M FUND
PROSPECTUS
MAY 1, 1997
M Fund, Inc. (the "Company") is an investment company consisting of
four separate diversified investment portfolios or funds (the "Funds"). These
Funds are available through the purchase of variable life insurance and variable
annuity policies issued by certain insurance companies ("Participating Insurance
Companies"). The Funds are intended to be offered in addition to other
portfolios offered by the Participating Insurance Companies.
Shares of the Funds may also be sold to qualified pension and retirement plans.
Each of the Funds seeks long-term capital appreciation or total return,
and each Fund will invest primarily in stocks and other equity securities.
However, the Funds will use different investment techniques or strategies, and
each Fund's Portfolio Manager has a different investment style.
O EDINBURGH OVERSEAS EQUITY FUND invests outside of the United States,
and when appropriate will focus on small- to medium-capitalization companies and
emerging markets.
o TURNER CORE GROWTH FUND emphasizes common stocks of U.S. companies
that show strong earnings potential and also have reasonable valuations.
o FRONTIER CAPITAL APPRECIATION FUND invests in common stock of U.S.
companies of all sizes, with emphasis on stocks of small- to
medium-capitalization companies.
o ENHANCED U.S. EQUITY FUND invests primarily in common stock of U.S.
companies perceived to provide an opportunity for higher rates of return than
the Standard & Poor's 500 Composite Stock Price Index (the "S&P 500" or the
"Index") while maintaining risk characteristics which approximate those of the
Index.
This Prospectus briefly describes the information that investors should
know before investing in these Funds, including the risks associated with
investing in each. Investors should read and retain this Prospectus for future
reference. A Statement of Additional Information dated May 1, 1997 (the "SAI"),
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated herein by reference. The SAI is available without charge, upon
request by writing to the Company at River Park Center, 205 S.E. Spokane Street,
Portland, Oregon 97202, Attn: M Fund Administrator, or by calling (888)736-2878.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS SHOULD BE READ IN CONJUNCTION WITH THE PROSPECTUS FOR
THE INSURANCE OR ANNUITY POLICIES.
TABLE OF CONTENTS
INTRODUCTION........................................................ 3
FINANCIAL HIGHLIGHTS................................................ 3
INVESTMENT OBJECTIVES AND POLICIES.................................. 5
Edinburgh Overseas Equity Fund............................. 5
Turner Core Growth Fund.................................... 6
Frontier Capital Appreciation Fund......................... 6
Enhanced U.S. Equity Fund.................................. 7
INVESTMENT RESTRICTIONS............................................. 7
MANAGEMENT.......................................................... 7
Directors and Officers..................................... 7
Investment Adviser......................................... 8
Portfolio Managers......................................... 9
INVESTMENT METHODS AND RISKS........................................ 10
Foreign Investments........................................ 10
Investing in Small-Capitalization Companies................ 12
Asset Growth............................................... 12
Securities Lending......................................... 12
Other Investments.......................................... 13
PERFORMANCE INFORMATION............................................. 13
M Fund Performance......................................... 13
Private Account Performance................................ 14
DETERMINATION OF NET ASSET VALUE.................................... 16
OFFERING, PURCHASE AND REDEMPTION OF SHARES......................... 16
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS.................... 17
TAXES .............................................................. 17
OTHER INFORMATION................................................... 18
Reports ................................................... 18
Voting and Other Rights.................................... 18
Administrative and Other Services.......................... 18
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INTRODUCTION
The M Fund investment portfolios are available to the public through
the purchase of variable life insurance and variable annuity policies offered by
members of M Financial Group and issued by Participating Insurance Companies. M
Financial Group is an independent life insurance producer group, specializing in
the distribution of life insurance to persons of substantial financial means.
The M Fund investment portfolios can be selected by policyholders in addition to
other portfolios offered by the Participating Insurance Companies. The M Fund
portfolio managers have been selected, and are reviewed and monitored, by M
Financial Investment Advisers, Inc., whose Board of Directors consists of
members from M Financial Group.
M Fund, Inc. (the "Company") is an open-end management investment
company, commonly known as a mutual fund. The Company consists of four separate
investment portfolios or funds (the "Funds" or a "Fund"), each of which is, in
effect, a separate mutual fund. (Additional Funds may be created from time to
time.) By investing in a Fund, an investor becomes entitled to a pro rata share
of all dividends and distributions arising from the net income and capital gains
on the investments of that Fund. Likewise, an investor shares pro rata in any
losses of that Fund.
Pursuant to an investment advisory agreement and subject to the
authority of the Company's board of directors (the "Board of Directors"), M
Financial Investment Advisers, Inc. (the "Adviser") serves as the Company's
investment adviser and conducts the business and affairs of the Company. The
Adviser has engaged the following Portfolio Managers to act as sub-advisers to
provide the day-to-day portfolio management for the respective Funds.
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FUND PORTFOLIO MANAGER
================================================================================
Edinburgh Overseas Equity Fund Edinburgh Fund Managers plc
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Turner Core Growth Fund Turner Investment Partners, Inc.
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Frontier Capital Appreciation Fund Frontier Capital Management Company, Inc.
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Enhanced U.S. Equity Fund Franklin Portfolio Associates LLC
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The Company currently offers its shares to separate accounts of
Participating Insurance Companies as funding vehicles for certain variable life
insurance or variable annuity policies (the "Policies"). The Company may also
offer its shares to qualified pension and retirement plans. The Company does not
offer its shares directly to the general public. A separate prospectus, which
accompanies this Prospectus, describes the applicable Policies and the separate
account through which they are funded.
The Funds' shares are sold with no sales load, no redemption fees, and
no "12b-1" or other distribution fees. However, various fees and charges
(possibly including sales loads) are imposed with respect to each Policy, as
described in the prospectus for the applicable Policy.
-3-
FINANCIAL HIGHLIGHTS
The following selected financial highlights are derived from the
Company's audited financial statements included in the Company's Annual Report
to Shareholders. The financial statements and report of Coopers & Lybrand
L.L.P., independent accountants, included in the Annual Report to Shareholders
for the Company's fiscal year ended December 31, 1996 are incorporated by
reference into the Statement of Additional Information. The following data
should be read in conjunction with such financial statements, related notes, and
other financial information contained in the Annual Report. The Annual Report is
available without charge and upon request by calling (888) 736-2878.
M Fund, Inc.
Financial Highlights
For the Period Ended December 31, 1996 (a)
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<TABLE>
<CAPTION>
EDINBURGH FRONTIER CAPITAL ENHANCED
OVERSEAS TURNER CORE APPRECIATION U.S. EQUITY
FUND GROWTH FUND FUND FUND
----------- ----------- --------------- ------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD ...................................... $10.00 $10.00 $10.00 $10.00
------------ ----------- --------------- -----------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income (loss) ..................................... 0.06 0.06 0.00 0.12
Net realized and unrealized gain (loss) on investments ........... (0.12) 1.94 3.03 2.25
------------ ---------- --------------- -----------
Total from investment operations ............................. (0.06) 2.00 3.03 2.37
------------ --------- --------------- -----------
LESS DISTRIBUTIONS TO SHAREHOLDERS:
From net investment income ....................................... (0.06) (0.06) - (0.12)
From net realized gains .......................................... - (0.34) (0.51) (0.40)
------------ --------- --------------- -----------
Total distributions ............................................. (0.06) (0.40) (0.51) (0.52)
------------ --------- --------------- -----------
NET ASSET VALUE, END OF PERIOD ............................................ $9.88 $11.60 $12.52 $11.85
============ ========= =============== ===========
TOTAL RETURN * ............................................................ (0.63%) 19.99% 30.31% 23.67%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000's) ............................... $3,177 $2,003 $3,006 $1,582
Net expenses to average daily net assets before interest expense** 1.30% 0.70% 1.15% 0.80%
Net expenses to average daily net assets after interest expense** 1.30% 0.78% 1.20% 0.80%
Net investment income (loss) to average daily net assets ** ..... 0.67% 0.55% (0.30%) 1.43%
Portfolio turnover rate ......................................... 65% 258% 140% 79%
Average commission rate paid *** ................................ $0.0474 $0.0600 $0.0362 $0.0227
Without the reimbursement of expenses by the adviser,
the ratio of net expenses and net investment income (loss)
to average net assets would have been :
Expenses before interest expense ............ 7.34% 8.51% 8.19% 12.45%
Net investment income (loss) ................ (5.37%) (7.26%) (7.34%) (10.22)%
(a) Funds commenced operations on January 4, 1996.
* Not annualized.
** Annualized.
*** Average commission rate paid is computed by dividing the total
dollar amount of commissions paid during the period by the total
number of shares purchased and sold during the period for which
commissions were charged. Amount is computed on a non annualized
basis.
</TABLE>
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INVESTMENT OBJECTIVES AND POLICIES
Each Fund has an investment objective and related investment policies
and uses various investment techniques to pursue its objective and policies.
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE.
Investors should not consider any one Fund alone to be a complete investment
program. Each of the Funds is subject to the risk of changing economic
conditions, as well as the risk inherent in the ability of the Portfolio Manager
to make changes in the portfolio composition of the Fund in anticipation of
changes in economic, business, and financial conditions. As with any security, a
risk of loss is inherent in an investment in the shares of any of the Funds.
The different types of securities, investments, and investment
techniques used by each Fund all have attendant risks of varying degrees. For
example, with respect to equity securities, there can be no assurance of capital
appreciation and there is a substantial risk of decline. With respect to debt
securities, there exists the risk that the issuer of the security may not be
able to meet its obligations on interest or principal payments at the time
required by the instrument. In addition, the value of debt instruments generally
rises and falls inversely with prevailing current interest rates. As described
below, an investment in certain of the Funds entails additional risks as a
result of the Funds' ability to invest a substantial portion of their assets in
either foreign investments or small-capitalization issuers or both. See
"Investment Methods and Risks."
Certain types of investments and investment techniques common to one or
more Funds are described in greater detail, including the risks of each, under
"Investment Methods and Risks" below and in the SAI. The Funds are also subject
to certain investment restrictions that are described under the caption
"Investment Restrictions" in either this Prospectus or the SAI.
The investment objective of each Fund, as well as investment policies
that are not fundamental, may be changed by the Board of Directors without
shareholder approval. See "Investment Restrictions."
EDINBURGH OVERSEAS EQUITY FUND
The Edinburgh Overseas Equity Fund's investment objective is long-term
capital appreciation with reasonable investment risk through active management
and investment in common stock and common stock equivalents of foreign issuers.
Current income, if any, is incidental.
The Fund seeks to achieve this objective by focusing on areas of the
market that the Portfolio Manager believes are inefficiently priced. These
include smaller, often emerging markets, and smaller companies.
The investment process utilized by the Portfolio Manager, Edinburgh
Fund Managers plc, combines decisions on country weightings, sector allocations,
and stock selection strategies. Sector weightings are based on research into
demand and supply factors and external independent studies. The stock selection
process is fundamentally driven and focuses on four factors: quality of
management, financial health, long-term industry prospects and valuation
relative to the stock's market price. Research is generally on less-followed
small- to medium-sized companies and, when economic conditions are deemed
appropriate, the Fund may hold up to 30% of its assets in small-cap stocks
(i.e., stocks of companies capitalized at less than $500 million).
When its assets are at a sufficient level, the Edinburgh Overseas
Equity Fund will have on average 60 to 80 different stocks. Under normal market
conditions, it will have at least 80% of the value of its total assets invested
in at least four different countries outside the United States, but it may
-5-
"concentrate" its investments by investing a substantial portion of its assets
(e.g., more than 25%) in only one or a few countries or regions. Securities
issued by U.S. based companies will ordinarily not be purchased by the Fund. The
Fund expects generally to be fully invested but may maintain temporary cash
balances pending investment or for liquidity purposes.
TURNER CORE GROWTH FUND
The Turner Core Growth Fund's investment objective is long-term capital
appreciation through a diversified portfolio of common stocks that show strong
earnings potential with reasonable market prices. The Portfolio Manager's style
is core "growth at a reasonable price" and is based on the philosophy that
earnings expectations are the primary determinant of stock prices.
The Portfolio Manager, Turner Investment Partners, Inc., uses a
bottom-up discipline (i.e., an individual stock selection process, rather than a
top-down industry sector selection process) utilizing sophisticated analytical
tools to screen over 5,300 securities for both attractive growth and value
characteristics. Growth factors include increasing earnings estimates and
results, while value measures include price/earnings ratio to growth rate, ratio
of market price to book value, and dividend yield. The first step is a computer
ranking based upon a proprietary model: stocks ranked in the 35th percentile or
above qualify for purchase, while those ranked in the 55th percentile or below
generally will be sold sometime thereafter.
Stocks eligible for purchase are then subjected to rigorous fundamental
and technical analyses. The fundamental analysis focuses on a company's earnings
prospects relative to analysts' consensus expectations, while the technical
analysis evaluates support for a stock based on price and volume patterns.
The Fund purchases stocks with favorable rankings, earnings prospects,
and positive technical indicators. Conversely, stocks are sold when earnings
prospects are deteriorating, as indicated by a ranking below the 55th percentile
(i.e., below 55% of the stocks screened), deteriorating earnings forecasts, or a
worsening of technical indicators.
Generally, the Turner Core Growth Fund will be fully invested, with an
individual security constituting no more than 2% of the net asset value of the
Fund, and when its assets have reached a sufficient level will generally contain
100 to 120 holdings. The Fund may maintain a portion of assets in cash or cash
equivalents pending investment or for liquidity purposes.
FRONTIER CAPITAL APPRECIATION FUND
The Frontier Capital Appreciation Fund's investment objective is
maximum capital appreciation through investment in common stock of companies of
all sizes, with emphasis on stocks of small- to medium-capitalization companies
(i.e., companies capitalized at less than $3 billion). Importance is placed on
an evaluation of earnings per share, growth and price appreciation, rather than
income.
The Portfolio Manager, Frontier Capital Management Company, Inc., seeks
to identify companies with unrecognized earnings potential. The investment
process emphasizes earnings growth potential and valuation of those companies
which tend to be less well followed by Wall Street analysts and have a
relatively low level of ownership by other institutional investors. The process
combines traditional fundamental research with a valuation model that screens
dividend valuation, equity valuation, earnings growth, earnings momentum, and
unexpectedly high or low earnings.
-6-
The portfolio is not restricted to any one segment of the market;
however, generally a majority of the portfolio will consist of stocks of small-
to medium-capitalization companies. The portfolio will typically consist of 80
to 120 stocks (when its asset size is sufficient). The Fund may maintain a
portion of assets in cash or cash equivalents pending investment or for
liquidity purposes.
Stocks are sold if earnings growth potential is realized, when the
fundamental reasons for purchase are no longer valid, or when a more attractive
situation is identified.
ENHANCED U.S. EQUITY FUND
The Enhanced U.S. Equity Fund's investment objective is above-market
total return through investment in common stock of companies perceived to
provide a return higher than that of the S&P 500 at approximately the same level
of investment risk as the S&P 500.
The Portfolio Manager, Franklin Portfolio Associates LLC, uses a
quantitative process that seeks to identify those stocks with the highest
expected returns. The Portfolio Manager, using proprietary software, will
attempt to construct a portfolio having similar risk characteristics as those of
the S&P 500. The S&P 500 represents a sampling of the stocks of the largest U.S.
corporations along with stocks of certain foreign corporations that are publicly
traded in the United States.
Valuation models used to rank the universe of stocks focus on
fundamental momentum, relative value, future cash flow, and supplementary
factors (e.g., trading by officers or directors of the company being analyzed
and short-term price momentum). Stocks which fall below the median ranking in
this process are sold. A proprietary optimizer is used to construct the
portfolio. The optimizer is a risk management system comprised of proprietary
software created by Franklin Portfolio Associates LLC. It categorizes both the
portfolio and the S&P 500 into 55 industry groups and 13 general risk
categories. Stocks are then selected from the top deciles in Franklin's ranking
process so that the portfolio reflects similar characteristics to those of the
industry groups and risk characteristics of the S&P 500. Thus, industry and
sector allocations are actively neutralized, permitting Franklin's investment
process to remain focused on individual stock selection.
When it reaches a sufficient asset size, the Fund will contain
approximately 150 stocks. Under normal market conditions, it will have at least
65% of the value of its total assets invested in equity securities of U.S. based
companies. The Fund may maintain a portion of assets in cash or cash equivalents
pending investment or for liquidity purposes.
INVESTMENT RESTRICTIONS
Each of the Funds is subject to certain investment restrictions which
have been adopted by the Company for each Fund as fundamental policies that
cannot be changed without the approval of a majority of the outstanding votes
attributable to shares of that Fund. Among other restrictions, a Fund may not,
with respect to 75% of the value of its total assets, purchase the securities of
any one issuer (except U.S. Government securities) if more than 5% of the value
of the Fund's assets would be invested in such issuer or if more than 10% of the
outstanding voting securities of that issuer would be owned by the Fund.
Similarly, it is a fundamental investment restriction that none of the Funds may
invest more than 25% of its total assets in securities of issuers in any one
industry, except that this limitation does not apply to U.S. Government
securities. For a more complete description of the investment restrictions to
which each Fund is subject, see the SAI.
-7-
MANAGEMENT
DIRECTORS AND OFFICERS
The Board of Directors is responsible for deciding matters of general
policy and reviewing the actions of the Adviser and the Portfolio Managers, the
custodian, accounting and administrative services provider and other providers
of services to the Company. The officers of the Company supervise the Company's
daily business operations. The SAI contains information as to the identity of,
and other information about, the directors and officers of the Company.
Investment Adviser
M Financial Investment Advisers, Inc. (the "Adviser") is the investment
adviser of the Company and its Funds. The Adviser is an affiliate of M Life
Insurance Company ("M Life"), a Colorado stock insurance company.
M Life is an agent-owned reinsurance company in that its capital stock
is indirectly owned, in part, by independent participating insurance agents who
are engaged primarily in selling insurance policies, including variable
insurance policies which will be invested in the Funds. M Life, for a fee paid
by the insurance carriers, reinsures a portion of the mortality risk on
insurance policies sold by its shareholder-agents.
The Adviser and M Life are controlled by M Financial Holdings
Incorporated ("M Holdings"), which does business under the name M Financial
Group. M Financial Group is engaged in providing product development and
marketing support services for participating insurance agents, most of which are
shareholders of M Holdings. M Financial Group receives from insurance carriers
compensation based, in part, upon the volume of insurance premiums generated by
its participating agents. All Class A shares of M Financial Group are owned by
participating insurance agents and all Class B Shares are owned by Ellison C.
Morgan, Mark I. Solomon, Peter W. Mullin, Carl G. Mammel and Thomas N. Spitzer
(either directly or through corporations owned by them). Mr. Mullin is a
director of the Company.
The Adviser, located at River Park Center, 205 S.E. Spokane Street,
Portland, Oregon 97202, began managing the Company at its commencement of
operations (January 4, 1996) but otherwise has no previous experience in
providing investment advisory services.
A reorganization of M Financial Group is being considered, as a result
of which a majority control of the Investment Adviser would reside with the
participating agents. This reorganization, if it occurs, would be consummated
within the next year. If the reorganization does not occur, it is expected that
a majority control of the Adviser would reside with the participating agents
commencing in 1999. In either case, it is expected that shareholders of the
Company will be asked to approve a new investment advisory agreement in
connection with the change of control.
-8-
The Adviser has entered into an investment advisory agreement, dated
December 5, 1995, with the Company under which the Adviser assumes overall
responsibility, subject to the ongoing supervision of the Company's Board of
Directors, for administering all operations of the Company and for monitoring
and evaluating the management of the assets of each of the Funds by the
Portfolio Manager. The Adviser provides or arranges for the provision of the
overall business management and administrative services necessary for the
Company's operations and furnishes or procures any other services and
information necessary for the proper conduct of the Company's business. The
Adviser also acts as liaison among, and supervisor of, the various service
providers to the Company, including the custodian, transfer agent,
administration agent, and accounting services agent. The Adviser is also
responsible for overseeing the Company's compliance with the requirements of
applicable law and with each Fund's investment objective, policies, and
restrictions.
For its services to the Company, the Adviser receives an advisory fee
that is based on the average daily net assets of each of the Funds, deducted
daily from the assets of each of the Funds. Such fee is presently paid to the
Adviser on a quarterly basis.
The following annual rates represent total advisory fees for each Fund:
<TABLE>
<CAPTION>
================================================== ===============================================
FUND TOTAL ADVISORY FEES
================================================== ===============================================
================================================== ===============================================
<S> <C>
Edinburgh Overseas Equity Fund 1.05% on the first $10 million
0.90% on the next $15 million
0.75% on the next $75 million
0.60% on amounts above $100 million
================================================== ===============================================
Turner Core Growth Fund 0.45%
================================================== ===============================================
Frontier Capital Appreciation Fund 0.90%
================================================== ===============================================
Enhanced U.S. Equity Fund 0.55% on the first $25 million
0.45% on the next $75 million
0.30% on amounts above $100 million
================================================== ===============================================
</TABLE>
The investment advisory agreement does not place limits on the
operating expenses of the Company or of any Fund. However, the Adviser has
voluntarily undertaken to pay any such expenses (but not including the advisory
fee, brokerage or other portfolio transaction expenses or expenses of
litigation, indemnification, taxes or other extraordinary expenses) to the
extent that such expenses, as accrued for each Fund, through December 31, 1997,
exceed 0.25% of that Fund's estimated average daily net assets on an annualized
basis.
PORTFOLIO MANAGERS
EDINBURGH FUND MANAGERS PLC ("Edinburgh") is the Portfolio Manager of
the Edinburgh Overseas Equity Fund. Edinburgh's principal business address is
Donaldson House, 97 Haymarket Terrace, Edinburgh EH12 5HD, Scotland, and
Edinburgh maintains a non-investment branch at 600 Peachtree Street, N.E., Suite
3820, Atlanta, Georgia 30308. Edinburgh was formed in 1969 and registered as an
investment adviser with the Securities and Exchange Commission in 1984. As of
December 31, 1996, Edinburgh managed approximately $11.8 billion of assets.
-9-
Edinburgh manages the Fund on a team basis. The Chief Investment
Director of Edinburgh is Michael Balfour, CA (Chartered Accountant). Mr. Balfour
holds a B.Comm. degree from Edinburgh University. He joined Edinburgh in 1985
and became Manager of the Pacific Rim Department the following year. He was
involved in the launching of Edinburgh Pacific Fund and the Edinburgh Dragon
Trust in 1987. In 1992, he was appointed a director of Edinburgh responsible for
overseas investment, and in 1995 he became Chief Investment Director responsible
for all investment departments and Chair of the asset allocation committee.
TURNER INVESTMENT PARTNERS, INC. ("Turner") is the Portfolio Manager of
the Turner Core Growth Fund. Turner's principal business address is 1235
Westlakes Drive, Suite 350, Berwyn, Pennsylvania 19312. Turner is a professional
investment management firm founded in 1990. Robert E. Turner is the controlling
shareholder of Turner. Turner has provided investment advisory services to
investment companies since 1992. At December 31, 1996, Turner managed
approximately $2.3 billion of assets.
Mr. Turner, CFA (Chartered Financial Analyst), Chairman and Chief
Investment Officer of Turner, is the person primarily responsible for the
day-to-day management of the Fund's investment portfolio. Mr. Turner holds a
B.S. degree in accounting and an M.B.A. degree in finance from Bradley
University and has over 15 years of investment experience. He is a member of the
Association for Investment Management and Research and is active with the
following organizations: Board of Directors - Financial Analysts of
Philadelphia; Advisory Board Investment Counseling Inc.; and Technology Council
of Greater Philadelphia. Prior to forming Turner, Mr. Turner was employed as
Senior Investment Manager with Meridian Investment Company (1985 to 1990),
Portfolio Manager/Analyst with Integon Corporation (1983 to 1985), and Analyst
with McMillion/Eubanks (1981 to 1983), and he served as a consultant with
Andersen Consulting (1979 to 1981).
FRONTIER CAPITAL MANAGEMENT COMPANY, INC. ("Frontier") is the Portfolio
Manager of the Frontier Capital Appreciation Fund. Frontier's principal business
address is 99 Summer Street, Boston, Massachusetts 02110. Frontier's investment
process combines its fundamental in-depth research effort with a proprietary
computer model to identify areas of investment opportunity. Frontier was founded
in 1980. As of September 30, 1996, Frontier managed a total of $2.58 billion.
Michael A. Cavarretta, CFA, is the person primarily responsible for the
day-to-day management of the Fund's investment portfolio. Mr. Cavarretta holds a
B.S. degree from the University of Maine and an M.B.A. degree from Harvard
Business School. He joined Frontier in 1988 and has served as sole portfolio
manager for Frontier's capital appreciation portfolios for four of the past
seven years. Prior to attending Harvard Business School, Mr. Cavarretta was
employed as a Financial Analyst with General Electric Company (1981-1986).
FRANKLIN PORTFOLIO ASSOCIATES LLC ("Franklin") is the Portfolio Manager
of the Enhanced U.S. Equity Fund. Franklin's principal business address is Two
International Place, 22nd Floor, Boston, Massachusetts 02110. Franklin is a
professional investment counseling firm which specializes in the management of
common stock portfolios through the use of quantitative investment models.
Founded in 1982, Franklin, a Massachusetts business trust, is a wholly-owned
indirect subsidiary of Mellon Bank Corporation. As of December 31, 1996,
Franklin provided investment advisory services with respect to approximately
$10.2 billion of client assets. Franklin employs proprietary computer models in
selecting individual equity securities and in structuring investment portfolios
for its clients, including the Fund.
John J. Nagorniak, CFA, President of Franklin, is the person primarily
responsible for the day-to-day management of the Fund's investment portfolio; he
will oversee the application of Franklin's quantitative techniques to the Fund's
assets. Mr. Nagorniak and the other investment principals of
-10-
Franklin are responsible for the ongoing development and enhancement of
Franklin's quantitative investment techniques. Mr. Nagorniak is a graduate of
Princeton University and has received a M.S. degree from the Sloan School at the
Massachusetts Institute of Technology. Prior to joining Franklin, he was
associated with State Street Bank and Trust Company as Chief Investment Officer
(1979 to 1981). Prior to that, he was Director of Investment Management
Technology for John Hancock Mutual Life Insurance Company (1970 to 1979). He is
past President of the Investment Technology Association and has been on the
Council of that organization and the Council of the Quantitative Discussion
Group. Mr. Nagorniak is on the Board of Directors and is past President of the
Boston Security Analysts Society. He has over 25 years of investment experience.
Investment Sub-Advisory Agreements. Each Portfolio Manager has entered
into an investment sub-advisory agreement with the Adviser under which the
Portfolio Manager, subject to the general supervision of the Adviser and the
Company's Board of Directors, manages the investment portfolio of the Fund of
which it is the Portfolio Manager. Under the investment sub-advisory agreements,
the Portfolio Managers are responsible for making investment decisions for the
Funds and for placing the purchase and sale orders for the portfolio
transactions of each Fund. In this capacity, the Portfolio Managers obtain and
evaluate appropriate economic, statistical, timing, and financial information
and formulate and implement investment programs in furtherance of each Fund's
investment objective. The Portfolio Managers may place orders for portfolio
transactions with any broker including, to the extent and in the manner
permitted by applicable law, affiliated brokers. As compensation for their
services, each Portfolio Manager receives a fee (paid by the Adviser) based on
the average daily net assets of the applicable Fund. See the SAI for more
detailed information about the investment sub-advisory fees and agreements.
Change of Portfolio Managers. The Company and the Adviser plan to apply
for an exemptive order from the SEC that would permit the Adviser, with the
approval of the Company's Board of Directors, to retain a different Portfolio
Manager for a Fund without submitting the investment sub-advisory agreements to
a vote of the Fund's shareholders. The Company will notify shareholders in the
event of any change in the identity of the Portfolio Manager of a Fund. Until or
unless this exemptive order is granted, if a duly appointed Portfolio Manager is
terminated or otherwise ceases to advise a Fund, the Company will propose that a
new Portfolio Manager be engaged to manage the Fund's assets. The Company would
then be required to submit to the vote of the Fund's shareholders the approval
of an investment sub-advisory agreement with the new Portfolio Manager.
INVESTMENT METHODS AND RISKS
FOREIGN INVESTMENTS
Investments in the securities of companies organized outside the United
States or of companies whose securities are principally traded outside the
United States ("foreign issuers"), or investments in securities denominated or
quoted in a currency other than the U.S. dollar ("non-dollar securities"), may
present potential benefits and risks not associated with investments solely in
securities of domestic issuers or U.S. dollar-denominated securities. Each of
the Funds may invest in securities of foreign issuers. The Frontier Capital
Appreciation Fund and the Turner Core Growth Fund may invest up to 10% of the
value of their total assets in securities of foreign issuers that are listed on
United States exchanges or are represented by American Depository Receipts
("ADRs"). The Edinburgh Overseas Equity Fund also may invest in non-dollar
securities. (However, the Edinburgh Overseas Equity Fund may not invest in
Canadian government securities, and the Enhanced U.S. Equity Fund, the Turner
-11-
Core Growth Fund and the Frontier Capital Appreciation Fund may not invest in
any foreign government securities.) Benefits of investing in foreign issuers or
non-dollar securities may include the opportunity to invest in foreign issuers
that appear, in the opinion of the Portfolio Manager, to offer better
opportunity for long-term capital appreciation or current earnings than
investments in domestic issuers, the opportunity to invest in foreign countries
with economic policies or business cycles different from those of the United
States, and the opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in a manner
parallel to U.S. markets.
Investing in non-dollar securities or in the securities of foreign
issuers involves significant risks that are not typically associated with
investing in U.S. dollar-denominated securities or in securities of domestic
issuers. Such investments may be affected by changes in currency rates, changes
in foreign or U.S. laws or restrictions applicable to such investments and in
exchange control regulations (e.g., currency blockage). For example, a decline
in the exchange rate would reduce the value of certain portfolio investments. In
addition, if the exchange rate for the currency in which a Fund receives
dividend or interest payments declines against the U.S. dollar before such
interest is paid as a dividend to the Fund's shareholders, the Fund may have to
sell portfolio securities to obtain sufficient cash to pay the dividend. The
Edinburgh Overseas Equity Fund may engage in forward foreign currency exchange
contracts to hedge its foreign currency exposure; however, such investments also
entail certain risks (described in the Statement of Additional Information).
Some foreign stock markets may have substantially less volume than, for example,
the New York Stock Exchange, and securities of some foreign issuers may be less
liquid than securities of comparable domestic issuers. Commissions and dealer
mark-ups on transactions in foreign investments may be higher than for similar
transactions in the United States. In addition, clearance and settlement
procedures may be different in foreign countries and, in certain markets, on
certain occasions, such procedures have been unable to keep pace with the volume
of securities transactions, thus making it difficult to conduct such
transactions. For example, delays in settlement could result in temporary
periods when a portion of the assets of a Fund are uninvested and no return is
earned thereon. The inability of a Fund to make intended investments due to
settlement problems could cause it to miss attractive investment opportunities.
Inability to dispose of portfolio securities or other investments due to
settlement problems could result either in losses to a Fund due to subsequent
declines in value of the portfolio investment or, if the Fund has entered into a
contract to sell the investment, could result in possible liability to the
purchaser.
Foreign issuers are not generally subject to uniform accounting,
auditing and financial reporting standards comparable to those applicable to
domestic companies. There may be less publicly available information about a
foreign issuer than about a domestic one. In addition, there is generally less
government regulation of stock exchanges, brokers, and listed and unlisted
issuers in foreign countries than in the United States. Furthermore, with
respect to certain foreign countries, there is a possibility of expropriation or
confiscatory taxation, imposition of withholding taxes on dividend or interest
payments, limitations on the removal of funds or other assets of a Fund, or
political or social instability or diplomatic developments which could affect
investments in those countries. Individual foreign economies also may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
Many securities of foreign issuers are represented by ADRs, which
represent the right to receive securities of foreign issuers deposited in a
domestic bank or foreign correspondent bank. Prices of ADRs are quoted in U.S.
dollars. Additional information regarding ADRs and other aspects of foreign
securities is in the Statement of Additional Information.
-12-
Emerging Market Securities. The Edinburgh Overseas Equity Fund may
invest up to 25% of its assets in countries or regions with relatively low gross
national product per capita compared to the world's major economies, and in
countries or regions with the potential for rapid economic growth (emerging
markets). The risks of investing in foreign securities may be intensified in the
case of investments in emerging markets. Emerging markets may be less liquid and
more volatile than securities of comparable domestic issuers and have different
clearance and settlement procedures that may not keep pace with the volume of
securities transactions, making it difficult to conduct such transactions.
Delays in settlement could result in temporary periods when a portion of the
assets of the Fund is uninvested and no return is earned thereon. The inability
to dispose of portfolio securities due to settlement problems could result in
losses to the Fund.
Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present greater risk of nationalization of businesses, restrictions
on foreign ownership, or prohibitions or repatriation of assets, and may have
less protection of property rights than more developed countries. Also, issuers
located in emerging markets may have limited marketability and may be subject to
more abrupt or erratic price movements. A more detailed discussion of the risks
associated with investing in emerging markets can be found in the Statement of
Additional Information.
INVESTING IN SMALL-CAPITALIZATION COMPANIES
All of the Funds may invest in small-capitalization companies
(generally considered to be companies with a capitalization of less than $500
million). Investing in securities of smaller, lesser-known companies involves
greater risks than investing in larger, more mature, better known issuers,
including an increased possibility of portfolio price volatility. Historically,
small-capitalization stocks and stocks of recently organized companies, in which
all of the Funds may also invest, have been more volatile in price than the
larger-capitalization stocks (such as those included in the S&P 500). Among the
reasons for the greater price volatility of the stocks of these smaller
companies are the less certain growth prospects of smaller firms, the lower
degree of liquidity in the markets for such stocks, and the greater sensitivity
of smaller companies to changing economic conditions. For example, such
companies may be subject to greater business risks resulting from their limited
product lines, markets, distribution channels, and financial and managerial
resources.
The stock prices of smaller companies may fluctuate independently of
larger company stock prices. Thus, small company stocks may decline in price as
large company stock prices rise, or rise in price as large company stock prices
decline. Investors should, therefore, expect that to the extent a Fund invests
in stock of small-capitalization companies, the net asset value of that Fund's
shares may be more volatile than, and may fluctuate independently of, broad
stock market indices such as the S&P 500. Furthermore, the securities of
companies with small stock market capitalizations may trade less frequently and
in limited volumes.
ASSET GROWTH
The Funds' present asset size may not be sufficient to invest in the
number of different stocks indicated above or to take advantage of certain
investment opportunities, and they may not be as diversified as other mutual
fund portfolios. There is no certainty as to how rapidly a Fund's assets will
increase.
-13-
SECURITIES LENDING
All Funds may seek to increase their income by lending portfolio
securities. Under present regulatory policies, such loans may be made to
institutions, such as certain broker-dealers, and are required to be secured
continuously by collateral in cash, cash equivalents, or U.S. Government
securities maintained on a current basis at an amount at least equal to the
market value of the securities loaned. A Fund may experience a loss or delay in
the recovery of its securities if the institution with which it has engaged in a
portfolio security loan transaction breaches its agreement with the Fund. If the
Portfolio Manager determines to make securities loans, the value of the
securities loaned will not exceed one-third of the value of the total assets of
the Fund making the loan.
OTHER INVESTMENTS
Some or all of the Funds may also utilize the following investment
techniques or make the following types of investments. However, it is
anticipated that no Fund will have more than 5% of its assets invested in any
one of the following:
* Foreign Government Obligations
* Sovereign Debt Obligations (Brady Bonds)
* American Depository Receipts, European Depository Receipts,
International Depository Receipts, and Global Depository Receipts
* Forward Foreign Currency Exchange Contracts
* Short-Term Bank and Corporate Obligations
* Zero Coupon Bonds
* Warrants and Rights
* Convertible Securities
* Repurchase Agreements
* Restricted and Illiquid Securities
* Borrowing
The Statement of Additional Information contains descriptions of these
investments and investment techniques.
PERFORMANCE INFORMATION
M FUND PERFORMANCE
From time to time, the Company may publish average annual total return
figures for one or more of the Funds in advertisements, communications to
shareholders, and sales literature. Average annual total return is determined by
computing the annual percentage change in value of $1,000 invested for specified
periods ending with the most recent calendar quarter, assuming reinvestment of
all dividends and distributions at net asset value. The average annual total
return calculation assumes a complete redemption of the investment at the end of
the relevant period.
-14-
The Company also may, from time to time, publish year-by-year total
return, cumulative total return and yield information for the Funds in
advertisements, communications to shareholders, and sales literature. These may
be provided for various specified periods by means of quotations, charts, graphs
or schedules. Year-by-year total return and cumulative total return for a
specified period are each derived by calculating the percentage rate required to
make a $1,000 investment in a Fund (assuming all distributions are reinvested)
at the beginning of such period equal to the actual total value of such
investment at the end of such period.
The Funds also may advertise their yields. Yield is computed by
dividing net investment income earned during a recent 30-day period by the
product of the average daily number of shares outstanding and entitled to
receive dividends during the period and the price per share on the last day of
the relevant period. The results are compounded on a bond-equivalent
(semiannual) basis and then annualized. Net investment income per share is equal
to the dividends and interest earned during the period, reduced by accrued
expenses for the period. The calculation of net investment income for these
purposes may differ from the net investment income determined for accounting
purposes. Performance data for the Funds will not reflect charges deducted under
the Policies. If Policy charges were taken into account, such performance data
would reflect lower returns.
In addition, the Company may from time to time publish the performance
of its Funds relative to certain performance rankings and indices.
The investment results of the Funds will fluctuate over time and any
presentation of investment results for any prior period should not be considered
a representation of what an investment may earn or what a Fund's performance may
be in any future period. In addition to information provided in shareholder
reports, the Company may, in its discretion, from time to time make lists of a
Fund's holdings available to investors upon request.
PRIVATE ACCOUNT PERFORMANCE
The Funds have been in operation since January 4, 1996 and have limited
performance records. However, each of the Funds has investment objectives,
policies and strategies that are substantially similar to those employed by the
Funds' Portfolio Managers with respect to certain Private Accounts which they
manage (" Private Accounts"). The performance information derived from these
Private Accounts may be relevant to prospective investors. The Funds'
performance may vary from the respective Private Account information because
each Fund will be actively managed and its investments will vary from time to
time and will not be identical to the past portfolio investments of the Private
Accounts.
The charts below show actual performance information for M Fund and
performance information derived from historical performance of the Private
Accounts of Edinburgh, Turner, Frontier and Franklin. The performance figures
for the Edinburgh Foreign Equity Composite, the Frontier Capital Appreciation
Composite, the Turner Equity Composite and the Franklin Enhanced S&P Composite
represent the actual calendar year performance results of the comparable Private
Accounts net of M Fund management fees. The performance data of these Private
Accounts is not M Fund performance and should not be considered as an indication
of the future performance of the respective Funds.
These figures also do not reflect the deduction of any insurance fees
or charges that are imposed in connection with the sale of variable life
insurance and variable annuity policies by the Participating Insurance
Companies. Investors should refer to the separate account prospectus describing
the life insurance policies and variable annuity contracts for information
pertaining to these insurance fees and charges.
-15-
<TABLE>
<CAPTION>
M FUND PERFORMANCE 1996#
<S> <C>
Edinburgh Overseas Equity Fund (0.63)%
Turner Core Growth Fund 19.99
Frontier Capital Appreciation Fund 30.31
Enhanced US Equity Fund 23.67
# Fund inception date was January 4, 1996.
</TABLE>
PRIVATE ACCOUNT PERFORMANCE INFORMATION
<TABLE>
<CAPTION>
10YR/*
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 3 YR* 5YR* SINCE
INCEPTION**
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Edinburgh Fund Managers/
Edinburgh Foreign Equity Composite - % - % 21.5% -13.1% 13.5% -8.0% 37.4% 0.8% 12.5% 3.5% 5.5% 8.2% 7.5%**
EAFE Benchmark - - 10.4 -23.6 12.2 -12.2 32.7 7.8 11.3 6.1 8.4 8.2 4.3
Turner Investment Partners/
Turner Equity Composite - - - - 50.4 12.2 15.3 -5.3 29.6 19.3 13.5 13.6 17.0**
Wilshire 5000 Stock Index - - - - 34.2 9.0 11.3 -0.1 36.5 21.2 18.2 14.9 15.3
Frontier Capital Management/
Frontier Capital Appreciation Composite 2.3 24.3 31.8 0.2 27.9 22.2 27.9 3.3 31.4 38.2 23.3 24.0 20.2
Russell 2500 Stock Index -4.7 22.7 19.4 -14.9 46.7 16.2 16.5 -1.1 31.7 19.0 15.8 16.0 13.9
Franklin Portfolio Associates/
Franklin Enhanced S&P Composite 2.0 15.4 31.6 -1.9 30.7 6.7 13.5 -0.8 35.7 22.5 18.1 14.8 14.8
S&P 500 Stock Index 5.2 16.5 31.6 -3.1 30.4 7.6 10.1 1.3 37.5 22.8 19.6 15.2 15.2
* 3yr, 5yr, 10yr and Since Inception returns are average annualized total returns.
**Inception dates for the Edinburgh Foreign Equity Composite and the Turner Equity Composite are 12/31/88 and 03/31/90 respectively.
See accompanying Notes to M Fund and Private Account Performance Information.
</TABLE>
-16-
Notes to M Fund and Private Account Performance Information
1. Returns for the M Fund are net of management fees and operating expenses.
Returns for the Edinburgh Foreign Equity Composite, the Turner Equity Composite,
the Frontier Capital Appreciation Composite and the Franklin Enhanced S&P
Composite are net of M Fund management fees: 1.05%, 0.45%, 0.90% and 0.55%
respectively. The operating expenses for all Private Accounts are different from
those of the M Fund.
2. Returns of the Private Accounts are based on accounts managed using
substantially similar investment objectives, policies and strategies and are
based on the following: returns for Edinburgh Fund Managers' Private Accounts
are those of the manager's Foreign Equity Composite; returns for Turner
Investment Partners' Private Accounts are those of the Turner Equity Composite;
returns for Frontier Capital Management's Private Accounts are those of the
manager's Capital Appreciation Composite; returns for Franklin Portfolio
Associates' Private Accounts are those of the manager's Enhanced S&P Composite.
3. Returns of the Private Accounts are based on accounts with substantially
higher net assets to that of the Funds. The Funds commenced operations on
January 4, 1996 and, therefore, are smaller than the managers' established
accounts.
4. Returns for the Edinburgh Foreign Equity Composite, the Turner Equity
Composite, the Frontier Capital Appreciation Composite and the Franklin Enhanced
S&P Composite are based on accounts that are not subject to certain investment
limitations, diversification requirements, and other restrictions imposed by the
Investment Company Act of 1940 and the Internal Revenue Code, which, if
applicable, may have adversely affected the performance result.
5. The Morgan Stanley Capital International Europe, Australia, and Far East
Index (EAFE) is the arithmetic, market value-weighted average of the performance
of over 900 securities listed on the stock exchanges of 20 countries. It is a
widely accepted benchmark for international stock performance. The Wilshire 5000
Stock Index is a capitalization weighted stock index representing all domestic
common stocks traded regularly on the organized exchanges. The index is the
broadest measure of the aggregate domestic stock market. The Russell 2500 Stock
Index is a capitalization weighted stock index representing the bottom 500
stocks in the Russell 1000 Stock Index and all stocks in the Russell 2000 Stock
Index. The S&P 500 Stock Index is a capitalization weighted index of 500 large
stocks, representing approximately 70% of the broad U.S. equity market. The
stocks represent the largest companies in 88 industries. The S&P 500 Stock Index
is calculated on a total return basis, which includes reinvestment of gross
dividends before deduction of withholding taxes.
6. Performance returns for the Private Accounts have been extracted from
performance information that has been prepared and presented in compliance with
the Association for Investment Management and Research (AIMR) Performance
Presentation Standards. Reports on such preparation and presentation are
available to the investor upon request.
-17-
DETERMINATION OF NET ASSET VALUE
The net asset value per share of each Fund is normally determined once
daily as of the close of regular trading on the New York Stock Exchange,
currently 4:00 p.m. New York time (with exceptions), on each day when the New
York Stock Exchange is open. The New York Stock Exchange is scheduled to be open
Monday through Friday throughout the year, except for certain federal and other
holidays. The net asset value of each Fund is determined by dividing the value
of the Fund's securities, cash, and other assets (including accrued but
uncollected interest and dividends), less all liabilities (including accrued
expenses) by the number of shares of the Fund outstanding.
The value of each Fund's securities and assets, except certain
short-term debt securities, is determined on the basis of their market values.
Short-term debt securities having remaining maturities of 60 days or less held
by any of the Funds are valued by the amortized cost method, which approximates
market value. Investments for which market quotations are not readily available
are valued at their fair value as determined in good faith by, or under
authority delegated by, the Board of Directors. See "Determination of Net Asset
Value" in the SAI.
OFFERING, PURCHASE AND REDEMPTION OF SHARES
Shares of the Funds are sold in a continuous offering to separate
accounts of the Participating Insurance Companies to support the insurance and
annuity Policies. Net purchase payments under the Policies are placed in one or
more subaccounts of the Participating Insurance Company's separate account, and
the assets of each such subaccount are invested in the shares of the Fund
corresponding to that subaccount. The separate accounts purchase and redeem
shares of the Funds for their subaccounts at net asset value without sales or
redemption charges.
For each day on which a Fund's net asset value is calculated, the
separate accounts transmit to the Transfer Agent any orders to purchase or
redeem shares of the Fund(s) based on the purchase payments, redemption
(surrender) requests, death benefits, Policy charges, and transfer requests from
Policy owners, annuitants and beneficiaries that have been processed on that
day. The separate accounts purchase and redeem shares of each Fund at the Fund's
net asset value per share calculated as of that same day although such purchases
and redemptions may be executed the next morning. The Board of Directors may
refuse to sell shares of any Fund to any person, or suspend or terminate the
offering of shares of any Fund if such action is required by law or by
regulatory authorities having jurisdiction or is, in the sole discretion of the
Board of Directors acting in good faith, and in light of their fiduciary duties
under federal and any applicable state laws, necessary in the best interests of
the shareholders of such Fund.
Please refer to the separate prospectus for the Policies (and the
separate account through which they are funded) for a more detailed description
of the procedures whereby a Policy owner, annuitant, or beneficiary may allocate
his or her interest in the separate account to a subaccount using the shares of
one of the Funds as an underlying investment medium.
The Company may also offer shares of one or more of the Funds
(including new Funds that might be added to the Company) to qualified pension
and retirement plans.
A potential for certain conflicts may exist between the interests of
variable annuity contract owners, variable life insurance policy owners and plan
participants. The Company currently does not foresee any disadvantage to owners
of the Policies arising from the fact that shares of any Fund might be held by
such entities. The Board of Directors, however, will monitor the Funds in order
to identify any material irreconcilable conflicts of interest which may possibly
arise, and to determine what action, if any, should be taken in response to any
such conflicts.
-18-
INCOME DIVIDENDS AND CAPITAL GAINS DISTRIBUTIONS
The Company will pay dividends for each Fund from that Fund's net
investment income and will make distributions from net realized securities
gains, if any, once a year, but may make distributions on a more frequent basis
to comply with the distribution requirements of the Internal Revenue Code of
1986, as amended (the "Code"), in all events in a manner consistent with the
provisions of the Investment Company Act of 1940 (the "1940 Act"). The Company
will not make distributions from net realized securities gains unless capital
loss carryovers, if any, have been utilized or have expired. Dividends are
automatically reinvested in additional Company shares at net asset value unless
payment in cash is selected.
Notice as to the tax status of dividends and distributions
will be mailed to shareholders annually. Dividends from net investment income,
together with distributions of net realized short-term securities gains and
gains from certain market discount bonds, generally are taxable as ordinary
income whether received in cash or reinvested in additional shares.
Distributions from net realized long-term securities gains generally are taxable
as long-term capital gains whether received in cash or reinvested in additional
shares. Since the Company's shareholders are the Participating Insurance
Companies and their separate accounts, no discussion is included herein as to
the federal income tax consequences to variable life insurance or annuity policy
holders. For information concerning the federal income tax consequences to such
holders, see the prospectus for such contract or policy.
TAXES
Tax Status. The Company believes that each Fund will qualify as a
regulated investment company under Subchapter M, Chapter 1, Subtitle A of the
Code, and each Fund intends to distribute substantially all of its net income
and net capital gain to its shareholders. As a result, under the provisions of
Subchapter M, there should be little or no income or gains taxable to the Fund.
In addition, each Fund intends to comply with certain other distribution rules
specified in the Code so that it will not incur a 4% nondeductible federal
excise tax that otherwise would apply. Under current law, the net income of the
Funds, including net capital gain, is not taxed to Participating Insurance
Companies to the extent that it is applied to increase the reserves held by the
Participating Insurance Company in respect of the Policies.
Foreign Investments. Funds investing in foreign securities or
currencies may be required to pay withholding or other taxes to foreign
governments. Foreign tax withholding from dividends and interest, if any, is
generally at a rate between 10% and 35%. The investment yield of the Funds that
invest in foreign securities or currencies will be reduced by these foreign
taxes. Shareholders will bear the cost of any foreign tax withholding, but may
not be able to claim a foreign tax credit or deduction for these foreign taxes.
Funds investing in securities of passive foreign investment companies may be
subject to U.S. federal income taxes and interest charges, and the investment
yield of the Funds making such investments will be reduced by these taxes and
interest charges. Shareholders will bear the cost of these taxes and interest
charges, but will not be able to claim a deduction for these amounts.
Additional Tax Considerations. If a Fund fails to qualify as a
regulated investment company, owners of Policies supported by the Fund (1) might
be taxed currently on the investment earnings under their Policies and thereby
lose the benefit of tax deferral, and (2) the Fund might incur additional taxes.
In addition, if a Fund fails to comply with the diversification requirements of
Section 817(h) of the Code, owners of Policies supported by the Fund would be
taxed on the investment earnings under their Policies and thereby lose the
benefit of tax deferral. Accordingly, compliance with the above rules is
-19-
carefully monitored by the Portfolio Managers and the Adviser, and it is
intended that the Funds will comply with these rules as they exist or as they
may be modified from time to time. In order to comply with the diversification
and other requirements of Subchapter M and Section 817(h), a Fund may not be
able to buy or sell certain securities at certain times, so the investments
utilized (and the time at which such investments are purchased and sold) may be
different from what the Portfolio Manager might otherwise believe to be
desirable.
For more information regarding the tax implications for the purchaser
of a Policy who allocates investments to the Funds, please refer to the
prospectus for the Policy.
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations currently in effect. It is not
intended to be a complete explanation or a substitute for consultation with
individual tax advisers. For the complete provisions, reference should be made
to the pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and Regulations are subject to change.
OTHER INFORMATION
REPORTS
Annual Reports containing audited financial statements of the Company
and Semiannual Reports containing unaudited financial statements, as well as
proxy materials, are sent to Policy owners, annuitants or beneficiaries, as
appropriate. Inquiries may be directed to the Company at the telephone number or
address set forth on the cover page of this Prospectus.
VOTING AND OTHER RIGHTS
Each share outstanding is entitled to one vote on all matters submitted
to a vote of shareholders (of a Fund or the Company) and is entitled to a pro
rata share of any distributions made by the applicable Fund and, in the event of
liquidation, of its net assets remaining after satisfaction of outstanding
liabilities. Each share (of each Fund), when issued, is nonassessable and has no
preemptive or conversion rights. The shares have noncumulative voting rights.
The Participating Insurance Companies will vote shares of a Fund held by their
separate accounts which are attributable to Policies in accordance with
instructions received from Policy owners, annuitants and beneficiaries as
provided in the prospectus for the Policies. Fund shares held by the separate
accounts as to which no instructions have been received will be voted for or
against any proposition, or in abstention, in the same proportion as the shares
of that separate account as to which instructions have been received. Fund
shares held by a Participating Insurance Company that are not attributable to
Policies will also be voted for or against any proposition in the same
proportion as the shares for which voting instructions are received by that
company. However, if a Participating Insurance Company determines that it is
permitted to vote any such shares of a Fund in its own right, it may elect to do
so, subject to the then-current interpretation of the 1940 Act and the rules
thereunder.
As a Maryland corporation, the Company is not required to, and does not
intend to, hold regular annual shareholder meetings. The Company is, however,
required to hold shareholder meetings for the following purposes: (i) approving
investment advisory and sub-advisory agreements as required by the 1940 Act
(unless, with respect to sub-advisory agreements, the Company and the Adviser
obtain the SEC exemptive order); (ii) changing any fundamental investment policy
or restriction of any Fund; and (iii) filling vacancies on the Board of
Directors in the event that less than a majority of the Company's
-20-
directors were elected by shareholders. Directors may also be removed by
shareholders by a vote of two-thirds of the outstanding votes attributable to
shares at a meeting called at the request of holders of 10% or more of such
votes. The Company has the obligation to assist in shareholder communications.
At December 31, 1996, the ownership of each Fund was as follows:
<TABLE>
<CAPTION>
Percentage of
Ownership
M Life Insurance Co. John Hancock Variable Life Pacific Mutual Life
Insurance Co. Insurance Co.
<S> <C> <C> <C>
Edinburgh Overseas Equity Fund 62.5% 35.0% 2.5%
Turner Core Growth Fund 57.9% 33.7% 8.4%
Frontier Capital Appreciation Fund 41.9% 40.5% 17.6%
Enhanced U.S. Equity Fund 74.9% --- 25.1%
</TABLE>
ADMINISTRATIVE AND OTHER SERVICES
Pursuant to a custody agreement with the Company, Investors Bank &
Trust Company ("Investors Bank") serves as the custodian of the Funds' assets.
Investors Bank also performs certain accounting services for the
Company. These services include maintaining and keeping current the Company's
books, accounts, records, journals and other records of original entry related
to the Company's business, performing certain daily functions related thereto,
including calculating each Fund's daily net asset value. Investors Bank is
responsible for providing certain administrative services to the Company, such
as calculating each Fund's standardized performance information, preparing
annual and semiannual reports to shareholders and the SEC, preparing each Fund's
tax returns, monitoring compliance and performing other administrative duties.
Pursuant to a Transfer Agency and Service Agreement with the Company,
Investors Bank also acts as a transfer, redemption and dividend disbursing agent
for the Company. Investors Bank's principal business address is 89 South Street,
Boston, Massachusetts 02111.
Investors Bank is not involved in the investment decisions made by the
Portfolio Managers.
The Company was incorporated in Maryland on August 11, 1995. It has no
employees and relies on the Adviser and other service providers for its
day-to-day operations.
-21-
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
M FUND
Edinburgh Overseas Equity Fund
Turner Core Growth Fund
Frontier Capital Appreciation Fund
Enhanced U.S. Equity Fund
May 1, 1997
This Statement of Additional Information ("SAI") is not a prospectus. Much of
the information contained in this SAI expands upon information discussed in the
prospectus for M Fund, Inc. (the "Company") and should, therefore, be read in
conjunction with the prospectus for the Company. To obtain a copy of the
Prospectus with the same date as this SAI, write to the Company at River Park
Center, 205 S.E. Spokane Street, Portland, Oregon 97202, Attn: M Fund
Administration, or call (888) 736-2878.
TABLE OF CONTENTS
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INTRODUCTION.................................................................................................... 3
SPECIAL INVESTMENT METHODS AND RISKS............................................................................ 4
Foreign Investments.................................................................................... 4
Restricted and Illiquid Securities..................................................................... 7
Sovereign Debt Obligations - Brady Bonds............................................................... 8
Fixed-Income Securities................................................................................ 8
Convertible Securities................................................................................. 10
Warrants and Rights.................................................................................... 10
Repurchase Agreements.................................................................................. 11
Borrowing.............................................................................................. 11
Other Investment Companies............................................................................. 11
INVESTMENT RESTRICTIONS......................................................................................... 12
Fundamental Restrictions............................................................................... 12
Non-Fundamental Restrictions........................................................................... 13
Interpretive Rules..................................................................................... 15
INVESTMENT ADVISER.............................................................................................. 15
Investment Advisory Agreement.......................................................................... 15
Expenses of the Company................................................................................ 16
PORTFOLIO MANAGERS.............................................................................................. 17
PORTFOLIO TRANSACTIONS AND BROKERAGE............................................................................ 17
DETERMINATION OF NET ASSET VALUE................................................................................ 18
PERFORMANCE INFORMATION......................................................................................... 20
SHARES OF STOCK................................................................................................. 22
CUSTODY OF ASSETS............................................................................................... 22
DIRECTORS AND OFFICERS.......................................................................................... 23
TAX INFORMATION................................................................................................. 24
OTHER INFORMATION............................................................................................... 25
Financial Statements................................................................................... 25
Legal Counsel.......................................................................................... 25
Company Name........................................................................................... 25
Other Information...................................................................................... 25
APPENDIX A -- DESCRIPTION OF CORPORATE BOND RATINGS.......................................................A - 1
APPENDIX B -- DESCRIPTION OF COMMERCIAL PAPER RATINGS.........................................................A - 4
</TABLE>
2
INTRODUCTION
M Fund, Inc. (the "Company") is an open-end management investment
company established as a Maryland corporation on August 11, 1995. The Company
consists of four separate investment portfolios or funds (the "Funds" or a
"Fund"), each of which is, in effect, a separate mutual fund. The Company issues
a separate class of stock for each Fund representing fractional undivided
interests in that Fund. By investing in a Fund, an investor becomes entitled to
a pro rata share of all dividends and distributions arising from the net income
and capital gains on the investments of that Fund. Likewise, an investor shares
pro rata in any losses of that Fund.
Pursuant to an investment advisory agreement and subject to the
authority of the Company's board of directors (the "Board of Directors"), M
Financial Investment Advisers, Inc. (the "Adviser") serves as the Company's
investment adviser and conducts the business and affairs of the Company. The
Adviser has engaged the following sub-advisers to act as Portfolio Managers to
provide the day-to-day portfolio management for the respective Funds:
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FUND PORTFOLIO MANAGER
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<S> <C>
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Edinburgh Overseas Equity Fund Edinburgh Fund Managers plc
=========================================================== ========================================================
Turner Core Growth Fund Turner Investment Partners, Inc.
=========================================================== ========================================================
Frontier Capital Appreciation Fund Frontier Capital Management Company, Inc.
=========================================================== ========================================================
Enhanced U.S. Equity Fund Franklin Portfolio Associates LLC
=========================================================== ========================================================
</TABLE>
The Company currently offers one or more classes of its stock to
separate accounts of certain insurance companies (the "Participating Insurance
Companies") as the underlying funding vehicles for certain variable annuity and
variable life insurance policies (the "Policies") issued by the Participating
Insurance Companies. The Company may also offer its stock to qualified pension
and retirement plans. The Company does not offer its stock directly to the
general public. Each such separate account, like the Company, is registered as
an investment company with the Securities and Exchange Commission (the "SEC"),
and a separate prospectus, which accompanies the prospectus for the Company (the
"Prospectus"), describes that separate account and the Policies. The prospectus
for that separate account and the Policies, which should be read in conjunction
with the Company's prospectus, also has a statement of additional information
similar to this SAI.
Terms appearing in this SAI that are defined in the Prospectus have the
same meaning herein as in the Prospectus.
3
SPECIAL INVESTMENT METHODS AND RISKS
Foreign Investments
Each of the Funds may invest in securities of foreign issuers. Because
investments in foreign issuers may involve currencies of foreign countries,
because a Fund may temporarily hold funds in bank deposits in foreign currencies
during completion of investment programs, and because a Fund may be subject to
currency exposure independent of its securities positions, the Fund may be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations and may incur costs in connection with conversions between
various currencies.
Foreign investment markets also 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 transactions, making it difficult to
conduct such transactions. Mail and courier service and other communications
between the United States and foreign countries may be slower or less reliable
than within the United States, thus increasing the risk of delayed settlements
of portfolio transactions or loss of certificates for portfolio securities.
INVESTMENTS IN ADRS, EDRS, IDRS, AND GDRS. Many securities of foreign
issuers are represented by American Depository Receipts ("ADRs"), European
Depository Receipts ("EDRs"), International Depository Receipts ("IDRs"), and
Global Depository Receipts ("GDRs"). Each of the Funds may invest in ADRs.
ADRs represent the right to receive securities of foreign issuers
deposited in a domestic bank or a foreign correspondent bank. Prices of ADRs are
quoted in U.S. dollars, and ADRs are traded in the United States on exchanges or
over-the-counter and are sponsored and issued by domestic banks. ADRs do not
eliminate all the risk inherent in investing in the securities of foreign
issuers. To the extent that a Fund acquires ADRs through banks which do not have
a contractual relationship with the foreign issuer of the security underlying
the ADR to issue and service such ADRs (i.e., unsponsored programs), there may
be an increased possibility that the Fund would not become aware of and be able
to respond to corporate actions such as stock splits or rights offerings
involving the foreign issuer in a timely manner. In addition, the lack of
information may result in inefficiencies in the valuation of such instruments.
However, by investing in ADRs rather than directly in the stock of foreign
issuers, a Fund will avoid currency risks during the settlement period for
purchases and sales. In general, there is a large, liquid market in the United
States for ADRs quoted on a national securities exchange or the Nasdaq National
Market. The information available for ADRs is subject to the accounting,
auditing and financial reporting standards of the domestic market or exchange on
which they are traded, which standards are more uniform and more exacting than
those to which many foreign issuers may be subject.
The Edinburgh Overseas Equity Fund may also invest in EDRs, IDRs, and
GDRs, which are receipts evidencing an arrangement with a bank similar to that
for ADRs and are designed for use in the foreign securities markets. EDRs, IDRs,
and GDRs are not necessarily quoted in the same currency as the underlying
security.
FOREIGN CURRENCY TRANSACTIONS. Because investment in foreign issuers
will usually involve currencies of foreign countries, and because the Funds may
be exposed to currency exposure independent of their securities positions, the
value of the assets of the Funds invested in foreign issuers as measured in U.S.
dollars will be affected by changes in foreign currency exchange rates. To the
extent that a Fund's assets consist of investments denominated in a particular
currency, the Fund's exposure to adverse developments affecting the value of
such currency will increase.
Currency exchange rates may fluctuate significantly over short periods
of time causing, along with other factors, a Fund's net asset value to fluctuate
as well. They generally are determined by the forces of supply and demand in the
foreign exchange markets and the relative merits of investments in different
countries, actual or
4
anticipated changes in interest rates and other complex factors, as seen from an
international perspective. Currency exchange rates also can be affected
unpredictably by intervention by U.S. or foreign governments or central banks,
or the failure to intervene, or by currency controls or political developments
in the U.S. or abroad. To the extent that a substantial portion of a Fund's
total assets, adjusted to reflect the Fund's net position after giving effect to
currency transactions, is denominated in the currencies of foreign countries,
the Fund will be more susceptible to the risk of adverse economic and political
developments within those countries.
The Edinburgh Overseas Equity Fund may enter into forward foreign
currency exchange contracts for hedging purposes in order to protect against
anticipated changes in future foreign currency exchange rates or to increase
total return. A forward foreign currency exchange contract involves an
obligation to purchase or sell 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. These contracts are traded
in the interbank market conducted directly between currency traders (usually
large commercial banks) and their customers. The market in forward foreign
currency exchange contracts offers less protection against defaults by the other
party to such instruments than is available for currency instruments traded on
an exchange. A forward contract generally has no deposit requirement, and no
commissions are generally charged at any stage for trades.
At the maturity of a forward contract the Fund may either accept or
make delivery of the currency specified in the contract or, at or prior to
maturity, enter into a closing purchase transaction involving the purchase or
sale of an offsetting contract. Closing purchase transactions with respect to
forward contracts are usually effected with the currency trader who is a party
to the original forward contract.
The Fund may enter into forward foreign currency exchange contracts in
several circumstances. First, when the Fund enters into a contract for the
purchase or sale of a security denominated or noted in a foreign currency, or
when the Fund anticipates the receipt in a foreign currency of dividend or
interest payments on such a security which it holds, the Fund may desire to
"lock in" the U.S. dollar price of the security or the U.S. dollar equivalent of
such dividend or interest payment, as the case may be. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars, of the
amount of foreign currency involved in the underlying transactions, the Fund
will attempt to protect itself against an adverse change in the relationship
between the U.S. dollar and the subject foreign currency during the period
between the date on which the security is purchased or sold, or on which the
dividend or interest payment is declared, and the date on which such payments
are made or received.
Additionally, when the Portfolio Manager believes that the currency of
a particular foreign country may suffer a substantial decline against the U.S.
dollar, it may enter into a forward contract to sell, for a fixed amount of
dollars, the amount of foreign currency approximating the value of some or all
of the Fund's portfolio securities denominated in such foreign currency. The
precise matching of the forward contract amounts and the value of the securities
involved will not generally be possible because the future value of such
securities in foreign currencies will change as a consequence of market
movements in the value of those securities between the date on which the
contract is entered into and the date it matures. Using forward contracts to
protect the value of the Fund's portfolio securities against a decline in the
value of a currency does not eliminate fluctuations in the underlying prices of
the securities. It simply establishes a rate of exchange which a Fund can
achieve at some future point in time. The precise projection of short-term
currency market movements is not possible, and short-term hedging provides a
means of fixing the dollar value of only a portion of the Fund's foreign assets.
The Fund may engage in cross-hedging by using forward contracts in one
currency to hedge against fluctuations in the value of securities denominated in
a different currency if the Portfolio Manager determines that there is a pattern
of correlation between the two currencies. The Fund may also purchase and sell
forward contracts for non-hedging purposes when the Portfolio Manager
anticipates that the foreign currency will
5
appreciate or depreciate in value, but securities denominated in that currency
do not present attractive investment opportunities and are not held in the
Fund's portfolio.
Upon instructions from the Portfolio Manager, the Fund's custodian will
place cash or liquid securities into a segregated account of the Fund in an
amount equal to the value of the Fund's total assets committed to the
consummation of forward foreign currency exchange contracts requiring the Fund
to purchase foreign currencies or forward contracts entered into for non-hedging
purposes. If the value of the securities placed in the segregated account
declines, additional cash or securities will be placed in the account on a daily
basis so that the value of the account will equal the amount of the Fund's
commitments with respect to such contracts. The segregated account will be
marked-to-market on a daily basis. Although the contracts are not presently
regulated by the Commodity Futures Trading Commission ("CFTC"), the CFTC may in
the future assert authority to regulate these contracts. In such event, the
Fund's ability to utilize forward foreign currency exchange contracts may be
restricted.
While the Fund will enter into forward contracts to reduce currency
exchange rate risks, transactions in such contracts involve certain other risks.
Thus, while the Fund may benefit from such transactions, unanticipated changes
in currency prices may result in a poorer overall performance for the Fund that
if it had not engaged in any such transactions. Moreover, there may be imperfect
correlation between the Fund's portfolio holdings of securities denominated in a
particular currency and forward contracts entered into by the Fund. Such
imperfect correlation may cause the Fund to sustain losses which will prevent
the Fund from achieving a complete hedge or expose the Fund to risk of foreign
exchange loss.
Forward contracts are subject to the risk that the counterparty to such
contract will default on its obligations. Since a forward foreign currency
exchange contract is not guaranteed by an exchange or clearinghouse, a default
on the contract would deprive the Fund of unrealized profits, transaction costs
or expected benefits of a currency hedge or force the Fund to cover its purchase
or sale commitments, if any, at the current market price. The Fund will not
enter into such transactions unless the credit quality of the unsecured senior
debt or the claims-paying ability of the counterparty is considered to be
investment grade by the Portfolio Manager.
EMERGING MARKET SECURITIES. The Edinburgh Overseas Equity Fund may
invest up to 25% of its total assets in countries or regions with relatively low
gross national product per capita compared to the world's major economies, and
in countries or regions with the potential for rapid economic growth (emerging
markets). Emerging markets will include any country: (i) having an "emerging
stock market" as defined by the International Finance Corporation; (ii) with
low-to-middle income economies according to the International Bank for
Reconstruction and Development (the "World Bank"); (iii) listed in World Bank
publications as developing; or (iv) determined by the Adviser to be an emerging
market as defined above. The Fund may invest in securities of: (i) companies the
principal securities trading market for which is an emerging market country;
(ii) companies organized under the laws of, and with a principal office in, an
emerging market country; (iii) companies whose principal activities are located
in emerging market countries; or (iv) companies traded in any market that
derives 50% or more of their total revenue from either goods or services
produced in an emerging market or sold in an emerging market.
The risks of investing in foreign securities may be intensified in the
case of investments in emerging markets. Securities of many issuers in emerging
markets may be less liquid and more volatile than securities of comparable
domestic issuers. Emerging markets also 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 a portion of the assets of the Fund is uninvested and no
return is earned thereon. The inability of the 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
6
result either in losses to the Fund due to subsequent declines in value of the
portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser. Certain markets may require
payment for securities before delivery.
Securities prices in emerging markets can be significantly more
volatile than in the more developed nations of the world, reflecting the greater
uncertainties of investing in less established markets and economies. In
particular, countries with emerging markets may have relatively unstable
governments, present the risk of nationalization of businesses, restrictions on
foreign ownership, or prohibitions on repatriation of assets, and may have less
protection of property rights than more developed countries. The economies of
countries with emerging markets may be predominantly based on only a few
industries, may be highly vulnerable to changes in local or global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation
rates. Local securities markets may trade a small number of securities and may
be unable to respond effectively to increases in trading volume, potentially
making prompt liquidation of substantial holdings difficult or impossible at
times. Securities of issuers located in countries with emerging markets may have
limited marketability and may be subject to more abrupt or erratic price
movements.
Certain emerging markets may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors. In addition, if a deterioration occurs in an
emerging market's balance of payments or for other reasons, a country could
impose temporary restrictions on foreign capital remittances. A Fund could be
adversely affected by delays in, or a refusal to grant, any required
governmental approval for repatriation of capital, as well as by the application
to the Fund of any restrictions on investments.
RESTRICTED AND ILLIQUID SECURITIES
The Edinburgh Overseas Equity Fund and the Turner Core Growth Fund may
purchase limited amounts of illiquid securities (i.e., securities which may not
be sold or disposed of in the ordinary course of business within seven days at
approximately the value at which the Company has valued the investment). The
Edinburgh Overseas Equity Fund and the Frontier Capital Appreciation Fund may
purchase certain restricted securities (i.e., securities which are not
registered under the Securities Act of 1933, as amended (the "1933 Act")) but
that can be sold to "qualified institutional buyers" in accordance with the
requirements stated in Rule 144A under the 1933 Act ("Rule 144A Securities"). A
Rule 144A Security may be considered illiquid. Investments in illiquid
securities and restricted securities are not anticipated to exceed, in the
aggregate, 5% of a Fund's assets, but see non-fundamental investment
restrictions 12 and 13, respectively, below.
The Board of Directors has adopted guidelines and delegated to the
Portfolio Managers the daily function of determining and monitoring the
liquidity of Rule 144A Securities. The Board, however, will retain oversight and
be ultimately responsible for the determinations. It is not possible to predict
with assurance exactly how the market for restricted securities sold and offered
under Rule 144A will develop. To the extent that qualified institutional buyers
become uninterested in purchasing these restricted securities, this investment
practice could have the effect of decreasing the level of liquidity in a Fund.
Certain repurchase agreements which provide for settlement in more than
seven days, however, can be liquidated before the nominal fixed term on seven
days' or less notice. The Company will consider such repurchase agreements as
liquid. Likewise, restricted securities (including commercial paper issued
pursuant to Section 4(2) of the 1933 Act) that the Board of Directors of the
Company or a Portfolio Manager has determined to be liquid will be treated as
such.
The SEC staff has taken the position that fixed-time deposits maturing
in more than seven days that cannot be traded on a secondary market and
participation interests in loans are illiquid and not readily marketable.
7
Until such time (if any) as this position changes, the Company will include such
investments in the percentage limitation on illiquid investments applicable to
each Fund.
SOVEREIGN DEBT OBLIGATIONS - BRADY BONDS
The Edinburgh Overseas Equity Fund may invest in certain Sovereign Debt
Obligations customarily referred to as "Brady Bonds," which are created through
the exchange of existing commercial bank loans to foreign entities for new
obligations in connection with debt restructuring. Brady Bonds have been issued
only recently, and, accordingly, do not have a long payment history. They may be
collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar-denominated), and they are actively traded in the
over-the-counter secondary market.
U.S. dollar-denominated, collateralized Brady Bonds which may be
fixed-rate par bonds or floating-rate discount bonds, are generally
collateralized in full as to principal due at maturity by U.S. Treasury zero
coupon obligations which have the same maturity as the Brady Bonds. Interest
payments on these Brady Bonds generally are collateralized by cash or securities
in an amount that, in the case of fixed-rate bonds, is equal to at least one
year of rolling interest payments or, in the case of floating-rate bonds,
initially is equal to at least one year's rolling interest payments based on the
applicable interest rate at that time and is adjusted at regular intervals
thereafter.
Certain Brady Bonds are entitled to "value recovery payments" in
certain circumstances, which in effect constitute supplemental interest payment
but generally are not collateralized. Brady Bonds are often viewed as having
three or four valuation components: (i) the collateralized repayment of
principal at final maturity; (ii) the collateralized interest payments; (iii)
the uncollateralized interest payments; and (iv) any uncollateralized repayment
of principal at maturity (these uncollateralized amounts constitute the
"residual risk"). In the event of a default with respect to collateralized Brady
Bonds as a result of which the payment obligations of the issuer are
accelerated, the U.S. Treasury zero coupon obligations held as collateral for
the payment of principal will not be distributed to investors, nor will such
obligations be sold and the proceeds distributed. The collateral will be held by
the collateral agent to the scheduled maturity of the defaulted Brady Bonds,
which will continue to be outstanding, at which time the face amount of the
collateral will equal the principal payments which would have then been due on
the Brady Bonds in the normal course. In view of the residual risk of Brady
Bonds and, among other factors, the history of defaults with respect to
commercial bank loans by the public and private entities of countries issuing
Brady Bonds, investments in Brady Bonds should be viewed as speculative.
Investments in Brady Bonds will not exceed 5% of the Edinburgh Overseas Equity
Fund's assets (and will count toward the Fund's 25% maximum investment in
emerging markets).
FIXED-INCOME SECURITIES
The Edinburgh Overseas Equity Fund and the Enhanced U.S. Equity Fund
may invest in fixed-income securities (the Frontier Capital Appreciation Fund
may invest in convertible securities; see discussion below). Fixed-income
securities tend to decrease in value when prevailing interest rates rise and
increase in value when prevailing interest rates fall. Because the value of a
Fund's investments in fixed-income securities is interest rate sensitive, its
performance may be affected by the Portfolio Manager's ability to anticipate and
respond to fluctuations in market interest rates. Fixed-income securities
include U.S. Government securities, debt obligations of states or municipalities
or state or municipal government agencies or instrumentalities, corporate debt
obligations, preferred stock, zero coupon bonds and deferred interest bonds.
U.S. GOVERNMENT SECURITIES. The Edinburgh Overseas Equity Fund and
Enhanced U.S. Equity Fund may invest in U.S. Government securities. U.S.
Government securities are obligations issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities. Some U.S. Government
securities, such as
8
Treasury bills, notes and bonds, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others, such as obligations issued or guaranteed by U.S.
Government agencies, authorities or instrumentalities are supported either by
(a) the full faith and credit of the U.S. Government (such as securities of the
Small Business Administration), (b) the right of the issuer to borrow from the
Treasury (such as securities of the Federal Home Loan Banks), (c) the
discretionary authority of the U.S. Government to purchase the agency's
obligations (such as securities of the Federal National Mortgage Association),
or (d) only the credit of the issuer. No assurance can be given that the U.S.
Government will provide financial support to U.S. Government agencies,
authorities or instrumentalities in the future. U.S. Government securities may
also include zero coupon bonds.
Securities guaranteed as to principal and interest by the U.S.
Government, its agencies, authorities or instrumentalities are considered to
include (a) securities for which the payment of principal and interest is backed
by a guarantee of or an irrevocable letter of credit issued by the U.S.
Government, its agencies, authorities or instrumentalities and (b) participation
in loans made to foreign governments or their agencies that are so guaranteed.
The secondary market for certain of these participations is limited. Such
participations may therefore be regarded as illiquid.
CORPORATE DEBT OBLIGATIONS. The Edinburgh Overseas Equity Fund may
purchase corporate debt obligations. The Fund will limit its investment in
corporate debt obligations to 5% of its total assets. Corporate debt securities
are subject to the risk of an issuer's inability to meet principal and interest
payments on the obligations (credit risk) and may also be subject to price
volatility due to such factors as interest rate sensitivity, market perception
of the creditworthiness of the issuer and general market liquidity (market
risk). The Portfolio Manager considers both credit risk and market risk in
making investment decisions as to corporate debt obligations. The Edinburgh
Overseas Equity Fund may only purchase investment-grade bonds (i.e., bonds rated
BBB or higher by Standard & Poor's Rating Service, a division of McGraw-Hill
Companies ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's")). See Appendix A for a description of the ratings issued by these
investment rating services.
SHORT-TERM BANK AND CORPORATE OBLIGATIONS. Commercial paper represents
short-term unsecured promissory notes issued in bearer form by banks or bank
holding companies, corporations, and finance companies. Only the Edinburgh
Overseas Equity Fund may invest in commercial paper. Commercial paper consists
of direct U.S. dollar-denominated obligations of domestic issuers. Bank
obligations include certificates of deposit, bankers' acceptances, fixed-time
deposits and bank notes.
Certificates of deposit are certificates issued against funds deposited
in a commercial bank for a definite period of time and earning a specified
return. Bankers' acceptances are negotiable drafts or bills of exchange,
normally drawn by an importer or exporter to pay for specific merchandise, which
are "accepted" by a bank, meaning, in effect, that the bank unconditionally
agrees to pay the face value of the instrument on maturity. Fixed-time deposits
are bank obligations payable at a stated maturity date and bearing interest at a
fixed rate. Fixed-time deposits may be withdrawn on demand by the investor, but
may be subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed-time deposit to a third party, although there is no market for such
deposits. Certain fixed-time deposits maturing in more than seven days may be
deemed to be illiquid securities. Bank notes rank junior to deposit liabilities
of the bank and pari passu with other senior, unsecured obligations of the bank.
Bank notes are classified as "other borrowings" on a bank's balance sheet, while
deposit notes and certificates of deposit are classified as deposits. Bank notes
are not insured by the Federal Deposit Insurance Corporation or any other
insurer. Deposit notes are insured by the Federal Deposit Insurance Corporation
only to the extent of $100,000 per depositor per bank.
9
ZERO COUPON BONDS. The Edinburgh Overseas Equity Fund may invest in
zero coupon bonds, which are debt obligations that do not entitle the holder to
any periodic payments of interest prior to maturity or provide for a specified
cash payment date when the bonds begin paying current interest. As a result,
zero coupon bonds are generally issued and traded at a significant discount from
their face value. The discount approximates the present value amount of interest
the bonds would have accrued and compounded over the period until maturity.
Zero coupon bonds benefit the issuer by mitigating its initial need for
cash to meet debt service, but generally provide a higher rate of return to
compensate investors for the deferment of cash interest and principal payments.
Such securities are often issued by companies that may not have the capacity to
pay current interest and so may be considered to have more risk than current
interest-bearing securities. In addition, the market price of zero coupon bonds
generally is more volatile than the market prices of securities that provide for
the periodic payment of interest. The market prices of zero coupon bonds are
likely to fluctuate more in response to changes in interest rates than those of
interest-bearing securities having similar maturities and credit quality.
Zero coupon bonds carry the additional risk that, unlike securities
that provide for the periodic payment of interest to maturity, a Fund will
realize no cash until a specified future payment date unless a portion of such
securities is sold. If the issuer of such securities defaults, a Fund may obtain
no return at all on its investment. In addition, a Fund's investment in zero
coupon bonds may require it to sell certain of its portfolio securities to
generate sufficient cash to satisfy certain income distribution requirements.
See "Tax Information" below.
OTHER RISKS ASSOCIATED WITH FIXED-INCOME SECURITIES. The prices of
fixed-income securities fluctuate in response to the general level of interest
rates. Another factor which causes fluctuations in the prices of fixed-income
securities is the supply and demand for similarly rated securities. Fluctuations
in the prices of portfolio securities subsequent to their acquisition will not
affect cash income from such securities but will be reflected in a Fund's net
asset value.
CONVERTIBLE SECURITIES
The Edinburgh Overseas Equity Fund, the Frontier Capital Appreciation
Fund, and the Enhanced U.S. Equity Fund may invest in convertible securities.
Convertible securities may include corporate notes or preferred stock but more
commonly are long-term debt obligations of the issuer convertible at a stated
exchange rate into common stock of the issuer. As with all debt securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, to increase as interest rates decline. Convertible
securities generally offer lower interest or dividend yields than
non-convertible securities of similar quality. However, when the market price of
the common stock underlying a convertible security exceeds the conversion price,
the price of the convertible security tends to reflect the value of the
underlying common stock. As the market price of the underlying common stock
declines, the convertible security tends to trade increasingly on a yield basis,
and thus may not depreciate to the same extent as the underlying common stock.
Convertible securities generally rank senior to common stock in an issuer's
capital structure and are consequently of higher quality and entail less risk of
declines in market value than the issuer's common stock. However, the extent to
which such common-stock-like risk is reduced for the holder of a convertible
security is inversely related to the amount by which the convertible security's
market price exceeds its value as a fixed-income security.
WARRANTS AND RIGHTS
The Edinburgh Overseas Equity Fund, the Frontier Capital Appreciation
Fund, and the Enhanced U.S. Equity Fund each may invest in warrants or rights
which entitle the holder to buy equity securities at a specific price for a
specific period of time but will do so only if such equity securities are deemed
appropriate by the Portfolio Manager for investment by the Fund. Warrants and
rights have no voting rights, receive no dividends and have no rights with
respect to the assets of the issuer.
10
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements with "primary dealers"
in U.S. Government securities and member banks of the Federal Reserve System
which furnish collateral at least equal in value or market price to the amount
of their repurchase obligation. The collateral must consist of U.S. Government
securities or instruments that are rated in the highest rating category by at
least two nationally recognized statistical rating organizations ("NRSROs") or
by a single NRSRO if only one has assigned a rating. In a repurchase agreement,
an investor (e.g., a Fund) purchases a debt security from a seller which
undertakes to repurchase the security at a specified resale price on an agreed
future date (ordinarily a week or less). The resale price generally exceeds the
purchase price by an amount which reflects an agreed-upon market interest rate
for the term of the repurchase agreement. The primary risk is that, if the
seller defaults, a Fund might suffer a loss to the extent that the proceeds from
the sale of the underlying securities and other collateral held by that Fund in
connection with the related repurchase agreement are less than the repurchase
price. In addition, in the event of bankruptcy of the seller or failure of the
seller to repurchase the securities as agreed, that Fund could suffer losses,
including loss of interest on or principal of the security and costs associated
with delay and enforcement of the repurchase agreement. In evaluating whether to
enter into a repurchase agreement, the Portfolio Manager will carefully consider
the creditworthiness of the seller pursuant to procedures established by the
Board of Directors.
BORROWING
The Edinburgh Overseas Equity Fund may borrow money but only from banks
and only for temporary or short-term purposes. Temporary or short-term purposes
may include: (i) short-term (i.e., no longer than five business days) credits
for clearance of portfolio transactions; (ii) borrowing in order to meet
redemption requests or to finance failed settlements of portfolio trades without
immediately liquidating portfolio securities or other assets; and (iii)
borrowing in order to fulfill commitments or plans to purchase additional
securities pending the anticipated sale of other portfolio securities or assets
in the near future. The Fund will not borrow for leveraging purposes. The Fund
will maintain continuous asset coverage of at least 300% with respect to all of
its borrowings. Should the value of the Fund's assets decline to below 300% of
borrowings, the Fund may be required to sell portfolio securities within three
days to reduce the Fund's debt and restore 300% asset coverage. Borrowing
involves interest costs.
OTHER INVESTMENT COMPANIES
The Edinburgh Overseas Equity Fund reserves the right to invest up to
10% of its total assets, calculated at the time of purchase, in the securities
of other investment companies including money market funds, business development
companies, and small business investment companies (although it is anticipated
that such investments will not exceed 5% of total assets). The Fund may not
invest more than 5% of its total assets in the securities of any one investment
company nor in more than 3% of the voting securities of any other investment
company. The Fund will indirectly bear their proportionate share of any advisory
fees paid by investment companies in which they invest in addition to the
management fee paid by the Fund.
11
INVESTMENT RESTRICTIONS
FUNDAMENTAL RESTRICTIONS
The following investment restrictions have been adopted by the Company
as fundamental policies for the Funds to which each applies, as shown below. A
fundamental policy is one that cannot be changed without the affirmative vote of
"a majority of the outstanding voting securities" (as defined in the Investment
Company Act of 1940 (the "1940 Act")) attributable to that Fund. The investment
objective of each Fund and all other investment policies or practices of the
Funds are considered by the Company not to be fundamental and accordingly may be
changed by the Board of Directors without shareholder approval. See "Investment
Objectives and Policies" in the Company's Prospectus. For purposes of the 1940
Act, "a majority of the outstanding voting securities" means the lesser of (a)
67% or more of the votes attributable to shares of the Fund present at a
meeting, if the holders of more than 50% of such votes are present or
represented by proxy, or (b) more than 50% of the votes attributable to shares
of the Fund.
None of the Funds may:
1. Pledge, mortgage or hypothecate its assets, except to the extent
necessary to secure permitted borrowings.
2. Purchase securities on margin, except for such short-term credits
as are necessary for the clearance of transactions.
3. Underwrite securities issued by others, except to the extent that
the sale of portfolio securities by a Fund may be deemed to be
underwriting.
4. Purchase, hold or deal in real estate (including real estate
limited partnerships) or oil, gas or mineral leases, although a
Fund may purchase and sell securities that are secured by real
estate or interests therein and may purchase mortgage-related
securities (unless otherwise prohibited in these investment
restrictions) and securities issued by real estate investment
trusts and may hold and sell real estate acquired for the Fund as
a result of the ownership of securities.
5. Invest in commodities.
6. Lend any money or other assets, except through the purchase of all
or a portion of an issue of securities or obligations of the type
in which the Fund may invest. However, a Fund may lend its
portfolio securities in an amount not to exceed one-third of the
value of its total assets, unless otherwise prohibited in these
investment restrictions.
7. Issue any senior security (as such term is defined in Section
18(f) of the 1940 Act) except as otherwise permitted under these
fundamental investment restrictions.
8. Alone or together with any other of the Funds, make investments
for the purpose of exercising control over, or management of, any
issuer.
9. Borrow money except from banks for temporary or short-term
purposes and then only if the Fund maintains asset coverage of at
least 300% for such borrowings. None of the Funds will purchase
securities when such borrowings exceed 5% of its assets.
10. Sell securities short or maintain a short position including short
sales against the box.
12
11. Invest more than 25% of the value of its total assets in the
securities of issuers conducting their principal business
activities in the same industry. This limitation does not apply to
U.S. Government securities.
12. As to 75% of the value of its total assets, purchase the
securities of any one issuer (except U.S. Government securities)
if, as a result thereof, more than 5% of the value of the Fund's
total assets would be invested in securities of that issuer or if,
as a result thereof, more than 10% of the outstanding voting
securities of that issuer would be owned by the Fund.
NON-FUNDAMENTAL RESTRICTIONS
In addition to the fundamental investment restrictions mentioned above,
the Board of Directors has adopted certain non-fundamental restrictions for each
Fund as shown below. Non-fundamental restrictions represent the current
intentions of the Board of Directors, and they differ from fundamental
investment restrictions in that they may be changed or amended by the Board of
Directors without prior notice to or approval of shareholders.
None of the Funds may:
1. Purchase the securities of any one issuer if, by such purchase,
the Fund would own more than 10% of the outstanding voting
securities of that issuer.
2. Write call or put options.
3. Purchase variable-amount master demand notes, which are
obligations that permit the investment of fluctuating amounts at
varying rates of interest pursuant to direct arrangements between
the lender and the borrower.
4. Purchase variable- or floating-rate demand instruments, which are
debt securities that include a variable or floating interest rate
adjustment feature.
5. Purchase fixed-income investments (e.g., corporate debt
obligations, including commercial paper) that are unrated or rated
at the time of purchase in the lower rating categories by S&P or
Moody's (i.e., ratings of BB or lower by S&P or Ba or lower by
Moody's for corporate debt obligations and ratings below A-3 by
S&P or Prime-3 by Moody's for commercial paper).
6. Invest in mortgage-backed securities, which represent direct or
indirect participation in, or are collateralized by and payable
from, mortgage loans secured by real property.
7. Invest in asset-backed securities, which represent participation
in, or are secured by and payable from, assets such as motor
vehicle installment sales, installment loan contracts, leases of
various types of real and personal property, receivables from
revolving credit (i.e., credit card) agreements and other
categories of receivables.
8. Invest in options or futures.
9. Invest in when-issued securities (or delayed-delivery or forward
commitment contracts).
13
10. Invest in interest-only ("IO") or principal only ("PO")
securities. However, this does not preclude investments in zero
coupon bonds.
11. Invest more than 25% of its net asset value in emerging markets,
including no more than 5% of net asset value in Brady Bonds.
Fund-specific restrictions:
12. The Edinburgh Overseas Equity Fund and the Turner Core Growth Fund
may not purchase illiquid securities, including certain repurchase
agreements or time deposits maturing in more than seven days, if,
as a result thereof, more than 5% of the value of its total assets
would be invested in assets that are either illiquid or are not
readily marketable. The Frontier Capital Appreciation Fund and the
Enhanced U.S. Equity Fund may not invest in illiquid securities.
13. The Edinburgh Overseas Equity Fund and the Frontier Capital
Appreciation Fund may not purchase restricted securities (except
securities offered and sold to "qualified institutional buyers" in
accordance with Rule 144A under the 1933 Act, and except foreign
securities offered and sold outside the United States) if, as a
result thereof, more than 10% of the value of its total assets
would be invested in restricted securities. The Turner Core Growth
Fund and the Enhanced U.S. Equity Fund may not invest in
restricted securities.
14. Each of the Frontier Capital Appreciation Fund and the Turner Core
Growth Fund may invest no more than 10% of the value of their
total assets in securities of foreign issuers that are listed on
United States exchanges or are represented by American Depository
Receipts.
15. The Edinburgh Overseas Equity Fund, the Frontier Capital
Appreciation Fund, and the Enhanced U.S. Equity Fund may not
invest in warrants or rights (other than those acquired in units
or otherwise attached to other securities) if, as a result
thereof, more than 5% of the value of its total assets would be
invested in warrants or rights, and each may not invest more than
2% of its total assets, calculated at the time of purchase, in
warrants or rights that are not listed on the New York Stock
Exchange or the American Stock Exchange. The Turner Core Growth
Fund may not invest in warrants or rights.
16. The Turner Core Growth Fund, the Frontier Capital Appreciation
Fund, and the Enhanced U.S. Equity Fund will not invest in other
investment companies.
17. The Edinburgh Overseas Equity Fund will not engage in forward
foreign currency exchange contracts with respect to more than 5%
of its assets. The other Funds will not enter into such contracts.
14
INTERPRETIVE RULES
For purposes of the foregoing fundamental and non-fundamental
limitations, any limitation which involves a maximum percentage will not be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition or encumbrance of securities or assets of, or
borrowings by, a Fund. In addition, with regard to exceptions recited in a
restriction, a Fund may only rely on an exception if its investment objective or
policies otherwise permit it to rely on the exception.
INVESTMENT ADVISER
M Financial Investment Advisers, Inc. (the "Adviser") is the investment
adviser of the Company and its Funds.
The Adviser was organized on September 11, 1995. Although the Adviser
is not primarily responsible for the daily management of the Funds, the Adviser
oversees the management of the assets of the Funds by each of the Portfolio
Managers. In turn, each Portfolio Manager is responsible for the day-to-day
management of a specific Fund.
INVESTMENT ADVISORY AGREEMENT
The investment advisory agreement provides that the Adviser may render
similar services to others (although there is no current intent for the Adviser
to do so) so long as the services that it provides to the Company are not
impaired thereby. The investment advisory agreement also provides that the
Adviser will not be liable for any error of judgment or mistake of law or for
any loss arising out of any investment or for any act or omission in the
management of the Company, except for (i) willful misfeasance, bad faith or
gross negligence in the performance of its duties or by reason of reckless
disregard of its duties or obligations under the investment advisory agreement,
and (ii) to the extent specified in Section 36(b) of the 1940 Act concerning
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation.
The investment advisory agreement was initially approved for each Fund
by the Board of Directors, including a majority of the Directors who are not
parties to the investment advisory agreement or "interested persons" (as such
term is defined in the 1940 Act) of any party thereto (the "non-interested
Directors"), on November 20, 1995, and by the sole initial shareholder of the
Company on December 5, 1995. On February 28, 1997, the investment advisory
agreement was approved for continuance through February 28, 1998. The investment
advisory agreement will remain in effect from year to year thereafter, provided
such continuance is specifically approved as to each Fund at least annually by
(a) the vote of a majority of the outstanding voting securities of that Fund or
by the Board of Directors, and (b) the vote of a majority of the non-interested
Directors, cast in person at a meeting called for the purpose of voting on such
approval. The investment advisory agreement will terminate automatically if
assigned (as defined in the 1940 Act). The investment advisory agreement is also
terminable as to any Fund at any time by the Board of Directors or by vote of a
majority of the votes attributable to outstanding voting securities of the
applicable Fund (a) without penalty and (b) on 60 days' written notice to the
Adviser. The agreement is also terminable by the Adviser on 90 days' written
notice to the Company. For the period January 4, 1996 (commencement of
operations) to December 31, 1996, the Funds incurred the following amounts as
investment advisory fees payable to the Adviser: Edinburgh Overseas Equity Fund,
$25,922; Turner Core Growth Fund, $8,040; Frontier Capital Appreciation Fund,
$17,411; Enhanced U.S. Equity Fund, $6,289.
15
EXPENSES OF THE COMPANY
The Company incurs certain operating and general administrative
expenses in addition to the Adviser's fee. These expenses, which are accrued
daily, include but are not limited to: taxes; expenses for legal and auditing
services; costs of printing; charges for custody services; transfer agent fees,
if any; expenses of redemption of shares; expense of registering shares under
federal and state securities laws; accounting costs; insurance; dues of trade
associations; interest; brokerage costs; and other expenses properly payable by
the Company.
In general, each Fund is charged for the expenses incurred in its
operations as well as for a portion of the Company's general administrative
expenses, allocated on the basis of the asset size of the respective Funds, or
by the Board of Directors as appropriate. Expenses other than the Adviser's fee
that are borne directly and paid individually by a Fund include, but are not
limited to, brokerage commissions, dealer markups, taxes, custody fees, expenses
of redemption, and other costs properly payable by the Fund. Expenses which are
allocated among the Funds include, but are not limited to, Directors' fees and
expenses, independent accountant fees, transfer agent fees, insurance costs,
legal fees, and all other costs of operation properly payable by the Company.
The Adviser has voluntarily undertaken to pay any such expenses (but
not including the advisory fee, brokerage or other portfolio transaction
expenses or expenses of litigation, indemnification, taxes or other
extraordinary expenses) to the extent that such expenses, as accrued for each
Fund through December 31, 1996, exceed 0.25% of the Fund's estimated average
daily net assets on an annual basis. In 1996, the Adviser paid the following
amounts on behalf of each Fund: Edinburgh Overseas Equity Fund $146,502; Turner
Core Growth Fund $137,012; Frontier Capital Appreciation Fund $133,645; Enhanced
U.S. Equity Fund $130,220. The Adviser has extended this same provision through
December 31, 1997.
PORTFOLIO MANAGERS
As compensation for their services, each Portfolio Manager receives a
fee (paid by the Adviser) based on the average daily net assets of the
applicable Fund at the following annual rates:
<TABLE>
<CAPTION>
=============================================== ================================================================
FUND SUB-ADVISORY FEE
=============================================== ================================================================
<S> <C>
=============================================== ================================================================
Edinburgh Overseas Equity Fund 0.90% on the first $10 million
0.75% on the next $15 million
0.60% on the next $75 million
0.45% on amounts above $100 million
=============================================== ================================================================
Turner Core Growth Fund 0.30%
=============================================== ================================================================
Frontier Capital Appreciation Fund 0.75%
=============================================== ================================================================
Enhanced U.S. Equity Fund 0.40% on the first $25 million
0.30% on the next $75 million
0.15% on amounts above $100 million
=============================================== ================================================================
</TABLE>
Since they are paid by the Adviser, the sub-advisory fees form a
portion of, and are not in addition to, the Advisory fees described in the
Prospectus. For the period January 4, 1996 (commencement of operations) to
December 31, 1996, the Adviser paid the Portfolio Managers the following
sub-advisory fees: Edinburgh Overseas Equity Fund - $22,219; Turner Core Growth
Fund - $5,360; Frontier Capital Appreciation Fund - $14,509; Enhanced U.S.
Equity Fund - $4,573.
PORTFOLIO TRANSACTIONS AND BROKERAGE
The Portfolio Managers are responsible for decisions to buy and sell
securities for the Funds, the selection of brokers and dealers to effect the
transactions and the negotiation of brokerage commissions, if any. Purchases and
sales of securities on a securities exchange are effected through brokers who
charge a negotiated commission for their services. Orders may be directed to any
broker including, to the extent and in the manner permitted by applicable law,
affiliates of the Adviser or the Portfolio Managers.
In placing orders for portfolio securities of a Fund, its Portfolio
Manager is required to give primary consideration to obtaining the most
favorable price and efficient execution. This means that the Portfolio Manager
will seek to execute each transaction at a price and commission, if any, which
provide the most favorable total cost or proceeds reasonably attainable in the
circumstances. While the Portfolio Manager generally seeks reasonably
competitive spreads or commissions, a Fund will not necessarily be paying the
lowest spread or commission available. Within the framework of this policy, the
Portfolio Managers may consider research and investment services provided by
brokers or dealers who effect or are parties to portfolio transactions of the
Funds, the Portfolio Managers and their affiliates, or other clients of the
Portfolio Managers or their affiliates. Such research and investment services
include statistical and economic data and research reports on particular
companies and industries. Such services are used by the Portfolio Managers in
connection with all of their investment activities, and some of such services
obtained in connection with the execution of transactions for the Funds may be
used in managing other investment accounts. Conversely, brokers furnishing such
services may be selected for the execution of transactions of such other
accounts, whose aggregate assets are far larger than those of the Funds, and the
services furnished by such brokers may be used by the Portfolio Managers in
providing investment sub-advisory services to the Funds.
On occasions when the Portfolio Manager deems the purchase or sale of a
security to be in the best interest of a Fund as well as its other advisory
clients (including any other fund or other investment company or advisory
account for which the Portfolio Manager or an affiliate acts as investment
adviser), the Portfolio Manager, to the extent permitted by applicable laws and
regulations, may aggregate the securities to be sold or purchased for the Fund
with those to be sold or purchased for such other customers in order to obtain
the best net
17
price and most favorable execution. In such event, allocation of the securities
so purchased or sold, as well as the expenses incurred in the transaction, will
be made by the Portfolio Manager in the manner it considers to be most equitable
and consistent with its fiduciary obligations to the Fund and such other
customers. In some instances, this procedure may adversely affect the price and
size of the position obtainable for a Fund.
Commission rates are established pursuant to negotiations with the
broker based on the quality and quantity of execution services provided by the
broker in the light of generally prevailing rates. The allocation of orders
among brokers and the commission rates paid are reviewed periodically by the
Board of Directors.
The Funds paid the following brokerage commissions for the period
January 4, 1996 (commencement of operations) to December 31, 1996: Edinburgh
Overseas Equity Fund - $26,916; Turner Core Growth Fund - $12,272; Frontier
Capital Appreciation Fund - $12,880; Enhanced U.S. Equity Fund - $1,461.
The portfolio turnover rate is calculated for each Fund by dividing the
lesser of the dollar amount of sales or purchases of portfolio securities by the
average monthly value of that Fund's portfolio securities, excluding securities
having a maturity at the date of purchase of one year or less. For the fiscal
year ended December 31, 1996, the portfolio turnover rates for the Funds were as
follows:
<TABLE>
<CAPTION>
============================================================ ===========================
FUND PORTFOLIO TURNOVER RATE
<S> <C>
============================================================ ===========================
Edinburgh Overseas Equity Fund 65%
============================================================ ===========================
============================================================ ===========================
Turner Core Growth Fund 258%
============================================================ ===========================
============================================================ ===========================
Frontier Capital Appreciation Fund 140%
===========================
============================================================
Enhance U.S. Equity Fund 79%
============================================================ ===========================
</TABLE>
High rates of portfolio turnover involve correspondingly greater
expenses which must be borne by a Fund and may under certain circumstances make
it more difficult for a Fund to qualify as a regulated investment company under
the Internal Revenue Code. The portfolio turnover rates for the Frontier Capital
Appreciation Fund and the Turner Core Growth Fund were higher than anticipated.
This was primarily due to out of the ordinary purchase and redemption activity
in the second and third quarters of 1996.
DETERMINATION OF NET ASSET VALUE
The Board of Directors is responsible for determining in good faith the
fair value of securities of each Fund. The price per share, and therefore the
net asset value per share, was initially established at $10.00 by the Board of
Directors. Thereafter, in accordance with procedures adopted by the Board of
Directors, the net asset value per share is calculated by determining the net
worth of each Fund (assets, including securities at market value or amortized
cost value, minus liabilities) divided by the number of that Fund's outstanding
shares. All securities are valued as of the close of regular trading on the New
York Stock Exchange. Each Fund will compute its net asset value once daily at
the close of such trading (normally 4:00 p.m. New York time). In addition, the
Funds may compute their net asset value as of any time permitted pursuant to any
exemption, order or statement of the SEC or its staff.
Portfolio assets of the Funds are valued as follows:
(a) securities and other investments listed on any U.S. or foreign
stock exchange or the National Association of Securities
Dealers Automated Quotation system ("Nasdaq") are valued at
the last sale price on that exchange or Nasdaq on the
valuation day; if no sale occurs, securities traded
18
on a U.S. exchange or Nasdaq are valued at the mean between
the closing bid and closing asked prices and securities traded
principally on a foreign exchange will be valued at the
official bid price (the last sale price and official bid price
for securities traded principally on a foreign exchange will
be determined as of the close of the London Foreign Exchange);
(b) over-the-counter securities not quoted on Nasdaq are valued at
the last sale price on the valuation day or, if no sale
occurs, at the mean between the last bid and asked prices;
(c) debt securities with a remaining maturity of 61 days or more
are valued on the basis of dealer-supplied quotations or by a
pricing service selected by the Portfolio Manager and approved
by the Board of Directors if those prices are deemed by the
Portfolio Manager to be representative of market values at the
close of business of the New York Stock Exchange;
(d) all other securities and other assets, including those for
which a pricing service supplies no quotations or quotations
are not deemed by the Portfolio Manager to be representative
of market values, but excluding debt securities with remaining
maturities of 60 days or less, are valued at fair value as
determined in good faith pursuant to procedures established by
the Board of Directors; and
(e) debt securities with a remaining maturity of 60 days or less
will be valued at their amortized cost which approximates
market value.
Portfolio securities traded on more than one U.S. national securities
exchange or foreign securities exchange are valued at the last sale price on
each business day at the close of the exchange representing the principal market
for such securities. The value of all assets and liabilities expressed in
foreign currencies will be converted into U.S. dollar values at the mean between
the buying and selling rates of such currencies against U.S. dollars last quoted
by any major bank. If such quotations are not available, the rate of exchange
will be determined in good faith by or under procedures established by the Board
of Directors.
Trading in securities on European and Far Eastern securities exchanges
and on over-the-counter markets is normally completed well before the close of
business on each business day. In addition, European or Far Eastern securities
trading generally or in a particular country or countries may not take place on
all business days. Furthermore, trading takes place in Japanese markets on
certain Saturdays and in various foreign markets on days which are not business
days for the Company and days on which a Fund's net asset value is not
calculated. Such calculation does not take place contemporaneously with the
determination of the prices of a majority of the portfolio securities used in
such calculation. Events affecting the values of portfolio securities that occur
between the time their prices are determined and the close of regular trading on
the New York Stock Exchange will not be reflected in a Fund's calculation of net
asset value until the following business day, unless the Portfolio Manager deems
that the particular event would materially affect net asset value, in which case
an adjustment will be made.
Under the amortized cost method of valuation, securities are valued at
cost on the date of their acquisition, and thereafter a constant accretion of
any discount or amortization of any premium to maturity is assumed, regardless
of the impact of fluctuating interest rates on the market value of the security.
While this method provides certainty in valuation, it may result in periods in
which value as determined by amortized cost is higher or lower than the price a
Fund would receive if it sold the security. During such periods, the quoted
yield to investors may differ somewhat from that obtained by a similar fund or
portfolio which uses available market quotations to value all of its portfolio
securities.
19
PERFORMANCE INFORMATION
The Company may from time to time quote or otherwise use average annual
total return information for the Funds in advertisements, shareholder reports,
and sales literature. Average annual total return values are computed pursuant
to equations specified by the SEC.
Average annual total return for a specified period is derived by
calculating the actual dollar amount of the investment return on a $1,000
investment in a Fund made at the beginning of the period, and then calculating
the annual compounded rate of return which would produce that amount, assuming a
redemption at the end of the period according to the following formula:
P ( 1 + T ) n = ERV
Where P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value at the end of the stated
period of a hypothetical $1,000 payment made at the
beginning of the state period
This calculation assumes a complete redemption of the investment. It
also assumes that all dividends and distributions are reinvested at net asset
value on the reinvestment dates during the period.
The Company also may from time to time quote or otherwise use
year-by-year total return, cumulative total return and yield information for the
Funds in advertisements, shareholder reports, and sales literature. Year-by-year
total return and cumulative total return for a specified period are each derived
by calculating the percentage rate required to make a $1,000 investment in a
Fund (assuming all distributions are reinvested) at the beginning of such period
equal to the actual total value of such investment at the end of such period.
Yield is computed by dividing net investment income earned during a
recent 30-day period by the product of the average daily number of shares
outstanding and entitled to receive dividends during the period and the price
per share on the last day of the relevant period. The results are compounded on
a bond-equivalent (semiannual) basis and then annualized. Net investment income
per share is equal to the dividends and interest earned during the period,
reduced by accrued expenses for the period. The calculation of net investment
income for these purposes may differ from the net investment income determined
for accounting purposes.
Any performance data quoted for a Fund will represent historical
performance, and the investment return and principal value of an investment will
fluctuate so that an investor's shares, when redeemed, may be worth more or less
than original cost. Performance data for the Funds will not reflect charges
deducted under the Policies. If Policy charges were taken into account, such
performance data would reflect lower returns.
From time to time the Company may publish an indication of the Funds'
past performance as measured by independent sources such as (but not limited to)
Lipper Analytical Services, Weisenberger Investment Companies Service,
Donoghue's Money Fund Report, Barron's, Business Week, Changing Times, Financial
World, Forbes, Fortune, Money, Personal Investor, Sylvia Porter's Personal
Finance and The Wall Street Journal. The Company may also advertise information
which has been provided to the NASD for publication in regional and local
newspapers. In addition, the Company may from time to time advertise its
performance relative to certain indices and benchmark investments, including
(but not limited to): (a) the Lipper Analytical Services, Inc. Mutual Fund
Performance Analysis, Fixed-Income Analysis and Mutual Fund Indices (which
measure total return and average current yield for the mutual fund industry and
rank mutual fund performance); (b) the CDA Mutual Fund Report published by CDA
Investment Technologies, Inc. (which analyzes price, risk
20
and various measures of return for the mutual fund industry); (c) the Consumer
Price Index published by the U.S. Bureau of Labor Statistics (which measures
changes in the price of goods and services); (d) Stocks, Bonds, Bills and
Inflation published by Ibbotson Associates (which provides historical
performance figures for stocks, government securities and inflation); (e) the
Hambrecht & Quist Growth Stock Index; (f) the Nasdaq OTC Composite Prime Return;
(g) the Russell Midcap Index; (h) the Russell 2000 Index - Total Return; (i) the
ValueLine Composite-Price Return; (j) the Wilshire 4500 Index; (k) the Salomon
Brothers' World Bond Index (which measures the total return in U.S. dollar terms
of government bonds, Eurobonds and foreign bonds of ten countries, with all such
bonds having a minimum maturity of five years); (l) the Shearson Lehman Brothers
Aggregate Bond Index or its component indices (the Aggregate Bond Index measures
the performance of Treasury, U.S. Government agencies, mortgage and Yankee
bonds); (m) the S&P Bond indices (which measure yield and price of corporate,
municipal and U.S. Government bonds); (n) the J.P. Morgan Global Government Bond
Index; (o) Donoghue's Money Market Fund Report (which provides industry averages
of 7-day annualized and compounded yields of taxable, tax-free and U.S.
Government money market funds); (p) other taxable investments including
certificates of deposit, money market deposit accounts, checking accounts,
savings accounts, money market mutual funds and repurchase agreements; (q)
historical investment data supplied by the research departments of Goldman
Sachs, Lehman Brothers, CS First Boston, Morgan Stanley (including EAFE),
Salomon Brothers, Merrill Lynch, Donaldson Lufkin & Jenrette or other providers
of such data; (r) the FT-Actuaries Europe and Pacific Index; (s) mutual fund
performance indices published by Variable Annuity Research & Data Service; (t)
S&P 500 Index; and (u) mutual fund performance indices published by Morningstar,
Inc. The composition of the investments in such indices and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of a Fund's portfolio. These indices and averages are
generally unmanaged and the items included in the calculations of such indices
and averages may be different from those of the equations used by the Company to
calculate a Fund's performance figures.
The Company may from time to time summarize the substance of
discussions contained in shareholder reports in advertisements and publish the
Portfolio Managers' views as to markets, the rationale for a Fund's investments
and discussions of a Fund's current asset allocation.
From time to time, advertisements or information may include a
discussion of certain attributes or benefits to be derived by an investment in a
particular Fund. Such advertisements or information may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail in the communication.
Such performance data will be based on historical results and will not
be intended to indicate future performance. The total return and yield of a Fund
will vary based on market conditions, portfolio expenses, portfolio investments,
and other factors. The value of a Fund's shares will fluctuate, and an
investor's shares may be worth more or less than the investor's original cost
upon redemption. The Company may also, at its discretion, from time to time make
a list of a Fund's holdings available to investors upon request.
AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
========================= ====================== ======================= ====================== ======================
Edinburgh Overseas Turner Core Growth Frontier Capital Enhanced U.S. Equity
Equity Fund Fund Appreciation Fund Fund
========================= ====================== ======================= ====================== ======================
<S> <C> <C> <C> <C>
For the Period 1/4/96*
to 12/31/96 (0.63)% 19.99% 30.31% 23.67%
========================= ====================== ======================= ====================== ======================
</TABLE>
*The Funds commenced operations on January 4, 1996.
21
SHARES OF STOCK
The Company issues a separate class of shares for each Fund
representing fractional undivided interests in that Fund. The Board of Directors
has authority to divide or combine the shares of any Fund into greater or lesser
numbers without thereby changing the proportionate beneficial interests in the
Fund.
Each issued and outstanding share is entitled to participate equally in
dividends and distributions declared for the respective class and, upon
liquidation or dissolution, in net assets allocated to such class remaining
after satisfaction of outstanding liabilities. The shares of each class, when
issued, will be fully paid and nonassessable and have no preemptive or
conversion rights.
Rule 18f-2 under the 1940 Act provides that any matter required to be
submitted by the provisions of the 1940 Act, applicable state law or otherwise
to the holders of the outstanding voting securities of an investment company
such as the Company shall not be deemed to have been effectively acted upon
unless approved by the holders of a majority of the outstanding shares of each
class or series affected by such matter. Rule 18f-2 further provides that a
class or series shall be deemed to be affected by a matter unless the interests
of each class or series in the matter are substantially identical or the matter
does not affect any interest of such class or series. However, Rule 18f-2
exempts the selection of independent public accountants, the approval of
principal underwriting contracts and the election of Directors from the separate
voting requirements of Rule 18f-2.
Under normal circumstances, subject to the reservation of rights
explained above, the Company will redeem shares of the Funds in cash within
seven days. However, the right of a shareholder to redeem shares and the date of
payment by the Company may be suspended for more than seven days for any period
during which the New York Stock Exchange is closed, other than the customary
weekends or holidays, or when trading on such Exchange is restricted as
determined by the SEC; or during any emergency, as determined by the SEC, as a
result of which it is not reasonably practicable for a Fund to dispose of
securities owned by it or fairly to determine the value of its net assets; or
for such other period as the SEC may by order permit for the protection of
shareholders.
Under Maryland law, the Company is not required to hold annual
shareholder meetings and does not intend to do so.
CUSTODY OF ASSETS
Pursuant to a custodian agreement with the Company, Investors Bank &
Trust Company ("Investors Bank") holds the cash and portfolio securities of the
Company as custodian.
Investors Bank is responsible for holding all securities and cash of
each Fund, receiving and paying for securities purchased, delivering against
payment securities sold, and receiving and collecting income from investments,
making all payments covering expenses of the Company, all as directed by persons
authorized by the Company. Investors Bank does not exercise any supervisory
function in such matters as the purchase and sale of portfolio securities,
payment of dividends, or payment of expenses of the Funds or the Company.
Portfolio securities of the Funds purchased domestically are maintained in the
custody of Investors Bank and may be entered into the Federal Reserve,
Depository Trust Company, or Participant's Trust Company book entry systems.
Pursuant to the custodian agreement, portfolio securities purchased outside the
United States will be maintained in the custody of various other custodians or
subcustodians, including foreign banks and foreign securities depositories, as
are approved by the Board of Directors, in accordance with regulations under the
1940 Act.
22
DIRECTORS AND OFFICERS
The Directors and officers of the Company are listed below together
with their respective positions with the Company and a brief statement of their
principal occupations during the past five years and any positions held with
affiliates of the Company:
<TABLE>
<CAPTION>
========================================= ==================== ======================================================
Position(s)
Held with Principal Occupation(s)
Name, Address, and Age the Company During Past 5 Years
========================================= ==================== ======================================================
<S> <C> <C>
Peter W. Mullin* Director Chairman and Chief Executive Officer, Mullin
(age 56) Consulting, Inc.
========================================= ==================== ======================================================
David M. Spungen* Director Director of CMS Capital Management, a division of
(age35) CMS Investment Resources, Inc.
========================================= ==================== ======================================================
Gerald Bidwell Director President and Chief Executive Officer, Bidwell & Co.
209 SW Oak St.
Portland, OR 97204
(age 53)
========================================= ==================== ======================================================
Neil E. Goldschmidt Director President, Neil Goldschmidt, Inc.; Formerly,
222 SW Columbia Governor, State of Oregon
Suite 1850
Portland, OR 97201
(age 57)
========================================= ==================== ======================================================
Philip W. Halpern Director Treasurer and Chief Investment Officer, California
Treasurer's Office Institute of Technology, since September 1996.
551 South Wilson Avenue Chief Investment Officer, Washinton State Investment
Mail Code 2-42 Board, since 1992.
Pasadena, California 91125
(age 42)
========================================= ==================== ======================================================
Daniel F. Byrne* President Senior Vice President, Product Development and Sales
(age 40) Support, of M Financial Group, since 1992..
========================================= ==================== ======================================================
David W. Schutt* Secretary and Secretary and Treasurer of M Life and Director of
(age 41) Treasurer Finance for M Financial Group, since 1992.
========================================= ==================== ======================================================
</TABLE>
* "Interested Person" of the Company for purposes of the 1940 Act. The
address of Interested Persons is M Fund, Inc., River Park Center, 205 S.E.
Spokane Street, Portland, Oregon 97202.
There is no family relationship between any of the Directors or
officers listed above.
Each non-interested Director receives as compensation an annual
retainer of $8,000 plus $500 per meeting of the Board or a committee thereof
which he attends.
During the period January 4, 1996 (commencement of operations) to
December 31, 1996, the Directors of the Company received the following
compensation from the Company:
<TABLE>
<CAPTION>
=================================================================================================================
=================================================================================================================
Pension or
Retirement Total
Aggregate Benefits Accrued Estimated Annual Compensation
Compensation from as Part of the Benefits upon from the Company
Name of Person, Position the Company** Company's Retirement and Fund Complex
Expenses** Paid to
Directors**
=================================================================================================================
<S> <C> <C> <C> <C>
Peter W. Mullin $ 0 $ 0 $ 0 $ 0
Director
=================================================================================================================
David M. Spungen $ 0 $ 0 $ 0 $ 0
Director
=================================================================================================================
Gerald Bidwell $10,000 $ 0 $ 0 $10,000
Director
=================================================================================================================
Neil E. Goldschmidt $10,000 $ 0 $ 0 $10,000
Director
=================================================================================================================
Philip W. Halpern $10,000 $ 0 $ 0 $10,000
Director
=================================================================================================================
</TABLE>
TAX INFORMATION
SOURCES OF GROSS INCOME. To qualify for treatment as a regulated investment
company, a Fund must, among other things, derive its income from certain
sources. Specifically, in each taxable year, a Fund must generally derive at
least 90% of its gross income from dividends, interest, payments with respect to
securities loans, gains from the sale or other disposition of securities or
foreign currencies, or other income derived with respect to its business of
investing in securities or currencies. A Fund must also generally derive less
than 30% of its gross income from the sale or other disposition of any of the
following which was held for less than three months: (1) stock or securities,
(2) options, futures, or forward contracts (other than options, futures, or
forward contracts on foreign currencies), or (3) foreign currencies (or options,
futures, or forward contracts on foreign currencies) but only if such currencies
(or options, futures, or forward contracts on currencies) are not directly
related to the Fund's principal business of investing in stock or securities (or
options and futures with respect to stock or securities). For purposes of these
tests, gross income generally is determined without regard to losses from the
sale or other disposition of stock or securities or other Fund assets.
DIVERSIFICATION OF ASSETS. To qualify for treatment as a regulated investment
company, a Fund must also satisfy certain requirements with respect to the
diversification of its assets. A Fund must have, at the close of each quarter of
the taxable year, at least 50% of the value of its total assets represented by
cash, cash items, U.S. Government securities, securities of other regulated
investment companies, and other securities which, in respect of any one issuer,
do not represent more than 5% of the value of the assets of the Fund nor more
than 10% of the voting securities of that issuer. In addition, at those times,
not more than 25% of the value of the Fund's assets may be invested in
securities (other than U.S. Government securities or the securities of other
regulated investment companies) of any one issuer, or of two or more issuers
which the Fund controls and which are engaged in the same or similar trades or
businesses or related trades or businesses. For purposes of a Fund's
requirements to maintain diversification for tax purposes, the issuer of a loan
participation will generally be the underlying borrower. However, in cases where
the Fund does not have recourse directly against the borrower, both the borrower
and each agent bank and co-lender interposed between the Fund and the borrower
will be deemed issuers of the loan participation for tax diversification
purposes. A Fund's investments in U.S. Government securities are not subject to
these limitations. The foregoing diversification requirements are in addition to
those imposed by the 1940 Act.
Because the Company is established as an investment medium for variable
annuity contracts and variable life insurance policies, Section 817(h) of the
Code imposes additional diversification requirements on each Fund. These
requirements generally are that no more than 55% of the value of the assets of a
Fund may be represented by any one investment; no more than 70% by any two
investments;
24
no more than 80% by any three investments; and no more than 90% by any four
investments. For these purposes, all securities of the same issuer are treated
as a single investment and each U.S. Government agency or instrumentality is
treated as a separate issuer.
OTHER INFORMATION
FINANCIAL STATEMENTS
Coopers & Lybrand L.L.P. acts as the Company's independent public
accountants. The Financial Statements for the Funds, which are contained in the
Company's Annual Report to Shareholders, are incorporated herein by reference.
LEGAL COUNSEL
Sutherland, Asbill & Brennan L.L.P., 1275 Pennsylvania Avenue, N.W.,
Washington, D.C. 20004-2404, has provided advice to the Company with respect to
certain matters relating to federal securities laws.
COMPANY NAME
The Company's Articles of Incorporation acknowledge that the Company
adopted its name through permission of M Life Insurance Company, an affiliate of
the Adviser. Under certain circumstances, the Company has agreed to eliminate
the name "M" from its name upon request of M Life Insurance Company.
OTHER INFORMATION
The Prospectus and this SAI do not contain all the information included
in the registration statement filed with the SEC under the 1933 Act with respect
to the securities offered by the Prospectus. Certain portions of the
registration statement have been omitted from the Prospectus and this SAI
pursuant to the rules and regulations of the SEC. The registration statement
including the exhibits filed therewith may be examined at the office of the SEC
in Washington, D.C.
Statements contained in the Prospectus or in this SAI as to the
contents of any contract or other document referred to are not necessarily
complete, and, in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement of which the
Prospectus and this SAI are parts, each such statement being qualified in all
respects by such reference.
25
APPENDIX A
DESCRIPTION OF CORPORATE BOND RATINGS 1/
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S CORPORATE BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa: Bonds which 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 which 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 which are rated Baa are considered as medium- grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payment 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 which are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a
desirable investment. 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 which are rated Caa are of poor standing. Such issues may be
in default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C: Bonds which are rated C are the lowest rated class of bonds and
issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security 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 issue ranks in the lower end of its generic rating
category.
26
ABSENCE OF RATING: Where no rating has been assigned or where a rating
has been suspended or withdrawn, it may be for reasons unrelated to the quality
of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities or companies
that are not rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or
issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances
arise, the effects of which preclude satisfactory analysis; if there is no
longer available reasonably up-to-date data to permit a judgment to be formed;
if a bond is called for redemption; or for other reasons.
DESCRIPTION OF STANDARD & POOR'S RATING SERVICE'S CORPORATE BOND RATINGS
INVESTMENT GRADE
AAA: Debt rated AAA has the highest rating assigned by Standard &
Poor's. 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 the highest rated issues only in 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: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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
debt in this category than in higher rated categories.
SPECULATIVE GRADE
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest. While
such debt will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major exposures to adverse conditions.
BB: Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
27
B: Debt rated B has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will like impair capacity or
willingness to pay interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
BB or BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The CCC rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied B or B- rating.
CC: The rating CC typically is applied to debt subordinated to senior
debt that is assigned an actual or implied CCC rating.
C: The rating C typically is applied to debt subordinated to senior
debt which is assigned an actual or implied CCC- debt rating. The C rating may
be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in payment default. The D rating category is used
when interest payments or principal payments are not made on the date due even
if the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
N.R.: Not rated.
- --------------------
1/ The rating systems described herein are believed to be the most recent
ratings systems available from Moody's Investors Service, Inc. ("Moody's") and
Standard & Poor's Rating Service ("S&P") at the date of this SAI for the
securities listed. Ratings are generally given to securities at the time of
issuance. While the rating agencies may from time to time revise such ratings,
they undertake no obligations to do so, and the ratings indicated do not
necessarily represent ratings which will be given to these securities on the
date of the Fund's fiscal year end.
28
APPENDIX B
DESCRIPTION OF COMMERCIAL PAPER RATINGS
COMMERCIAL PAPER - MOODY'S INVESTORS SERVICE. INC.
"Prime-1.- Commercial paper issuers related Prim-1 are judged to be one
of the best quality. Their short-term debt obligations carry the smallest degree
of investment risk. Margins of support for current indebtedness are large or
stable with cash flow and asset protection well assured. Current liquidity
provides ample coverage of near-term liabilities and unused alternative
financing arrangements are generally available. While protective elements may
change over the intermediate or longer term, such changes are most unlikely to
impair the fundamentally strong position of short-term obligations.
"Prime-2. - Issuers in the Commercial Paper market rated Prime-2 are
high quality. Protection for short-term holders is assured with liquidity and
value of current assets as well as cash generation in sound relationship to
current indebtedness. They are rated lower than the best commercial paper
issuers because margins of protection may not be as large or because
fluctuations of protective elements over the near or immediate term may be of
greater amplitude. Temporary increases in relative short and overall debt load
may occur. Alternative means of financing remain assured.
"Prime-3" - Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
COMMERCIAL PAPER - STANDARD & POOR'S RATINGS SERVICE
"A" - Issues assigned this highest rate are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designation 1, 2 and 3 to indicate the relative degree of
safety.
"A-1" - This designation indicates that the degree of safety regarding
timely payment is very strong.
"A-2" - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not overwhelming as for issues
designated "A-1".
"A-3" - Issues carrying this designation have a satisfactory capacity
for timely payment. They are, however, somewhat vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designation.
29
