of the
Fund or the Fund's custodian in an amount at least equal to the market value of
the securities, plus accrued interest, subject to the agreement.
Rights and Warrants. 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.
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Short Sales. The Global Financial Services Fund may make short sales of
securities. A short sale is a transaction in which the Fund sells a security it
does not own in anticipation that the market price of that security will
decline. When the Fund makes a short sale, it must borrow the security sold
short and deliver it to the broker-dealer through which it made the short sale
as collateral for its obligation to deliver the security upon conclusion of the
sale. The Fund may also sell securities that it owns or has the right to acquire
at no additional cost but does not intend to deliver to the buyer, a practice
known as selling short "against-the-box." The Fund may have to pay a fee to
borrow particular securities and is often obligated to pay over any payments
received on such borrowed securities. The Fund's obligation to replace the
borrowed security will be secured by collateral deposited with the broker-
dealers, usually cash, U.S. Government securities or other highly liquid
securities similar to those borrowed. The Fund will also be required to deposit
similar collateral with its custodian to the extent necessary so that the value
of both collateral deposits in the aggregate is at all times equal to as least
100% of the current market value of the security sold short. Depending on
arrangements made with the broker-dealer from which it borrowed the security
regarding payment over any received by the Fund on such security, the Fund may
not received any payments (including interest) on its collateral deposited with
such broker-dealer. The Fund will incur transaction costs, including interest
expenses, in connection with opening, maintaining, and closing short sales.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Any gain is limited to the price at which it sold the security short; its
potential loss is theoretically unlimited.
Stand-by Commitments. The Balanced Fund, Cash Investment Fund, Money Market
Fund, the Tax-Free Bond Funds and Tax-Free Money Market Fund 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 and the Trust 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 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 Bond Funds and the Tax-Free Money Market Fund 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 and the Tax-Free Bond Funds (other than the Tax-Free Short-Intermediate
Bond Fund) may purchase and sell stock index futures, options on stock and bond
indices and options on stock and bond index futures contracts as a hedge against
movements in the equity and bond markets. The Tax-Free Short-Intermediate Bond
Fund may purchase and sell bond index futures contracts. The International Bond
Fund may purchase and sell options on bond index futures contracts as a hedge
against movements in the bond markets.
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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, World (with respect to the Index 500 Fund and the
International Equity Fund) or the Sub-Advisor (with respect to the Framlington
Funds) 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 futures contract or index option resulting from the
increase in the index. If, on the other hand, the Advisor, World or the Sub-
Advisor, as the case may be, 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 Fund's
position in such futures contract or put option.
The Equity Funds, the Balanced Fund, the Bond Funds and the Tax-Free Bond
Funds (other than Tax-Free Short-Intermediate Bond Fund) 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 or bond index futures, the Funds will be
required to deposit as "initial margin" an amount of cash or short-term U.S.
Government securities equal to between 5% to 8% of the contract amount.
Thereafter, subsequent payments (referred to as "variation margin") are made to
and from the broker to reflect changes in the value of the option or futures
contract. No Fund may at any time commit more than 5% of its total assets to
initial margin deposits on futures contracts, index options and options on
futures contracts.
Stripped Securities. Certain 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 principal payment on the
security and does not receive any rights to periodic interest (cash) payments.
The underlying U.S. Treasury bonds and notes themselves are held in book-entry
form at the Federal Reserve Bank or, in the case of bearer securities (i.e.,
unregistered securities which are ostensibly owned by the bearer or holder), in
trust on behalf of the owners.
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Counsel to the underwriters of these certificates or other evidences of
ownership of U.S. Treasury securities have stated that, in their opinion,
purchasers of the stripped securities most likely will be deemed the beneficial
holders of the underlying U.S. Government obligations for federal tax and
securities purposes. The Company, the Trust and Framlington are 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.
The U.S. 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 on U.S. Treasury securities
through the Federal Reserve book-entry record-keeping system. The Federal
Reserve program as established by the U.S. 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. 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.
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 Boards of Directors/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. The U.S.
Treasury Money Market Fund will purchase obligations issued by the U.S.
Treasury. Obligations of certain agencies and instrumentalities of the U.S.
Government, such as those of 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
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United States, are supported by the right of the issuer to borrow from the U.S.
Treasury; and still others, such as those of the Student Loan Marketing
Association, are supported only by the credit of the agency or instrumentality
issuing the obligation. No assurance can be given that the U.S. Government
would provide financial support to U.S. Government-sponsored instrumentalities
if it is not obligated to do so by law. Examples of the types of U.S.
Government obligations that may be acquired by the Funds include U.S. Treasury
Bills, U.S. Treasury Notes and U.S. Treasury Bonds and the obligations of
Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the
Federal Housing Administration, Farmers Home Administration, Export-Import Bank
of the United States, Small Business Administration, FNMA, GNMA, 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 or the
Sub-Advisor, as the case may be, 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. 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, International Bond Fund,
Cash Investment Fund and Money Market Fund may make limited investments in
guaranteed investment contracts ("GICs") issued by U.S. insurance companies.
Pursuant to such contracts, a Fund makes cash contributions to a deposit fund of
the insurance company's general account. The insurance company then credits to
the Fund on a monthly basis interest which is based on an index (in most cases
this index is expected to be the Salomon Brothers CD Index), but is guaranteed
not to be less than a certain minimum rate. A GIC is normally a general
obligation of the issuing insurance company and not funded by a separate
account. The purchase price paid for a GIC becomes part of the general assets
of the insurance company, and the contract is paid from the company's general
assets. A Fund will only purchase GICs from insurance companies which, at the
time of purchase, have assets of $1 billion or more and meet quality and credit
standards established by the Advisor pursuant to guidelines approved by the
Boards of Directors/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
Fund's limitation on illiquid investments.
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When-Issued Purchases and Forward Commitments (Delayed-Delivery
Transactions). When-issued purchases and forward commitments (known as delayed-
delivery transactions) are commitments by a Fund to purchase or sell particular
securities with payment and delivery to occur at a future date (perhaps one or
two months later). These transactions permit 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 Fund will designate cash or liquid portfolio securities
equal to the amount of the commitment. Normally, the Fund will designate
portfolio securities to satisfy a purchase commitment, and in such a case the
Fund may be required subsequently to designate additional assets 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 designates portfolio securities to
cover such purchase commitments than when it designates cash. Because a Fund's
liquidity and ability to manage its portfolio might be affected when it
designates cash or portfolio securities to cover such purchase commitments, the
Advisor or the Sub-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.
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., Fitch IBCA, Inc. and other
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 Cash Investment Fund and Money Market Fund 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. Each of Cash Investment Fund,
Money Market Fund and Tax-Free Money Market Fund 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 rated
in the highest rating category by an NRSRO 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 Directors/Trustees, that the unrated and single rated securities are
of comparable quality to the appropriate rated securities.
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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 Directors/Trustees or the Advisor or the
Sub-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.
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,
World purchases and sells securities for the Fund in an attempt to produce
investment results that substantially duplicate the performance of the common
stocks included in the S&P 500 Composite Stock Price 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. World 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. World 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 World 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, World 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,
World may be required to sell some or all of the common stock of such issuer
then held by the Fund. Such sales of portfolio securities may be made at times
when, if World were not required to effect purchases and sales of portfolio
securities in accordance with the S&P 500, such securities might not be sold.
These sales may result in lower prices for the securities than may have been
realized or in losses that may not have been incurred if World were not required
to effect the purchases and sales. The failure of an issuer to declare or pay
dividends, the institution against an issuer of potentially materially adverse
legal proceedings, the existence or threat of defaults materially and adversely
affecting an issuer's future declaration and payment of dividends, or the
existence of other materially adverse credit factors will not necessarily be the
basis for the disposition of portfolio securities, unless such event causes the
issuer to be eliminated entirely from the S&P 500. However, although World does
not intend to screen securities for investment by the Fund by traditional
methods of financial and market analysis, World 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
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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 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 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 SAI.
Disclaimers. The Index 500 Fund is not sponsored, endorsed, sold or
promoted by Standard & Poor's Ratings Service, a division of McGraw-Hill
Companies, Inc. ("S&P"). S&P makes no representation or warranty, express or
implied, to the owners of the Index 500 Fund or any member of the public
regarding the advisability of investing in securities generally or in the Index
500 Fund particularly or the ability of the S&P 500 Index to trace general stock
market performance. S&P's only relationship to the Trust is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 Index which is
determined, composed and calculated by S&P without regard to the Trust or the
Index 500 Fund. S&P has no obligation to take the needs of the Trust or the
owners of the Index 500 Fund into consideration in determining, composing or
calculating the S&P 500 Index. S&P is not responsible for and has not
participated in the determination of the prices and amount of the Index 500 Fund
or the timing of the issuance or sale of the Index 500 Fund or in the
determination or calculation of the equation by which the Index 500 Fund is to
be converted into cash. S&P has no obligation or liability in connection with
the administration, marketing or trading of the Index 500 Fund.
S&P does not guarantee the accuracy and/or the completeness of the S&P 500
Index or any data included therein and S&P shall have no liability for any
errors, omissions, or interruptions therein. S&P makes no warranty, express or
implied, as to results to be obtained by the Trust, owners of the Index 500
Fund, or any other person or entity from the use of the S&P 500 Index or any
data included therein. S&P makes no express or implied warranties, and
expressly disclaims all warranties of merchantability of fitness for a
particular purpose or use with respect to the S&P 500 Index or any data included
therein. Without limiting any of the foregoing, in no event shall S&P have any
liability for any special, punitive, indirect, or consequential damages
(including lost profits), even if notified of the possibility of such damages.
"Standard & Poor's", "S&P", "S&P 500", "Standard & Poor's 500", and "500"
are trademarks of McGraw-Hill, Inc. and have been licensed for use by the Trust.
The Index 500 Fund is not sponsored, endorsed, sold or promoted by S&P and S&P
makes no representation regarding the advisability of investing in the Index 500
Fund.
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RISK FACTORS AND SPECIAL CONSIDERATIONS - MICHIGAN BOND FUND AND
TAX-FREE SHORT-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 Trust has not independently verified this
information.
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.
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.
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 55% from the payment of State taxes and
45% from federal and non-tax revenue sources. Tax revenues credited to the
General Fund include portions of collections from the personal income tax, the
single business tax, use tax, sales tax and various other taxes.
The State's Constitution also 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, discussed below. The State may raise
taxes in excess of the limit in emergency situations, when deemed necessary by
the Governor and two-thirds of the members of each house of the Legislature.
In 1977, the State enacted legislation which created the Counter-Cyclical
Budget and Economic Stabilization Fund, commonly known as the Budget
Stabilization Fund ("BSF"), to accumulate balances during years of significant
economic growth for utilization in years when the State's economy experiences
cyclical downturns or unforeseen fiscal emergencies. Calculated on an accrual
basis, the unreserved ending accrued balance of the BSF on September 30, 1995
was $987.9 million, $614.5 million on September 30, 1996, $579.8 million on
September 30, 1997 and 1,000.5 million on September 30, 1998. The balance is
net of a reserve for future education funding of $539.1 million on September 30,
1996 and $572.6 million on September 30, 1997.
In 1999, legislation was passed completely phasing out the single business
tax ("SBT"). Effective January 1, 1999, the SBT rate was reduced from 2.3% to
2.2% and is to be reduced annually by 0.1% each January 1 until the tax is
completely eliminated. The annual reduction does not occur if the BSF balance
for the prior fiscal year is under $250 million. SBT rate reductions will cease
until the BSF fiscal year ending balance returns to $250 million or more. The
same legislation also provides single business tax relief for companies that
spin off a portion of their business pursuant to a restructuring, specifically
defines the tax base of foreign corporations for single business tax purposes
and replaces the capital acquisition deduction with an investment tax credit
("ITC"). The ITC becomes effective on January 1, 2000 and was set at the revenue
neutral rate of 0.85%, which will be reduced in proportion to the SBT rate cut.
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Property tax and school finance reform measures enacted in 1998
substantially cut local school property taxes and raised additional State
revenues to replace most of the property tax cut. A constitutional amendment
approved by the voters in March 1994, increased the State sales and use tax from
4% to 6%, limited the ability of local school districts to levy taxes, and
limited assessment increases for each parcel of property to the lesser of 5% or
the rate of inflation. When property is subsequently sold, its taxable value
will revert to the current assessment level of 50% of true cash value.
Companion legislation increased the cigarette tax $.25 to $.75 per pack and
imposed an additional tax of 16% of the wholesale price on certain other tobacco
products, imposed a State real estate transfer tax of 0.75% and a 6-mill State
property tax and cut the State's income tax rate from 4.6% to 4.4%. These
measures shift significant portions of the cost of local school operations from
local school districts to the State and raise 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, tax collection, commerce and
budgetary reductions to school districts and governmental units and court
funding. Relief sought includes damages in tort cases generally, alleviation of
prison overcrowding, improvement of prison medical and mental health care and
refund claims under State taxes. The State is also a party to various legal
proceedings which, if resolved in the State's favor, would result in contingency
gains to the State's General Fund balance, but without material effect upon such
fund balance. Although the ultimate disposition and consequences of all of
these proceedings are not presently determinable, the Attorney General of the
State has indicated in a recent official statement prepared in connection with
issuance of general obligation bonds of the State that such ultimate
dispositions and consequences of any single proceeding or all legal proceedings
collectively should not themselves, except as listed below, have a material
adverse effect on the security for such bonds; provided, however, that no
opinion is expressed with respect to the ultimate disposition and consequences
of any litigation in combination with any State revenue loss, the implementation
of any tax reduction proposal or the failure of the State to realize any budget
assumption.
On August 22, 1994, the Ingham Circuit and probate courts, together with
the 55th District Court, filed suits in the Court of Claims and Ingham County
Circuit Court against the State of Michigan and Ingham County for declaratory
and injunctive relief, and for damages, due to the alleged failure of the State
Court Administrative Office to properly calculate Ingham County's reimbursement
under the court funding statute. These cases have been dismissed by stipulation
of the parties because the plaintiffs are raising the same claims as members of
a class action captioned as 10th Judicial Circuit, et al v State of Michigan, et
al. Plaintiffs assert that the amount in controversy exceeds $5 million dollars.
The case is currently pending final class certification.
In an order dated June 10, 1997 and a decision rendered July 31, 1997, the
Michigan Supreme Court decided, in the consolidated cases of Durant v State of
Michigan and Schmidt v State of Michigan, that the special education, special
education transportation, bilingual education, driver training and school lunch
programs provided by local school districts are State mandated programs within
the meaning of Michigan Constitution, Article 9, (S) 29 (part of the so-called
"Headlee Amendment") and, therefore, the State is obligated to fund these
programs at levels established by the Headlee Amendment. In fashioning a remedy
in this case of first impression under the Headlee Amendment, the Court
concluded that, in future cases, the correct remedy will typically be limited to
a declaratory judgment. However, due to the protracted nature of the Durant and
Schmidt litigation, the Court ruled that money damages, without interest, shall
be paid to the 84 plaintiff school districts for the full amount of the
underfunding for the State mandated programs during the 1991-92, 1992-93, and
1993-94 school years. On November 19, 1997, the Governor signed legislation
providing approximately $212 million to the 84 plaintiff school districts to
cover the underfunding for those three years. That payment was made to the 84
plaintiff school districts on April 15, 1998 from the State's Budget
Stabilization Fund. The board of education of each plaintiff school district is
to determine the appropriate distribution of the award between taxpayer relief
and/or use by the district for other public purposes. The Court has affirmed the
award to plaintiffs of their costs including attorney fees. Approximately 400
other school districts have asserted similar claims. In companion legislation
signed by the Governor on November 19, 1997, the State will pay each "non-
Durant" school district for its underfunded State mandated program costs for
those same three years, if the district agreed, by March 2, 1998, to waive any
claim against the State of the same nature as the claims made by the 84 Durant
plaintiffs through
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September 30, 1997. All "non-Durant" school districts submitted the statutory
waiver by March 2, 1998. It is estimated that the aggregate payments to the
"non-Durant" school districts will, over time, total $632 million. Those
payments, commencing in fiscal year 1998-1999, will be paid out of the Budget
Stabilization Fund and the General Fund, half in annual payments over 10 years
and half in annual payments over 15 years.
On May 14, 1998, more than 100 Michigan school districts and individuals
filed suit in the Michigan Court of Appeals, asserting that the current version
of the state school aid act violates the Headlee Amendment, in much the same
manner as prior versions of the act were ruled unconstitutional by the Michigan
Supreme Court in Durant v State Board of Education, 456 Mich 175 (1977). Durant,
et al. v State, et al. ("Durant II"). The Durant II plaintiffs are claiming
damages of approximately $347 million for each of the 1997-1998, 1998-1999 and
1999-2000 school years for the State's alleged underfunding of special education
services, special education transportation, and school lunch programs. The
Durant II plaintiffs are also requesting a declaratory judgment that the current
version of the state school aid act will not provide proper funding levels for
future school years. They also seek attorney fees and costs of the litigation.
On June 11, 1998, the Michigan Court of Appeals dismissed this suit on technical
grounds, without prejudice however, to the timely filing of a new complaint. On
September 29, 1998, the Michigan Supreme Court reversed the June 11, 1998 Order
of the Michigan Court of Appeals and remanded Durant II to the Michigan Court of
Appeals. The Michigan Supreme Court directed the Michigan Court of Appeals to
resolve expeditiously certain issues raised by the Durant II plaintiffs.
On October 30, 1998, the school districts moved to amend their complaint to
challenge the newly-enacted amendments to the State School Aid Act, 1998 PA 339,
to add claims for the 1999-2000 fiscal year and to add a new count for mandamus
against the State treasurer. On December 2, 1998, the Court of Appeals granted
the Durant II plaintiffs' motion to amend the complaint and established a
briefing schedule. On September 17, 1999, the Court of Appeals granted the
Durant II plaintiffs' motion to file a second amended complaint which, among
other provisions, added 125 additional school districts and at least 125
individuals as plaintiffs, bringing the entire class to approximately 500
plaintiffs. The case remains pending in the Court of Appeals and is expected to
proceed in an expedited fashion.
The principal sectors of Michigan's diversified economy are the
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 industries, 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 1998, this figure had fallen to 14.4%.
Although manufacturing (including auto-related manufacturing) continues to be an
important part of the State's economy, approximately 66% of the civilian labor
force is currently engaged in service related employment.
As of the date of this SAI, the State's general obligation bonds have been
rated "AA+" by Standard & Poor's Ratings Service, a division of The McGraw-Hill
Companies, Inc. ("S&P"), "Aa1" by Moody's Investors Service, Inc. ("Moody's"),
and "AA+" by Fitch ICBA ("Fitch"). In January, 1998, the State received an
upgrade from S&P from its prior rating of "AA". In March, 1998, the State
received an upgrade from Moody's from its prior rating of "Aa2". In April, 1998,
the State received an upgrade from Fitch from its prior rating of "AA". Such
ratings are in each case based upon certain information and materials concerning
the Bonds and the State furnished by the State to such rating agencies. Any
explanation of the significance of such ratings may be obtained only from the
rating agencies furnishing the same. There is no assurance that such ratings
will prevail for any given period of time or that they will not be revised
downward or withdrawn entirely by any or all of such rating agencies if, in the
judgment of any or all of them, circumstances so warrant. Any such downward
revision or withdrawal of such ratings, or any or all of them, may have an
adverse effect on the market price of the Bonds. To the extent that the
portfolio of Michigan municipal bonds is comprised of revenue of 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 Short-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 Short-
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 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 clause
(i) and, with respect to the Money Market Funds, clause (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;
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;
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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
Short-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 Fund and Bond
Fund may enter into forward currency contracts in accordance with its
investment objectives and policies; or
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 Short-Intermediate Bond Fund may not:
1. Purchase or retain securities of any issuer if the officers or
Trustees of the Trust or its Advisor who own beneficially more than
one-half of 1% of the securities of such issuer together own
beneficially more than 5% of such securities;
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; or
3. Participate on a joint or joint and several basis in any securities
trading account.
No Fund of Framlington may:
1. Purchase securities (except U.S. Government securities) if more than
5% of its total assets will be invested in the securities of any one
issuer, except that up to 25% of the assets of the Fund may be
invested without regard to this 5% limitation;
24
<PAGE>
2. Invest 25% or more of its total assets in securities issued by one or
more issuers conducting their principal business activities in the
same industry (except that the Healthcare Fund will invest more than
25% of its total assets in securities of issuers conducting their
principal business activities in healthcare industries and the Global
Financial Services Fund will invest more than 25% of its total assets
in securities of issuers conducting their principal business
activities in the financial services industry);
3. Borrow money or enter into reverse repurchase agreement except that
the Fund may (i) borrow money or enter into reverse repurchase
agreements for temporary purposes in amounts not exceeding 5% of its
total assets and (ii) borrow money for the purpose of meeting
redemption requests, in amounts (when aggregated with amounts borrowed
under clause (i)) not exceeding 33 1/3% of its total assets;
4. Pledge, mortgage or hypothecate its assets other than to secure
borrowings permitted by investment limitation 3 above (collateral
arrangements with respect to margin requirements for options and
futures transactions are not deemed to be pledges or hypothecations
for this purpose);
5. Make loans of securities to other persons in excess of 25% of the
Fund's total assets; provided the Fund may invest without limitation
in short-term debt obligations (including repurchase agreements) and
publicly distributed debt obligations;
6. Underwrite securities of other issuers, except insofar as the Fund may
be deemed an underwriter under the Securities Act of 1933, as amended,
in selling portfolio securities;
7. 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;
8. Purchase securities on margin, or make short sales of securities
(except that the Global Financial Services Fund may 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
Fund may make margin deposits in connection with transactions in
options, futures and options of futures;
9. Make investments for the purpose of exercising control or management;
10. Invest in commodities or commodity futures contracts, provided that
this limitation shall not prohibit the purchase or sale by the Fund of
forward foreign currency exchange contracts, financial futures
contracts and options on financial futures contracts, foreign currency
futures contracts, and options on securities, foreign currencies and
securities indices, as permitted by the Fund's Prospectus; or
11. Issue senior securities, except as permitted by the 1940 Act.
Additional investment restrictions adopted by each Fund of Framlington
which may be changed by the Board of Trustees, provide that each Fund may
not:
1. Invest more than 15% of its net assets in illiquid securities;
2. Own more than 10% (taken at market value at the time of purchase) of
the outstanding voting securities of any single issuer; or
3. Invest in other investment companies except as permitted under the
1940 Act.
25
<PAGE>
No Fund of the Company may:
1. Invest more than 25% of its total assets in any one industry (i)
provided that securities issued or guaranteed by the U.S. Government,
its agencies or instrumentalities are not considered to represent
industries; (ii) except that the Real Estate Fund will invest more
than 25% of its assets in securities of issuers in the real estate
industry; (iii) except that the NetNet Fund will invest more than 25%
of its assets in securities of companies engaged in the research,
design, development, manufacturing or distribution of products,
processes or services for use with the Internet or Intranet related
businesses; (iv) provided that with respect to the Focus Growth Fund,
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; and (v) except that the Future
Technology Fund will invest more than 25% of its total assets in the
technology industry;
2. (For each Fund except the International Bond Fund and the Future
Technology 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 U.S.
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 investment limitation 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;
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 Future
Technology, Growth Opportunities, Multi-Season, NetNet, Real Estate,
Value and International Bond Funds of forward currency contracts,
financial
26
<PAGE>
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); or
4. Invest in other investment companies except as permitted under the
1940 Act.
In addition, the International Bond Fund and the Future Technology Fund may
not with respect to 50% of each Fund's assets, invest more than 5% of each
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 U.S. 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 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.
TEMPORARY DEFENSIVE POSITION
During periods of unusual economic or market conditions or for temporary
defensive purposes or liquidity, each Fund (other than the Index 500 Fund) may
invest without limit in cash and in U.S. dollar-denominated high quality money
market and other short-term instruments. These investments may result in a lower
yield than would be available from investments with a lower quality or longer
term.
27
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES, DIRECTORS AND OFFICERS
The trustees, directors and executive officers of the Trust, Framlington
and the Company, and their business addresses, ages, and principal occupations
during the past five years, are:
<TABLE>
<CAPTION>
Positions with Trust, Company Principal Occupation
Name, Address and Age and Framlington+ During Past Five Years
- --------------------- ---------------- -----------------------
<S> <C> <C>
Charles W. Elliott Trustee/Director and Chairman of Senior Advisor to the President,
1024 Essex Circle the Board of Trustees and Directors Western Michigan University (July
Kalamazoo, MI 49008 1995 through December 1998);
DOB: 1/7/32 Executive Vice President,
Administration & Chief Financial
Officer, Kellogg Company (January 1987
through June 1995). Board of
Directors, Steelcase Financial
Corporation.
John Rakolta, Jr. Trustee/Director and Vice Chairman Chairman and Chief Executive Officer,
1876 Rathmor of the Boards of Trustees and Walbridge Aldinger Company
Bloomfield Hills, MI 48304 Directors (construction company).
DOB: 5/26/47
Thomas B. Bender Trustee/Director Director, Disciplined Growth Investors
5033 Wood Ridge Road (investment management firm since
Glen Arbor, MI 49636 December 1999); Partner, Financial &
DOB: 7/14/33 Investment Management Group (April
1991 to December 1999).
David J. Brophy Trustee/Director Professor, University of Michigan.
1025 Martin Place Director, River Place Financial
Ann Arbor, MI 48104 Corporation.
DOB: 8/7/36
Dr. Joseph E. Champagne Trustee/Director Dean, University Center, Macomb
319 East Snell Road College (since September 1997);
Rochester, MI 48306 Corporate and Executive Consultant
DOB: 5/19/38 (since September 1993); Chancellor,
Lamar University (September 1994 to
September 1995); Chairman of Board of
Directors, Ross Controls of Troy,
Michigan.
</TABLE>
28
<PAGE>
<TABLE>
<S> <C> <C>
Thomas D. Eckert Trustee/Director President and Chief Executive Officer,
10726 Falls Pointe Drive Capital Automotive REIT (real estate
Great Falls, VA 22066 investment trust specializing in
DOB: 9/22/47 retail automotive properties) (since
November 1997); President,
Mid-Atlantic Region of Pulte Home
Corporation (developer of residential
land and construction of housing
units) (1983 to 1997); Director,
Celotex Corporation (building products
manufacturer).
Michael Monahan Vice President Chairman of the Advisor (January 2000
480 Pierce Street to present); Chief Executive Officer of the
Suite 300 Advisor (October 1999 to December 1999);
Birmingham, MI 48009 President of Monahan Enterprises, LLC
DOB: 1/26/39 (consulting company) (June 1999 to
present); President of Comerica
Incorporated (1994 to June 1999);
President of Comerica Bank
(1994 to June 1999).
Elyse G. Essick Vice President Vice President and Director of
480 Pierce Street Communications and Client Services of
Suite 300 the Advisor (since January 1995).
Birmingham, MI 48009
DOB: 4/6/58
James C. Robinson President Chief Executive Officer of the Advisor
480 Pierce Street (January 2000 to present); Executive
Suite 300 Vice President of the Advisor
Birmingham, MI 48009 (February 1998 to December 1999); and
DOB: 4/24/61 Chief Investment Officer/Fixed Income
of the Advisor (January 1995 to
December 1999).
Leonard J. Barr Vice President Vice President and Director of Core
480 Pierce Street Equity Research of the Advisor (since
Suite 300 January 1995 ); Director and Senior
Birmingham, MI 48009 Vice President, Old MCM (since 1988);
DOB: 6/16/44 Director of LPM (since June 1993).
Therese Hogan Assistant Secretary Director, State Regulation Department,
101 Federal Street PFPC Inc. (formerly First Data
Boston, MA 02110 Investor Services Group) (since June
DOB: 2/27/62 1994).
</TABLE>
29
<PAGE>
<TABLE>
<S> <C> <C>
Libby Wilson Assistant Secretary and Treasurer Director of Mutual Fund Operations of
480 Pierce Street the Advisor (since July 1999); Global
Suite 300 Portfolio Client Associate of Invesco
Birmingham, MI 48009 Global Asset Management (investment
DOB:2/24/69 advisor) (March 1999 to July 1999);
Manager of Mutual Funds Operations of
the Advisor (May 1996 to March 1999);
Administrator of Mutual Funds
Operations of the Advisor (March 1993
to May 1996).
Bradford E. Smith Assistant Treasurer Manager of Mutual Fund Operations of
480 Pierce Street the Advisor (March 2000 to present;
Suite 300 Administrator of Mutual Fund
Birmingham, MI 48009 Operations of the Advisor (August 1999
DOB: 4/19/72 to February 2000); Assistant Vice
President, Madison Mosaic, LLC
(advisor to the Mosaic Funds)
(September 1998 to July 1999);
Assistant Director of Shareholder
Service, Madison Mosaic, LLC (April
1997 to August 1998); Cash Manager,
GIT Funds (n.k.a. Mosaic Funds); (June
1996 to March 1997); and Registered
Representative, GIT Investment
Services, Inc. (January 1995 to May
1996).
Mary Ann Shumaker Assistant Secretary Associate General Counsel of the
480 Pierce Street Advisor (since July 1997); and
Suite 300 Associate, Miro Weiner & Kramer (law
Birmingham, MI 48009 firm) (1991 to 1997).
DOB:7/31/54
</TABLE>
+ Individual holds same position with St. Clair Funds, Inc., ("St. Clair") a
registered investment company.
* Trustee/Director is an "Interested person" of the Trust, Framlington and
the Company as defined in the 1940 Act.
Trustees who are not interested persons of the Trust and Framlington and
Directors who are not interested persons of the Company receive an aggregate fee
from the Trust, Framlington the Company and St. Clair for service on those
organizations' respective Boards, comprised of an annual retainer fee of $35,000
and a fee of $3,500 for each Board meeting attended; and are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
The following table summarizes the compensation paid by the Trust,
Framlington, the Company and St. Clair to their respective Trustees/Directors
for the year ended June 30, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Charles W. Elliot John Rakolta, Jr. Thomas B. David J. Dr. Joseph E. Thomas D.
Chairman Vice Chairman Bender Brophy Champagne Eckert
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Compensation
from the Company $ 8,908 $ 8,908 $ 8,908 $ 8,908 $ 8,908 $ 8,908
(comprised of 15 funds)
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Charles W. Elliot John Rakolta, Jr. Thomas B. David J. Dr. Joseph E. Thomas D.
Chairman Vice Chairman Bender Brophy Champagne Eckert
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Aggregate Compensation
from the Trust $29,448 $29,448 $29,448 $29,448 $29,448 $29,448
(comprised of 14 funds)
- --------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from Framlington $ 713 $ 713 $ 713 $ 713 $ 713 $ 713
(comprised of 4 funds)
- --------------------------------------------------------------------------------------------------------------------------
Aggregate Compensation
from St. Clair $ 931 $ 931 $ 931 $ 931 $ 931 $ 931
(comprised of 11 funds)
- --------------------------------------------------------------------------------------------------------------------------
Pension Retirement
Benefits Accrued as
Part of Fund Expenses None None None None None None
- --------------------------------------------------------------------------------------------------------------------------
Estimated Annual
Benefits upon Retirement None None None None None None
- --------------------------------------------------------------------------------------------------------------------------
Total from the Fund
Complex $40,000 $40,000 $40,000 $40,000 $40,000 $40,000
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
No officer, director or employee of the Advisor, World, the Sub-Advisor,
the Custodian, the Distributor, the Administrator or the Transfer Agent
currently receives any compensation from the Trust, Framlington or the Company.
As of April 28, 2000, the Trustees and officers of the Trust, as a group, owned
less than 1% of all classes of outstanding shares of the Funds of the Trust, the
Trustees and officers of Framlington, as a group, owned less than 1% of all
classes of outstanding shares of the Funds of Framlington except the Emerging
Markets Fund in which Trustees and officers, as a group, owned 1.19% of Class Y
shares of the Fund, and the Directors and officers of the Company, as a group,
owned less than 1% of all classes of outstanding shares of the Funds of the
Company except the Future Technology Fund, the Micro-Cap Fund and the NetNet
Fund in which the Directors and officers, as a group, owned 4.35%, 1.59% and
1.15% of Class Y shares of those Funds, respectively.
James C. Robinson is administrator of a pension plan for employees of
Munder Capital Management, which as of April 28, 2000, owned 9,560 Class Y
shares of the Emerging Markets Fund, 17,214 Class Y shares of the International
Growth Fund, 5,563 Class Y shares of the Micro-Cap Fund, 50,775 Class Y shares
of the Multi-Season Growth Fund, 18,804 Class Y shares of the Real Estate Fund,
24,238 Class Y shares of the Value Fund, 45,291 Class Y shares of the Index 500
Fund, 13,250 Class Y shares of the Small-Cap Value Fund, 45,237 Class Y shares
of the International Bond Fund, 12,782 Class Y shares of the International
Equity Fund and 10,021 Class Y shares of the Small Company Growth Fund, which
represented less than 1% of the outstanding Class Y Shares of those Funds. As of
the same date, the pension plan owned 9,100 Class Y shares of the Healthcare
Fund, 18,063 Class Y shares of the Focus Growth Fund, 8,144 Class Y shares of
the NetNet Fund, 46,237 Class Y shares of the International Bond Fund and
146,976 Class Y shares of the Bond Fund, which represented 1.68%, 2.39%, 1.98%,
1.23% and 1.11%, respectively of the outstanding Class Y shares of those Funds.
As of April 28, 2000, the Advisor owned beneficially 1,173,234.610 of Class
Y shares of the Money Market Fund, which represented 4.19% of the outstanding
Class Y shares of the Fund.
The initial sales charge on Class A shares of the Funds of the Company, the
Trust and Framlington will be waived for full-time employees and retired
employees of the Advisor and individuals with an investment account or
relationship with the Advisor.
Shareholder and Trustee Liability. Under Massachusetts law, shareholders
of a business trust may, under certain circumstances, be held personally liable
for the obligations of the trust. However, the Trust's and Framlington's
Declaration of Trust, as amended, each provide that shareholders shall not be
subject to any personal liability in connection with the assets of the Trust or
Framlington for the acts or obligations of the Trust or Framlington, and that
every note, bond, contract, order or other undertaking made by the Trust or
Framlington shall contain a provision to the effect that the shareholders are
not personally liable thereunder. Each Declaration of
31
<PAGE>
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. Each Declaration of Trust, as amended, also provides that the
Trust and Framlington shall, upon request, assume the defense of any claim made
against any shareholder for any act or obligation of the Trust or Framlington,
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 or Framlington itself would be unable to meet
its obligations.
Each Declaration of Trust, as amended, further provides that all persons
having any claim against the Trustees, the Trust or Framlington shall look
solely to the trust property for payment; that no Trustee of the Trust or
Framlington 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 or Framlington; 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, each 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
and Framlington to the same extent that Trustees are entitled to
indemnification.
INVESTMENT ADVISORY AND OTHER SERVICE ARRANGEMENTS
Investment Advisor, World and Sub-Advisor. The Advisor of each Fund (other
than the Index 500 Fund and the International Equity 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 the
investment advisor to the investment portfolios of the Company on January 31,
1995, upon the closing 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 advisor
business of its indirect subsidiaries, Woodbridge and World Asset Management, to
the Advisor. The general partners of the Advisor are WAM, WAM II and Munder
Group LLC. WAM and WAM II are wholly-owned subsidiaries of Comerica Bank -
Detroit, which in turn. is a wholly-owned subsidiary of Comerica Incorporated, a
publicly-held bank holding company.
The investment advisor for the Index 500 Fund and the International Equity
Fund is World Asset Management, a Delaware limited liability company. World is
a wholly-owned subsidiary of the Advisor.
The Funds have entered into Investment Advisory Agreements (the "Advisory
Agreements") with the Advisor or World which have been approved by the
shareholders.
Under the terms of the Advisory Agreements, the Advisor or World 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 or World, subject
to review by the Trust's and the Company's Boards of Directors/Trustees. Under
the terms of the Advisory Agreement between the Advisor and Framlington, the
Advisor furnishes overall investment management for the Framlington Funds,
provides research and credit analysis, oversees the purchase and sale of
portfolio securities by the Sub-Advisor, maintains books and records with
respect to the Funds' securities transactions and provides periodic and special
reports to the Board of Trustees as requested.
The Advisory Agreements will continue in effect for a period of two years
from their effective dates. 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 Boards of Directors/Trustees 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 such 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 Boards of
32
<PAGE>
Directors/Trustees. Each Advisory Agreement is terminable with respect to a Fund
by vote of the Boards of Directors/Trustees, 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 or World. The Advisor or World may also
terminate its advisory relationship with respect to a Fund without penalty on 90
days' written notice to the Trust, Framlington or the Company, as applicable.
Each Advisory Agreement terminates automatically in the event of its assignment
(as defined in the 1940 Act).
The Sub-Advisor is a subsidiary of Framlington Group Limited, which is
incorporated in England and Wales and, through its subsidiaries, provides a wide
range of investment services. Framlington Group Limited is a wholly owned
subsidiary of Framlington Holdings Limited which is, in turn, owned 49% by the
Advisor and 51% by Credit Commercial de France S.A., a French banking
corporation listed on the Societe des Bourses Francaises.
The Framlington Funds have entered into a Sub-Advisory Agreement with the
Advisor and the Sub-Advisor which has been approved by the shareholders of the
Framlington Funds. Under the terms of the Sub-Advisory Agreement, the Sub-
Advisor provides sub-advisory services to the Framlington Funds. Subject to the
supervision of the Advisor, the Sub-Advisor is responsible for the management of
each Fund's portfolio, including decisions regarding purchases and sales of
portfolio securities by the Framlington Funds. The Sub-Advisor is also
responsible for arranging the execution of portfolio management decisions,
including the selection of brokers to execute trades and the negotiation of
related brokerage commissions.
The Sub-Advisory Agreement, with respect to each Fund, will continue in
effect with respect to each Fund for a period of two years from its effective
date. If not sooner terminated, the Sub-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 who are not parties to the Sub-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) with respect to
a Fund, the vote of a majority of the outstanding voting securities of that
Fund, or (ii) the vote of a majority of the Board of Trustees. The Sub-Advisory
Agreement is terminable by vote of the Board of Trustees, or, with respect to a
Fund, by the holders of a majority of the outstanding voting securities of that
Fund, at any time without penalty, on 60 days' written notice to the Sub-
Advisor, or by the Advisor on 90 days' written notice to the Sub-Advisor. The
Sub-Advisor may also terminate its sub-advisory relationship with a Fund without
penalty on 90 days' written notice to Framlington. The Sub-Advisory Agreement
terminates automatically in the event of its assignment (as defined in the 1940
Act).
For the advisory services provided and expenses assumed by it, the Advisor
has agreed to a fee from each Fund computed daily and payable monthly at the
rates set forth below:
1.25% of average daily net assets
. Emerging Markets Fund**
1.00% of the first $500 million of average daily net assets and .75%
of net assets in excess of $500 million
. Multi-Season Fund*
1.00% of the first $250 million of average daily net assets and .75%
of net assets in excess of $250 million
. International Growth Fund**
. Healthcare Fund**
1.00% of average daily net assets
. Future Technology Fund**
. Micro-Cap Fund**
. NetNet Fund**
33
<PAGE>
.75% of average daily net assets
. Focus Growth Fund
. Global Financial Services Fund**
. Equity Income Fund
. Growth Opportunities Fund**
. International Equity Fund
. Small-Cap Value Fund
. Small Company Growth Fund
.74% of average daily net assets
. Real Estate Fund
. Value Fund
.65% of average daily net assets
. Balanced Fund
.50% of average daily net assets
. Bond Fund
. Intermediate Bond Fund
. International Bond Fund
. U.S. Income Fund
. Michigan Bond Fund
. Tax-Free Bond Fund
. Tax-Free Short-Intermediate Bond Fund
.40% of average daily net assets
. Money Market Fund
.35% of average daily net assets
. Cash Investment Fund
. Tax-Free Money Market Fund
. U.S. Treasury Money Market Fund
_________________________________
* The Advisor expects to receive, after waivers, an advisory fee at the
annual rate of .75% of average daily net assets of Multi-Season Fund during
the current fiscal year.
** The Advisor expects to voluntarily reimburse expenses during the current
fiscal year with respect to Future Technology Fund, Growth Opportunities
Fund, Micro-Cap Fund, NetNet Fund, International Growth Fund, Emerging
Markets Fund, Healthcare Fund and Global Financial Services Fund.
The Advisor may discontinue such fee waivers and/or expense reimbursements
at any time, in its sole discretion.
The Advisor pays the Sub-Advisor a monthly fee equal on an annual basis to
up to 0.50% of average daily net assets up to $250 million, reduced to .375% of
average daily net assets in excess of $250 million for the International Growth
Fund and the Healthcare Fund, up to .625% of average daily net assets for the
Emerging Markets Fund and .375% of average daily net assets for the Global
Financial Services Fund.
For the advisory services provided and expenses assumed by it, World has
agreed to a fee from each Fund computed daily and payable monthly at the rates
set forth below:
.20% of the first $250 million of average daily net assets;
0.12% of the next $250 million of net assets
and .07% of net assets in excess of $500 million
. Index 500 Fund
34
<PAGE>
.75% of average daily net assets
. International Equity Fund
For the fiscal year ended June 30, 1997 (and for the period from
commencement of operations through June 30, 1997 for the International Growth,
Emerging Markets, Healthcare, Micro-Cap, Small-Cap Value and International Bond
Funds), the Advisor received fees after waivers, if any, of $445,259 for the
Balanced Fund, $1,650,704 for the Equity Income Fund, $249,764 for the Index 500
Fund, $1,720,496 for the International Equity Fund, $1,884,242 for the Small
Company Growth Fund, $751,954 for the Bond Fund, $2,554,647 for the Intermediate
Bond Fund, $1,175,733 for the U.S. Income Fund, $132,451 for the Michigan Bond
Fund, $1,006,688 for the Tax-Free Bond Fund, $1,584,769 for the Tax-Free Short-
Intermediate Bond Fund, $3,454,159 for the Cash Investment Fund, $879,155 for
the Tax-Free Money Market Fund, $1,101,183 for the U.S. Treasury Money Market
Fund, $3,189,742 for the Multi-Season Fund, $259,015 for the Real Estate Fund,
$599,286 for the Money Market Fund, $401,505 for the Value Fund, $71,843 for the
International Growth Fund, $25,210 for the Emerging Markets Fund, $11,440 for
the Healthcare Fund, $6,479 for the Micro-Cap Equity Fund, $20,442 for the
Small-Cap Value Fund and $143,476 for the International Bond Fund.
For the fiscal year ended June 30, 1998 (and for the period from
commencement of operations through June 30, 1998 for the Global Financial
Services Fund and Growth Opportunities Fund), the Advisor received fees after
waivers, if any, of $524,133 for the Balanced Fund, $1,900,685 for the Equity
Income Fund, $884,003 for the Index 500 Fund, $1,628,425 for the International
Equity Fund, $3,045,349 for the Small Company Growth Fund, $1,116,093 for the
Bond Fund, $2,770,357 for the Intermediate Bond Fund, $1,386,132 for the U.S.
Income Fund, $261,589 for the Michigan Bond Fund, $1,017,292 for the Tax-Free
Bond Fund, $1,542,255 for the Tax-Free Short-Intermediate Bond Fund, $3,750,786
for the Cash Investment Fund, $1,075,987 for the Tax-Free Money Market Fund,
$470,094 for the U.S. Treasury Money Market Fund, $6,169,411 for the Multi-
Season Fund, $612,857 for the Real Estate Fund, $454,600 for the Money Market
Fund, $1,066,142 for the Value Fund, $516,840 for the International Growth Fund,
$554,427 for the Emerging Markets Fund, $143,897 for the Healthcare Fund,
$304,989 for the Micro-Cap Equity Fund, $1,028,013 for the Small-Cap Value Fund,
$253,258 for the International Bond Fund, $62,684 for NetNet Fund, $302 for the
Global Financial Services Fund and $193 for the Growth Opportunities Fund.
For the fiscal year ended June 30, 1999 (and for the period of commencement
of operations through June 30, 1999 for the Focus Growth Fund) the Advisor
received fees after waivers, if any, of $417,501 for the Balanced Fund, $50,364
for the Focus Growth Fund, $1,851,765 for the Equity Income Fund, $19,294 for
the Growth Opportunities Fund $681,461 for the Index 500 Fund, $1,537,543 for
the International Equity Fund, $432,863 for the Micro-Cap Equity Fund,
$5,611,477 for the Multi-Season Fund, $8,434,195 for NetNet Fund, $652,005 for
the Real Estate Fund, $1,022,524 for the Small-Cap Value Fund, $2,558,572 for
the Small Company Growth Fund, $1,187,734 for the Value Fund, $1,323,141 for the
Bond Fund, $2,847,670 for the Intermediate Bond Fund, $270,236 for the
International Bond Fund, $345,389 for the Michigan Bond Fund, $971,168 for the
Tax-Free Bond Fund, $1,511,012 for the Tax-Free Short-Intermediate Bond Fund,
$1,506,263 for the U.S. Income Fund, $4,450,033 for the Cash Investment Fund,
$514,285 for the Money Market Fund, $1,188,449 for the Tax-Free Money Market
Fund, $334,833 for the U.S. Treasury Money Market Fund, $626,144 for the
International Growth Fund, $538,218 for the Emerging Markets Fund, $192,182 for
the Healthcare Fund and $18,413 for the Global Financial Services Fund.
For the fiscal year ended June 30, 1997 the Advisor voluntarily waived
advisory fees and/or reimbursed expenses in the amounts of $1,063,248 for the
Multi-Season Fund, $10,143 for the Real Estate Fund, $17,688 for the Value Fund,
$360,721 for the Index 500 Fund and $51,815 for the Michigan Bond Fund.
For the fiscal year ended June 30, 1998, the Advisor voluntarily waived
advisory fees and/or reimbursed expenses in the amounts of $421,846 for the
Index 500 Fund, $75,264 for the Micro-Cap Equity Fund, $1,214,795 for the Multi-
Season Growth Fund, $110,473 for the Emerging Markets Fund, $112,541 for the
Healthcare Fund, $105,456 for the International Growth Fund, $33,890 for the
NetNet Fund and $2 for the Growth Opportunities Fund.
35
<PAGE>
For the fiscal year ended June 30, 1999, the Advisor voluntarily waived
advisory fees and/or reimbursed expenses in the amounts of $12,414 for the
Growth Opportunities Fund, $1,778,650 for the Index 500 Fund, $50,658 for the
Micro-Cap Equity Fund, $1,250,000 for the Multi-Season Growth Fund, $118,477 for
the Emerging Markets Fund, $59,761 for the Healthcare Fund, $93,638 for the
International Growth Fund and $0 for the NetNet Fund.
Distribution Agreements. The Trust, Framlington 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, Class C and Class II
Shares. Each Fund has adopted a Service 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 (except the Future Technology Fund) has also
adopted Service and Distribution Plans 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 Service and Distribution Plans for Class II Shares with respect to the
Future Technology Fund, Focus Growth Fund, Growth Opportunities Fund and Global
Financial Services Fund, the Distributor is paid an annual service fee of up to
0.25% of the value of average daily net assets of the Class II 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 II 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 Boards of Directors/Trustees, including a
majority of the Directors/Trustees who are not interested persons of the Trust,
Framlington 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 Directors/Trustees 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 (as defined in the 1940 Act)
of the relevant class of the respective Fund on not more than 30 days' written
notice to the Distributor of the Plan. Pursuant to each Plan, the Distributor
will provide the Boards of Directors/Trustees periodic reports of amounts
expended under the Plan and the purpose for which such expenditures were made.
The Directors/Trustees have determined that the Plans will benefit the
Trust, Framlington, 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) retaining 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. With respect to Class II Class Shares
of the Future Technology Fund, Focus Growth Fund, Growth Opportunities Fund and
Global Financial Services Fund, the Distributor expects to pay sales commissions
to dealers authorized to sell the Funds' Class II Shares at the time of sale.
The Distributor will use its own funds (which may be borrowed) to pay such
36
<PAGE>
commissions pending reimbursement by the relevant 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.
Fees paid to the Distributor Pursuant to Class A Service Plans for the last
three fiscal years.
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
6/30/97 6/30/98 6/30/99
----------------------------------------
Funds of the Trust
Balanced Fund $ 981 $ 1,274 $ 2,752
Bond Fund $ 2,203 $ 2,735 $ 5,031
Cash Investment Fund $ 0 $269,773 $318,257
Equity Income Fund $ 5,324 $ 14,520 $ 14,718
Index 500 Fund $ 48,763 $140,154 $668,669
Intermediate Bond Fund $ 13,919 $ 17,654 $ 22,016
International Equity Fund $ 13,505 $ 15,618 $ 16,677
Michigan Bond Fund $ 1,206 $ 2,067 $ 5,390
Small Company Growth Fund $ 17,843 $ 59,251 $ 52,064
Tax-Free Bond Fund $ 1,206 $ 7,966 $ 6,166
Tax-Free Short-Intermediate Bond $ 14,678 $ 17,556 $ 16,189
Fund
Tax-Free Money Market Fund $ 0 $154,996 $177,079
U.S. Income Fund $ 0 $ 9,378
U.S. Treasury Money Market Fund $ 0 $ 6,581 $ 28,349
Funds of the Company
Focus Growth Fund N/A N/A $ 0****
Growth Opportunities Fund N/A $ 0** $ 0****
International Bond Fund $ 39* $ 400 $ 813
Micro-Cap Fund $ 79* $ 14,218 $ 19,674
Money Market Fund $ 1,198* $ 31,560 $ 45,127
Multi-Season Fund $ 30,811 $ 55,691 $100,839
NetNet Fund N/A $ 2,066 $839,394
Real Estate Fund $ 1,559 $ 6,769 $ 7,993
Small-Cap Value Fund $ 558* $ 10,714 $ 15,374
Value Fund $ 2,347 $ 10,919 $ 12,320
Funds of Framlington
Emerging Markets Fund $ 285 $ 1,804 $ 1,134
Global Financial Services Fund N/A $ 0** $ 0****
Healthcare Fund $ 241 $ 7,066 $ 10,366
International Growth Fund $ 759 $ 3,287 $ 5,139
____________________________________
* Figures reflect period from commencement of operations through June 30,
1997.
** As of June 30, 1998, the Growth Opportunities Fund and the Global Financial
Services Fund had not commenced selling of Class A Shares.
**** As of June 30, 1999, the Focus Growth Fund, Growth Opportunities Fund and
the Global Financial Services Fund had not commenced selling of Class A
Shares.
37
<PAGE>
Fees paid to the Distributor Pursuant to Class B Service and Distribution Plans
for the last three fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES CDSCs FEES CDSCs FEES CDSCs
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $ 1,249 $ 0.00 $ 3,890 $ 1,004 $ 9,120 $ 909
Bond Fund $ 5,482 $ 447.26 $ 6,329 $ 245 $ 15,696 $ 2,354
Equity Income Fund $ 3,519 $ 535.41 $ 10,447 $ 2,013 $ 24,950 $ 4,389
Index 500 Fund $153,426 $ 0.00 $421,479 $51,363 $1,928,910 $ 146,960
Intermediate Bond Fund $ 2,627 $ 0.00 $ 5,683 $ 1,556 $ 22,201 $ 9,978
International Equity Fund $ 10,398 $ 318.86 $ 11,221 $ 2,246 $ 9,592 $ 4,257
Michigan Bond Fund $ 2,779 $ 0.00 $ 4,234 $ 27 $ 6,916 $ 434
Small Company Growth Fund $21, 679 $ 930.13 $107,506 $ 6,931 $ 107,763 $ 36,705
Tax-Free Bond Fund $ 566 $ 0.00 $ 3,552 $ 50 $ 7,353 $ 428
Tax-Free Short-
Intermediate Bond Fund $ 1,782 $ 0.00 $ 3,575 $ 0 $ 9,837 $ 652
U.S. Income Fund $ 13,452 $ 0.00 $ 12,408 $ 1 $ 35,222 $ 3,037
Funds of the Company
Focus Growth Fund N/A N/A N/A N/A $ 0**** $ 0
Growth Opportunities Fund N/A N/A $ 0*** $ 0 $ 0**** $ 0
International Bond Fund $ 11* $ 0.00 $ 401 $ 0 $ 1,342 $ 0
Micro-Cap Fund $ 513* $ 0.00 $ 81,387 $18,345 $ 127,395 $ 50,177
Money Market Fund $ 1,925 $ 711.20 $ 7,836 $ 2,888 $ 47,860 $ 77,825
Multi-Season Fund $ 27,446 $ 0.00 $942,437 $57,921 $ 948,914 $ 41,704
NetNet Fund N/A N/A $ 1,359** $ 0 $3,635,986 $1,584,021
Real Estate Fund $731,958 $26,020.64 $ 63,758 $ 6,409 $ 56,177 $ 22,385
Small-Cap Value Fund $ 648* $ 0.00 $ 15,054 $ 590 $ 28,749 $ 6,116
Value Fund $ 2,689 $ 0.00 $ 15,819 $ 129 $ 21,110 $ 8,889
Funds of Framlington
Emerging Markets Fund $ 95* $ 0.00 $ 4,169 $ 1,670 $ 4,912 $ 22,506
Global Financial Services
Fund N/A N/A $ 0*** $ 0 $ 0**** $ 0
Healthcare Fund $ 1,240* $ 0.00 $ 42,842 $ 7,556 $ 75,939 $ 43,628
International Growth Fund $ 175* $ 0.00 $ 2,170 $ 190 $ 5,792 $ 15,508
</TABLE>
_____________________________________
* Figures reflect period from commencement of operations through June 30,
1997.
** Figures reflect period from commencement of operations through June 30,
1998.
*** As of June 30, 1998, the Growth Opportunities Fund and the Global Financial
Services Fund had not commenced selling of Class B Shares.
**** As of June 30, 1999, the Focus Growth Fund, the Growth Opportunities Fund
and the Global Financial Services Fund had not commenced selling of Class B
Shares.
38
<PAGE>
Fees paid to the Distributor Pursuant to Class C Service and Distribution Plans
for the last three fiscal years.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
JUNE 30, 1997 JUNE 30, 1998 JUNE 30, 1999
DISTRIBUTION DISTRIBUTION DISTRIBUTION
AND SERVICE AND SERVICE AND SERVICE
FEES CDSCs FEES CDSCs FEES CDSCs
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $ 337 $ 0.00 $ 880 $ 29 $ 1,491 $ 36
Bond Fund $ 787 $ 0.00 $ 1,545 $ 862 $ 2,689 $ 0
Equity Income Fund $ 2,683 $ 0.00 $ 7,781 $ 67 $ 9,852 $ 2,098
Index 500 Fund N/A* N/A N/A*** N/A N/A**** N/A
Intermediate Bond Fund $ 1,136 $ 0.00 $ 1,584 $ 7,747 $ 2,423 $ 436
International Equity Fund $18,452 $ 0.00 $ 23,594 $11,988 $ 17,822 $ 259
Michigan Bond Fund $ 568 $ 0.00 $ 747 $ 0 $ 2,242 $ 2,946
Small Company Growth Fund $13,938 $212.00 $ 51,322 $13,088 $ 47,642 $ 4,471
Tax-Free Bond Fund N/A* N/A $ 396 $ 0 $ 666 $ 10
Tax-Free Short-
Intermediate Bond Fund N/A* N/A N/A*** N/A $ 316 $ 0
U.S. Income Fund $ 93 $ 0.00 $ 268 $ 35 $ 6,931 $ 0
Funds of the Company
Focus Growth Fund N/A N/A N/A N/A $ 0**** $ 0
Growth Opportunities Fund N/A N/A $ 0*** $ 0 $ 0**** $ 0
International Bond Fund N/A* N/A $ 2 $ 0 $ 491 $ 0
Micro-Cap Fund $ 48** $ 0.00 $ 42,988 $24,200 $ 57,284 $ 6,445
Money Market Fund $ 5,932 $ 0.00 $ 13,170 $ 3 $ 15,411 $ 11,034
Multi-Season Fund $73,808 $391.84 $112,333 $ 556 $ 125,706 $ 1,353
NetNet Fund N/A N/A N/A*** N/A $1,370,510 $235,208
Real Estate Fund $1, 829 $ 2.38 $ 10,810 $ 261 $ 12,460 $ 594
Small-Cap Value Fund $ 223** $ 0.00 $ 9,109 $ 159 $ 17,721 $ 719
Value Fund $ 4,397 $ 0.00 $ 8,593 $ 23 $ 12,058 $ 795
Funds of Framlington
Emerging Markets Fund $ 49** $ 0.00 $ 448 $ 0 $ 3,029 $ 75
Global Financial Services Fund $ 0*** $ 0 $ 0**** $ 0
Healthcare Fund $ 125** $ 0.00 $ 20,953 $ 474 $ 23,360 $ 446
International Growth Fund $ 63** $ 0.00 $ 1,303 $ 142 $ 1,744 $ 46
</TABLE>
___________________________________
* As of June 30, 1997, the following funds had not commenced selling Class C
Shares: Index 500 Fund, Tax-Free Bond Fund, Tax-Free Short-Intermediate
Bond Fund and International Bond Fund.
** Figures reflect period from commencement of operations through June 30,
1997.
*** As of June 30, 1998, the Growth Opportunities Fund, the Index 500 Fund, the
Tax-Free Short-Intermediate Bond Fund, the NetNet Fund and the Global
Financial Services Fund had not commenced selling Class C shares.
**** As of June 30, 1999, the Focus Growth Fund, the Growth Opportunities Fund,
the Global Financial Services Fund and the Index 500 Fund had not commenced
selling Class C Shares.
39
<PAGE>
The following amounts were paid by each Fund under its Class B Service and
Distribution Plans during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Printing and
Mailing of
Prospectuses to Interest
other than Compensation Carrying or
Current Compensation to Compensation to to Sales other Financing
Advertising Shareholders Underwriters Dealers Personnel Charges
----------- ------------ ------------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $0 $0 $0 $ 748 $0 $ 996
Bond Fund $0 $0 $0 $ 1,284 $0 $ 1,071
Equity Income Fund $0 $0 $0 $ 2,588 $0 $ 2,428
Index 500 Fund $0 $0 $0 $ 94,747 $0 $106,915
Intermediate Bond Fund $0 $0 $0 $ 2,168 $0 $ 1,075
International Equity Fund $0 $0 $0 $ 1,970 $0 $ 126
Michigan Bond Fund $0 $0 $0 $ 917 $0 $ 560
Small Company Growth Fund $0 $0 $0 $ 12,870 $0 $ 16,264
Tax-Free Bond Fund $0 $0 $0 $ 1,002 $0 $ 74
Tax-Free Short- $0 $0 $0 $ 1,186 $0 $ 905
Intermediate Bond Fund
U.S. Income Fund $0 $0 $0 $ 4,955 $0 $ 1,196
Funds of the Company
Focus Growth Fund $0 $0 $0 $ 0 $0 $ 0
Growth Opportunities Fund $0 $0 $0 $ 0 $0 $ 0
International Bond Fund $0 $0 $0 $ 80 $0 $ 224
Micro-Cap Fund $0 $0 $0 $ 6,651 $0 $ 27,021
Money Market Fund $0 $0 $0 $ 7,927 $0 $ (2,680)
Multi-Season Fund $0 $0 $0 $179,401 $0 $(34,486)
NetNet Fund $0 $0 $0 $ 6,407 $0 $566,975
Real Estate Fund $0 $0 $0 $ 7,973 $0 $ 6,229
Small-Cap Value Fund $0 $0 $0 $ 2,015 $0 $ 5,437
Value Fund $0 $0 $0 $ 2,635 $0 $ 1,581
Funds of Framlington
Emerging Markets Fund $0 $0 $0 $ 245 $0 $ 1,297
Global Financial Services Fund $0 $0 $0 $ 0 $0 $ 0
Healthcare Fund $0 $0 $0 $ 5,306 $0 $ 13,807
International Growth Fund $0 $0 $0 $ 448 $0 $ 871
</TABLE>
40
<PAGE>
The following amounts were paid by each Fund under its Class C Service and
Distribution Plans during the fiscal year ended June 30, 1999.
<TABLE>
<CAPTION>
Printing and
Mailing of Interest
Prospectuses Carrying or
to other than Compensation Compensation other
Current to Compensation to to Sales Financing
Advertising Shareholders Underwriters Dealers Personnel Charges
----------- ------------ ------------ ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Funds of the Trust
Balanced Fund $0 $0 $0 $ 585 $0 $ 2
Bond Fund $0 $0 $0 $ 233 $0 $ (48)
Equity Income Fund $0 $0 $0 $ 3,134 $0 $ (311)
Index 500 Fund $0 $0 $0 $ 0 $0 $ 0
Intermediate Bond Fund $0 $0 $0 $ 755 $0 $ 1,509
International Equity Fund $0 $0 $0 $14,810 $0 $ (550)
Michigan Bond Fund $0 $0 $0 $ 551 $0 $ 38
Small Company Growth Fund $0 $0 $0 $19,905 $0 $ 17
Tax-Free Bond Fund $0 $0 $0 $ 370 $0 $ (1)
Tax-Free
Short-Intermediate Bond Fund $0 $0 $0 $ 59 $0 $ 1
U.S. Income Fund $0 $0 $0 $ 808 $0 $ (66)
Funds of the Company
Focus Growth Fund $0 $0 $0 $ 0 $0 $ 0
Growth Opportunities Fund $0 $0 $0 $ 0 $0 $ 0
International Bond Fund $0 $0 $0 $ 1 $0 $ 12
Micro-Cap Fund $0 $0 $0 $16,382 $0 $ 588
Money Market Fund $0 $0 $0 $12,594 $0 $ (229)
Multi-Season Fund $0 $0 $0 $86,990 $0 $(3,092)
NetNet Fund** $0 $0 $0 $ 3,086 $0 $46,927
Real Estate Equity
Investment Fund $0 $0 $0 $ 4,654 $0 $ 37
Small-Cap Value Fund $0 $0 $0 $ 2,791 $0 $ 569
Value Fund $0 $0 $0 $ 5,222 $0 $ (73)
Funds of Framlington
Emerging Markets Fund $0 $0 $0 $ 123 $0 $ 147
Global Financial Services Fund $0 $0 $0 $ 0 $0 $ 0
Healthcare Fund $0 $0 $0 $10,522 $0 $ (137)
International Growth Fund $0 $0 $0 $ 581 $0 $ 1
</TABLE>
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, Framlington 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 0.25% (on
an annualized basis) of the average daily net assets of the Class K Shares
beneficially owned by the Customers.
41
<PAGE>
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, Framlington 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, Framlington's or the Company's arrangements with
institutions; and (x) providing such other similar services as the Trust,
Framlington 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, Framlington's and the Company's agreements with
such institutions, the Boards of Directors/Trustees will review, at least
quarterly, a written report of the amounts expended under Trust's, Framlington'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 Directors/Trustees, including a
majority of the Directors/Trustees 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 Directors/Trustees 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.
Administrator. State Street Bank and Trust Company ("State Street" or the
"Administrator"), whose principal business address is 225 Franklin Street,
Boston, Massachusetts, 02110, serves as administrator for the Trust, Framlington
and the Company pursuant to administration agreements (each, an "Administration
Agreement"). State Street has agreed to maintain office facilities for the
Trust, Framlington and the Company; oversee the computation of each Fund's net
asset value, net income and realized capital gains, if any; furnish statistical
and research data, clerical services, and stationery and office supplies;
prepare and file various reports with the appropriate regulatory agencies; and
prepare various materials required by the SEC. State Street may enter into an
agreement with one or more third parties pursuant to which such third parties
will provide administrative services on behalf of the Funds.
Each Administration Agreement provides that the Administrator performing
services thereunder shall not be liable under the Agreement except for its bad
faith, negligence or willful misconduct in the performance of its duties and
obligations thereunder.
Prior to November 1, 1997, PFPC Inc. (formerly First Data Investor Services
Group, Inc.) located at 4400 Computer Drive, Westborough, Massachusetts 01581
served as administrator to the Funds.
For the fiscal year ended June 30, 1997, the administration fees of PFPC
Inc. accrued were: Balanced Fund - $77,364; Equity Income Fund - $248,644; Index
500 Fund - $405,016; International Equity Fund - $259,162; Small Company Growth
Fund - $283,755; Bond Fund - $169,932; Intermediate Bond Fund - $577,425; U.S.
Income Fund - $265,637; Michigan Bond Fund - $41,620; Tax-Free Bond Fund -
$227,508; Tax-Free Short-Intermediate Bond Fund - $358,214; Cash Investment Fund
- - $1,115,110; Tax-Free Money Market Fund - $283,803; $480,310-Multi-Season Fund;
$39,493-Real Estate Fund, $169,405-Money Market Fund, $61,224-Value Fund and
U.S. Treasury Money Market Fund - $355,592, respectively.
For the period from commencement of operations through June 30, 1997,
administration fees of PFPC Inc. accrued were $9,644 - Emerging Markets Fund;
$9,644 - Healthcare Fund, $9,644 - International Growth Fund, $730 - Micro-Cap
Fund; $14,220 - Small-Cap Value Fund; and $32,343 - International Bond
Fund.
42
<PAGE>
For the period July 1, 1997 through October 31, 1997, administration fees
to PFPC Inc. accrued were: $14,689 for Balanced Fund, $29,146 for Bond Fund,
$184,587 for Cash Investment Fund, $47,089 for Equity Income Fund, $109,244 for
Index 500 Fund, $95,635 for Intermediate Bond Fund, $42,940 for International
Equity Fund, $8,786 for Michigan Bond Fund, $68,964 for Small Company Growth
Fund, $37,599 for Tax-Free Bond Fund, $56,420 for Tax-Free Short-Intermediate
Bond Fund, $53,524 for Tax-Free Money Market Fund, $49,187 for U.S. Income Fund,
$39,194 for U.S. Treasury Money Market Fund, $9,604 for International Bond Fund,
$2,199 for Micro-Cap Fund, $23,555 for Money Market Fund, $104,045 for Multi-
Season Fund, $631 for NetNet Fund, $12,483 for Real Estate Fund, $19,515 for
Small Cap Value Fund, $20,603 for Value Fund, $6,740 for International Growth
Fund, $6,740 for Emerging Markets Fund, and $6,740 for Healthcare Fund.
For the period November 1, 1997 through June 30, 1998, administration fees
of State Street accrued were: $27,469 for Balanced Fund, $86,722 for Bond Fund,
$374,880 for Cash Investment Fund, $85,474 for Equity Income Fund, $235,148 for
Index 500 Fund, $193,688 for Intermediate Bond Fund, $70,559 for International
Equity Fund, $18,511 for Michigan Bond Fund, $142,877 for Small Company Growth
Fund, $68,797 for Tax-Free Bond Fund, $104,833 for Tax-Free Short-Intermediate
Bond Fund, $106,966 for Tax-Free Money Market Fund, $95,641 for U.S. Income
Fund, $32,072 for U.S. Treasury Money Market Fund, $16,884 for International
Bond Fund, $13,505 for Micro-Cap Fund, $36,373 for Money Market Fund, $240,139
for Multi-Season Fund, $2,614 for NetNet Fund, $30,617 for Real Estate Fund,
$51,728 for Small Cap Value Fund, $54,313 for Value Fund, $13 for Growth
Opportunities Fund, $19,511 for International Growth Fund, $16,445 for Emerging
Markets Fund, $5,819 for Healthcare Fund, and $15 for Global Financial Services
Fund.
For the fiscal year ended June 30, 1999, administration fees of State
Street accrued were: $68,581 for Balanced Fund, $282,194 for Bond Fund,
$1,375,320 for Cash Investment Fund, $262,917 for Equity Income Fund, $1,009,569
for Index 500 Fund, $606,823 for Intermediate Bond Fund, $218,250 for
International Equity Fund, $73,705 for Michigan Bond Fund, $363,930 for Small
Company Growth Fund, $206,804 for Tax-Free Bond Fund, $321,790 for Tax-Free
Short-Intermediate Bond Fund, $361,566 for Tax-Free Money Market Fund, $321,496
for U.S. Income Fund, $102,073 for U.S. Treasury Money Market Fund, $57,684 for
International Bond Fund, $46,203 for Micro-Cap Fund, $137,095 for Money Market
Fund, $796,216 for Multi-Season Fund, $895,909 for NetNet Fund, $94,060 for Real
Estate Fund, $145,544 for Small Cap Value Fund, $171,327 for Value Fund, $2,743
for Growth Opportunities Fund, $66,652 for International Growth Fund, $45,835
for Emerging Markets Fund, $20,469 for Healthcare Fund, $2,479 for Global
Financial Services Fund and $7,147 for Focus Growth Fund.
Custodian. State Street serves as the custodian (the "Custodian") to the
Funds pursuant to custodian agreements (each, a "Custodian Contract") between
State Street and the Company, the Trust and Framlington, respectively. State
Street is also the custodian with respect to the custody of foreign securities
held by the Funds. State Street has in turn entered into additional agreements
with financial institutions located in foreign countries with respect to the
custody of such securities. Under the Custodian Contracts, State Street (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 Directors/Trustees concerning
the Funds' operations.
Transfer and Dividend Disbursing Agent. PFPC Inc. (the "Transfer Agent")
serves as the transfer and dividend disbursing agent for the Funds pursuant to
transfer agency agreements with the Trust, Framlington and the Company,
respectively, under which Investor Services Group (i) issues and redeems shares
of each Fund, (ii) addresses and mails all communications by each Fund to its
record owners, including reports to shareholders, dividend and distribution
notices and proxy materials for its meetings of shareholders, (iii) maintains
shareholder accounts, (iv) responds to correspondence by shareholders of the
Funds and (v) makes periodic reports to the Boards Directors/Trustees concerning
the operations of each Fund.
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
43
<PAGE>
publicly-held bank holding company), its affiliates and subsidiaries and other
institutions that have entered into agreements with the Company, the Trust and
Framlington providing for shareholder services for their customers.
Other Information Pertaining to Administration, Custodian and Transfer
Agency Agreements. Except as noted in this SAI 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, World, Sub-Advisor,
Administrator, Custodian and Transfer Agent; fees and expenses of officers and
Boards of Directors/Trustees; taxes; interest; legal and auditing fees;
brokerage fees and commissions; certain fees and expenses in registering and
qualifying the Fund and its shares for distribution under Federal and state
securities laws; expenses of preparing prospectuses and statements of additional
information and of printing and distributing prospectuses and statements of
additional information to existing shareholders; the expense of reports to
shareholders, shareholders' meetings and proxy solicitations; fidelity bond and
directors' and officers' liability insurance premiums; and the expense of using
independent pricing services. Any general expenses of the Trust, Framlington or
the Company that are not readily identifiable as belonging to a particular
investment portfolio of the Trust, Framlington or the Company are allocated
among all investment portfolios of the Trust, Framlington or the Company by or
under the direction of the Boards of Directors/Trustees in a manner that the
Boards determine to be fair and equitable. The Advisor, World, Sub-Advisor,
Administrator, Custodian and Transfer Agent may voluntarily waive all or a
portion of their respective fees from time to time.
CODE OF ETHICS
The Company, the Trust, Framlington, Advisor, World, Sub-Advisor and the
Distributor each have adopted a code of ethics as required by applicable law,
which is designed to prevent affiliated persons of the Company, the Trust,
Munder Framlington, Advisor, World, Sub-Advisor and the Distributor from
engaging in deceptive, manipulative or fraudulent activities in connection with
securities held or to be acquired by the Funds (which may also be held by
persons subject to a code of ethics). There can be no assurance that the codes
of ethics will be effective in preventing such activities. Each code of ethics
may be examined at the office of the SEC in Washington, D.C. or on the Internet
from the SEC's website at http:/www.sec.gov.
PORTFOLIO TRANSACTIONS
Subject to the general supervision of the Boards of Directors/Trustees, the
Advisor, World or the Sub-Advisor, as the case may be, makes decisions with
respect to and places orders for all purchases and sales of portfolio securities
for the Funds.
Transactions on U.S. stock exchanges involve the payment of negotiated
brokerage commissions. On exchanges on which commissions are negotiated, the
cost of transactions may vary among different brokers. Transactions on foreign
stock exchanges involve payment for brokerage commissions which are generally
fixed.
Over-the-counter issues, including corporate debt and government
securities, are normally traded through dealers on a "net" basis (i.e., without
commission), or directly with the issuer. With respect to over-the-counter
transactions, the Advisor, World or the Sub-Advisor, as the case may be, will
normally deal directly with dealers who make a market in the instruments except
in those circumstances where more favorable prices and execution are available
elsewhere. The cost of 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, World or
the Sub-Advisor, as the case may be, 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
44
<PAGE>
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
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.
Each Fund's portfolio turnover rate is included in the prospectuses under
the section entitled "Financial Highlights."
In its Advisory Agreements, the Advisor and World and, in the case of the
Framlington Funds, the Sub-Advisor pursuant to the Sub-Advisory Agreement each
agree to select broker-dealers in accordance with guidelines established by the
Boards of Directors/Trustees from time to time and in accordance with applicable
law. In assessing the terms available for any transaction, the Advisor, World
or the Sub-Advisor, as the case may be, 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 and Sub-
Advisory Agreements authorize the Advisor, World or the Sub-Advisor, as the case
may be, subject to the prior approval of the Boards of Directors/Trustees, 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, World or
the Sub-Advisor, as the case may be, 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, World or
the Sub-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, World or the Sub-
Advisor, as the case may be, and does not reduce the advisory fees payable to
the Advisor, World or the Sub-Advisor by the Funds. It is possible that certain
of the supplementary research or other services received will primarily benefit
one or more other investment companies or other accounts for which investment
discretion is exercised. Conversely, 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.
The table below shows information on brokerage commissions paid by the
Funds. For the fiscal year ended June 30, 1997:
<TABLE>
<CAPTION>
% of Brokerage Commission
$ Amount Brokerage Representing Research $ Amount of Transactions
Commission Services Involving Research Services
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $ 57,518 30.47% $ 17,526
Equity Income Fund $386,237 21.02% $ 81,184
Index 500 Fund $ 71,050 0.00% $ 0
International Equity Fund $101,527 0.00% $ 0
Small Company Growth Fund $852,094 3.72% $ 31,719
Micro-Cap Fund* $ 8,813 3.85% $ 339
Multi-Season Fund $366,341 31.40% $115,038
Real Estate Fund $ 3,649 2.96% $ 108
Small Cap Value Fund* $ 67,889 7.81% $ 5,304
Value Fund* $ 83,242 11.04% $ 9,192
International Growth Fund* $232,163 28.39% $ 65,918
Emerging Markets Fund* $ 87,174 1.09% $ 946
Healthcare Fund* $ 36,584 1.29% $ 472
</TABLE>
__________________________
*For the period from commencement of operations through June 30, 1997
45
<PAGE>
The table below shows information on brokerage commissions paid by the Funds.
For the fiscal year ended June 30, 1998:
<TABLE>
<CAPTION>
% of Brokerage Commission
$ Amount Brokerage Representing Research $ Amount of Transactions
Commission Services Involving Research Services
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $ 73,143 6.55% $ 4,793
Equity Income Fund $ 431,055 11.01% $47,460
Index 500 Fund $ 41,022 0.00% $ 0
International Equity Fund $ 135,364 0.00% $ 0
Small Company Growth Fund $1,860,600 1.68% $31,342
Micro-Cap Fund $ 599,304 1.26% $ 7,561
Multi-Season Fund $ 566,155 9.80% $55,508
NetNet Fund $ 86,894 0.00% $ 0
Real Estate Fund $ 102,670 0.00% $ 0
Small Cap Value Fund $ 437,217 3.27% $14,300
Value Fund $ 557,514 3.27% $18,204
Growth Opportunities Fund* $ 2,152 0.00% $ 0
International Growth Fund $ 252,419 6.84% $17,273
Emerging Markets Fund $ 430,410 1.46% $ 6,274
Healthcare Fund $ 20,464 5.97% $ 1,221
Global Financial Services Fund* $ 3,342 0.00% $ 0
</TABLE>
______________________
*For the period from commencement of operations through June 30, 1998
The table below shows information on brokerage commissions paid by the Funds.
For the fiscal year ended June 30, 1999:
<TABLE>
<CAPTION>
% of Brokerage Commission
$ Amount Brokerage Representing Research $ Amount of Transactions
Commission Services Involving Research Services
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balanced Fund $ 148,930 2.29% $ 3,404
Equity Income Fund $ 339,050 10.01% $33,930
Index 500 Fund $ 78,429 0.00% $ -
International Equity Fund $ 82,374 0.00% $ -
Small Company Growth Fund $ 867,597 0.54% $ 4,713
Micro-Cap Fund $ 157,816 2.47% $ 3,905
Multi-Season Fund $1,066,557 3.11% $33,221
NetNet Fund $ 407,329 6.63% $27,000
Real Estate Fund $ 102,511 0.00% $ -
Small Cap Value Fund $ 192,950 1.80% $ 3,481
Value Fund $ 656,504 1.45% $ 9,510
Growth Opportunities Fund $ 8,130 1.25% $ 102
International Growth Fund $ 257,980 0.00% $ -
Emerging Markets Fund $ 456,864 0.00% $ -
Healthcare Fund $ 20,634 0.00% $ -
Global Financial Services Fund $ 6,873 0.00% $ -
Focus Growth Fund $ 32,160 0.01% $ 3
</TABLE>
Portfolio securities will not be purchased from or sold to the Advisor,
World, Sub-Advisor, 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, World or the Sub-Advisor are made independently of each
other in the light of differing conditions. However, the same
46
<PAGE>
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, World or the Sub-Advisor, as the case may be, 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 while the Advisor, World, the Sub-
Advisor or any affiliated person (as defined in the 1940 Act) is a member of any
underwriting or selling group for such securities except pursuant to procedures
adopted by the Trust's or Framlington Board of Trustees or the Company's Board
of Directors in accordance with Rule 10f-3 under the 1940 Act.
The Trust, the Company and Framlington are required to identify the
securities of their regular brokers or dealers (as defined in Rule 10b-1 under
the 1940) Act or their parent companies held by them as of the close of their
most recent fiscal year and state the value of such holdings. As of June 30,
1999, the Focus Growth Fund held securities of Chase Manhattan Corp. valued at
$190,575, Morgan Stanley, Dean Witter & Co. valued at $123,000, Suntrust Banks,
Inc. valued at $104,156; Framlington Global Financial Services held securities
of Chase Manhattan Corp. valued at $34,560, Morgan Stanley, Dean Witter & Co.
valued at $51,250, BankAmerica Corp. valued at $36,656; NetNet Fund held
securities of Charles Schwab & Co., Inc. valued at $44,477,400, Ameritrade
Holding Corp. valued at $45,908,600, E*Trade Group, Inc. valued at $36,950,175,
Donaldson, Lufkin, and Jenrette valued at $590,000; Balanced Fund held
securities of Chase Manhattan Corp. valued at $285,862; Index 500 Fund held
securities of BankAmerica Corp. valued at $14,449,820, Morgan Stanley, Dean
Witter & Co. valued at $6,610,122, Merrill Lynch & Co., Inc. valued at
$3,325,400, J.P. Morgan & Co., Inc. valued at $2,810,000, Lehman Brothers
Holding, Inc. valued at $834,150, Bear Stearns & Co., Inc. valued at $614,295,
Chase Manhattan Corp. valued at $8,287,240, Charles Schwab & Co., Inc. valued at
$5,070,731, Suntrust Capital Markets, Inc. valued at $2,250,581, Comerica
Securities valued at $1,037,184, Paine Webber Group, Inc. valued at $771,375;
Intermediate Bond Fund held securities of Chase Manhattan Corp. valued at
$3,360,000; International Equity Fund held securities of Deutsche Bank AG
valued at $1,201,203, ABN Amro Holding valued at $1,158,281, Canadian Imperial
Bank of Commerce valued at $381,600; Value Fund held securities of Chase
Manhattan Corp. valued at $4,279,275, Goldman Sachs valued at $5,014,150, Morgan
Stanley, Dean Witter & Co. valued at $1,629,750; Cash Investment Fund held
securities of Bank of Nova Scotia valued at $50,000,000, Deutsche Bank AG valued
at $20,000,000 and Money Market Fund held securities of Bank of Nova Scotia
valued at $10,000,000 and Deutsche Bank AG valued at $4,000,000.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Purchases. As described in the Prospectuses, shares of the Funds may be
purchased in a number of different ways. Such alternative sales arrangements
permit an investor to choose the method of purchasing shares that is most
beneficial depending on the amount of the purchase, the length of time the
investor expects to hold shares and other relevant circumstances. An investor
may place orders directly through the Transfer Agent or the Distributor or
through arrangements with his/her authorized broker.
Retirement Plans. Shares of any of the Funds may be purchased in
connection with various types of tax deferred retirement plans, including
individual retirement accounts ("IRAs"), qualified plans, deferred compensation
for public schools and charitable organizations (403(b) plans) and simplified
employee pension IRAs. An individual or organization considering the
establishment of a retirement plan should consult with an attorney and/or an
accountant with respect to the terms and tax aspects of the plan. A $10.00
annual custodial fee is also charged on IRAs. This custodial fee is due by
December 15 of each year and may be paid by check or shares liquidated from a
shareholder's account.
Redemptions. The redemption price for Fund shares is the net asset value
next determined after receipt of the redemption request in proper order. The
redemption proceeds will be reduced by the amount of any applicable contingent
deferred sales charge ("CDSC").
47
<PAGE>
Contingent Deferred Sales Charge - Class B Shares. Class B Shares redeemed
within six years of purchase are subject to a CDSC. The CDSC is based on the
original net asset value at the time of investment or the net asset value at the
time of redemption, whichever is lower.
The CDSC Schedule for Class B Shares of the Trust Funds purchased before
June 27, 1995 is set forth below. The Prospectuses describe the CDSC Schedule
for Class B Shares of Funds of the Trust, the Company and Framlington purchased
after June 27, 1995.
Class B Shares of the Trust Funds
Purchased on or before June 27, 1995
<TABLE>
<CAPTION>
Redemption During CDSC
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
1/st/ Year Since Purchase................................................................ 4.00%
2/nd/ Year Since Purchase................................................................ 4.00%
3/rd/ Year Since Purchase................................................................ 3.00%
4/th/ Year Since Purchase................................................................ 3.00%
5/th/ Year Since Purchase................................................................ 2.00%
6/th/ Year Since Purchase................................................................ 1.00%
</TABLE>
CDSC Waivers - Class B Shares of the Trust Funds Purchased on or before
June 27, 1995. The CDSC will be waived with respect to Class B Shares of the
Trust Funds purchased on or before June 27, 1995 in the following circumstances:
(1) total or partial redemptions made within one year following the death
or disability of a shareholder or registered joint owner;
(2) minimum required distributions made in connection with an IRA or other
retirement plan following attainment of age 59 1/2; and
(3) redemptions pursuant to a Fund's right to liquidate a shareholder's
account involuntarily.
CDSC Waivers - Class B Shares of the Company Funds Purchased on or before
June 27, 1995. The CDSC will be waived on the following types of redemptions
with respect to Class B Shares of the Company Funds purchased on or before June
27, 1995:
(1) redemptions by investors who have invested a lump sum amount of $1
million or more in the Fund;
(2) redemptions by the officers, directors, and employees of the Advisor
or the Distributor and such persons' immediate families;
(3) dealers or brokers who have a sales agreement with the Distributor,
for their own accounts, or for retirement plans for their employees or
sold to registered representatives or full time employees (and their
families) that certify to the Distributor at the time of purchase that
such purchase is for their own account (or for the benefit of their
families);
(4) involuntary redemptions effected pursuant to the Fund's right to
liquidate shareholder accounts having an aggregate net asset value of
less than $250; and
(5) redemptions the proceeds of which are reinvested in the Fund within 90
days of the redemption.
Contingent Deferred Sales Charge - Class A and Class C Shares. The
Prospectuses describe the CDSC for Class A or C Shares of the Funds of the
Trust, the Company and Framlington purchased after June 27, 1995.
Class A Shares of the Trust Funds purchased on or before June 27, 1995
without a sales charge by reason of a purchase of $500,000 or more are subject
to a CDSC of 1.00% of the lower of the original purchase price or the net asset
value at the time of redemption if such shares are redeemed within two years of
the date of purchase. Class A Shares of the Trust Funds purchased on or before
June 27, 1995 that are redeemed will not be subject to the CDSC to the extent
that the value of such shares represents: (1) reinvestment of dividends or other
distributions; (2)
48
<PAGE>
Class A Shares redeemed more than two years after their purchase; (3) a minimum
required distribution made in connection with IRA or other retirement plans
following attainment of age 59 1/2; or (4) total or partial redemptions made
within one year following the death or disability of a shareholder or registered
joint owner.
No CDSC is imposed to the extent that the current net asset value of the
shares redeemed does not exceed (a) the current net asset value of shares
purchased through reinvestment of dividends or capital gain distributions plus
(b) the current net asset value of shares purchased more than one year prior to
the redemption, plus (c) increases in the net asset value of the shareholder's
shares above the purchase payments made during the preceding one year.
The holding period of Class A or Class C Shares of a Fund acquired through
an exchange of the corresponding class of shares of the Munder Money Market Fund
(which are available only by exchange of Class A or Class C Shares of the Fund,
as the case may be) and the Company Funds, the Framlington Funds and the non-
money market funds of the Trust will be calculated from the date that the Class
A or Class C Shares of the Fund were initially purchased.
In determining whether a CDSC is applicable to a redemption, the
calculation will be made in a manner that results in the lowest possible rate.
It will be assumed that the redemption is made first of amounts representing all
Class A Shares on which a front-end sales charge has been assessed; then of
shares acquired pursuant to the reinvestment of dividends and distributions; and
then of amounts representing the cost of shares purchased one year or more prior
to the redemption.
Other Redemption Information. 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.
The Funds reserve the right to suspend or postpone redemptions during any
period when: (i) trading on the New York Stock Exchange (the "NYSE") is
restricted by applicable rules and regulations of the SEC; (ii) the NYSE is
closed other than for customary weekend and holiday closings; (iii) the SEC has
by order permitted such suspension or postponement for the protection of the
shareholders; or (iv) an emergency, as determined by the SEC, exists, making
disposal of portfolio securities or valuation of net assets of a Fund not
reasonably practicable.
The Funds may involuntarily redeem an investor's shares if the net asset
value of such shares is less than $250; 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 $250 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., Eastern time.
The Funds, Distributor and Transfer Agent reserve the right at any time to
suspend or terminate the expedited exchange procedure or to impose a fee for
this service. During periods of unusual economic or market changes,
shareholders may experience difficulties or delays in effecting telephone
exchanges. Neither the Funds nor the Transfer Agent will be responsible for any
loss, damages, expense or cost arising out of any telephone exchanges effected
upon instructions believed by them to be genuine. The Transfer Agent has
instituted procedures that it believes are reasonably designed to insure that
exchange instructions communicated by telephone are genuine, and could be liable
for losses caused by unauthorized or fraudulent instructions in the absence of
such procedures. The procedures currently include a recorded verification of
the shareholder's name, social security
49
<PAGE>
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
Directors/Trustees 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
Money Market Fund for purposes of sales and redemptions. These procedures
include a review by the Boards of Directors/Trustees, 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
Directors/Trustees will promptly consider whether any and, if any, what action
should be initiated. If the Board believes that the extent of any deviation
from a Money Market 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 under the 1940 Act, 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/Trustees. There can be no assurance that a constant net asset value
will be maintained for each Money Market Fund.
All Funds. Securities traded on a national securities exchange or on
NASDAQ for which there were no sales on the date of valuation and securities
traded on other over-the-counter markets, including listed securities for which
the primary market is believed to be over-the-counter, are valued at the mean
between the most recently quoted bid and asked prices. Options will be valued
at market value or fair value if no market exists. Futures contracts will be
valued in like manner, except that open futures contract sales will be valued
using the closing settlement price or, in the absence of such a price, the most
recently quoted asked price. Restricted securities and securities and assets
for which market quotations are not readily available are valued at fair value
by the Advisor under the supervision of the Boards of Directors/Trustees. Debt
securities with remaining maturities of 60 days or less are valued at amortized
cost, unless the Boards of Directors/Trustees determines that such valuation
does not constitute fair value at that time. Under this method, such securities
are valued initially at cost on the date of
50
<PAGE>
purchase (or the 61st day before maturity). In determining the approximate
market value of portfolio investments, the Trust, Framlington 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, Framlington'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, World or the Sub-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 Fund; (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 table below shows 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, 1999.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Class A Class B Class C Class K Class Y
- ------------------------------------------------------------------------------------------------------------------------------
Effective Effective Effective Effective Effective
Yield Yield Yield Yield Yield Yield Yield Yield Yield Yield
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Cash Investment
Fund 4.30% 4.39% N/A N/A N/A N/A 4.40% 4.49% 4.55% 4.65%
- ------------------------------------------------------------------------------------------------------------------------------
Money Market
Fund 4.11% 4.19% 3.36% 3.41% 3.35% 3.41% N/A N/A 4.36% 4.46%
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Free Money
Market Fund 2.52% 2.55% N/A N/A N/A N/A 2.62% 2.65% 2.77% 2.81%
- ------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury
Money Market 3.81% 3.88% N/A N/A N/A N/A 3.91% 3.99% 4.06% 4.14%
Fund
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
51
<PAGE>
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
1 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, 1999, the tax-
equivalent yield for Class A, Class K and Class Y Shares of the Tax-Free Money
Market Fund was 3.66% (Class A), 3.80% (Class K) and 4.02% (Class Y) 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.
Performance of the Non-Money Market Funds
Yield. The Bond Funds' and International Bond Fund's (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:
YIELD = 2 [( a-b + 1)/6/ - 1]
----
cd
Where:
a = dividends and interest earned by a Fund during the period;
b = expenses accrued for the period (net of reimbursements and waivers);
c = average daily number of shares outstanding during the period entitled
to receive dividends;
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.
Interest earned on tax-exempt obligations that are issued without original
issue discount and that have a current market discount is calculated by using
the coupon rate of interest instead of the yield to maturity. In the case of
tax-exempt obligations that are issued with original issue discount but which
have discounts based on current market value that exceed the then-remaining
portion of the original issue discount (market discount), the yield to maturity
is the imputed rate based on the original issue discount calculation. On the
other hand, in the case of tax-exempt obligations that are issued with original
issue discount but which have the discounts based on current market value that
are less than the then-remaining portion of the original issue discount (market
premium), the yield to maturity is based on the market value.
With respect to mortgage- or other receivables-backed debt obligations
purchased at a discount or premium, the formula generally calls for amortization
of the discount or premium. The amortization schedule will be adjusted monthly
to reflect changes in the market value of such debt obligations. Expenses
accrued for the
52
<PAGE>
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, currently 2.50% of the per share offering price for Class A) and the
Balanced Fund and 4.00% of the per share offering price for Class A Shares of
the Bond Fund, International Bond Fund and Tax-Free Bond Funds. The tax-
equivalent yield for each Tax-Free Bond 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, 1999 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------- ---------------------------
<S> <C> <C>
Bond Fund 5.27% N/A
Intermediate Bond Fund 5.03% N/A
U.S. Income Fund 5.51% N/A
International Bond Fund 1.68% N/A
Michigan Bond Fund 3.90% 5.99%
Tax-Free Bond Fund 3.89% 5.71%
Tax-Free Short-Intermediate Bond Fund 3.74% 5.51%
</TABLE>
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, 1999 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 4.74% N/A
Intermediate Bond Fund 4.49% N/A
U.S. Income Fund 4.99% N/A
International Bond Fund 0.96% N/A
Michigan Bond Fund 3.30% 5.07%
Tax-Free Bond Fund 3.30% 4.85%
Tax-Free Short-Intermediate Bond Fund 3.14% 4.62%
</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, 1999 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 4.74% N/A
Intermediate Bond Fund 4.49% N/A
U.S. Income Fund 5.00% N/A
International Bond Fund 0.97% N/A
Michigan Bond Fund 3.30% 5.07%
Tax-Free Bond Fund 3.27% 4.80%
Tax-Free Short-Intermediate Bond Fund 3.15% 4.64%
</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, 1999 were:
53
<PAGE>
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 5.49% N/A
Intermediate Bond Fund 5.24% N/A
U.S. Income Fund 5.75% N/A
International Bond Fund 1.73% N/A
Michigan Bond Fund 4.06% 6.24%
Tax-Free Bond Fund 4.05% 5.95%
Tax-Free Short-Intermediate Bond Fund 3.90% 5.74%
</TABLE>
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, 1999 were:
<TABLE>
<CAPTION>
30-Day Yield Tax-Equivalent 30-Day Yield
------------ ---------------------------
<S> <C> <C>
Bond Fund 5.74% N/A
Intermediate Bond Fund 5.50% N/A
U.S. Income Fund 6.00% N/A
International Bond Fund 1.98% N/A
Michigan Bond Fund 4.31% 6.62%
Tax-Free Bond Fund 4.30% 6.32%
Tax-Free Short-Intermediate Bond Fund 4.15% 6.11%
</TABLE>
Total Return. 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:
P (1 + T)/n/ = ERV
Where:
P = hypothetical initial payment of $1,000;
T = average annual total return;
n = period covered by the computation, expressed in years; and
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).
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 annual total return and load adjusted
aggregate total return quotations for Class A Shares will reflect the deduction
of the maximum sales charge charged
54
<PAGE>
in connection with the purchase of such shares - 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, currently 2.50% of the per share offering price for Class
A) and the Balanced Fund and 4.00% of the per share offering price for Class A
Shares of the Bond Fund, International Bond Fund and Tax-Free Bond Funds; and
the Funds' load adjusted average annual total return and load adjusted 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 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 12 month and 5 year periods ended June 30, 1999 and
since commencement of operations.
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund-Inception Date 6/30/99* 6/30/99* 6/30/99* 6/30/99** 6/30/99** 6/30/99**
- -----------------------------------------------------------------------------------------------------------------------------
Funds of the Trust
<S> <C> <C> <C> <C> <C> <C>
Balanced Fund
Class A-4/30/93 10.76% 14.92% 11.37% 4.70% 13.62% 10.37%
Class B-6/21/94 9.96% 13.96% 13.55% 5.16% 13.72% 13.43%
Class C-1/24/96 10.11% N/A 12.92% 9.15% N/A 12.92%
Class K-4/16/93 10.83% 14.95% 11.13% 10.83% 14.95% 11.13%
Class Y-4/13/93 11.21% 15.25% 11.31% 11.21% 15.25% 11.31%
Equity Income Fund
Class A-8/8/94 6.96% N/A 18.77% 1.07% N/A 17.40%
Class B-8/9/94 6.18% N/A 17.91% 1.38% N/A 17.70%
Class C-12/5/95 6.18% N/A 16.78% 5.23% N/A 16.78%
Class K-7/5/94 6.95% N/A 18.63% 6.95% N/A 18.63%
Class Y-7/5/94 7.22% N/A 18.91% 7.22% N/A 18.91%
Index 500 Fund
Class A-12/9/92 22.12% 27.26% 21.21% 19.05% 26.62% 20.74%
Class B-10/31/95 21.71% N/A 27.64% 18.71% N/A 27.43%
Class C N/A N/A N/A N/A N/A N/A
Class K12/7/92 21.99% 27.13% 21.12% 21.99% 27.13% 21.12%
Class Y-12/1/91 22.30% 27.48% 20.99% 22.30% 27.48% 20.99%
International Equity Fund
Class A-11/30/92 10.80% 10.80% 11.05% 4.74% 9.55% 10.09%
Class B-3/9/94 10.08% 10.00% 7.92% 5.08% 9.73% 7.79%
Class C-9/29/95 10.07% N/A% 9.98% 9.07% N/A 9.98%
Class K-11/23/92 10.94% 10.83% 11.26% 10.94% 10.83% 11.26%
Class Y-12/1/91 11.30% 11.12% 10.63% 11.30% 11.12% 10.63%
Small Company Growth Fund
Class A-11/23/92 (10.92)% 16.62% 12.94% (15.81)% 15.31% 11.98%
Class B-4/28/94 (11.55)% 15.77% 13.45% (15.65)% 15.54% 13.33%
Class C-9/26/95 (11.58)% N/A 12.14% (12.40)% N/A 12.14%
Class K-11/23/92 (10.92)% 16.62% 12.94% (10.92)% 16.62% 12.94%
Class Y-12/1/91 (10.62)% 16.92% 14.57% (10.62)% 16.92% 14.57%
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Ended Period Ended through
Fund-Inception Date 6/30/99* 6/30/99* 6/30/99* 6/30/99** 6/30/99** 6/30/99**5%
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Bond Fund
Class A-12/9/92 1.72% 6.72% 6.21% (2.38)% 5.85% 5.65%
Class B-3/13/96 0.86% N/A 5.02% (3.95)% N/A 4.21%
Class C-3/25/96 0.95% N/A 4.97% (0.01)% N/A 4.97%
Class K-11/23/92 1.72% 6.72% 6.17% 1.72% 6.17%
Class Y-12/1/91 1.97% 6.99% 6.11% 1.97% 6.11%
Intermediate Bond Fund
Class A-11/24/92 2.93% 5.97% 5.22% (1.22)% 4.57%
Class B-10/25/94 2.06% N/A 5.56% (2.81)% N/A 5.20%
Class C-4/19/96 2.06% N/A 4.64% 1.08% N/A 4.64%
Class K-11/20/92 2.83% 5.92% 5.19% 2.83% 5.92% 5.19%
Class Y-12/1/91 3.08% 6.16% 5.75% 3.08% 6.16% 5.75%
US Income Fund
Class A-7/28/94 2.12% N/A 6.83% (1.95)% N/A 5.94%
Class B-9/6/95 1.36% N/A 5.05% (3.47)% N/A 4.38%
Class C-8/12/96 1.35% N/A 5.18% 0.39% N/A 5.18%
Class K-7/5/94 2.11% N/A 6.79% 2.11% N/A 6.79%
Class Y-7/5/94 2.37% N/A 7.05% 2.37% N/A 7.05%
Michigan Bond Fund
Class A-2/15/94 0.78% 5.98% 4.32% (3.26)% 5.12% 3.54%
Class B-7/5/94 0.34% N/A 5.30% (4.45)% N/A 4.97%
Class C-10/4/96 0.34% N/A 4.39% (0.62)% N/A 4.39%
Class K-1/3/94 0.99% 6.03% 4.18% 0.99% 6.03% 4.18%
Class Y-1/3/94 1.24% 6.29% 4.43% 1.24% 6.29% 4.43%
Tax-Free Bond Fund
Class A-10/9/95 0.83% N/A 4.88% (3.23)% N/A 3.73%
Class B-12/6/94 (0.02)% N/A 5.82% (4.69)% N/A 5.46%
Class C-7/7/98 (0.03)% N/A 3.14% (0.96)% N/A 3.14%
Class K-7/5/94 0.82% N/A 5.85% 0.82% N/A 5.85%
Class Y-7/21/94 1.08% N/A 6.02% 1.08% N/A 6.02%
Tax-Free
Short-Intermediate Bond
Fund
Class A-11/30/92 2.27% 4.66% 4.31% (1.86)% 3.81% 3.66%
Class B-5/16/96 1.51% N/A 3.46% (3.37)% N/A 2.57%
Class C-7/8/98 N/A N/A 1.90% N/A N/A 0.91%
Class K-2/9/87+ 2.27% 4.66% 5.30% 2.27% 4.66% 5.30%
Class Y-12/17/92 2.42% 4.91% 4.51% 2.42% 4.91% 4.51%
Funds of Framlington
Emerging Markets Fund
Class A-1/14/97 30.03% N/A 7.14% 22.92% N/A 4.71%
Class B-2/25/97 28.16% N/A 2.47% 23.16% N/A 1.22%
Class C-3/3/97 28.01% N/A 3.14% 27.01% N/A 3.14%
Class K-1/10/97 29.03% N/A 7.29% 29.03% N/A 7.29%
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Period through
Fund-Inception Date 6/30/99* 6/30/99* 6/30/99* Ended Ended 6/30/99**
6/30/99** 6/30/99**
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class Y-12/31/96 29.33% N/A 7.71% 29.33% N/A 7.71%
Global Financial
ServicesFund
Class Y-6/24/98 (1.29)% N/A 0.58% (1.29)% N/A 0.58%
Healthcare Fund
Class A-2/14/97 (10.69)% N/A (2.83)% (15.62)% N/A (5.12)%
Class B-1/31/97 (11.40)% N/A (2.50)% (15.79)% N/A (3.72)%
Class C-1/13/97 (11.40)% N/A (0.13)% (12.28)% N/A (0.13)%
Class K-4/1/97 (10.70)% N/A 5.00% (10.70)% N/A 5.00%
Class Y-12/31/96 (10.42)% N/A 2.38% (10.42)% N/A 2.38%
International Growth Fund
Class A-2/20/97 7.36% N/A 10.81% 1.48% N/A 8.18%
Class B-3/19/97 6.23% N/A 11.43% 1.23% N/A 10.27%
Class C-2/13/97 6.13% N/A 10.19% 5.13% N/A 10.19%
Class K-1/10/97 7.02% N/A 11.19% 7.02% N/A 11.19%
Class Y-12/31/96 7.35% N/A 10.72% 7.35% N/A 10.72%
Funds of the Company
Focus Growth Fund
Class Y-11/11/98 N/A N/A 24.50% N/A N/A 24.50%
Growth Opportunities Fund
Class Y-6/24/98 8.44% N/A 8.49% 8.44% N/A 8.49%
International Bond Fund
Class A-10/17/96 3.93% N/A 1.44% (0.21)% N/A (0.10)%
Class B-6/9/97 3.15% N/A 1.54% (1.85)% N/A 0.12%
Class C-6/3/98 2.92% N/A 1.91% 1.92% N/A 0.99%
Class K-3/25/97 3.92% N/A 3.42% 3.92% N/A 3.42%
Class Y-10/2/96 4.21% N/A 1.60% 4.21% N/A 1.60%
Micro-Cap Fund
Class A-12/26/96 9.10% N/A 29.88% 3.10% N/A 27.00%
Class B-2/24/97 8.29% N/A 26.09% 3.29% N/A 25.15%
Class C-3/31/97 8.29% N/A 32.12% 7.29% N/A 32.12%
Class K-12/31/96 9.04% N/A 29.42% 9.04% N/A 29.42%
Class Y-12/26/96 9.43% N/A 30.19% 9.43% N/A 30.19%
Multi-Season Fund
Class A-8/4/93 11.34% 22.07% 18.23% 5.21% 20.69% 17.11%
Class B-4/29/93 10.66% 21.22% 16.89% 5.66% 21.03% 16.89%
Class C-9/20/93 10.70% 21.22% 17.78% 9.70% 21.22% 17.78%
Class K-6/23/95 11.40% N/A 22.11% 11.40% N/A 22.11%
Class Y-8/16/93 11.70% 22.43% 18.62% 11.70% 22.43% 18.62%
</TABLE>
57
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<TABLE>
<CAPTION>
12 Month 5 Year Inception 12 Month 5 Year Inception
Period Ended Period Ended through Period Period through
Fund-Inception Date 6/30/99* 6/30/99* 6/30/99* Ended Ended 6/30/99**
6/30/99** 6/30/99**
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NetNet Fund
Class A-8/19/96 116.57% N/A 79.16% 104.67% N/A 75.67%
Class B-6/1/98 114.97% N/A 141.73% 109.97% N/A 138.30%
Class C-11/3/98 N/A N/A 133.26% N/A N/A 132.26%
Class Y-6/1/98 117.49% N/A 79.45% 117.49% N/A 79.45%
Small-Cap Fund
Class A-1/10/97 (5.19)% N/A 14.37% (10.42)% N/A 11.80%
Class B-2/11/97 (5.85)% N/A 11.76% (10.44)% N/A 10.67%
Class C-1/13/97 (6.00)% N/A 13.64% (6.91)% N/A 13.64%
Class K-12/31/96 (5.33)% N/A 14.84% (5.33)% N/A 14.84%
Class Y-12/26/96 (5.01)% N/A 15.40% (5.01)% N/A 15.40%
Real Estate Fund
Class A-9/30/94 (6.66)% N/A 11.03% (11.79)% N/A 9.72%
Class B-10/3/94 (7.37)% N/A 10.21% (11.64)% N/A 9.92%
Class C-1/5/96 (7.34)% N/A 10.35% (8.19)% N/A 10.35%
Class K-10/3/96 (6.66)% N/A 8.53% (6.66)% N/A 8.53%
Class Y-10/3/94 (6.35)% N/A 11.34% (6.35)% N/A 11.34%
Value Fund
Class A-9/14/95 (0.23)% N/A 18.17% (5.71)% N/A 16.43%
Class B-9/19/95 (1.23)% N/A 17.27% (5.98)% N/A 16.76%
Class C-2/9/96 (1.23)% N/A 16.44% (2.18)% N/A 16.44%
Class K-11/30/95 (0.48)% N/A 17.94% (0.48)% N/A 17.94%
Class Y-8/18/95 (0.16)% N/A 19.25% (0.16)% N/A 19.25%
</TABLE>
____________________________________________________________
* Figures do not include the effect of the sales charge.
** Figures include the effect of the applicable sales charge.
++ For the ten year period ended June 30, 1999, the average annual return for
Class K Shares was 5.48%.
As of June 30, 1999, the following Classes had not commenced
operations: Class A Shares of the Focus Growth Fund, Global Financial Services
Fund and Growth Opportunities Fund; Class B Shares of the Focus Growth Fund,
Global Financial Services Fund, Growth Opportunities Fund, Cash Investment Fund,
International Bond Fund, Tax-Free Money Market Fund and U.S. Treasury Money
Market Fund; Class C Shares of the Focus Growth Fund, Global Financial Services
Fund, Growth Opportunities Fund, Cash Investment Fund, Tax-Free Money Market
Fund, Index 500 Fund, and U.S. Treasury Money Market Fund; and Class K Shares of
the Focus Growth Fund, Global Financial Services Fund and Growth Opportunities
Fund.
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.
All Funds. The performance of any investment is generally a function
of portfolio quality and maturity, type of investment and operating expenses.
From time to time, in advertisements or in reports to shareholders, 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. 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
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<PAGE>
shareholders. Hypothetical examples showing the difference between a taxable and
a tax-free investment may also be provided to shareholders.
TAXES
The following summarizes certain additional Federal and state income 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. This discussion is based upon present provisions of
the Internal Revenue Code, the regulations promulgated thereunder, and judicial
and administrative ruling authorities, all of which are subject to change, which
change may be retroactive. Prospective investors should consult their own tax
advisers with regard to the federal tax consequences of the purchase, ownership
and disposition of Fund shares, as well as the tax consequences arising under
the laws of any state, foreign country, or other taxing jurisdiction.
General. Each Fund intends to elect and qualify to be taxed separately as
a regulated investment company under Subchapter M of the Internal Revenue 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 Internal Revenue Code that are described
below. Distributions of investment company taxable income and net tax-exempt
interest income made during the taxable year or, under specified circumstances,
within twelve months after the close of the taxable year will satisfy the
Distribution Requirement.
In addition to satisfying the Distribution Requirement, each Fund must
derive with respect to a taxable year at least 90% of its gross income from
dividends, interest, certain payments with respect to securities loans and gains
from the sale or other disposition of stock or securities or foreign currencies,
or from other income derived with respect to its business of investing in such
stock, securities, or currencies (the "Income Requirement").
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.
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 Tax-Free Bond Funds 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 gain from the sale or exchange of a capital asset
held for more than one year, regardless of the length of time a shareholder has
held his or her Fund shares and regardless of whether the distribution is paid
in cash or reinvested in shares. The Funds expect that capital gain dividends
will be taxable to shareholders as long-term gain. Capital gain dividends are
not eligible for the dividends-received deduction.
In the case of corporate shareholders, distributions of a Fund for any
taxable year generally qualify for the dividends-received deduction to the
extent of the gross amount of "qualifying dividends" received by such Fund for
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<PAGE>
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.
Amounts not distributed on a timely basis in accordance with a calendar
year distribution requirement are subject to a nondeductible 4% excise tax. To
prevent imposition of the excise tax, a Fund must distribute during each
calendar year an amount equal to the sum of (1) at least 98% of its ordinary
income (not taking into account any capital gains or losses) for the calendar
year, (2) at least 98% of its capital gains in excess of its capital losses
(adjusted for certain ordinary losses, as prescribed by the Code) for the one-
year period ending on October 31 of the calendar year, and (3) any ordinary
income and capital gains for previous years that was not distributed during
those years. A distribution will be treated as paid on December 31 of the
current calendar year if it is declared by a Fund in October, November or
December with a record date in such a month and paid by a Fund during January of
the following calendar year. Such distributions will be taxable to shareholders
in the calendar year in which the distributions are declared, rather than the
calendar year in which the distributions are made. To prevent application of the
excise tax, a Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
Although a 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, a Fund may be subject to
the tax laws of such states or localities.
The Trust, the Framlington 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 an incorrect tax identification
number or no number at all, (ii) who is subject to backup withholding by the
Internal Revenue Service for failure to report the receipt of taxable interest
or dividend income properly, or (iii) who has failed to certify 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 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 and treated
as long-term capital gains. Furthermore, a loss realized by a shareholder on
the redemption, sale or exchange of shares of a Fund with respect to which
exempt-interest dividends have been paid will, to the extent of such exempt-
interest dividends, be disallowed if such shares have been held by the
shareholder for six months or less.
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
60
<PAGE>
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.
Tax-Free Bond Funds and Tax-Free Money Market Fund. The Michigan Bond
Fund, Tax-Free Bond Fund, Tax-Free Short-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" generally 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 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 advisers 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.
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<PAGE>
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.
Michigan Tax Considerations - Michigan Bond Fund and Tax-Free Short-
Intermediate Bond Fund. As stated in the Michigan Bond Fund Prospectus and the
Tax-Free Short-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 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 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.
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, International Growth Fund, Emerging Markets
Fund, Global Financial Services Fund and International Bond Fund. Income
received by the International Equity Fund, the International Growth Fund, the
Emerging Markets Fund, the Global Financial Services 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 a Fund
qualifies as a regulated investment company, certain distribution requirements
are satisfied, and more than 50% of the value of the Fund's assets at the close
of the taxable year consists of securities of foreign corporations, the Fund may
elect, subject to limitation, to pass through its foreign tax credits to its
shareholders. The Fund may qualify for and make this election in some, but not
necessarily all, of its taxable years. If a Fund were to make an election, an
amount equal to the foreign income taxes paid by the Fund 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, a Fund 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 limitations, including the restriction 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
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<PAGE>
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, all described above.
Original Issue Discount. The Funds may purchase debt securities with
original issue discount. Original issue discount represents the difference
between the original price of the debt instrument and the stated redemption
price at maturity. Original issue discount is required to be accreted on a
daily basis and is considered interest income for tax purposes and, therefore,
such income would be subject to the distribution requirements applicable to
regulated investment companies.
Market Discount. The Funds may purchase debt securities at a discount in
excess of the original issue discount to the stated redemption price maturity
(for debt securities without original issue discount), and this discount is
called market discount. If market discount is be recognized at the time of
disposition of the debt security, accrued market discount is recognized to the
extent of gain on the disposition of the debt security.
Hedging Transactions. The taxation of equity options and over-the-counter
options on debt securities is governed by Code section 1234. Pursuant to Code
section 1234, the premium received by a Fund for selling a put or call option is
not included in income at the time of receipt. If the option expires, the
premium is short-term capital gain to the Fund. If the Fund enters into a
closing transaction, the difference between the amount paid to close out its
position and the premium received is short-term capital gain or loss. If a call
option written by a Fund is exercised, thereby requiring the Fund to sell the
underlying security, the premium will increase the amount realized upon the sale
of such security and any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term depending upon the holding period of the
security. With respect to a put or call option that is purchased by a Fund, if
the option is sold, any resulting gain or loss will be a capital gain or loss,
and will be long-term or short-term, depending upon the holding period of the
option. If the option expires, the resulting loss is a capital loss and is
long-term or short-term, depending upon the holding period of the option. If
the option is exercised, the cost of the option, in the case of a call option,
is added to the basis of the purchased security and, in the case of a put
option, reduces the amount realized on the underlying security in determining
gain or loss.
Any regulated futures and foreign currency contracts and certain options
(namely, nonequity options and dealer equity options) 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 U.S. 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)
63
<PAGE>
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, and may 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 more than or less than the
distributions of substantially as compared to a fund that did not engage in such
hedging transactions.
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.
Constructive Sales. Recently enacted rules may affect the timing and
character of gain if a Fund engages in transactions that reduce or eliminate its
risk of loss with respect to appreciated financial positions. If the Fund
enters into certain transactions in property while holding substantially
identical property, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code.
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 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.
Passive Foreign Investment Companies. Certain Funds may invest in shares
of foreign corporations that may be classified under the Code as passive foreign
investment companies ("PFICs"). In general, a foreign corporation is classified
as a PFIC if at least on-half of its assets constitute passive assets, or 75% or
more of its gross income passive income. If a Fund receives a so-called "excess
distribution" with respect to PFIC shares, the Fund itself may be subject to a
tax on a portion of the excess distribution, whether or not the corresponding
income is distributed by the Fund to shareholders. In general, under the PFIC
rules, an excess distribution is treated as having been realized ratably over
the period during which the Fund held the PFIC shares. Each Fund will itself be
subject to tax on the portion, if any, of an excess distribution that is so
allocated to prior Fund taxable years and an interest factor will be added to
the tax, as if the tax had been payable in such prior taxable years. Certain
distributions from a PFIC as well as gain from the sale of PFIC shares are
treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
The Funds may be eligible to elect alternative tax treatment with respect
to PFIC shares. Under an election that currently is available in some
circumstances, a Fund generally would be required to include in its gross income
its share of the earnings of a PFIC on a current basis, regardless of whether
distributions were received from the PFIC in a given year. If this election
were made, the special rules, discussed above, relating to the taxation of
excess distributions, would not apply. In addition, another election would
involve marking to market the Fund's PFIC shares at the end of each taxable
year, with the result that unrealized gains would be treated as though they were
realized and reported as ordinary income. Any mark-to market losses and any
loss from an actual disposition of Fund shares would be deductible as ordinary
losses to the extent of any net mark-to-market gains included in income in prior
years.
64
<PAGE>
Income received by a Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries.
Fund shareholders may be subject to state, local and foreign taxes on their
Fund distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations are exempt from taxation. The
tax consequences to a foreign shareholder of an investment in the Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in the Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in the Fund.
Other Taxation
The foregoing discussion relates only to U.S. federal income tax law and
certain state taxes as applicable to U.S. persons (i.e., U.S. citizens and
residents and domestic corporations, partnerships, trusts and estates).
Distributions by the Funds, and dispositions of Fund shares also may be subject
to other 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). Future legislative or administrative
changes or court decisions may significantly change the conclusions expressed
herein, and any such changes or decisions may have a retroactive effect with
respect to the transactions contemplated herein.
ADDITIONAL INFORMATION CONCERNING SHARES
The Trust and Framlington are Massachusetts business trusts. Under each
Declaration of Trust, the beneficial interest in the Trust or Framlington may be
divided into an unlimited number of full and fractional transferable shares.
The Company is a Maryland corporation. The Trust's and Framlington's
Declaration of Trust and the Company's Articles of Incorporation authorize the
Boards of Directors/Trustees to classify or reclassify any unissued shares of
the Trust, Framlington 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 Balanced, Equity Income, Index 500, International Equity, Small
Company Growth, Bond, Intermediate Bond, U.S. Income, Michigan Bond, Tax-Free
Bond, Tax-Free Short-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. The Cash Investment Fund, Tax-Free Money Market Fund and
U.S. Treasury Money Market Fund offer only Class A Shares, Class K Shares and
Class Y Shares. Pursuant to the authority of Framlington's Declaration of
Trust, the Trustees have authorized the issuance of an unlimited number of
shares of beneficial interest in Framlington representing interests in the
International Growth Fund, Emerging Markets Fund, Global Financial Services Fund
and Healthcare Fund. The shares of each Fund (except the Global Financial
Services Fund) are offered in five separate classes: Class A, Class B, Class C,
Class K and Class Y Shares. The shares of the Global Financial Services Fund
are offered in six separate classes: Class A, Class B, Class C, Class II, Class
K and Class Y 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 Focus Growth Fund, Future Technology Fund,
Growth Opportunities Fund, International NetNet Fund Micro-Cap Fund, Multi-
Season Fund, Real Estate Fund, Small-Cap Value Fund, Value Fund, International
Bond Fund, Money Market Fund, All-Season Conservative Fund, All-Season Moderate
Fund, All-Season Aggressive Fund, Financial Services Fund and NetNet Fund. The
shares of each Fund (other than the Money Market Fund, All-Season Conservative
Fund, All-Season Moderate Fund, All-Season Aggressive Fund, NetNet Fund,
International NetNet Fund, Future Technology Fund, Focus Growth Fund and Growth
Opportunities Fund) are offered in five separate classes: Class A, Class B,
Class C, Class K and Class Y Shares. The Money
65
<PAGE>
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, Framlington and the Company) and Class Y Shares. The
All-Season Conservative Fund, All-Season Moderate Fund and All-Season Aggressive
Fund offer only Class A, Class B and Class Y Shares. The NetNet Fund offers only
Class A, Class B, Class C and Class Y Shares. The Future Technology Fund and
International NetNet Fund offer Class A, Class B, Class II, Class K and Class Y
Shares. The Focus Growth Fund and Growth Opportunities Fund offer only Class A,
Class B, Class C, Class II, Class K and Class Y Shares.
The Boards of the Trust, the Company and Framlington have 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 the Trust, Framlington 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, Framlington's or the Company's respective 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, only Class II Shares of a Fund will be entitled to vote on matters
submitted to a vote of shareholders pertaining to a Fund's Class II 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, Framlington 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 Directors/Trustees. 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, Framlington 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, (i) unless it is clear that the interests of each Fund in the matter are
substantially identical or (ii) that the matter does not affect any interest of
the Fund. Under the Rule, the approval of an investment advisory agreement,
sub-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, Framlington or the Company voting
together in the aggregate without regard to a particular Fund.
Shares of each of the Trust, Framlington and the Company have noncumulative
voting rights and, accordingly, the holders of more than 50% of each of the
Trust's, Framlington'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,
Framlington and the Company.
Annual 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, Framlington 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.
66
<PAGE>
The Trust's and Framlington's Declaration of Trust, as amended, each
authorizes the 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, the exercise of
such authority may be subject to certain restrictions under the 1940 Act. The
Trust's and Framlington'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.
OTHER INFORMATION
Counsel. The law firm of Dechert Price & Rhoads, 1775 Eye Street, N.W.,
Washington, D.C. 20006, has passed upon certain legal matters in connection with
the shares offered by the Funds and serves as counsel to the Trust, Framlington
and the Company.
Independent Auditors. Ernst & Young LLP, 200 Clarendon Street, Boston,
Massachusetts 02116, serves as the Trust's, Framlington's and the Company's
independent auditors.
Control Persons and Principal Holders of Securities. As of April 28, 2000,
Comerica Bank, One Detroit Center, 500 Woodward Ave., Detroit, Michigan 48226,
held of record substantially all of the outstanding shares of the Funds (except
the NetNet Fund) as agent or trustee for its customers. As a result, Comerica
Bank will be able to affect the outcome of matters presented for a vote of each
Fund's shareholders. As of April 28, 2000, the following persons were beneficial
owners of 5% or more of the outstanding shares of any class of a Fund because
they possessed voting or investment power with respect to such shares:
<TABLE>
<CAPTION>
Percent of
Total Shares
Name of Fund Name and Address Outstanding
- ------------ ---------------- ----------------
<S> <C> <C>
Cash Investment Fund - Class A National Financial Services Corp. 76.618%
For the exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
Tax-Free Money Market Fund - Class A National Financial Services Corp. 98.089%
For the exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
U.S. Treasury Money Market Fund - Class A National Financial Services Corp. 90.126%
For the exclusive benefit of its customers
P.O. Box 3908 Church Street Station
New York, NY 10008-3908
</TABLE>
67
<PAGE>
<TABLE>
<S> <C> <C>
Small Company Growth Fund - Class A Merrill Lynch Pierce Fenner & Smith 24.125%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
First Clearing Corporation 8.861%
Nelson Metal Products
UAW Hourly Emp. Pension Plan
2950 Prairie Street SW
Grandville, MI 49418-2072
Index 500 Fund - Class A Merrill Lynch Pierce Fenner & Smith 32.975%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Equity Fund - Class A Charles Schwab & Co., Inc. 13.436%
Special custody acct. for benefit of its
customers
101 Montgomery Street
San Francisco, CA 94104
Merrill Lynch Pierce Fenner & Smith 15.475%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Intermediate Bond Fund - Class A Resources Trust Company 10.657%
For the exclusive benefit of various IMS
customers
P.O. Box 3865
Englewood, CO 80155-3865
Investors Fiduciary Trust Company 6.395%
FBO Peaker Services Inc.
801 Pennsylvania Avenue
Kansas City, MO 64105
Bond Fund - Class A First Union Securities, Inc. 20.984%
Lewis P. Gallagher
111 East Kilbourn Avenue
Milwaukee, WI 53202
National Financial Services Corp. 10.687%
FBO S A Colah IRA
17197 N. Nunnely Road
Clinton Township, MI 48036
</TABLE>
68
<PAGE>
<TABLE>
<S> <C> <C>
Tax-Free Short-Intermediate Bond Fund - Class A Merrill Lynch Pierce Fenner & Smith 19.724%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Balanced Fund - Class A Investors Fiduciary Trust Company 10.687%
FBO Hydraulic Service
801 Pennsylvania Avenue
Kansas City, MO 64105
Trans-Industries Inc 8.618%
Employees 401K Profit Sharing Plan & Trust
2637 South Adams Road
Rochester Hills, MI 48309
Wexford Clearing Services Corp FBO 8.502%
Valleywest Properties Limited Partnership
9230 N. 40th Street
Phoenix, AZ 85028-5018
Merrill Lynch Pierce Fenner & Smith 7.853%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
National Financial Services Corp. 7.804%
S A Colah IRA
17197 N. Nunnely Road
Clinton Township, MI 48039
Michigan Bond Fund - Class A Trent & Company 24.642%
FBO American Machining Inc. Corp.
C/O Old Kent Bank
111 Lyon NW
Grand Rapids, MI 49503
Resources Trust Company 9.767%
FBO Various IMS Customers
P.O. Box 3865
Englewood, CO 80155
National Financial Services Corp. 7.394%
William D. Pate
1835 Technology Drive
Troy, MI 48083
</TABLE>
69
<PAGE>
<TABLE>
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith 6.898%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
McDonald Investments, Inc. 6.701%
Suite 2100
800 Superior Ave
Cleveland, OH 44114
Prudential Securities, Inc 6.030%
FBO Emendes LLC
2122 London Bridge Drive
Rochester Hills, MI 48307-4231
National Financial Securities Corp. 5.739%
Donald A Dick/Catherine L Dick
Deborah L Evans
15810 Stout Street
Detroit, MI 48223
Charles Schwab & Co., Inc. 5.390%
FBO Susan A Rich
101 Montgomery Street
San Francisco, CA 94104
Tax-Free Bond Fund - Class A MARIL & Co. 16.434%
C/O Marshall & Ilsley Trust Co
P.O. Box 2977
Milwaukee, WI 53201
Merrill Lynch Pierce Fenner & Smith 9.227%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Trent & Co. 8.933%
C/O Old Kent Bank
Attn: Trust Securities
4420 44th Street, Suite A
Grand Rapids, MI 49512
National Financial Services Corp. 6.974%
Marie S. Lane TTEE
Marie S. Lane Trust
33444 Jefferson
St. Clair Shores, MI 48082
</TABLE>
70
<PAGE>
<TABLE>
<S> <C> <C>
Painewebber for the Benefit of 6.853%
Theodore C. Dye II
19110 Devonshire
Birmingham, MI 48025-3946
Calhoun & Co. 5.391%
C/O Comerica Bank
Attn: Mutual Funds Unit MC 3446
P.O. Box 75000
Detroit, MI 48275-3446
National Financial Services Corp. 5.156%
Timothy Lowell Westbay TTEE
Timothy Lowell Westbay Rev Living Trust
46502 Darwood Court
Plymouth, MI 48170
Equity Income Fund - Class A Merrill Lynch Pierce Fenner & Smith 25.208%
(Formerly Growth & Income Fund) FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
U.S. Income Fund - Class A Merrill Lynch Pierce Fenner & Smith 31.571%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
EAMCO 7.866%
c/o Riggs Bank NA
Mutual Funds Desk
P.O. Box 96211
Washington, DC 20090-6211
Salomon Smith Barney 7.778%
333 West 34th Street, 3rd Floor
New York, NY 10001
National Financial Services Corp. 5.254%
Robert E. Guenther TTEE/Trust
1268 Port Austin Road
P.O. Box 59
Port Austin, MI 48467
Multi-Season Fund - Class A Merrill Lynch Pierce Fenner & Smith 35.201%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
71
<PAGE>
<TABLE>
<S> <C> <C>
Real Estate Fund - Class A Interra Clearin Services FBO 25.940%
Ronald Sandler
Perle Ann Kagan
100 Oxford Drive #902
Monroeville, PA 15146-2326
Merrill Lynch Pierce Fenner & Smith 19.788%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Pierson & Co. 5.546%
C/O Trust Operations Mutual Funds
P.O. Box 9088
Farmington Hills, MI 48333-9088
Money Market Fund - Class A Salomon Smith Barney 10.739%
333 West 34th Street, 3rd Floor
New York, NY 10001
Bank of New York 6.716%
FBO Michael G. Sanderson
Attn: Matthew Louis
New York, NY 10286
Salomon Smith Barney 6.555%
333 West 34th Street, 3rd Floor
New York, NY 10001
Salomon Smith Barney 5.997%
333 West 34th Street, 3rd Floor
New York, NY 10001
Salomon Smith Barney 5.558%
333 West 34th Street, 3rd Floor
New York, NY 10001
Value Fund - Class A Merrill Lynch Pierce Fenner & Smith 29.764%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Painewebber for the benefit of 8.394%
James E. & Robert B. Decker TTEE
The John Christian Co. Inc.
21950 Hoover Road
Warren, MI 48089-2557
</TABLE>
72
<PAGE>
<TABLE>
<S> <C> <C>
Pierson & Co. 8.341%
C/O Trust Operations Mutual Funds
P.O. Box 9088
Farmington Hills, MI 48333-9088
International Bond Fund - Class A Penson Financial Services, Inc. 40.100%
1700 Pacific Avenue
Suite 1400
Dallas, TX 75201
Raymond James & Assoc. 20.969%
Benjamin A. Heskett IRA
550 Hartford Street
Worthington, OH 43085-4120
Donald, Lufkin Jenrette 13.317%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Raymond James & Assoc. Cust 13.012%
Carolyn M. Llesket
880 Carillon Parkway
P.O. Box 12749
St. Petersburg, FL 33733-2749
NetNet Fund - Class A Merrill Lynch Pierce Fenner & Smith 19.100%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Micro-Cap Fund - Class A Merrill Lynch Pierce Fenner & Smith 25.418%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Charles Schwab & Company Inc. 7.486%
Attn: Mutual Funds
101 Montgomery Street
San Francisco, CA 94104
Small-Cap Value Fund - Class A Carn & Co 17.419%
FBO Kasle Steel Corp Savings Plan
P.O. Box 96211
Washington, DC 20090-6211
</TABLE>
73
<PAGE>
<TABLE>
<S> <C> <C>
Merrill Lynch Pierce Fenner & Smith 13.376%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
First Union Securities, Inc. 8.184%
Lewis P. Gallagher Family Foundation
111 East Kilbourn Avenue
Milwaukee, WI 53202
Future Technology Fund - Class A Merrill Lynch Pierce Fenner & Smith 12.898%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Growth Fund - Class A Fiserv Securities Inc. 17.770%
Attn: Mutual Funds Department
One Commerce Street
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Fiserv Securities Inc. 17.723%
Attn: Mutual Funds Department
One Commerce Street
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Trans-Industries Inc. 10.177%
Employee 401K Profit Sharing Plan & Trust
2637 S. Adams Road
Rochester Hills, MI 48309
Emerging Markets Fund - Class A Merrill Lynch Pierce Fenner & Smith 14.429%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Bear Stearns Securities Corp. 11.210%
1 Metrotech Center North
Brooklyn, NY 11201-3859
Charles Schwab & Co., Inc. 10.944%
For the benefit of the customer
101 Montgomery Street
San Francisco, CA 94104
</TABLE>
74
<PAGE>
<TABLE>
<S> <C> <C>
Fiserv Securities Inc. 5.866%
Attn: Mutual Funds Department
One Commerce Street
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Healthcare Fund - Class A Merrill Lynch Pierce Fenner & Smith 28.319%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Small Company Growth Fund - Class B Merrill Lynch Pierce Fenner & Smith 60.444%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Index 500 Fund - Class B Merrill Lynch Pierce Fenner & Smith 40.792%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Equity Fund - Class B Merrill Lynch Pierce Fenner & Smith 39.960%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Intermediate Bond Fund - Class B Merrill Lynch Pierce Fenner & Smith 54.053%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Bond Fund - Class B Merrill Lynch Pierce Fenner & Smith 45.635%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Jonathon Petak 18.057%
155 W. 68th Street
New York, NY 10023
Tax-Free Short-Intermediate Bond Fund - Class B Merrill Lynch Pierce Fenner & Smith 87.577%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
75
<PAGE>
<TABLE>
<S> <C> <C>
Balanced Fund - Class B Merrill Lynch Pierce Fenner & Smith 26.180%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Michigan Bond Fund - Class B National Financial Securities Corp. 24.359%
Henry Oelkers
3004 Geneva
Dearborn, MI 48124
National Financial Securities Corp. 23.070%
Martin G. Janower & Rena A. Janower
6216 Cromwell
West Bloomfield, MI 48322
Prudential Securities Inc. FBO 19.527%
Ms. Helen R. Nash TTEE
Helen R. Nash Living Trust
150 Lone Pine Road
Bloomfield, MI 48304-3537
National Financial Securities Corp. 5.091%
Eleanor Bendy Revocable Trust
7551 W. Morrow Circle
Dearborn, MI 48126
Tax-Free Bond Fund - Class B Merrill Lynch Pierce Fenner & Smith 68.970%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
PaineWebber For the Benefit of 6.261%
Mabel Leason
3868 Millspring
Bloomfield, MI 48304-3048
Prudential Securities Inc. FBO 5.442%
Mr. Claude Nelson Sigmon
205 Herman Sipe Road
Conover, NC 28613-9648
Equity Income Fund - Class B Merrill Lynch Pierce Fenner & Smith 36.661%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
76
<PAGE>
<TABLE>
<S> <C> <C>
U.S. Income Fund - Class B Merrill Lynch Pierce Fenner & Smith 67.858%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Multi-Season Fund - Class B Merrill Lynch Pierce Fenner & Smith 49.249%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Real Estate Fund - Class B Merrill Lynch Pierce Fenner & Smith 52.029%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Value Fund - Class B Merrill Lynch Pierce Fenner & Smith 55.258%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Bond Fund - Class B Merrill Lynch Pierce Fenner & Smith 52.736%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
J.C. Bradford & Co. FBO 35.122%
William Michael
330 Commerce Street
Nashville, TN 37201-1809
NetNet Fund - Class B Merrill Lynch Pierce Fenner & Smith 31.155%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Micro-Cap Fund - Class B Merrill Lynch Pierce Fenner & Smith 47.233%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Small-Cap Value Fund - Class B Merrill Lynch Pierce Fenner & Smith 57.865%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
77
<PAGE>
<TABLE>
<S> <C> <C>
Future Technology Fund - Class B Merrill Lynch Pierce Fenner & Smith 24.271%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Growth Fund - Class B Merrill Lynch Pierce Fenner & Smith 35.638%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Emerging Markets Fund - Class B Merrill Lynch Pierce Fenner & Smith 38.594%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Healthcare Fund - Class B Merrill Lynch Pierce Fenner & Smith 30.521%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Small Company Growth Fund - Class C Merrill Lynch Pierce Fenner & Smith 69.041%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Equity Fund - Class C Merrill Lynch Pierce Fenner & Smith 73.453%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Intermediate Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 64.717%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
State Street Bank & Trust Co. FBO 7.538%
Thomas Casey R/O IRA
19 West Emerson Street
Melrose, MA 02176
Prudential Securities Inc. FBO 5.359%
Mr. Mark Howard
12050 Rambling Road
Lockport, IL 60441-7874
</TABLE>
78
<PAGE>
<TABLE>
<S> <C> <C>
Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 79.370%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Prudential Securities Inc. FBO 5.095%
Mrs. Elvie Weber
2260 SW 131st Place
Miami, FL 33175-1133
Tax-Free Short-Intermediate Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 92.361%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Prudential Securities Inc. FBO 5.663%
Guenter & Astrid Berger &
Jakob Ackermannn & Marlene Ackermann
Rowland Heights, CA 91748-4209
Balanced Fund - Class C Merrill Lynch Pierce Fenner & Smith 43.741%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Wachovia Securities, Inc. 15.167%
P.O. Box 1220
Charlotte, NC 28201-1220
Michigan Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 99.558%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Tax-Free Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 57.554%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Hilda P. Willet 20.121%
Estate of James McKneely
901 Wakestone Court
Raleigh, NC 27609-6352
</TABLE>
79
<PAGE>
<TABLE>
<S> <C> <C>
Equity Income Fund - Class C Merrill Lynch Pierce Fenner & Smith 42.955%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Linda A. Bramley 7.382%
3604 Brookshire
Plano, TX 75075
U.S. Income Fund - Class C Merrill Lynch Pierce Fenner & Smith 52.981%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Robert W. Baird & Co. 36.588%
777 East Wisconsin Avenue
Milwaukee, WI 53202-5391
Multi-Season Fund - Class C Merrill Lynch Pierce Fenner & Smith 80.448%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Real Estate Fund - Class C Merrill Lynch Pierce Fenner & Smith 36.995%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Value Fund - Class C Merrill Lynch Pierce Fenner & Smith 28.306%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
PaineWebber FBO 8.734%
Louise C. Pais
3250 Barry Avenue
Los Angeles, CA 90066-1206
Prudential Securities FBO 7.010%
David H. Gregg - IRA
1008 Essex Circle
Kalamazoo, MI 49008-2349
Prudential Securities FBO 6.999%
Marilyn A. Rhodes & Jeffrey J. Rhodes JT TEN
1117 Fennimore Drive
Marshall, MI 49068-9644
</TABLE>
80
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber FBO 6.034%
Norman R. Bodine
P.O. Box 3321
Weehawken, NJ 07087-8154
First Clearing Corporation 5.198%
John Van Dusen
722 Woodcrest Road
Radnor, PA 19087-3608
International Bond Fund - Class C Merrill Lynch Pierce Fenner & Smith 30.927%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Donald, Lufkin Jenrette 30.661%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
Donald, Lufkin Jenrette 29.6000%
Securities Corporation Inc.
P.O. Box 2052
Jersey City, NJ 07303-9998
NetNet Fund - Class C Merrill Lynch Pierce Fenner & Smith 37.489%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Micro-Cap Fund - Class C Merrill Lynch Pierce Fenner & Smith 50.787%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Small Cap Value Fund - Class C Merrill Lynch Pierce Fenner & Smith 54.534%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
International Growth Fund - Class C PaineWebber 19.360%
M. Michael Moscone
328 Cranbrook Ct.
Bloomfield Hills, MI 48304-3525
</TABLE>
81
<PAGE>
<TABLE>
<S> <C> <C>
PaineWebber 14.137%
FBO Keilley A. Hamm Trustee
P.O. Box 955
Branchville, NJ 07826-0955
PaineWebber 14.137%
FBO Keith Hamm Trustee
P.O. Box 955
Branchville, NJ 07826-0955
Merrill Lynch Pierce Fenner & Smith 12.183%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
Donaldson, Lufkin & Jenrette Securities 5.105%
P.O. Box 2052
Jersey City, NJ 07303-9998
Emerging Markets Fund - Class C Merrill Lynch Pierce Fenner & Smith 25.734%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
National Financial Services Corp. 6.022%
FBO Carl Simons
220 Allandale Road
Chestnut Hill, MA 02467
Healthcare Fund - Class C Merrill Lynch Pierce Fenner & Smith 35.681%%
FBO The sole benefit of its customers
4800 Deer Lake Dr. East 2nd Floor
Jacksonville, FL 32246-6484
</TABLE>
As of April 28, 2000, Munder Capital Management, on behalf of their clients
owned 73.65% of the Michigan Tax-Free Bond Fund Class Y shares, 5.19% of the
International Equity Fund Class Y shares, 2.28% of the Index 500 Class Y shares,
1.39% of the Small Company Growth Fund Class A shares, 12.69% of the Small
Company Growth Fund Class Y shares, 32.91% of the U.S. Treasury Money Market
Fund Class Y shares, 4.50% of the Tax-Free Bond Fund Class Y shares, 1.29% of
the Equity Income Fund Class Y Shares, 39.50% of the Real Estate Fund Class Y
shares, 1.10% of the Tax-Free Short-Intermediate Bond Fund Class A shares, 7.79%
of the Tax-Free Short-Intermediate Bond Fund Class Y shares, 24.47% of the Value
Fund Class A shares, 5.51% of the Value Fund Class Y shares, 4.11% of the Focus
Growth Fund Class Y shares, 43.52% of the Growth Opportunities Fund Class Y
shares, 1.01% of the Multi-Season Growth Fund Class A shares, 7.34% of the
Multi-Season Growth Fund Class Y shares, 4.35% of the International Growth Fund
Class K shares, 54.38% of the International Growth Fund Class Y shares, 1.79% of
the Global Financial Services Fund Class Y Shares, 4.85% of the Balanced Fund
Class Y Shares, 1.13% of the Micro-Cap Fund Class A shares, 47.33% of the Micro-
Cap Fund Class Y shares, 24.73% of the NetNet Fund Class Y shares, 29.75% of the
Future Technology Fund Class Y shares, 7.96% of the Small-Cap Value Fund Class A
shares, 12.52% of the Small-Cap Value Fund Class Y shares, 24.82% of the Bond
Fund Class Y shares, 22.74% of the International Bond Fund Class Y shares,
24.47% of the Value Fund Class A
82
<PAGE>
shares, 5.51% of the Value Fund Class Y shares, 3.05% of the U.S. Government
Income Fund Class A shares and 94.75% of the Money Market Fund Class Y shares.
Shareholder Approvals. As used in this SAI, 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 SAI 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. Text-only versions of
fund documents can be viewed online or downloaded from the SEC at
http:/www.sec.gov.
Statements contained herein and in each of the Fund's Prospectuses as to
the contents of any contract or other documents referred to are not necessarily
complete, and, in such instance, reference is made to the copy of such contract
or other documents filed as an exhibit to the Fund's registration statement,
each such statement being qualified in all respects by such reference.
FINANCIAL STATEMENTS
The financial statements for the Trust, Framlington and the Company
including the notes thereto, dated June 30, 1999 have been audited by Ernst &
Young LLP and are incorporated by reference into this SAI from the Annual
Reports of the Trust, Framlington and the Company dated as of June 30, 1999. The
information under the caption "Financial Highlights" of the Funds for the period
from commencement of operations through June 30, 1999, appearing in the related
Prospectuses dated October 26, 1999 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.
83
<PAGE>
APPENDIX A
----------
- Rated Investments -
Corporate Bonds
- ---------------
From Moody's Investors Services, Inc. ("Moody's") description of its bond
ratings:
"Aaa":
Bonds that are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position
of such issues.
"Aa":
Bonds that are rated "Aa" are judged to be of high-quality by all
standards. Together with the "Aaa" group they comprise what are
generally known as "high-grade" bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in "Aaa"
securities or fluctuation of protective elements may be of greater
amplitude or there may be other elements present which make the long-term
risks appear somewhat larger than in "Aaa" securities.
"A":
Bonds that are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors
giving security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
"Baa":
Bonds that are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
"Ba":
Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty
of position characterizes bonds in this class.
"B":
Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
"Caa":
Bonds that are rated "Caa" are of poor standing. These issues may be
in default or present elements of danger may exist with respect to
principal or interest.
Moody's applies numerical modifiers (1, 2 and 3) with respect to bonds
rated "Aa" through "B". The modifier 1 indicates that the bond being rated
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the bond ranks in the
lower end of its generic rating category.
A-1
<PAGE>
From Standard & Poor's Corporation ("S&P") description of its bond ratings:
"AAA":
Debt rated "AAA" has the highest rating assigned by S&P. Capacity to
pay interest and repay principal is extremely strong.
"AA":
Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from "AAA" issues by a small degree.
"A":
Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher
rated categories.
"BBB":
Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds in
higher rated categories.
"BB," "B" and "CCC":
Bonds rated "BB" and "B" are regarded, on balance, as predominantly
speculative with respect to capacity to pay interest and principal in
accordance with the terms of the obligations. "BB" represents a lower
degree of speculation than "B" and "CCC" the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
To provide more detailed indications of credit quality, the "AA" or "A"
ratings may be modified by the addition of a plus or minus sign to show relative
standing within these major rating categories.
Commercial Paper
- ----------------
The rating "Prime-1" is the highest commercial paper rating assigned by
Moody's. These issuers (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Instruments rated "Prime-2" are offered by issuers (or related supporting
institutions) which have a strong capacity for repayment of short-term
promissory obligations. This will normally be evidenced by many of the
characteristics of "Prime-1" rated issues, but to a lesser degree. Earnings
trends and coverage ratios, while sound, will be more susceptible to variation.
Capitalization characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Commercial paper ratings of S&P are current assessments of the likelihood
of timely payment of debt having original maturities of no more than 365 days.
Commercial paper rated "A-1" by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted "A-1+."
Commercial paper rated "A-2" by S&P indicates that capacity for timely payment
is strong. However, the relative degree of safety is not as high as for issues
designated "A-1."
Rated commercial paper purchased by a Fund must have (at the time of
purchase) the highest quality rating assigned to short-term debt securities or,
if not rated, or rated by only one agency, are determined to be of comparative
quality pursuant to guidelines approved by a Fund's Boards of Trustees and
Directors.
A-2
<PAGE>
APPENDIX B
----------
The Equity Funds, the Balanced Fund and the Bond Funds may enter into
certain futures transactions and options for hedging purposes. Each of the
Equity Funds, Balanced Fund, Bond Funds, International Bond Fund and Tax-Free
Bond Funds (other than Tax-Free Short-Intermediate Bond Fund) may also write
covered call options, buy put options, buy call options and write secured put
options. 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.
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.
B-1
<PAGE>
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 Advisor wishes to fix the current
market value of the portfolio security until some point in the future. Assume
the portfolio security has a market value of 100, and the Advisor believes that,
because of an anticipated rise in interest rates, the value will decline to 95.
The fund might enter into futures contract sales of Treasury bonds for an
equivalent of 98. If the market value of the portfolio security does indeed
decline from 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 advisor could be wrong in its forecast of interest rates and the
equivalent futures market price could rise above 98. In this case, the market
value of the portfolio securities, including the portfolio security being
protected, would increase. The benefit of this increase would be reduced by the
loss realized on closing out the futures contract sale.
If interest rate levels did not change, the Fund in the above example might
incur a loss of 2 points (which might be reduced by an offsetting transaction
prior to the settlement date). In each transaction, transaction expenses would
also be incurred.
Example of Futures Contract Purchase. The Funds would engage in an
-------------------------------------
interest rate futures contract purchase when they are not fully invested in
long-term bonds but wish to defer for a time the purchase of long-term bonds in
light of the availability of advantageous interim investments, e.g., shorter
term securities whose yields are greater than those available on long-term
bonds. A Fund's basic motivation would be to maintain for a time the income
advantage from investing in the short-term securities; the Fund would be
endeavoring at the same time to eliminate the effect of all or part of an
expected increase in market price of the long-term bonds that the Fund may
purchase.
For example, assume that the market price of a long-term bond that the Fund
may purchase, currently yielding 10% , tends to move in concert with futures
market prices of Treasury bonds. The advisor wishes to fix the current market
price (and thus 10% yield) of the long-term bond until the time (four months
away in this example) when it may purchase the bond. Assume the long-term bond
has a market price of 100, and the advisor believes that, because of an
anticipated fall in interest rates, the 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 designated on the books of
the Fund's custodian for sale in four months, for purchase of the long-term bond
at an assumed market price of 100. Assume these short-term securities are
yielding 15%. If the market price of the long-term bond does indeed rise from
100 to 105, the equivalent futures market price for Treasury bonds might also
rise from 98 to 103. In that case, the 5 point increase in the price that the
Fund pays for the long-term bond would be offset by the 5 point gain realized by
closing out the futures contract purchase.
The advisor could be wrong in its forecast of interest rates; long-term
interest rates might rise to above 10%; and the equivalent futures market price
could fall below 98. If short-term rates at the same time fall to 10% or below,
it is possible that the Fund would continue with its purchase program for long-
term bonds. The market price
B-2
<PAGE>
of available long-term bonds would have decreased. The benefit of this price
decrease, and thus yield increase, will be reduced by the loss realized on
closing out the futures contract purchase.
If, however, short-term rates remained above available long-term rated, it
is possible that the Fund would discontinue its purchase program for long-term
bonds. The yield on short-term securities in the portfolio, including those
originally in the pool assigned to the particular long-term bond, would remain
higher than yields on long-term bonds. The benefit of this continued
incremental income will be reduced by the loss realized on closing out the
futures contract purchase. In each transaction, expenses would also be
incurred.
II. Index Futures Contracts
-----------------------
General. A bond index assigns relative values of the bonds included in the
--------
index and the index fluctuates with changes in the market values of the bonds
included. The Chicago Board of Trade has designed a futures contract based on
the Bond Buyer Municipal Bond Index. This Index is composed of 40 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 indices,
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 indices, such as the Standard & Poor's 100 or indices based on an
industry or market segment, such as oil and gas stocks.
Futures contracts are traded on organized exchanges regulated by the
Commodity Futures Trading Commission. Transactions on such exchanges are
cleared through a clearing corporation, which guarantees the performance of the
parties to each contract.
A Fund will sell index futures contracts in order to offset a decrease in
market value of its portfolio securities that might otherwise result from a
market decline. A Fund will purchase index futures contracts in anticipation of
purchases of securities. In a substantial majority of these transactions, a
Fund will purchase such securities upon termination of the long futures
position, but a long futures position may be terminated without a corresponding
purchase of securities.
In addition, a Fund may utilize index futures contracts in anticipation of
changes in the composition of its portfolio holdings. For example, in the event
that a Fund expects to narrow the range of industry groups represented in its
holdings it may, prior to making purchases of the actual securities, establish a
long futures position based on a more restricted index, such as an index
comprised of securities of a particular industry group. A Fund may also sell
futures contracts in connection with this strategy, in order to protect against
the possibility that the value of the securities to be sold as part of the
restructuring of the portfolio will decline prior to the time of sale.
Examples of Stock Index Futures Transactions. The following are examples
---------------------------------------------
of transactions in stock index futures (net of commissions and premiums, if
any).
ANTICIPATORY PURCHASE HEDGE: Buy the Future
Hedge Objective: Protect Against Increasing Price
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
Anticipate buying $62,500 in Equity Securities -Day Hedge is Placed-
Buying 1 Index Futures at 125
Value of Futures = $62,500/Contract
Buy Equity Securities with Actual Cost = $65,000 Day Hedge is Lifted-
</TABLE>
B-3
<PAGE>
<TABLE>
<S> <C>
Increase in Purchase Price = $2,500 Sell 1 Index Futures at 130
Value of Futures = $65,000/Contract
Gain on Futures = $2,500
</TABLE>
HEDGING A STOCK PORTFOLIO: Sell the Future
Hedge Objective: Protect Against Declining
Value of the Portfolio
Factors:
Value of Stock Portfolio = $1,000,000
Value of Futures Contract - 125 X $500 =
$62,500 Portfolio Beta Relative to the Index = 1.0
<TABLE>
<CAPTION>
Portfolio Futures
<S> <C>
Anticipate Selling $1,000,000 in Equity Securities - Day Hedge is Placed-
Sell 16 Index Futures at 125
Value of Futures = $1,000,000
Equity Securities - Own Stock Day Hedge is Lifted-
with Value = $960,000 Buy 16 Index Futures at 120
Loss in Portfolio Value = $40,000 Value of Futures = $960,000
Gain on Futures = $40,000
</TABLE>
III. Margin Payments
---------------
Unlike the purchase or sale of portfolio securities, no price is paid or
received by a Fund upon the purchase or sale of a futures contract. Initially,
the Fund will be required to deposit with the broker or in a segregated account
with the Fund's custodian in an amount of cash or cash equivalents, known as
initial margin, based on the value of the contract. The nature of initial
margin in futures transactions is different from that of margin in securities
transactions in that futures contract margin does not involve the borrowing of
funds by the customer to finance the transactions. Rather, the initial margin
is in the nature of a performance bond or good faith deposit on the contract
which is returned to the Fund upon termination of the futures contract assuming
all contractual obligations have been satisfied. Subsequent payments, called
variation margin, to and from the broker, will be made on a daily basis as the
price of the underlying instruments fluctuates making the long and short
positions in the futures contract more or less valuable, a process known as
marking to the market. For example, when a particular Fund has purchased a
futures contract and the price of the contract has risen in response to a rise
in the underlying instruments, that position will have increased in value and
the Fund will be entitled to receive from the broker a variation margin payment
equal to that increase in value. Conversely, where the Fund has purchased a
futures contract and the price of the futures contract has declined in response
to a decrease in the underlying instruments, the position would be less valuable
and the Fund would be required to make a variation margin payment to the broker.
At any time prior to expiration of the futures contract, the Advisor, World or
the Sub-Advisor may elect to close the position by taking an opposite position,
subject to the availability of a secondary market, which will operate to
terminate the Fund's position in the futures contract. A final determination of
variation margin is then made, additional cash is required to be paid by or
released to the Fund, and the Fund realizes a loss or gain.
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 futures and movements in the price of the
instruments which are the subject of the hedge. The price of futures may move
more than or less than the price of the instruments being hedged. If the price
of futures moves less than the price of the instruments which are the subject of
the hedge, the hedge will not be fully effective but, if the price of the
instruments being hedged has moved in an unfavorable direction, the Fund would
be in a better position than if it had not hedged at all. If the
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price of the instruments being hedged has moved in a favorable direction, this
advantage will be partially offset by the loss on the futures. If the price of
the futures moves more than the price of the hedged instruments, the Fund
involved will experience either a loss or gain on the futures which will not be
completely offset by movements in the price of the instruments which are the
subject of the hedge. To compensate for the imperfect correlation of movements
in the price of instruments being hedged and movements in the price of futures
contracts, the Fund may buy or sell futures contracts in a greater dollar amount
than the dollar amount of instruments being hedged if the volatility over a
particular time period of the prices of such instruments has been greater than
the volatility over such time period of the futures, or if otherwise deemed to
be appropriate by the Advisor, World or the Sub-Advisor. Conversely, the Funds
may buy or sell fewer futures contracts if the volatility over a particular time
period of the prices of the instruments being hedged is less than the volatility
over such time period of the futures contract being used, or if otherwise deemed
to be appropriate by the Advisor, World or the Sub-Advisor. It is also possible
that, when the Fund had sold futures to hedge its portfolio against a decline in
the market, the market may advance and the value of the futures instruments held
in the Fund may decline. If this occurs, the Fund would lose money on the
futures and also experience a decline in value in its portfolio securities.
Where futures are purchased to hedge against a possible increase in the
price of securities before a Fund is able to invest its cash (or cash
equivalents) in an orderly fashion, it is possible that the market may decline
instead; if the Fund then concludes not to invest its cash at that time because
of concern as to possible further market decline or for other reasons, the Funds
will realize a loss on the futures contract that is not offset by a reduction in
the price of the securities that were to be purchased.
In instances involving the purchase of futures contracts by the Funds, an
amount of cash and cash equivalents, equal to the market value of the futures
contracts, will be deposited in a segregated account with the Fund's custodian
and/or in a margin account with a broker to collateralize the position and
thereby insure that the use of such futures is unleveraged.
In addition to the possibility that there may be an imperfect correlation,
or no correlation at all, between movements in the futures and the instruments
being hedged, the price of futures may not correlate perfectly with movement in
the cash market due to certain market distortions. Rather than meeting
additional margin deposit requirements, investors may close futures contracts
through off-setting transactions which could distort the normal relationship
between the cash and futures markets. Second, with respect to financial futures
contracts, the liquidity of the futures market depends on participants entering
into off-setting transactions rather than making or taking delivery. To the
extent participants decide to make or take delivery, liquidity in the futures
market could be reduced, thus producing distortions. Third, from the point of
view of speculators, the deposit requirements in the futures market are less
onerous than margin requirements in the securities market. Therefore, increased
participation by speculators in the futures market may also cause temporary
price distortions. Due to the possibility of price distortion in the futures
market, and because of the imperfect correlation between the movements in the
cash market and movements in the price of futures, a correct forecast of general
market trends or interest rate movements by the Advisor, World or the Sub-
Advisor may still not result in a successful hedging transaction over a short
time frame.
Positions in futures may be closed out only on an exchange or board of
trade which provides a secondary market for such futures. Although the Funds
intend to purchase or sell futures only on exchanges or boards of trade where
there appear to be active secondary markets, there is no assurance that a liquid
secondary market on any exchange or board of trade will exist for any particular
contract or at any particular time. When there is no liquid market, it may not
be possible to close a futures investment position, and in the event of adverse
price movements, the Funds would continue to be required to make daily cash
payments of variation margin. However, in the event futures contracts have been
used to hedge portfolio securities, such securities will not be sold until the
futures contract can be terminated. In such circumstances, an increase in the
price of the securities, if any, may partially or completely offset losses on
the futures contract. However, as described above, there is no guarantee that
the price of the securities will in fact correlate with the price movements in
the futures contract and thus provide an offset on a futures contract.
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Further, it should be noted that the liquidity of a secondary market in a
futures contract may be adversely affected by "daily price fluctuation limits"
established by commodities exchanges which limit the amount of fluctuation in a
futures contract price during a single trading day. Once the daily limit has
been reached in the contract, no trades may be entered into at a price beyond
the limit, thus preventing the liquidation of open futures positions. The
trading of futures contracts is also subject to the risk of trading halts,
suspensions, exchange or clearing house equipment failures, government
intervention, insolvency of a brokerage firm or clearing house or other
disruptions of normal activity, which could at times make it difficult or
impossible to liquidate existing positions or to recover excess variation margin
payments.
Successful use of futures by the Funds is also subject to the Advisor's,
World's or the Sub-Advisor's ability to predict correctly movements in the
direction of the market. For example, if a particular Fund has hedged against
the possibility of a decline in the market adversely affecting securities held
by it and securities prices increase instead, the Fund will lose part or all of
the benefit to the increased value of its securities which it has hedged because
it will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales of securities may be, but
will not necessarily be, at increased prices which reflect the rising market.
The Funds may have to sell securities at a time when it may be disadvantageous
to do so.
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 from(call) or sell to(put) the writer of the option a futures
contract at a specified price at any time during the period of the option. Upon
exercise, the writer of, the option is obligated to pay the difference between
the cash value of the futures contract and the exercise price. Like the buyer or
seller of a futures contract, the holder, or writer, of an option has the right
to terminate its position prior to the scheduled expiration of the option by
selling, or purchasing an option of the same series, at which time the person
entering into the closing transaction will realize a gain or loss. A Fund will
be required to deposit initial margin and variation margin with respect to put
and call options on futures contracts written by it pursuant to brokers'
requirements similar to those described above. Net option premiums received will
be included as initial margin deposits.
Investments in futures options involve some of the same considerations that
are involved in connection with investments in future contracts (for example,
the existence of a liquid secondary market). In addition, the purchase or sale
of an option also entails the risk that changes in the value of the underlying
futures contract will not correspond to changes in the value of the option
purchased. Depending on the pricing of the option compared to either the
futures contract upon which it is based, or upon the price of the securities
being hedged, an option may or may not be less risky than ownership of the
futures contract or such securities. In general, the market prices of options
can be expected to be more volatile than the market prices on underlying futures
contract. Compared to the purchase or sale of futures contracts, however, the
purchase of call or put options on futures contracts may frequently involve less
potential risk to the Fund because the maximum amount at risk is the premium
paid for the options (plus transaction costs). The writing of an option on a
futures contract involves risks similar to those risks relating to the sale of
futures contracts.
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 SAI. The Fund may enter into currency transactions with counterparties
which have received (or the guarantors of
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<PAGE>
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 or World.
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 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, World or the
Sub-Advisor considers that the Austrian schilling is correlated to the German
mark (the "D-mark"), the Fund holds securities denominated in shillings and the
Advisor, World or the Sub-Advisor believes that the value of the schillings will
decline against the U.S. dollar, the Advisor, World or the Sub-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 designate liquid, high grade
assets on the books of the Fund's 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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VII. Options
-------
Each of the Equity Funds, Balanced Fund, Bond Funds, International Bond
Fund and Tax-Free Bond Funds (other than Tax-Free Short-Intermediate Bond Fund)
may write covered call options, buy put options, buy call options and write
secured put options. Such options may relate to particular securities and may
or may not be listed on a national securities exchange and issued by the Options
Clearing Corporation. Options trading is a highly specialized activity which
entails greater than ordinary investment risk. Options on particular securities
may be more volatile than the underlying securities, and therefore, on a
percentage basis, an investment in options may be subject to greater fluctuation
than an investment in the underlying securities themselves.
A call option for a particular security gives the purchaser of the option
the right to buy, and the writer of the option the obligation to sell, the
underlying security at the stated exercise price at any time prior to the
expiration of the option, regardless of the market price of the security. The
premium paid to the writer is in consideration for undertaking the obligations
under the option contract. A put option for a particular security gives the
purchaser the right to sell, and the writer of the option the obligation to buy,
the underlying security at the stated exercise price at any time prior to the
expiration date of the option, regardless of the market price of the security.
The writer of an option that wishes to terminate its obligation may effect
a "closing purchase transaction." This is accomplished by buying an option of
the same series as the option previously written. The effect of the purchase is
that the writer's position will be canceled by the clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." The cost of such a closing purchase plus transaction costs may be
greater than the premium received upon the original option, in which event the
Fund will have incurred a loss in the transaction. There is no guarantee in any
instance that either a closing purchase or a closing sale transaction can be
effected.
Effecting a closing transaction in the case of a written call option will
permit the Funds to write another call option on the underlying security with
either a different exercise price or expiration date or both, or in the case of
a written put option, will permit the Funds to write another put option to the
extent that the exercise price thereof is secured by deposited cash or short-
term securities. Also, effecting a closing transaction will permit the cash or
proceeds from the concurrent sale of any securities subject to the option to be
used for other Fund investments. If a Fund desires to sell a particular
security from its portfolio on which it has written a call option, it will
effect a closing transaction prior to or concurrent with the sale of the
security.
The Funds may write options in connection with buy-and-write transactions;
that is, the Funds may purchase a security and then write a call option against
that security. The exercise price of the call the Funds determine to write will
depend upon the expected price movement of the underlying security. The
exercise price of a call option may be below ("in-the-money"), equal to ("at-
the-money") or above ("out-of-the-money") the current value of the underlying
security at the time the option is written. Buy-and-write transactions using
in-the-money call options may be used when it is expected that the price of the
underlying security will remain flat or decline moderately during the option
period. Buy-and-write transactions using out-of-the-money call options may be
used when it is expected that the premiums received from writing the call option
plus the appreciation in the market price of the underlying security up to the
exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the maximum gain to the relevant Fund will be the premium received
by it for writing the option, adjusted upwards or downwards by the difference
between the Fund's purchase price of the security and the exercise price. If
the options are not exercised and the price of the underlying security declines,
the amount of such decline will be offset in part, or entirely, by the premium
received.
In the case of writing a call option on a security, the option is "covered"
if a Fund owns the security underlying the call or has an absolute and immediate
right to acquire that security without additional cash consideration (or, if
additional cash consideration is required, cash or liquid securities in such
amount as are earmarked on the books of the Fund's 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 liquid
securities 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
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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 in cash or liquid securities is
earmarked on the books of the Fund's custodian. A Fund will limit its investment
in uncovered call options purchased or written by the Fund to 33 1/3% of the
Fund's total assets. A Fund will write put options only if they are "secured" by
cash or liquid securities earmarked on the books of the Fund's 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.
The Funds may purchase put options to hedge against a decline in the value
of their portfolios. By using put options in this way, a Fund will reduce any
profit it might otherwise have realized in the underlying security by the amount
of the premium paid for the put option and by transaction costs. The Funds may
purchase call options to hedge against an increase in the price of securities
that they anticipate purchasing in the future. The premium paid for the call
option plus any transaction costs will reduce the benefit, if any, realized by a
Fund upon exercise of the option, and, unless the price of the underlying
security rises sufficiently, the option may expire worthless to the Fund.
When a Fund purchases an option, the premium paid by it is recorded as an
asset of the Fund. When the Fund writes an option, an amount equal to the net
premium (the premium less the commission) received by the Fund is included in
the liability section of the Fund's statement of assets and liabilities as a
deferred credit. The amount of this asset or deferred credit will be
subsequently marked to market to reflect the current value of the option
purchased or written. The current value of the traded option is the last sale
price or, in the absence of a sale, the average of the closing bid and asked
prices. If an option purchased by the Fund expires unexercised the Fund
realizes a loss equal to the premium paid. If the Fund enters into a closing
sale transaction on an option purchased by it, the Fund will realize a gain if
the premium received by the Fund on the closing transaction is more than the
premium paid to purchase the option, or a loss if it is less. If an option
written by the Fund expires on the stipulated expiration date or if the Fund
enters into a closing purchase transaction, it will realize a gain (or loss if
the cost of a closing purchase transaction exceeds the net premium received when
the option is sold) and the deferred credit related to such option will be
eliminated. If an option written by the Fund is exercised, the proceeds of the
sale will be increased by the net premium originally received and the Fund will
realize a gain or loss.
There are several risks associated with transactions in options on
securities and indices. For example, there are significant differences between
the securities and options markets that could result in an imperfect correlation
between these markets, causing a given transaction not to achieve its
objectives. An option writer unable to effect a closing purchase transaction
will not be able to sell the underlying security (in the case of a covered call
option) or liquidate the earmarked securities (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 (an "Exchange"),
may be absent for reasons which include the following: there may be insufficient
trading interest in certain options; restrictions may be imposed by an Exchange
on opening transactions or closing transactions or both; trading halts,
suspensions or other restrictions may be imposed with respect to particular
classes or series of options or underlying securities; unusual or unforeseen
circumstances may interrupt normal operations on an Exchange; the facilities of
an Exchange or the Options Clearing Corporation may not at all
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<PAGE>
times be adequate to handle current trading volume; or one or more Exchanges
could, for economic or other reasons, decide or be compelled at some future date
to discontinue the trading of options (or a particular class or series of
options), in which event the secondary market on that Exchange (or in that class
or series of options) would cease to exist, although outstanding options that
had been issued by the Options Clearing Corporation as a result of trades on
that Exchange would continue to be exercisable in accordance with their terms.
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 a 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 the issuing country's economy.
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