<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 28, 1998
FILE NO. 333-56445
FILE NO. 811-08805
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. 1
and
REGISTRATION STATEMENT UNDER THE
INVESTMENT ACT OF 1940
AMENDMENT NO. 1
WORLDWIDE INDEX FUNDS
(Exact Name of Registrant as Specified in Charter)
C/O 790 EAST COLORADO BOULEVARD, 9TH FLOOR
PASADENA, CALIFORNIA 91101
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, ZIP CODE)
Registrant's Telephone Number, including Area Code (626) 793-8078
F. BRIAN CERINI
LMI INVESTMENT ADVISORS LLC
790 EAST COLORADO BOULEVARD, 9TH FLOOR
PASADENA, CALIFORNIA 91101
(Name and Address of Agent for Service)
Copies to:
W. JOHN McGUIRE, ESQUIRE
Morgan, Lewis & Bockius LLP
1800 M STREET, N.W.
WASHINGTON, D.C. 20036
- --------------------------------------------------------------------------------
/X/ Approximate date of Proposed Public Offering:
As soon as practicable after the
effective date of this Registration Statement
- --------------------------------------------------------------------------------
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until the Registrant shall file a
further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a)
may determine.
<PAGE> 2
================================================================================
WORLDWIDE INDEX FUNDS(SM)
THE INDEX ALTERNATIVE
================================================================================
WORLDWIDE INDEX FUNDS(SM)
AUSTRALIA INDEX FUND
FRANCE INDEX FUND
GERMANY INDEX FUND
HONG KONG INDEX FUND
ITALY INDEX FUND
JAPAN INDEX FUND
NETHERLANDS INDEX FUND
SPAIN INDEX FUND
SWEDEN INDEX FUND
SWITZERLAND INDEX FUND
UNITED KINGDOM INDEX FUND
EUROPE INDEX FUND
INTERNATIONAL INDEX FUND
790 East Colorado Blvd., 9th Floor
Pasadena, California 91101
626-793-8078
Toll-Free: 1-877-463-9363
Worldwide Index Funds (the "Trust") is a no-load mutual fund complex with
thirteen separate investment portfolios (the "Funds"), all of which are
described in this Prospectus. The Funds sell shares directly, and through
broker-dealers and registered investment advisers, to retail investors and
institutions. This Prospectus offers R Class shares to retail investors and I
Class shares to institutional investors.
This Prospectus contains important information about the Funds. Please read it
before investing and keep it on file for future reference.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THE
TRUST'S SHARES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________, 1998
PROSPECTUS
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
INVESTMENT SUMMARY: INVESTMENTS, STRATEGIES AND RISKS........................... 3
FEES AND EXPENSES OF THE FUNDS.................................................. 5
COUNTRY INDEX FUNDS............................................................. 7
FUNDS OF INDEX FUNDS............................................................ 8
ADDITIONAL RISK CONSIDERATIONS.................................................. 9
HOW TO INVEST IN THE FUNDS......................................................11
REDEMPTIONS.....................................................................13
DIVIDENDS AND DISTRIBUTIONS.....................................................13
TAX INFORMATION.................................................................14
MANAGEMENT OF THE FUNDS.........................................................14
ADDITIONAL FUND INFORMATION...........................................Back Cover
</TABLE>
2
<PAGE> 4
INVESTMENT SUMMARY: INVESTMENTS, STRATEGIES AND RISKS
INVESTMENT OBJECTIVES
- - The Australia, France, Germany, Hong Kong, Italy, Japan, Netherlands,
Spain, Sweden, Switzerland, and United Kingdom Index Funds (the "COUNTRY
INDEX FUNDS") seek long-term capital appreciation that reasonably
corresponds with local market equity returns. Each Fund seeks to track as
closely as possible the performance of a widely used index of local
market equity securities (the "LOCAL MARKET INDEX"(SM) or "LMI"(SM)) for
each respective country, and seeks to reduce or eliminate the impact of
currency fluctuation.
- - The Europe Index Fund and International Index Fund are "funds of funds"
(the "FUNDS OF INDEX FUNDS") which will invest in I Class shares of a
particular group of COUNTRY INDEX FUNDS. The FUNDS OF INDEX FUNDS seek
long-term capital appreciation that reasonably corresponds with local
market equity returns of the group of countries in which the underlying
COUNTRY INDEX FUNDS invest, and seek to reduce or eliminate the impact of
currency fluctuation. The Europe Index Fund will invest in the following
COUNTRY INDEX FUNDS: France, Germany, Italy, Netherlands, Spain, Sweden,
Switzerland, and United Kingdom (collectively, the "European COUNTRY
INDEX FUNDS"). The International Index Fund will invest in the eight
European COUNTRY INDEX FUNDS and the Australia, Hong Kong and Japan
COUNTRY INDEX FUNDS.
PRINCIPAL INVESTMENT STRATEGIES
- - The COUNTRY INDEX FUNDS intend to achieve their investment objective by
normally investing at least 95% of their total assets in a combination
of:
- some or all of the stocks included in each country's LMI;
- LMI futures and Related Securities;
- stock swap agreements;
- currency forward contracts and Related Securities;
- currency futures contracts and Related Securities; and/or
- cash and short-term debt instruments.
The COUNTRY INDEX FUNDS will invest at least 80% of their total assets in
the stocks included in each country's respective LMI and in LMI futures.
"Related Securities" may be options or other securities based upon an
underlying futures contract or forward contract.
- - The Funds will generally invest in all the underlying securities
within each LMI and in the same proportion as the LMI. Nonetheless, the
Funds may not invest in all of the securities in, or in the same
proportion as, an LMI if the securities: (i) make up a small percentage
of the total LMI and the Advisor and/or Sub-Advisor believe that such
securities will have no material effect on a Fund's performance; or (ii)
if investing in the securities would be inconsistent with Federal tax
diversification requirements. A Fund may hold a representative sampling
of its LMI using "portfolio sampling" which considers each stock based on
its capitalization, industry and investment characteristics.
- - The COUNTRY INDEX FUNDS will hedge local currencies against the U.S.
Dollar in an attempt to significantly reduce or eliminate the impact of
currency fluctuation.
- - The FUNDS OF INDEX FUNDS will invest in I Class shares of underlying
COUNTRY INDEX FUNDS and will allocate their investments in proportion to
the relative equity market capitalization of the countries represented
(the "Allocation Method"). For example, in the case of the Europe Index
Fund, if the total capitalization of Spain's equity market were to equal
5% of the combined capitalization of the underlying countries in the
Fund, the Fund will seek to invest 5% of its assets in I Class shares
of the Spain Index Fund. The FUNDS OF INDEX FUNDS will reallocate their
investments on a continuous basis. The FUNDS OF INDEX FUNDS use country
capitalization figures published by the Financial Times when calculating
allocation percentages under the Allocation Method.
3
<PAGE> 5
- - The FUNDS OF INDEX FUNDS seek to reduce or eliminate the impact of
currency fluctuation by investing in the COUNTRY INDEX FUNDS which are
hedged against such risk.
GENERAL RISKS OF INVESTING IN THE FUNDS
The Funds are designed as long-term investments and not as trading vehicles. The
Funds do not represent a complete investment program and may not be suitable for
all investors. The Funds are designed for investors that may wish to add an
international component to a domestic portfolio to assist them in achieving
additional diversification and to participate in growth opportunities in
international markets. The following principal risk factors may affect each of
the Funds:
- - Because the Funds will invest in foreign markets, either directly or
indirectly, each of these Funds will be subject to the market, economic
and political risks prevalent in these foreign markets. Foreign
securities markets generally have less trading volume and less liquidity
than U.S. markets, and prices in some foreign markets can be extremely
volatile. In addition, the value of securities denominated in foreign
currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken relative to
the U.S. Dollar. The Funds will seek to hedge fully against this risk at
all times but cannot guarantee that such a strategy will be successful.
- - Investing in foreign companies may involve risks not typically associated
with investing in U.S. companies. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and
custodial fees, generally are higher than for U.S. investments.
- - A Country Index Fund will invest primarily in the equity securities, and
instruments tied to those securities, in each Fund's respective LMI. Over
time, equity securities have generally shown superior gains, but they
have tended to be more volatile in the short-term.
- - The COUNTRY INDEX FUNDS, other than the Japan, Australia and United
Kingdom Index Funds, are "non-diversified" mutual funds. This means that
each non-diversified Fund may invest a significant portion of its assets
in securities issued by a few companies which may make the Fund
susceptible to the risks associated with those particular companies, or a
single economic, political or regulatory occurrence. In addition, as a
result of each Fund's policy to invest in the securities included in its
respective LMI, a Fund may necessarily "concentrate" its investments in
companies engaged in the same or similar industries if the underlying LMI
represents a concentration in those industries, making the Funds
susceptible to the risks and market fluctuations of that industry. These
strategies may cause a Fund's net asset value or share price to be more
volatile than that of a "diversified" mutual fund, such as the Japan,
Australia, United Kingdom, European and International Index Funds.
- - Because the Funds will invest in futures and other futures related
securities, the extent of a Fund's losses from these types of investments
may exceed the losses which could result if a Fund were holding the
underlying stocks represented by the LMI. (See "ADDITIONAL RISK
CONSIDERATIONS").
- - On January 1, 1999, the European Monetary Union (EMU) plans to implement
a new currency unit, the Euro, which is expected to reshape financial
markets, banking systems and monetary policies in Europe and other parts
of the world. Although it is not possible to predict the impact of the
Euro implementation plan on the Funds, the transition to the Euro may
change the economic environment and behavior of investors, particularly
in European markets.
- - BECAUSE INVESTING IN THESE FUNDS INVOLVES CERTAIN RISKS, YOU COULD LOSE
MONEY.
4
<PAGE> 6
FEES AND EXPENSES OF THE FUNDS
This table describes the highest fees and expenses that you could currently be
charged if you buy and hold shares of the Funds. The Funds will impose a
purchase fee of 0.50% as a percentage of net asset value, which is not reflected
in the table, payable to the respective Fund on any purchase into a Fund. THESE
PURCHASE FEES ARE PAID TO THE RESPECTIVE FUND AND ARE INTENDED TO COVER
BROKERAGE FEES AND OTHER COSTS INCURRED BY THE FUND WHICH ARE ASSOCIATED WITH A
FUND'S PURCHASING OR SELLING ITS PORTFOLIO SECURITIES. All purchase fees paid to
a FUND OF INDEX FUNDS will be passed on to its underlying COUNTRY INDEX FUNDS.
The Annual Fund Operating Expenses in the table below do not reflect voluntary
fee waivers and/or expense reimbursements from the Advisor.
<TABLE>
<CAPTION>
R CLASS I CLASS
------- -------
SHAREHOLDER FEES
- ----------------
COUNTRY FUNDS COUNTRY FUNDS
INDEX OF INDEX INDEX OF INDEX
FUNDS FUNDS FUNDS FUNDS
<S> <C> <C> <C> <C>
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON None None None None
PURCHASE (AS A PERCENTAGE OF OFFERING PRICE)
MAXIMUM SALES CHARGE (LOAD) IMPOSED ON
REINVESTED DIVIDENDS (AS A PERCENTAGE OF NET
ASSET VALUE) None None None None
</TABLE>
ANNUAL FUND OPERATING EXPENSES+
(EXPENSES THAT ARE DEDUCTED FROM FUND ASSETS)
<TABLE>
<CAPTION>
R CLASS I CLASS
------- -------
COUNTRY FUNDS COUNTRY FUNDS
INDEX OF INDEX INDEX OF INDEX
FUNDS FUNDS FUNDS FUNDS
<S> <C> <C> <C> <C>
MANAGEMENT FEES .50% .0% .50% .0%
OTHER EXPENSES* .75% .05% .50% .05%
UNDERLYING FUND None 1.00% None 1.00%
EXPENSES**
TOTAL ANNUAL FUND OPERATING EXPENSES 1.25% 1.05% 1.00% 1.05%
</TABLE>
- -----------------------------------
+ THE ADVISOR COMMITS, BY WAIVING ITS FEES AND REIMBURSING EXPENSES AS
NECESSARY, TO LIMIT EACH COUNTRY INDEX FUND'S TOTAL EXPENSE RATIO AND
EACH FUNDS OF INDEX FUNDS' TOTAL EXPENSE RATIO, INCLUDING THE UNDERLYING
FUND EXPENSES, TO NO GREATER THAN 0.99% FOR R CLASS SHARES AND 0.74% FOR
I CLASS SHARES OVER A CALENDAR YEAR UNTIL DECEMBER 31, 2001. FEE WAIVERS
AND/OR EXPENSE REIMBURSEMENTS ARE VOLUNTARY. THE ADVISOR RESERVES THE
RIGHT TO TERMINATE ANY WAIVER AND/OR REIMBURSEMENT AT ANY TIME AFTER
DECEMBER 31, 2001, WITHOUT NOTICE.
* Other Expenses are based on estimated amounts for the current fiscal
year. For R CLASS shares only, 0.25% of Other Expenses is a shareholder
servicing fee.
** Note that the FUNDS OF INDEX FUNDS will be subject to expenses greater
than those incurred by a COUNTRY INDEX FUND. The FUNDS OF INDEX FUNDS not
only bear the expenses associated with their operations and management,
but will also bear a pro-rata share of the expenses of the underlying
COUNTRY INDEX FUNDS. Underlying Fund Expenses for each FUND OF INDEX
FUNDS are based upon the initial allocation of each.
5
<PAGE> 7
EXAMPLE
- --------------------------------------------------------------------------------
This example is intended to help you compare the cost of investing in each Fund
with the cost of investing in other mutual funds.
The example assumes that you invest $10,000 in each Fund for the time periods
indicated, that your investment has a 5% return each year and that each Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower and based on these assumptions, you would pay the following expenses if
you redeem all of your shares at the end of the time periods indicated:
<TABLE>
<CAPTION>
R CLASS I CLASS
------- -------
1 YEAR 3 YEARS 1 YEAR 3 YEARS
<S> <C> <C> <C> <C>
COUNTRY INDEX $177 $389 $151 $311
FUNDS
FUNDS OF INDEX
FUNDS $182 $397 $157 $317
</TABLE>
6
<PAGE> 8
COUNTRY INDEX FUNDS
THE COUNTRY INDEX FUNDS AND CORRESPONDING LMIS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
COUNTRY INDEX FUND LOCAL MARKET INDEX ("LMI")(SM)
- ---------------------------------------------------------------------------------------------
<S> <C>
AUSTRALIA INDEX FUND All Ordinaries Index ("ASX")
- ---------------------------------------------------------------------------------------------
FRANCE INDEX FUND CAC-40 ("CAC")
- ---------------------------------------------------------------------------------------------
GERMANY INDEX FUND Deutsche Aktienindex ("DAX")
- ---------------------------------------------------------------------------------------------
HONG KONG INDEX FUND Hang Seng ("HSI")
- ---------------------------------------------------------------------------------------------
ITALY INDEX FUND MIB-30 ("MIB")
- ---------------------------------------------------------------------------------------------
JAPAN INDEX FUND Nikkei-225 ("NKI")
- ---------------------------------------------------------------------------------------------
NETHERLANDS INDEX FUND Amsterdam Exchanges Index ("AEX")
- ---------------------------------------------------------------------------------------------
SPAIN INDEX FUND IBEX-35 ("IBEX")
- ---------------------------------------------------------------------------------------------
SWEDEN INDEX FUND Stockholm Options Market Index ("OMX")
- ---------------------------------------------------------------------------------------------
SWITZERLAND INDEX FUND Swiss Market Index ("SMI")
- ---------------------------------------------------------------------------------------------
UNITED KINGDOM INDEX FUND FTSE-100 ("UKX")
- ---------------------------------------------------------------------------------------------
</TABLE>
COUNTRY INDEX FUND LMI DESCRIPTIONS
The AUSTRALIA INDEX FUND seeks to track the All Ordinaries Index ("ASX") which
is a capitalization-weighted index of 310 common stocks listed on the Australian
Stock Exchange. As of April 7, 1998, the three stocks representing the highest
approximate percentage of capitalization in the index are The National Australia
Bank, Ltd. (7.1%), The Broken Hill Proprietary Company, Ltd. (7%), and The News
Corporation, Ltd. (4.7%).
The FRANCE INDEX FUND seeks to track the CAC-40 ("CAC") which is a narrow-based,
capitalization-weighted index of 40 companies listed on the Paris Stock Exchange
(the Bourse). The index serves as a basis for futures and options traded on
France's financial futures and options market (the MATIF and MONEP). As of April
7, 1998, the three stocks representing the highest approximate percentage of
capitalization in the index are France Telecom (9.3%), AXA (6.2%), and Elf
Aquitaine (5.6%).
The GERMANY INDEX FUND seeks to track the Deutsche Aktienindex ("DAX") which is
a total rate of return index of 30 selected German blue-chip stocks traded on
the Frankfurt Stock Exchange. As of April 7, 1998, the three stocks representing
the highest approximate percentage of capitalization in the index are Allianz,
AG (10.9%), Daimler-Benz (7.4%), and SAP, AG (6.2%).
The HONG KONG INDEX FUND seeks to track the Hang Seng ("HSI") which is a
capitalization-weighted index of 33 companies that represent approximately 70%
of the total market capitalization of the Stock Exchange of Hong Kong. As of
April 7, 1998, the three stocks representing the highest approximate percentage
of capitalization in the index are HSBC Holdings, PLC (27.1%), Hutchison Whampoa
(8.7%), and Hong Kong Telecommunications (8.1%).
The ITALY INDEX FUND seeks to track the MIB-30 ("MIB") which is a
capitalization-weighted index of the 30 top companies listed on the Milan Stock
Exchange. As of April 7, 1998, the three stocks representing the highest
approximate percentage of capitalization in the index are ENI, SPA (15.6%),
Telecom Italia (11.8%), and Telecom Italia Mobile, SPA (11.1%).
7
<PAGE> 9
The JAPAN INDEX FUND seeks to track the Nikkei-225 ("NKI") which is a
price-weighted index of the 225 top-rated Japanese companies listed in the First
Section of the Tokyo Stock Exchange. As of April 7, 1998, the three stocks
representing the highest approximate percentage of capitalization in the index
are Sony Corporation (6.9%), Fuji Photo Film (3%), and Honda Motor Co. (2.9%).
The NETHERLANDS INDEX FUND seeks to track the Amsterdam Exchanges Index ("AEX")
which is a weighted index of the 25 leading Dutch stocks traded on the Amsterdam
Stock Exchange. The index is rebalanced every February by setting the company
with the greatest capitalization in the basket of stocks to 10% and calculating
the weights of the remaining stocks accordingly. As of April 7, 1998, the three
stocks representing the highest approximate percentage of capitalization in the
index are ING Groep, NV (11.8%), Unilever, NV (10.8%), and Royal Dutch Petroleum
(9.8%).
The SPAIN INDEX FUND seeks to track the IBEX-35 ("IBEX") which is a
capitalization-weighted index of the 35 most liquid Spanish stocks traded on the
Continuous Markets. As of April 7, 1998, the three stocks representing the
highest approximate percentage of capitalization in the index are Telefonica de
Espana (18.1%), Banco Bilbao (12.7%), and Endesa, SA (10.5%).
The SWEDEN INDEX FUND seeks to track the Stockholm Options Market Index ("OMX")
which is a capitalization-weighted index of 30 stocks that have the largest
volume of trading on the Stockholm Stock Exchange. As of April 7, 1998, the
three stocks representing the highest approximate percentage of capitalization
in the index are Ericsson, LM (22.2%), Astra, AB (13.5%), and Foreningssparban
(5.5%).
The SWITZERLAND INDEX FUND seeks to track the Swiss Market Index ("SMI") which
is a capitalization-weighted index of 21 of the largest and most liquid stocks
traded on the Electronic Bourse System. As of April 7, 1998, the three stocks
representing the highest approximate percentage of capitalization in the index
are Novartis (21%), Nestle, SA (14.9%), and Roche Hldg. - Genus (14.5%).
The UNITED KINGDOM INDEX FUND seeks to track the FTSE-100 ("UKX") which is a
capitalization-weighted index of the 100 most highly capitalized companies
traded on the London Stock Exchange. As of April 7, 1998, the three stocks
representing the highest approximate percentage of capitalization in the index
are Glaxo Wellcome (5.9%), Lloyds TSB Group (5%), and British Petroleum (4.8%).
For specific information on each country, see "THE FUNDS AND COUNTRY SPECIFIC
ECONOMIC CONSIDERATIONS" section in the Statement of Additional Information
("SAI").
THE COUNTRY INDEX FUNDS ARE NOT SPONSORED, ENDORSED, SOLD, OR PROMOTED BY THEIR
RESPECTIVE LMIs.
FUNDS OF INDEX FUNDS
FUNDS OF INDEX FUNDS AND UNDERLYING COUNTRY INDEX FUNDS
<TABLE>
- ---------------------------------------------------------------------------------------------
<S> <C>
FUND OF INDEX FUNDS UNDERLYING COUNTRY INDEX FUNDS (AND
APPROXIMATE ALLOCATION PERCENTAGE AS OF
_______ 1998)
- ---------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 10
<TABLE>
- ---------------------------------------------------------------------------------------------
<S> <C>
EUROPE INDEX FUND France Index Fund (__%)
Germany Index Fund (__%)
Italy Index Fund (__%)
Netherlands Index Fund (__%)
Spain Index Fund (__%)
Sweden Index Fund (__%)
Switzerland Index Fund (__%)
United Kingdom Index Fund (__%)
- ---------------------------------------------------------------------------------------------
INTERNATIONAL INDEX FUND Australia Index Fund (__%)
France Index Fund (__%)
Germany Index Fund (__%)
Hong Kong Index Fund (__%)
Italy Index Fund (__%)
Japan Index Fund (__%)
Netherlands Index Fund (__%)
Spain Index Fund (__%)
Sweden Index Fund (__%)
Switzerland Index Fund (__%)
United Kingdom Index Fund (__%)
- ---------------------------------------------------------------------------------------------
</TABLE>
ADDITIONAL RISK CONSIDERATIONS
NON-DIVERSIFICATION - The COUNTRY INDEX FUNDS are classified as
"non-diversified" for purposes of the 1940 Act, which means each of those Funds
is not limited by the 1940 Act with regard to the portion of its assets that may
be invested in the securities of a single issuer. However, each Fund, regardless
of whether classified as non-diversified, intends to maintain the required level
of diversification and otherwise conduct its operations so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code, in
order to relieve the Trust of any liability for Federal income tax to the extent
that its earnings are distributed to shareholders. Compliance with the
diversification requirements of the Internal Revenue Code may limit the
investment flexibility of certain Funds and could, as a result, decrease the
likelihood that such Funds will meet their investment objectives. In addition,
as a result of each Fund's policy to invest in the securities included in its
respective LMI, a Fund may necessarily "concentrate" its investments in
companies engaged in the same or similar industries if the underlying LMI
represents a concentration in those industries.
The stocks of a small number of issuers, or of issuers in a small number of
industries, may dominate the LMIs of certain Funds and, consequently, the
investment portfolios of such Funds. This may adversely affect the performance
of such Funds or subject such Funds to greater price volatility than that
experienced by diversified investment companies. The Funds may be more
susceptible to any single economic, political or regulatory occurrence than the
portfolio securities of an investment company that is more broadly invested than
the Funds in the equity securities of the relevant market.
CORRELATION ACCURACY - A perfect correlation of 100% is achieved if the net
asset value of a Fund increases or decreases in exact proportion to changes in
its respective LMI. Over time, the accuracy of the correlation between a Fund's
performance in tracking its respective LMI and the actual performance of that
LMI (without regard to currency hedging costs or income), is expected to be
greater than 95%, although there can be no assurances that such correlation will
be achieved. While the Funds expect to track their respective LMIs, factors such
as Fund expenses, imperfect correlation between the Funds' investments and those
of their LMIs, rounding of share prices, changes to the LMI, regulatory
policies, and the requirements of the Internal Revenue Code may affect their
ability to achieve more accurate correlation.
Because an LMI is just a composite of the prices of the securities it represents
rather than an actual portfolio of those securities, an LMI will have no
expenses. As a result, a Fund, which will have expenses such as taxes,
9
<PAGE> 11
custody, management fees and other operational costs, and brokerage, may not
achieve its investment objective of accurately correlating to an LMI because of
these additional costs it must bear. In addition, because the Funds will attempt
to fully hedge currency risks at all times, a Fund's performance may not be the
same as the performance of its respective LMI.
FUTURES CONTRACTS/OPTIONS/SWAPS - The Funds may use options, futures contracts,
options on futures contracts, forward contracts, options on forward contracts,
and swaps because these instruments provide the Funds with higher liquidity,
lower brokerage costs, and the ability to track the performance of the
securities in an LMI without purchasing the underlying securities. Using these
instruments and investing in indexed securities involves special risks,
including: (1) imperfect or no correlation between the price of options, futures
contracts and forward contracts and the movements in the price of the underlying
securities or LMIs; (2) possible lack of a liquid secondary market for any
particular instrument at a particular time; (3) the fact that the skills needed
to use these strategies are different from those needed to select portfolio
securities; (4) losses due to unanticipated market price movements; (5) loss of
premiums paid by a Fund on options it purchases; and (6) the possible inability
of a Fund to purchase or sell a portfolio security at a time when it would
otherwise be favorable for it to do so, or the possible need for a Fund to sell
a portfolio security at a disadvantageous time, due to the need for the Fund to
maintain "cover" or to segregate assets in connection with such transactions and
the possible inability of a Fund to close out or liquidate its position.
These instruments may increase the volatility of a Fund and may typically
involve a small investment of cash relative to the magnitude of the risk
assumed. In addition, these instruments could result in a loss if the
counterparty to the transaction does not perform as promised or if there is not
a liquid secondary market to close out a position that a Fund has entered into.
The ordinary spreads between prices in the cash and futures markets, due to the
differences in the nature of those markets, are subject to distortion. Investors
should also be aware that while index futures and options contracts closely
correlate with the applicable Indexes over long periods, shorter-term deviation,
such as on a daily basis, does occur with these instruments. As a result, a
Fund's short-term performance will reflect such deviation from its relevant LMI.
The Funds may only invest in futures in countries that have futures markets
recognized by the Commodities Futures Trading Commission (The "CFTC"). Because
the futures markets of Switzerland and the Netherlands are not recognized by the
CFTC, the Switzerland and Netherlands Index Funds are unable to invest in
futures contracts in their respective countries. As an alternate, these Funds
will invest in options and swaps to a greater degree than the other Funds which
is intended to have similar economic results as investing in a futures contract.
FOREIGN SECURITIES - Investing in foreign companies may involve risks not
typically associated with investing in U.S. companies. The value of securities
denominated in foreign currencies, and of dividends from such securities, can
change significantly when foreign currencies strengthen or weaken relative to
the U.S. Dollar. Foreign securities markets generally have less trading volume
and less liquidity than U.S. markets, and prices in some foreign markets can be
extremely volatile. Many foreign countries lack uniform accounting and
disclosure standards comparable to those that apply to U.S. companies, and it
may be more difficult to obtain reliable information regarding a foreign
issuer's financial condition and operations. In addition, the costs of foreign
investing, including withholding taxes, brokerage commissions and custodial
fees, generally are higher than for U.S. investments.
CURRENCY HEDGING - The COUNTRY INDEX FUNDS will use forward contracts on the
foreign currency within each respective country in which that Fund is investing
("Country Currency"), options on forward contracts and Related Securities,
futures contracts on Country Currency, options on such futures contracts, and
options on Country Currency to attempt to eliminate the effect that fluctuations
in the U.S. Dollar/Country Currency exchange rate may have on the Fund's net
asset value per share. The funds will seek to hedge fully against such
fluctuations at all times but cannot guarantee that a strategy will be
successful.
YEAR 2000 - The Funds depend on the smooth functioning of computer systems in
almost every aspect of their business. Like other mutual funds, businesses and
individuals around the world, the Funds could be adversely
10
<PAGE> 12
affected if the computer systems used by its service providers do not properly
process dates on and after January 1, 2000 and distinguish between the year 2000
and the year 1900. The Funds have asked their service providers whether they
expect to have their computer systems adjusted for the year 2000 transition, and
received assurances from each that they are devoting significant resources to
prevent material adverse consequences to the Funds. The Funds and their
respective shareholders may experience losses if these assurances prove to be
incorrect or as a result of year 2000 computer difficulties experienced by
issuers of portfolio securities or third parties, such as custodians, banks,
broker-dealers or others with which the Funds do business. Furthermore, many
foreign countries are not as prepared as the U.S. for the year 2000 transition.
Consequently, computer difficulties in foreign markets and with foreign
institutions as a result of the year 2000 may add to the possibility of losses
to the Funds and their respective shareholders.
HOW TO INVEST IN THE FUNDS
CLASSES
The Funds offer two classes of shares: R Class shares and I Class shares. R
Class shares are primarily intended for retail investors, require a minimum
initial investment of $5,000 for any Fund ($2,000 for individual retirement
accounts ("IRAs") and Roth IRAs) and are subject to a shareholder service fee of
0.25% of the net asset value of the respective shares. I Class shares are
primarily intended for institutional investors, require a minimum initial
investment of $100,000, in the aggregate, and are not subject to a shareholder
service fee.
ABOUT NET ASSET VALUE
The net asset value for one Fund share is the value of that share's portion of
all of the assets of that class of shares of the Fund. In making this
calculation, the Fund generally values securities at market price. If market
prices are unavailable or become unreliable because of events occurring during
or after the close of trading in any of the relevant foreign markets, fair value
prices may be determined by the Advisor, in good faith, using methods approved
by the Board of Trustees. Occasionally events that affect the values of foreign
securities and foreign exchange rates may occur between the times at which they
are determined and the close of the New York Stock Exchange (the "NYSE") and
will, therefore, not be reflected in the computation of a Fund's net asset
value. If events materially affecting the values of these foreign securities
occur during this period, the securities will be valued in accordance with
procedures established by the Trustees. As such, values ascribed to certain
securities maintained by a fund may not be the quoted or published prices of
those securities on their primary markets or exchanges.
PRICING OF PORTFOLIO SHARES
The price of R Class and I Class shares of each Fund is the net asset value next
determined for the respective class. The Fund determines net asset value as of
the close of regular trading on the NYSE (normally 4:00 p.m. Eastern Time) on
each day that the NYSE is open for business (the "Pricing Time"). Because the
Funds have portfolio securities that are listed on foreign exchanges which may
trade on weekends or other days when the Funds do not price their shares, the
net asset value of the Funds' shares may change on days when shareholders will
not be able to purchase or redeem the Funds' shares.
PURCHASE OF SHARES
You may purchase R Class and I Class shares of each Fund directly from the Fund,
from the Distributor or through certain third parties, such as brokers or other
agents ("Financial Intermediaries"). The minimum initial investment is $5,000
for R Class shares of any Fund ($2,000 for IRAs and Roth IRAs), and $100,000, in
the aggregate, for I Class shares. The minimum amount for an additional
investment is $250 for R Class shares, and $1000 for I Class shares, for each
account that you have. If the value of your account falls below the minimum
initial investment amount for R Class shares or I Class shares as a result of
share redemptions, and remains below that minimum for 60 consecutive days, you
may be subject to involuntary conversion from I Class shares to R Class shares
or involuntary redemption. The Fund will notify you that your account is below
the required minimum before taking further action. The Advisor may waive the
minimum initial investment requirement and involuntary conversion or redemption
for certain investors, including individuals purchasing through a Financial
Intermediary. Investors effecting a transaction through a Financial Intermediary
may be charged a fee by that Financial Intermediary. The minimum initial
investment for R Class and I Class shares will be waived for 401(k) plans and
403(b) plans, and other qualified employee benefit plans as the Trust shall
determine.
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<PAGE> 13
Shares of the Funds are sold at an offering price which is equal to the net
asset value of the shares plus a purchase fee. This fee represents management's
estimate of the costs reasonably anticipated to be associated with a Fund's
purchase or sale of portfolio securities and related operational costs. Fees are
paid directly to that Fund and are used to defray these costs.
- - Each Fund charges a purchase fee for the purchase of R Class and I Class
shares equal to 0.50% of that Fund's shares net asset value.
You may arrange to purchase R Class and I Class shares directly from the Trust
by calling toll-free, 1-877-463- 9363, or by returning a completed Account
Registration Form with payment for your purchase. The price you pay will be the
net asset value calculated at the next Pricing Time, plus a purchase fee,
following receipt of your purchase order in good order.
To purchase shares through a Financial Intermediary, you should contact your
Financial Intermediary for details about how to purchase shares. Generally, the
price of shares purchased through a Financial Intermediary is the price
calculated at the next Pricing Time, plus a purchase fee, after the Fund
receives your order from your Financial Intermediary in good order. Certain
Financial Intermediaries may have made arrangements with the Fund so that you
may purchase shares at the price calculated at the next Pricing Time after your
Financial Intermediary receives your purchase order. Your Financial Intermediary
may charge an additional service or transaction fee.
- - Because of the risks associated with common stock investments, the
Portfolios are intended to be long-term investment vehicles and are not
designed to provide investors with a means of speculating on short-term
market movements. Consequently, the Funds reserve the right to reject any
specific purchase request. The Funds also reserve the right to suspend
the offering of shares for a period of time.
BY MAIL. Initial applications and investments, as well as subsequent
investments, in the Worldwide Index Funds made by mail must be received in good
form by the Trust, on any Business Day, at or prior to 4:00 p.m., Eastern Time
(1:00 p.m. Pacific Time), in order to be processed for that Business Day's net
asset value. Fill out an application and make a check payable to "Worldwide
Index Funds." Mail the check, along with the completed application to:
First Data Investor Services Group, Inc.
P.O. Box 9698
Westboro, MA 01581
"Good form" means that all information, signatures, documents and payments
accompany the completed application. Federal law requires you to provide a
certified tax identification number when you open an account. The Trust reserves
the right to reject or delay the processing of your application if it is not
received in good form.
IN ADDITION TO CHARGES DESCRIBED ELSEWHERE IN THIS PROSPECTUS, THE TRUST ALSO
MAY CHARGE $25.00 FOR CHECKS RETURNED FOR INSUFFICIENT OR UNCOLLECTIBLE FUNDS.
BY BANK WIRE TRANSFER. First, fill out an application and fax the completed
application in good form, along with a request for a shareholder account number,
to the Trust at 508-xxx-xxxx. Then, request that your bank wire transfer the
purchase amount to the custodian, State Street Bank and Trust Company, using the
following instructions:
State Street Bank and Trust Company
Routing Number: xxxx-xxxxx
For Account of Worldwide Index Funds
Trust Account Number: xxxxx-xxxxx
[Your Name]
[Your Shareholder Account Number]
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<PAGE> 14
After instructing your bank to transfer money by wire (your bank may charge a
fee for such services) for both initial and subsequent purchases, you must call
the Trust toll-free at 1-877-463-9363 and inform the Trust as to the amount that
you have transferred and the name of the bank sending the transfer in order to
obtain same-day pricing or credit. For initial purchases, you must also supply
the time the wire was sent and the Fed Wire reference number. If the purchase is
canceled because your wire transfer is not received, you may be liable for any
loss that the Trust incurs.
Wire transfers for both initial investments (which must be preceded by an
application, faxed to 508-xxx-xxxx) and subsequent investments in the Funds must
be received in good form at the Trust, on any Business Day, and funds must be
received at the Federal Reserve Bank by 4:00 p.m., Eastern Time in order to be
processed at that Business Day's net asset value. An initial application that is
faxed to the Trust does not constitute a purchase order until the application
has been processed and correct payment by check or wire transfer has been
received by the Trust. Financial Intermediaries may have earlier cut-off times
for purchases. For more information about how to purchase through an
intermediary, you should contact that intermediary directly.
REDEMPTIONS
REDEMPTION OF SHARES
You may redeem Fund shares directly from the Funds, through the Distributor or
through a Financial Intermediary as described above under Purchase of Shares.
The redemption price will be the net asset value per share calculated at the
next Pricing Time, which may be more or less than the purchase price of your
shares. The Funds will ordinarily distribute redemption proceeds in cash within
one business day of your redemption request. However, if you purchased shares by
check, a Fund will not distribute redemption proceeds until it has collected
your purchase payment, which may take up to ten business days from the purchase
date.
- - Although the Funds do not have an exchange feature, you may redeem shares
from one Fund and purchase shares from any other Fund in the Worldwide
Index Funds. On these transactions, you will be charged a purchase fee
equal to 0.50% of the net asset value of the shares purchased.
PROCEDURES FOR REDEMPTIONS
Written requests for redemptions should be sent to First Data Investor Services
Group, Inc., P.O. Box 9698, Westboro, MA 01581, and should be signed by the
record owner or owners. With proper prior authorization, telephone and
electronic redemption and transfer requests are also permitted. Telephone
redemption requests may be made by calling 1-877-463-9363 (toll-free) or
508-xxx-xxxx by 3:30 p.m., Eastern Time (12:30 p.m., Pacific Time), on any
Business Day. The Trust reserves the right to suspend the right of redemption in
accordance with the SAI. The Trust's offices are open between 8:30 a.m. and 5:30
p.m., Pacific Time (11:30 a.m. and 8:30 p.m. Eastern Time) on each Business Day.
If you own shares that are registered in your Financial Intermediary's name, and
you want to transfer the registration to another intermediary or want the shares
registered in your name, then you should contact your Financial Intermediary for
instructions to make this change.
TRANSACTIONS OVER THE TELEPHONE. Telephone redemption transactions are extremely
convenient, but are not risk-free. To ensure that your telephone transactions
are safe, secure, and as risk-free as possible, the Trust has instituted certain
safeguards and procedures for determining the identity of callers and
authenticity of instructions, including recording telephone inquiries. As a
result, neither the Trust nor its transfer agent will be responsible for any
loss, liability, cost, or expense for following telephone or wire instructions
they reasonably believe to be genuine. If you or your intermediary make
redemption requests by telephone, you will generally bear the risk of any loss.
If you are unable to reach the Trust by telephone, you may want to try to reach
the Trust by other means.
DIVIDENDS AND DISTRIBUTIONS
Each Fund distributes its income at least annually. If you own Fund shares on a
Fund's record date, you will be entitled to receive the dividend. The Funds make
distributions of capital gains at least annually. The Trust,
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<PAGE> 15
however, may declare a special capital gain distribution if the Trustees believe
that such a distribution would be in the best interest of the shareholders of a
Fund.
You will receive dividends and distributions in the form of additional Fund
shares unless you have elected to receive payment in cash. If you have not
already elected to receive cash payments on your application, you must notify
the Trust in writing prior to the date of distribution. Your election will
become effective for dividends paid after the Trust receives your written
notice. To cancel your election, simply send written notice to the Trust.
Dividends and distributions from a Fund are taxable to you whether they are
reinvested in additional shares of the Fund or are received in cash. You will
receive an account statement at least quarterly.
TAX INFORMATION
The following is a summary of some important tax issues that affect the Funds
and their Shareholders. The summary is based on current tax laws, which may be
changed by legislative, judicial or administrative action. This prospectus does
not present a detailed explanation of the tax treatment of the Funds or of the
tax consequences of an investment in the Funds.
YOU SHOULD CONSULT YOUR TAX ADVISOR REGARDING SPECIFIC QUESTIONS AS TO FEDERAL,
STATE AND LOCAL INCOME TAXES.
TAX STATUS OF DISTRIBUTIONS
Each Fund will distribute substantially all of its income. The income dividends
you receive from the Funds may be taxed as ordinary income and capital gains
(which may be taxable at different rates depending on the length of time the
Fund holds its assets), whether you receive the dividends in cash or in
additional shares. Distributions paid in January but declared by a Fund in
October, November or December of the previous year, may be taxable to you in the
previous year.
TAX STATUS OF SHARE TRANSACTIONS
EACH SALE OR REDEMPTION OF FUND SHARES IS A TAXABLE EVENT TO YOU. YOU SHOULD
CONSIDER THE TAX CONSEQUENCES OF ANY REDEMPTION BEFORE MAKING SUCH A REQUEST.
FOREIGN TAX CONSIDERATIONS
The COUNTRY INDEX FUNDS may elect to "pass through" to shareholders of those
Funds the foreign income taxes paid by the Funds. If this election is made
because it was deemed to be in the best interest of shareholders, shareholders
would be required to include in their gross income their proportional share of
the foreign taxes paid by their respective Fund. Shareholders will, however, be
able to treat this income as either an itemized deduction or a foreign tax
credit (but not both) against U.S. income taxes. The Fund will report to
shareholders about the status of such "pass through" taxes on an annual basis.
If the COUNTRY INDEX FUNDS elect to "pass through" foreign taxes to
shareholders, the tax credit would not pass through to FUNDS OF INDEX FUNDS
shareholders. Because the FUNDS OF INDEX FUNDS hold shares of the COUNTRY INDEX
FUNDS which are U.S. business entities, and do not hold shares of foreign
securities, the FUNDS OF INDEX FUNDS cannot pass through the tax credit to
shareholders. The FUNDS OF INDEX FUNDS may, however, claim a deduction for any
foreign taxes paid by the underlying COUNTRY INDEX FUNDS.
STATE TAX CONSIDERATIONS
Distributions by the Funds may be subject to state and local taxation. You
should verify your tax liability with your tax advisor.
MANAGEMENT OF THE FUNDS
THE INVESTMENT ADVISOR
LMI Investment Advisors LLC (the "Advisor"), a Delaware limited liability
company with offices at 790 E. Colorado Boulevard, 9th Floor, Pasadena
California 91101, serves as the investment adviser for each Fund. The Advisor is
controlled by F. Brian Cerini, who formed the Advisor in 1998. Prior to that
time, Mr. Cerini was
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<PAGE> 16
President of Sierra Capital Management Corporation. The Advisor is responsible
for formulating and continuing to assess investment policies and recommending
changes to the Board of Trustees where appropriate; supervising compliance by
State Street Global Advisors (the "Sub-Advisor") with the Funds' investment
objectives, policies and limits, as well as with laws and regulations applicable
to the Funds; evaluation of the performance of the Sub-Advisor in light of
selected benchmarks and the needs of the Funds; and reporting to the Board of
Trustees and shareholders on the foregoing. The Advisor is a newly organized and
registered investment adviser with no previous business experience. For its
services, the Advisor will receive from each Fund the management fee set forth
in the table below:
<TABLE>
<CAPTION>
COUNTRY INDEX FUNDS FUNDS OF INDEX FUNDS
------------------- --------------------
<S> <C> <C>
MANAGEMENT FEE: .50% .0%
</TABLE>
THE INVESTMENT SUB-ADVISOR
State Street Global Advisors (the "Sub-Advisor"), the investment advisory
division of State Street Bank and Trust Company, is a Massachusetts trust
company with offices at 225 Franklin Street, Boston, Massachusetts 02110 and
serves as the investment sub-advisor for each Fund. The Sub-Advisor is
responsible for continuously managing the particular Fund's investment program
in accordance with the Fund's investment objectives. The Sub-Advisor has been in
the investment management business for 20 years. As of March 31, 1998, the
Sub-Advisor managed assets of approximately $471 billion, including $85 billion
of assets in internationally indexed investments.
The Sub-Advisor makes investment decisions for the assets of the Funds and the
Advisor continuously reviews, supervises, and administers each Fund's investment
program. The Trustees of the Trust supervise the Advisor and establish policies
that the Advisor and Sub-Advisor must follow in their day-to-day management
activities. The Advisor bears all of its own costs associated with providing
these advisory services, the fee paid to the Sub-Advisor and the expenses of the
Trustees who are affiliated with the Advisor. The Advisor may make payments from
its own resources to broker-dealers and other financial institutions in
connection with the sale of Fund shares. For its services, the Sub-Advisor will
receive from the Advisor the sub-advisory fee set forth in the table below:
<TABLE>
<CAPTION>
COUNTRY INDEX FUNDS FUNDS OF INDEX FUNDS
------------------- --------------------
<S> <C> <C>
SUB-ADVISORY FEE: .15% .0%
</TABLE>
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<PAGE> 17
ADDITIONAL FUND INFORMATION
Additional information about the WORLDWIDE INDEX FUNDS is included in a
Statement of Additional Information dated _______, 1998 (the "SAI"). The SAI is
incorporated by reference into this Prospectus and, therefore, is legally a part
of this Prospectus.
You may obtain a copy of the SAI, or of the annual or semi-annual reports,
without charge by calling toll-free 1-877-463-9363, or by writing to WORLDWIDE
INDEX FUNDS at 790 E. Colorado Blvd., 9th Floor, Pasadena, CA 91101. The SAI has
been filed with the Securities and Exchange Commission (the "SEC"). The SEC
maintains a Web site ("http://www.sec.gov") that contains the SAI, other
material incorporated by reference, and other information regarding registrants
that file electronically with the SEC. You may also review and copy documents at
the SEC Public Reference Room in Washington, DC (for information call
1-800-SEC-0330). You may request documents by mail from the SEC, upon payment of
a duplicating fee, by writing to: Securities and Exchange Commission, Public
Reference Section, Washington, DC 20549-6009. To aid you in obtaining this
information, the Fund's Investment Company Act registration number is 811-08805.
- --------------------------------------------------------------------------------
================================================================================
WORLDWIDE INDEX FUNDS(SM)
THE INDEX ALTERNATIVE
================================================================================
<PAGE> 18
STATEMENT OF ADDITIONAL INFORMATION
WORLDWIDE INDEX FUNDS(SM)
790 E. Colorado Boulevard, 9th Floor
Pasadena, California 91101
Toll Free: 1-877-463-9363
(626) 468-8520
The Worldwide Index Funds (the "Trust") is a no-load mutual fund with thirteen
separate investment portfolios (individually a "Fund" and collectively, the
"Funds"). This Statement of Additional Information ("SAI") relates to all
thirteen Funds: Australia Index Fund, France Index Fund, Germany Index Fund,
Hong Kong Index Fund, Italy Index Fund, Japan Index Fund, Netherlands Index
Fund, Spain Index Fund, Sweden Index Fund, Switzerland Index Fund, and United
Kingdom Index Fund (collectively the "Country Index Funds"); and Europe Index
Fund and International Index Fund (collectively the "Funds of Index Funds").
This SAI is not a prospectus but should be read in conjunction with, and is
incorporated by reference into, the Prospectus for the Worldwide Index Funds,
dated ________, 1998. Copies of the Prospectus are available, without charge,
upon request to the Trust at 790 E. Colorado Blvd., 9th Floor, Pasadena, CA
91101 or by calling toll-free, 1-877-463-9363 or 626-793-8078.
The date of this SAI is ________, 1998.
<PAGE> 19
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
THE FUNDS AND COUNTRY SPECIFIC ECONOMIC CONSIDERATIONS ........................3
ADDITIONAL RISK CONSIDERATIONS................................................18
INVESTMENT POLICIES AND OBJECTIVES............................................19
INVESTMENT TECHNIQUES.........................................................21
INVESTMENT RESTRICTIONS.......................................................27
PORTFOLIO TRANSACTIONS AND BROKERAGE..........................................28
ORGANIZATION OF THE TRUST AND THE FUNDS.......................................30
MANAGEMENT OF THE TRUST.......................................................30
DETERMINATION OF NET ASSET VALUE..............................................33
PERFORMANCE INFORMATION.......................................................34
CALCULATION OF RETURN QUOTATIONS..............................................35
INFORMATION ON COMPUTATION OF YIELD...........................................36
PURCHASE AND REDEMPTION OF SHARES.............................................37
DIVIDENDS, DISTRIBUTIONS, AND TAXES...........................................37
EXPERTS.......................................................................41
</TABLE>
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<PAGE> 20
THE FUNDS AND COUNTRY SPECIFIC ECONOMIC CONSIDERATIONS
THE COUNTRY INDEX FUNDS
The AUSTRALIA INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of the Australia All Ordinaries Index (the "ASX"). The Fund will
normally invest at least 95% of its total assets in a combination of: (i) some
or all of the stocks included in the ASX; (ii) ASX futures and Related
Securities; (iii) currency forward contracts and/or currency futures contracts
and Related Securities; and/or (iv) short-term debt instruments. The Fund seeks
to reduce or eliminate the impact of currency fluctuation through hedging local
currency against the U.S. Dollar.
The ASX is a capitalization-weighted index of common stocks listed on the
Australian Stock Exchange. As of April 7, 1998, the top five stocks represented
in the ASX and their approximate proportional percentages are The National
Australia Bank, Ltd. (7.1%), The Broken Hill Proprietary Company, Ltd.(7%), The
News Corporation, Ltd. (4.7%), Westpac Banking Corporation (4.5%), and
Commonwealth Bank of Australia (3.8%).
Trading shares has taken place in Australia since 1828, but did not become
significant until the latter half of the nineteenth century when there was
strong demand for equity capital to support the growth of mining activities. A
stock market was first formed in Melbourne in 1865. In 1885, the Melbourne
market became the stock exchange of Melbourne, in which form it has remained
until recently. Other stock exchanges were also established in Sydney (1871),
Brisbane (1884), Adelaide (1887), Hobart (1891) and Perth (1891). In 1937, the
six capital city stock exchanges established the Australian Associated Stock
Exchanges (AASE) to represent them at a national level. In 1987, the regional
exchanges merged to create a single entity -- The Australian Stock Exchange
(ASX). Trading is done via a computer link-up called "SEATS." SEATS enables all
exchanges to quote uniform prices. All the exchanges are members of the ASX and
are subject to the Securities Industry Act, which regulates the major aspects of
stock exchange operations. Although there are stock exchanges in all six states,
the Melbourne and Sydney Stock Exchanges are the major centers, covering 90% of
all trades.
Economic activity in Australia grew moderately in late 1997 and early 1998.
Asia's economic problems have yet to leave their mark fully on the Australian
economy. Consumer spending was strong, due to the current low interest rate
environment and rising consumer confidence. Inflation remained in check, and
interest-rate sensitive sectors, such as housing continued to benefit from
favorable monetary policy developments. Despite the new right-of-center liberal
national coalition elected to power in March of 1996, unemployment remains at
8.6% as growth remains below the 4% pace needed to cut the jobless rate.
Full-time employment is up sharply. Resource companies that export commodities
such as coal, natural gas, and minerals have suffered due to the weakened
Australian dollar, which hit a 3 1/2-year low against the U.S. dollar in October
of 1997.
Australian reporting, accounting and auditing standards differ substantially
from U.S. standards. In general Australian corporations do not provide all of
the disclosure required by U.S. law and accounting practice, and such disclosure
may be less timely and less frequent than that required of U.S. corporations. As
of August 31, 1997, the total market capitalization of the Australian equity
markets was approximately AUD 419.4 billion or US$307.9 billion.
The FRANCE INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of France's CAC-40 Index (the "CAC"). The Fund will normally invest
at least 95% of its total assets in a combination of: (i) some or all of the
stocks included in the CAC; (ii) CAC futures and Related Securities; (iii)
currency forward contracts and/or currency futures contracts and Related
Securities; and/or (iv) short-term debt instruments. The Fund seeks to reduce or
eliminate the impact of currency fluctuation through hedging local currency
against the U.S. Dollar.
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<PAGE> 21
The CAC is a narrow-based, capitalization-weighted index of 40 companies listed
on the Paris Stock Exchange (the Bourse). The index serves as a basis for
futures and options traded on France's financial futures and options market (the
MATIF and MONEP). As of April 7, 1998, the top five stocks represented in the
CAC and their approximate proportional percentages are France Telecom (9.3%),
AXA (6.2%), Elf Aquitaine (5.6%), L'Oreal (5.5%), and Alcatel Alsthom (5%).
Trading of securities in France is subject to the monopoly of the Societe de
Bourse, which replaced the individual agents de change in 1991 in order to
increase the cohesion of the French equity market. All purchases or sales of
equity securities in listed companies on any one of the French exchanges must be
executed through the Societe de Bourse. There are three different markets on
which French securities may be listed: (1) the official list (La Cote
Officielle), comprised of equity securities of large French and foreign
companies and most bond issues; (2) the second market (Le Second Marche),
designed for the trading of equity securities of smaller companies; and (3) the
"Hors-Cote" Market. Securities may only be traded on the official list and the
second market after they have been admitted for the listing by the Conseil des
Bourses de Valeurs (the "CBV"). By contrast, the Hors-Cote Market has no
prerequisites to listing, and shares of otherwise unlisted companies may be
freely traded there once they have been introduced on the market by the Societe
de Bourse. Although the Hors-Cote Market is frequently referred to as an
over-the-counter market, this term is inaccurate in that, like the official list
and the second market, it is supervised by Societes des Bourses Francaises and
regulated by the CBV.
Although there are seven stock exchanges in France (located in Paris, Bordeaux,
Lille, Lyon, Marseille, Nancy and Nantes), the Paris Stock Exchange handles more
than 95% of transactions in the country. All bonds and shares, whether listed or
unlisted, must be traded on one of the seven exchanges. Trading in most of the
Paris exchange-listed stocks takes place through the computer order-driven
trading system CAC, launched in 1988. French market capitalization constitutes
approximately 30% of the French Gross Domestic Product. Securities are
denominated in the official unit of currency, the French Franc. Unless otherwise
provided by a double tax treaty, dividends on French shares are subject to a
withholding tax of 25%.
Although French reporting, accounting and auditing standards are considered
rather rigorous by European standards, they differ from U.S. standards in
certain material respects. In general, French corporations are not required to
provide all of the disclosure required by U.S. law and accounting practice, and
such disclosure may be less timely and less frequent than that required of U.S.
corporations. As of August 31, 1997, the total market capitalization of the
French equity markets was approximately FRF 3,507.6 billion or US$578.3 billion.
France is a leading industrial country. Its large service sector, accounting for
approximately two-thirds of GDP, includes tourism, transportation and computer
consultancy. The once dominant iron and steel and textile industries have given
way to the fast growing aerospace, chemicals and pharmaceuticals, plastics and
telecommunications industries. The automobile industry, the most important
industry in the early eighties, has been largely overtaken by capital goods
industries. The capital goods industries account for one-fifth of the country's
exports and supply as many jobs as the agricultural sector.
High unemployment rates and a soaring budget deficit are some of the main
economic concerns that have plagued France for the past decade. Since 1993, the
government has been trying to solve these problems through a mix of higher
taxes, which reached a record level in 1995, and a reduction of non-wage costs.
In 1996, the largest attempt to cut the budget deficit was implemented, leading
to a disparity of interest rate differentials vis-a-vis Germany.
The government's 1996 implementation of an unpopular far-reaching reform of the
social security system, which aimed to curb health care spending through tighter
control from the Parliament and supervisory bodies, resulted in a protracted
strike. In 1997, the unexpected Socialist victory in the early general election
raised fresh doubts
4
<PAGE> 22
about the French authorities' commitment to cut the budget deficit in line with
the European Monetary Union ("EMU") requirements. However, the new government
finally decided to implement a temporary 10% corporate tax increase, the second
one since 1995, and cut spending, which should allow France to qualify for the
EMU. The government also envisions reducing current employees' weekly working
time and hiring 350,000 youths in the public sector to cut unemployment rates.
The French GDP grew by 2.5% in 1997, while inflation was 1.2%, the lowest level
seen since the 1950's. The government deficit was 3% of GDP in 1997.
Unemployment, while still high, dropped significantly in December of 1997,
indicating a downward trend. As employment numbers improved, consumer spending
increased, which led to a significant rise in import consumption. However,
foreign demand for French cars stimulated car exports to record levels. Consumer
spending is expected to continue this trend, acting as the main catalyst for the
French recovery. Additionally, corporate investment has increased dramatically.
Due to record low inflation together with significant excess capacity, no change
is anticipated in current monetary policy.
The future economic challenges facing the French government include reducing the
budget deficit to a level acceptable to the EMU requirements, downsizing and
restructuring the public sector and improving the business environment,
particularly by increasing labor market flexibility.
The GERMANY INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Germany's Deutsche Aktienindex (the "DAX"). The Fund will
normally invest at least 95% of its total assets in a combination of: (i) some
or all of the stocks included in the DAX; (ii) DAX futures and Related
Securities; (iii) currency forward contracts and/or currency futures contracts
and Related Securities; and/or (iv) short-term debt instruments. The Fund seeks
to reduce or eliminate the impact of currency fluctuation through hedging local
currency against the U.S. Dollar.
The DAX is a total rate of return index of 30 selected German blue-chip stocks
traded on the Frankfurt Stock Exchange. As of April 7, 1998, the top five stocks
represented in the DAX and their approximate proportional percentages are
Allianz, AG (10.9%), Daimler-Benz (7.4%), SAP, AG (6.2%), Deutsche Bank (6.1%),
and Muenchener Rue (5.4%).
The history of Frankfurt as a financial center can be traced back to the early
Middle Ages. Frankfurt had the right to issue coins as early as 1180; the first
exchange office was opened in 1402. Germany has been without a central stock
exchange, the position formerly held by the Berlin exchange, since 1945. Today
there are eight independent stock exchanges, of which Dusseldorf and Frankfurt
account for over three-quarters of the total volume. Frankfurt is the main
exchange in Germany. Exchange securities are denominated in German Marks, the
official currency of Germany. Equities may be traded in Germany in one of three
markets: (i) the official market, comprised of trading in shares which have been
formally admitted to official listing by the admissions committee of the
relevant stock exchange, based on disclosure in the listing application; (ii)
the "semi-official" unlisted market, comprised of trading in shares not in the
official listing; and (iii) the unofficial, over-the-counter market, which is
governed by the provisions of the Civil Code and the Merchant Code and not by
the provisions of any stock exchange. There is no stamp duty in Germany, but a
nonresident capital gains tax may apply in certain circumstances.
German reporting, accounting and auditing standards differ substantially from
U.S. standards. In general, German corporations do not provide all of the
disclosure required by U.S. law and accounting practice, and such disclosure may
be less timely and less frequent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Germany equity markets
was approximately DM 1,261.1 billion or US $700.5 billion.
Germany, the third largest economy in the world, has faced substantial economic
challenges resulting from the reunification of East and West Germany. The former
East Germany, which had been insulated from any real
5
<PAGE> 23
competition, was under invested in housing and infrastructure and was not geared
to handle full economic and political union with West Germany. In addition, the
cost of reunification, which West Germany intended to finance with increased
taxes, proved to be much greater than anticipated due to the high cost of social
security transfers, extensive environmental damage and a worse than expected
economic condition. As a result, the public sector deficit rose from 0% to 7.5%
in 1993 and the Bundesbank (central bank) sharply raised interest rates, causing
the economy to recess.
Germany began to recover from recession in 1994, but the rise in interest rates
and the appreciation of the German Mark restricted market advances. The
depreciation of the German Mark and other monetary policies implemented by the
Bundesbank through 1997 have created very favorable monetary conditions to which
the economy is responding. The German economy continued to show signs of
strength in 1997 despite continued labor problems. Unemployment rose to a new
record high in January 1998, at 12.8%. There was continued unrest among the
trade unions, with protest marches taking place throughout the country.
Employment numbers showed signs of bottoming in November of 1997 suggesting that
the unemployment situation is starting to respond, albeit slowly, to the
economic recovery of 1997.
Rising capacity utilization rates, together with a significant decline in unit
labor costs over the past two years, should produce an increase in employment in
1998 - the first in six years. Domestic demand, both capital and consumer, is
expected to replace exports as the driving force in Germany's economic recovery.
Capital spending has already surged in early 1998 in response to the high rate
of capacity utilization and rising profits. Consumers have been driving a
miniature consumption boom, accelerating purchases of consumer durables. The
Bundesbank clearly signaled that it would take a proactive role in monetary
policy, announcing an M3 money supply target range of 3% to 6% for 1998. M3
money supply includes the money consumers use for ordinary purchases of goods
and services (M1), time deposits, money market funds, overnight repurchase
agreements (M2) and time deposits of more than $100,000 and repurchase
agreements with terms longer than one day. Germany's fiscal health and
prosperity over the next few years will largely depend on the continued growth
of capitalism in eastern Germany.
The HONG KONG INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Hong Kong's Hang Seng Index (the "HSI"). The Fund will normally
invest at least 95% of its total assets in a combination of: (i) some or all of
the stocks included in the HSI; (ii) HSI futures and Related Securities; (iii)
currency forward contracts and/or currency futures contracts and Related
Securities; and/or (iv) short-term debt instruments. The Fund seeks to reduce or
eliminate the impact of currency fluctuation through hedging local currency
against the U.S. Dollar.
The HSI is a capitalization-weighted index of 33 companies that represent
approximately 70% of the total market capitalization of the Stock Exchange of
Hong Kong. As of April 7, 1998, the top five stocks represented in the HSI and
their approximate proportional percentages are HSBC Holdings, PLC (27.1%),
Hutchison Whampoa (8.7%), Hong Kong Telecommunications (8.1%), China Telecom
(7.9%), and Hang Seng BK (5.9%).
Trading in equity securities in Hong Kong began in 1891 with the formation of
the Association of Stockbrokers, which was changed in 1914 to the Hong Kong
Stock Exchange. In 1921, a second stock exchange, The Hong Kong Stockbrokers'
Association, was established. In 1947, these two exchanges were merged under the
name The Hong Kong Stock Exchange Limited. Three additional exchanges, the Far
East Exchange Limited (1969), The Kam Ngan Stock Exchange Limited (1971) and The
Kowloon Stock Exchange (1972) also commenced trading activities. These four
exchanges were unified in 1986 to form The Stock Exchange of Hong Kong Limited
(the "SEHK"). Trading on the SEHK is conducted in the post trading method,
matching buyers and sellers through public outcry. Securities are denominated in
the official unit of currency, the Hong Kong Dollar. Foreign
6
<PAGE> 24
investment in Hong Kong is generally unrestricted. All investors are subject to
a small stamp duty and a stock exchange levy, but capital gains are tax-exempt.
Hong Kong has significantly upgraded the required presentation of financial
information in the past decade. Nevertheless, reporting, accounting and auditing
practices remain significantly less rigorous than U.S. standards. In general,
Hong Kong corporations are not required to provide all of the disclosure
required by U.S. law and accounting practice, and such disclosure may be less
timely and less frequent than that required of U.S. corporations. As of August
31, 1997, the total market capitalization of the Hong Kong equity markets was
approximately HKD 3,278.1 billion or US$423 billion.
The transfer of sovereignty from Britain to China, which has created a sense of
uncertainty in Hong Kong's economy, has largely been a smooth transition. Under
the principal of "one country, two systems," Hong Kong is now a special
administrative region (SAR) of the People's Republic of China and is empowered
with a high degree of autonomy. It has retained its administrative, legislative
and judicial systems. The SAR government has full control over its monetary and
fiscal policies and it maintains its own customs and immigration control,
separate from the mainland. Except for issues relating to national security and
foreign policy, the SAR is largely run as an independent territory.
The first chief executive of the SAR, Mr. C.H. Tung, a former shipping tycoon,
has vowed to make a difference in the lives of the people of Hong Kong, by
focusing his attention on the areas of housing, education and infrastructure. In
the past, the chronic shortage of housing has been a strong influence on the
property market. Hong Kong property prices today are among the highest in the
world. The Tung administration announced a major housing package in October
1997, detailing its plan to double the supply of apartments in the territory.
Worth noting is that there is heavy exposure to the property market in Hong
Kong's banking sector as well as the stock market as a whole.
The integration of Hong Kong's economy with that of the mainland continues
apace. While the integration process in the 1980's was driven by the relocation
of Hong Kong's labor-intensive manufacturing sector to Southern China, the
integration theme for the 1990's is that of Hong Kong becoming a service center
for China's fast growing economy. A large number of mainland companies have
established offices in Hong Kong as a window for interaction with the global
economy. The Hong Kong financial sector is increasing its role in the
intermediation of foreign funds for investment in China. Close to half of the
FDI into China goes through Hong Kong. Furthermore, Hong Kong is increasingly
playing a role in intermediating China's savings for investment in China. Hong
Kong is well on its way to become a bona fide financial center for China.
The Hong Kong dollar, which is pegged to the U.S. dollar, has come under recent
selling pressure as have most Asian currencies. Both the Hong Kong government
and the Central Bank of China have significant U.S. dollar reserves, which are
expected to be used to defend the peg. There can be no assurance that a
substantial devaluation will not occur. Hong Kong's property, bond, equity and
currency markets have all recently experienced downside pressure, partly as a
result of devaluation fears.
While it is impossible to pinpoint the economic effects of the transfer of
sovereignty from Britain to China, the transition appeared to have little impact
on the economy. During 1997, Hong Kong's economy felt the effects of the Asian
economic problems. Tourism is suffering from weakened currencies in Southeast
Asia, Korea, and Japan, which historically have accounted for 35% of Hong Kong's
tourism revenue. Decreased tourism has also negatively affected Hong Kong's
retail and hospitality industries. In November 1997, manufacturers saw a 9%
decline in orders from the prior month, with the plastics, electronics and
electrical industries being the hardest hit. At the same time, the printing and
publishing industries recorded an increase in orders of 14%. Climbing
unemployment indicated a slowing economy, edging up to 2.5% in late 1997 and
inflation was also somewhat high
7
<PAGE> 25
at 5.8%. The government raised interest rates in late 1997 to defend the Hong
Kong dollar's peg to the US dollar, as Hong Kong became a target of currency
speculation. While GDP in 1997 grew by 5.5%, the highest growth since 1993, it
is showing signs of slowing down in 1998.
The ITALY INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Italy's MIB-30 Index (the "MIB"). The Fund will normally invest
at least 95% of its total assets in a combination of: (i) some or all of the
stocks included in the MIB; (ii) MIB futures and Related Securities; (iii)
currency forward contracts and/or currency futures contracts and Related
Securities; and/or (iv) short-term debt instruments. The Fund seeks to reduce or
eliminate the impact of currency fluctuation through hedging local currency
against the U.S. Dollar.
The MIB is a capitalization-weighted index of the 30 top companies listed on the
Milan Stock Exchange. As of April 7, 1998, the top five stocks represented in
the MIB and their approximate proportional percentages are ENI, SPA (15.6%),
Telecom Italia (11.8%), Telecom Italia Mobile, SPA (11.1%), Generali
Assicurazioni (9.2%), and Fiat, SPA (4.6%).
The first formal exchange was created in Italy in 1808 with the establishment of
the Milan Stock Exchange. Since then, nine other exchanges have been founded.
Milan is the most important exchange, accounting for 90% of total equity volume
and about 80% of turnover in fixed income securities. After the Milan Stock
Exchange the other exchanges, in order of importance, are: Rome, Turin, Genoa,
Bologna, Florence, Naples, Palermo, Trieste and Venice. By law the only persons
allowed to trade in the official posts of the stock exchange are the
stockbrokers, who must act as brokers and not trade for their own account. Banks
and intermediaries are allowed to enter the trading post as observers. In 1991,
the Parliament passed legislation creating Societa di Intermediazone Mobiliare
(SIMs). SIMs were created to regulate brokerage activities in the securities
market and are allowed to trade on their own and for customers' accounts. In
1986, the Centro Elaboraizione Dati (C.E.D. Borsa), a subsidiary of the Milan
Stock Exchange, developed a supporting service called Borsamat. The Borsamat
records all trading floor orders, links all Italian exchanges, checks
transaction details and issues confirmations. Italy has the world's largest
government securities market after the United States and Japan. At the end of
1993, issues of treasury bills, notes and bonds outstanding totaled US$1,133
billion.
Italian reporting, accounting and auditing practices are regulated by Italy's
National Control Commission. These practices bear some similarities to United
States standards, but differ significantly in many important respects. In
general, Italian corporations do not provide all of the disclosure required by
U.S. law and accounting practice, and such disclosure may be less timely, less
frequent and less consistent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Italian equity markets
was approximately ITL 500,698.7 billion or US$284.4 billion.
Italy is a net importer of agricultural products and also imports most of its
energy products. Aside from tourism and design, Italy's service sector is not
very competitive. Through networks of small and medium-sized companies Italy's
strengths lie in its manufacturing sector, particularly in machine tools and
consumer goods. In the early 1990s, industry began to struggle to compete as a
result of wage increases and an exchange rate policy designed to limit the
effect of government borrowing on the inflation rate. In September 1992, the
lira collapsed and was forced to leave the Exchange Rate Mechanism (ERM). The
lira recovered in 1996 and returned to the ERM by the end of that year.
The Bank of Italy, operating autonomously, has historically followed a tough
monetary policy in an effort to prevent government borrowing from causing
inflation. Beginning in 1991, the government implemented a fiscal policy that
reduced government borrowing through tax measures and spending cuts. Since then,
successive governments have delivered to parliament ambitious budget laws that
included revenue raising measures and cuts
8
<PAGE> 26
to the pension system, health service, local government and defense. Despite the
slow pace of reform to avoid social unrest, impressive improvements have been
made to realize 1997's 3%-of-GDP deficit target as required by the Maastricht
Treaty.
In 1992, Italy also began a privatization program by transferring major state
holdings to joint stock companies as an intermediate step to total or, at least
partial, floatation on the stock exchange. Although the privatization program
was somewhat curbed in 1994, it resumed in 1995 and is still proceeding.
As Italy makes its case to join the EMU, real growth in 1997 was 1.5%, with a
strong fourth quarter rate of 2.8%. However, the growth was narrow, driven by
the government's auto-replacement program, in which 10-year old cars are turned
in for cash. As a result, new car sales were up dramatically, with car
registrations up 75% in September. The budget deficit represented 2.7% of GDP.
General government debt declined in 1997, due to significant privatization
revenues and unexpected tax revenues. Short-run growth in the consumer price
index ("CPI") has continued at an annual rate of approximately 2% for the last
five months of 1997, with year on year inflation increasing to 1.6% in December.
Industrial production figures showed growth at the end of 1997, with the year on
year growth rate at 8.1%, up from 4.9% in November. Due to its growth rate being
the slowest in the European Union, Italy's fiscal policy is expected to be less
restrictive, with the Bank of Italy cutting interest rates and stimulating
economic growth. The Italian lira is strong, stimulated by investor demand for
high-yielding Italian bonds. Rising confidence and real wages are expected to
boost consumer demand, with increased capital spending not far behind.
THE JAPAN INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Japan's Nikkei-225 Index (the "NKI"). The Fund will normally
invest at least 95% of its total assets in a combination of: (i) some or all of
the stocks included in the NKI; (ii) NKI futures and Related Securities; (iii)
currency forward contracts and/or currency futures contracts and Related
Securities; and/or (iv) short-term debt instruments. The Fund seeks to reduce or
eliminate the impact of currency fluctuation through hedging local currency
against the U.S. Dollar.
The NKI is a price-weighted index of the 225 top-rated Japanese companies listed
in the First Section of the Tokyo Stock Exchange. As of April 7, 1998, the top
five stocks represented in the NKI and their approximate proportional
percentages are Sony Corporation (6.9%), Fuji Photo Film (3%), Honda Motor Co.
(2.9%), Takeda Chemical (2.15%), and Sankyo, Co., Ltd. (2.1%).
The Japanese stock market has a history of over 100 years beginning with the
establishment of the Tokyo Stock Exchange Company Ltd. in 1878. Stock exchanges
are located in eight cities in Japan (Tokyo, Osaka, Nagoya, Kyoto, Hiroshima,
Fukuoka, Niigata and Sapporo). There is also an over-the-counter market. There
are three distinct sections on the main Japanese stock exchanges. The First
Section trades in over 1,100 of the largest and most active stocks, which
account for over 95% of total market capitalization. The Second Section consists
of over 400 issues with lower turnover than the First Section, which are newly
quoted on the exchange or which are not listed and would otherwise be traded
over-the-counter. The Third Section consists of foreign stocks which are traded
over-the-counter. The main activity of the regular exchange members is the
buying and selling of securities on the floor of an exchange, both for their
customers and for their own account. Japan is second only to the United States
in aggregate stock market capitalization. Securities are denominated in the
official unit of currency, the Japanese Yen. Takeover activity is negligible in
Tokyo, and although foreign investors play a significant role, the trend of the
market is set by the domestic investor. The withholding tax is 20% on dividends.
There also is a transaction tax on share trades and a small stamp duty.
Although some Japanese reporting, accounting and auditing practices are based
substantially on U.S. principles, they are not identical to U.S. standards in
some important respects, particularly with regard to unconsolidated
9
<PAGE> 27
subsidiaries and related structures. In general, Japanese corporations are not
required to provide all of the disclosure required by U.S. law and accounting
practice, and such disclosure may be less timely and less frequent than that
required of U.S. corporations. As of August 31, 1997, the total market
capitalization of the Japanese equity markets was approximately JPY 349,605.2
billion or US$2,906.4 billion.
Japan's economy, the second-largest in the world, has grown substantially over
the last three decades. However in 1995, the Japanese economy expanded by just
0.9% and its budget showed a deficit of 5.9% of GDP. The boom in Japan's equity
and property markets during the expansion of the late 1980's supported high
rates of investment and consumer spending on durable goods, but both of these
components of demand have now retreated sharply following the decline in asset
prices. Profits have fallen sharply, unemployment has reached a historical high
and consumer confidence is low. The banking sector continues to suffer from
nonperforming loans. Numerous cuts of the discount-rate since its 6% peak in
1991, a succession of fiscal stimulus packages, support plans for the
debt-burdened financial system and spending for reconstruction following the
Kobe earthquake may help to contain the recessionary forces, but substantial
uncertainties remain.
In addition to a cyclical downturn, Japan is suffering through structural
adjustments. Like the Europeans, the Japanese have seen a deterioration of their
competitiveness due to high wages, a strong currency and structural rigidities.
Finally, Japan is reforming its political process and deregulating its economy.
This has resulted in turmoil, uncertainty and a crisis of confidence.
While the Japanese governmental system itself seems stable, the dynamics of the
country's politics have been unpredictable in recent years. The economic crisis
of 1990-92 brought the downfall of the conservative Liberal Democratic Party,
which had ruled since 1955. Since then, the country has seen a series of
unstable multi-party coalitions and several prime ministers come and go, because
of politics as well as personal scandals. While there appears to be no reason to
anticipate civic unrest, it is impossible to know when the political instability
will end and what trade and fiscal policies might be pursued by the government
that emerges.
Japan's heavy dependence on international trade has been adversely affected by
trade tariffs and other protectionist measures, as well as the economic
condition of its trading partners. Japan subsidizes its agricultural industry
since only 19% of its land is suitable for cultivation. It is only 50%
self-sufficient in food production. Accordingly, it is highly dependent on large
imports of wheat, sorghum and soybeans. In addition, industry, its most
important economic sector, depends on imported raw materials and fuels,
including iron ore, copper, oil and many forest products. Japan's high volume of
exports, such as automobiles, machine tools and semiconductors, has caused trade
tensions, particularly with the United States. Some trade agreements have been
implemented to reduce these tensions. The relaxing of official and de facto
barriers to imports, or hardships created by any pressures brought by trading
partners, could adversely affect Japan's economy. A substantial rise in world
oil or commodity prices could also have a negative affect. Additionally, the
strength of the yen itself may prove an impediment to strong continued exports
and economic recovery, because it makes Japanese goods sold in other countries
more expensive and reduces the value of foreign earnings repatriated to Japan.
Since the Japanese economy is so dependent on exports, any fall off in exports
may be seen as a sign of economic weakness, which may adversely affect the
market.
The Japanese economy found no relief in 1997 from the economic struggles it has
experienced for the last seven years. The benchmark Nikkei Stock Average sank
4.2% on November 7, falling below the 16,000-point level for the first time in
more than two years, and it finished the year at a low not seen since 1985. The
decline wiped out unrealized stock gains in the portfolios of seven of Japan's
top 20 banks, fueling a pessimistic outlook on the financial crisis. By the end
of 1997, three major financial institutions had collapsed amidst overwhelming
debt: Sanyo Securities, Hokkaido Takushoku Bank, and Yamaichi Securities.
Yamaichi left behind $23 billion in debt, Japan's largest bankruptcy ever.
Bankruptcies are no longer newsworthy as banks tighten credit and enforce
10
<PAGE> 28
tougher regulatory requirements. Consumers, anticipating a recession and reeling
from increases in taxes and medical fees, have cut spending considerably. Retail
sales in November of 1997 dropped 4.7% from a year earlier, the largest drop
since 1955. Industrial production has also dropped. While Asia needs an economic
leader to anchor any future recovery, Japan has been unable to take on that
role, actually cutting new investment in Thailand, Malaysia, Indonesia and the
Philippines by 29% over the summer. The economic trials of Japan's neighbors
continue to raise concerns over profit levels for the big Japanese exporters.
The NETHERLANDS INDEX FUND seeks long-term capital appreciation in line with
local market equity returns. The Fund seeks to track as closely as possible the
performance of the Netherlands' Amsterdam Exchanges Index (the "AEX"). The Fund
will normally invest at least 95% of its total assets in a combination of: (i)
some or all of the stocks included in the AEX; (ii) AEX futures and Related
Securities; (iii) currency forward contracts and/or currency futures contracts
and Related Securities; and/or (iv) short-term debt instruments. The Fund seeks
to reduce or eliminate the impact of currency fluctuation through hedging local
currency against the U.S. Dollar.
The AEX is a weighted index of the 25 leading Dutch stocks traded on the
Amsterdam Stock Exchange. The index is rebalanced every February by setting the
company with the greatest capitalization in the basket of stocks to 10% and
calculating the weights of the remaining stocks accordingly. As of April 7,
1998, the top five stocks represented in the AEX and their approximate
proportional percentages are ING Groep, NV (11.8%), Unilever, NV (10.8%), Royal
Dutch Petroleum (9.8%), Aegon, NV (9.8%), and ABN Amro Hldg (9.7%).
Trading securities on the AEX Stock Exchange (AEX) (formerly the Amsterdam Stock
Exchange) started at the beginning of the seventeenth century. The United East
India Company was the first company in the world financed by an issue of shares,
and such issue was effected through the exchange. The Netherlands claims the
honor of having the oldest established stock exchange in existence. In 1611 a
stock market began trading in the coffee houses along the Dam Square. A more
formal establishment, the Amsterdam Stock Exchange Association, began trading
industrial stocks in 1876 and until World War II, Amsterdam ranked after New
York and London as the third most important stock market in the world. After the
war, the AEX Stock Exchange only gradually began to resume its activities, as
members felt threatened by what they saw as an impending socialist order which
would leave little of the stock market intact. Since the end of the war, the
Dutch market has remained relatively neglected, as local companies have found it
more favorable to use bank financing to meet their capital requirements. Trading
in shares on the AEX may take place on the official market or on the parallel
market, which is available to medium-sized and smaller companies that cannot yet
meet the requirements demanded for the official market.
Dutch reporting, accounting and auditing standards differ substantially from
U.S. standards. In general, Dutch corporations do not provide all of the
disclosure required by U.S. law and accounting practice, and such disclosure may
be less timely and less frequent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Dutch equity markets was
approximately NLG 911.5 billion or US$449.8 billion.
The Netherlands boasts one of the highest levels of GDP per capita in the world.
While industry is its most important sector, the Netherlands also benefits from
agricultural and natural gas resources. Foreign trade is vital to the
Netherlands, accounting for approximately 50% of GDP. The recovery of exports by
the end of the 1980s was fueled by government policies on wage moderation,
although such policies resulted in an increased unemployment rate. Additionally,
the reunification of Germany resulted in a surge in demand for exports.
Public spending has exceeded 50% of GDP, including transfer payments. The
public-sector deficit is a political and economic problem and has received
heightened government attention. While the deficit has been reduced recently,
further reduction remains a key government objective. The Netherlands has
efficiently increased the flexibility of its labor market and cut indirect wage
costs. As a consequence, the Netherlands should outperform the European average
in terms of economic performance over the years to come.
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<PAGE> 29
Continuing the growth trend of the last seven years, the Dutch economy grew at a
rate of 3.25% in 1997. The Netherlands' bid for membership in the EMU is very
likely to be successful, since its economy is admired by its European
counterparts due to its high growth, deficit reduction and low unemployment. The
Netherlands' only significant weakness is its high debt ratio, which was over
60% in 1997, but has been trending down since 1995. The Netherlands' economic
stability is due to the key role of agricultural produce in the export mix,
particularly to Germany. Exports make up almost 55% of the Dutch GDP. However,
1997 saw a sharp increase in demand for imports and a decrease in the export
trade balance due in part to higher domestic consumption and investment
spending. Inflation was about 2.2% for 1997, 0.75% higher than the EU average.
With output growth projected to remain strong, there is upward pressure on
inflation. Moderate wage growth has resulted from cooperation between the
government, trade unions, and employers. Unlike many other European countries,
the Dutch labor market is remarkably flexible, using a deregulated labor market
similar to that of the U.S. while still retaining a European-style social safety
net. Current interest rates are low, but as interest rates in Germany are
expected to climb, forecasts show a modest tightening of monetary policy in the
Netherlands as well.
The SPAIN INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Spain's IBEX-35 (the "IBEX"). The Fund will normally invest at
least 95% of its total assets in a combination of: (i) some or all of the stocks
included in the IBEX; (ii) IBEX futures and Related Securities; (iii) currency
forward contracts and/or currency futures contracts and Related Securities;
and/or (iv) short-term debt instruments. The Fund seeks to reduce or eliminate
the impact of currency fluctuation through hedging local currency against the
U.S. Dollar.
The IBEX is a capitalization-weighted index of the 35 most liquid Spanish stocks
traded on the Continuous Markets. As of April 7, 1998, the top five stocks
represented in the IBEX and their approximate proportional percentages are
Telefonica de Espana (18.1%), Banco Bilbao (12.7%), Endesa, SA (10.5%), Banco
Santander (9.4%), and Repsol, SA (6.2%).
The trading of shares in Spain dates back to 1831 when the Madrid Stock Exchange
was founded. Since that time, other exchanges have been established in
Barcelona, Bilbao and Valencia, although the latter remains purely a local
market. Madrid is by far the most active and the most international market
exchange, accounting for nearly 50% of total market capitalization of both bonds
and stocks. The next largest exchange is Barcelona, founded in 1915. Membership
at each stock exchange in Spain is restricted to stockbrokers nominated by the
Ministry of Finance. In order to practice their profession, a broker must belong
to the Association of Brokers. In November 1986, the Madrid Stock Exchange
opened the new second market, or unlisted securities market, as part of an
effort to expand the range of Spanish companies whose shares are publicly
quoted. The second market provides small and medium-sized companies with access
to the trading market of the Madrid Stock Exchange.
Spanish reporting, accounting and auditing standards differ substantially from
U.S. standards. In general, Spanish corporations do not provide all of the
disclosure required by U.S. law and accounting practice, and such disclosure may
be less timely and less frequent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Spanish equity markets
was approximately ESP 30,769.4 billion or US$202.4 billion.
Spain's entry into the European Community in 1986 was followed by a period of
rapid economic growth. Economic growth did not continue; however, and the
government's restrictive monetary policy and the overvalued peseta contributed
to a downturn in investment along with a rise in unemployment in the early
1990s. Currently, the government faces the challenges of addressing the domestic
concerns of controlling inflation, reducing the deficit and effecting labor
reform against the competing interests of maintaining a monetary policy suitable
for Spain's participation in the EMU.
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<PAGE> 30
In June 1989, Spain joined the Exchange Rate Mechanism of the European Monetary
System with the goal of maintaining a stable currency. The resulting huge inflow
of foreign capital caused the Spanish economy to lose some of its
competitiveness. Despite the devaluation of the peseta and the easing of
monetary policy in 1993, Spain slipped into its worst recession in 30 years.
Economic growth has recovered since then, averaging 2.4% from 1994-96. The
center-right government elected in 1996 has displayed a strong ability to
control public spending through structural reforms.
In June of 1994, Spain experienced a general strike by the trade unions. The
strike, while unsuccessful, led to reforms in the labor market to ease the rigid
regulations that govern permanent job contracts. Spain's unemployment is
currently the highest in the European Union; however, 1997's strong economic
growth and new reforms to improve the flexibility of the labor market have
decreased the rate of unemployment from 24.6% in 1994 to 20.5% as of July 1997.
Like many of its European neighbors trying to improve themselves for the EMU,
Spain enjoyed a healthy growth rate of 3.4% in 1997, up from 2.3% in 1996. This
strong showing is attributable to the private consumption component of the
economy, with Spain being the first European country to achieve a demand-driven
recovery. The combination of 3% employment growth, rising real disposable
income, and lower interest rates were all factors in the increase in
consumption. Low interest rates drove a spending boom on durable goods, and
mortgage payments have decreased, giving homeowners more disposable income. On a
quarter-by-quarter basis, however, consumption is decelerating, raising
expectations that inflation will continue to be low. Unemployment is still the
highest in Europe at 20%, yet consumer confidence is at its highest in years.
The deficit has been reduced to 2.6% of GDP, down from 6.6% in 1995, due to
economic growth and increased employment. Strong imports drove a negative net
trade balance in the fourth quarter, although exports are still quite strong.
Spain's greatest challenge will be to increase the flexibility of its labor
markets.
The SWEDEN INDEX FUND seeks long-term capital appreciation in line with local
market equity returns. The Fund seeks to track as closely as possible the
performance of Sweden's Stockholm Options Market Index (the "OMX"). The Fund
will normally invest at least 95% of its total assets in a combination of: (i)
some or all of the stocks included in the OMX; (ii) OMX futures and Related
Securities; (iii) currency forward contracts and/or currency futures contracts
and Related Securities; and/or (iv) short-term debt instruments. The Fund seeks
to reduce or eliminate the impact of currency fluctuation through hedging local
currency against the U.S. Dollar.
The OMX is a capitalization-weighted index of 30 stocks that have the largest
volume of trading on the Stockholm Stock Exchange. As of April 7, 1998, the top
five stocks represented in the OMX and their approximate proportional
percentages are Ericsson, LM (22.2%), Astra, AB (13.5%), Foreningssparban
(5.5%), Svenska, Handelsbanken (4.8%), and ABB, AB (4.7%).
Organized trading of securities in Sweden can be traced back to 1776. Although
the Stockholm Stock Exchange was founded in 1864, the real formation of a stock
exchange in an international sense took place in 1901. The statutes of the stock
exchange were modified in 1906 and, from the beginning of 1907, commercial banks
were admitted as members. During the 1970's the Stockholm market was
characterized by limited turnover and dull trading conditions. In 1980 the
market started to climb and for several years Stockholm was one of the best
performing stock markets in both price and volume growth. This regeneration of a
market for risk capital was reflected in the large number of companies
introduced in the early 1980's. The Stockholm Stock Exchange is structured on a
membership basis, with the Bank Inspection Board being the supervising
authority. The board consists of 11 directors and one chief executive. The
directors of the board are elected by the Swedish government, and the
Association of the Swedish Chamber of Commerce, the Federation of Swedish
Industries and the member companies of the Stock Exchange. There are three
different markets for trading shares in Sweden. The dominant market is the A1
list, for the largest and most heavily traded companies. The second distinct
market is the
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<PAGE> 31
Over-the-Counter Market, which is more loosely regulated than the official
market and caters to small and medium sized companies. The other market is the
unofficial parallel market which deals in unlisted shares, both on and off the
exchange floor. The shares most frequently traded on this market are those which
have been delisted from the other markets and those which are only occasionally
available for trading. There are also two independent markets for options -- the
Swedish Options Market (SOM) and the Swedish Options and Futures Exchange
(SOFE). They offer calls, puts and forwards on Swedish stocks and stock market
index.
Swedish reporting, accounting and auditing standards differ substantially from
U.S. standards. In general, Swedish corporations do not provide all of the
disclosure required by U.S. law and accounting practice, and such disclosure may
be less timely and less frequent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Swedish equity markets
was approximately SEK 2,036.8 billion or US$259.4 billion.
Sweden has a highly developed and successful industrial sector. The chief
industries, most of which are privately owned, include textiles, furniture,
electronics, dairy, metals, ship building, clothing, engineering, chemicals,
food processing, fishing, paper, oil and gas, automobiles and shipping.
Productivity, as measured by GDP per capita, is well above the European average,
although two-thirds of GDP passes through the public sector.
Successive governments have traditionally afforded Swedes generous benefits for
unemployment, sick leave, child care, elderly care and general public welfare,
along with state medical care. This extensive social welfare system has proved
unsustainable in recent years and has resulted in large government deficits.
Furthermore, a wide tax wedge, caused by the generous social benefits, is a key
impediment to job creation and is the reason for the high unemployment rate.
Almost half of the personal disposable income received by Swedes resulted from
transfer payments, a system for redistributing income.
Sweden suffered a severe recession in the early 1990s causing GDP to fall 5%
between 1990 and 1993. The economic recovery gathered pace in 1994 and is now in
its fourth year. Nonetheless, the recession led to a drop in the standard of
living and has left Sweden with a large gap in its public finances. The budget
deficit peaked in 1993 at 12.3% of GDP.
Sweden, which joined the European Community on January 1, 1995, received strong
pressure to bring its public finances under control. A fiscal consolidation
plan, entailing a tightening of policy over a period of four years, was approved
by Parliament in 1995. Sweden is in the midst of a cyclical upturn, with a 1997
GDP growth rate of 2.3%, and a forecast of 3.1% growth in 1998. The 1997 growth
was split evenly between domestic demand and net exports. The deficit, at 1.9%
of GDP in 1997, is expected to revert to a balance in 1998. As the economy
continues to improve, Sweden has seen an improvement in its unemployment rate,
which is currently at 8.1%. Unemployment is expected to fall even further by the
end of 1998, perhaps down to around 6.5%. Inflation was 1.9% for 1997, leading
to expectations of tighter monetary policy by the Riksbank in 1998. Long yields
are expected to absorb most of the prospective tightening of monetary policy.
Overall, Sweden's fiscal situation continues to improve, with the deficit ratio
equivalent to 1.6% of GDP in 1997, contrasted to a 1994 ratio of 10.3%. The
resulting improvement in investor and business confidence has boosted Sweden's
economic prospects and, despite the continuing fiscal consolidation, such
economic prospects are some of the best in Europe for the remainder of the
decade.
The SWITZERLAND INDEX FUND seeks long-term capital appreciation in line with
local market equity returns. The Fund seeks to track as closely as possible the
performance of Switzerland's Swiss Market Index (the "SMI"). The Fund will
normally invest at least 95% of its total assets in a combination of: (i) some
or all of the stocks included in the SMI; (ii) SMI futures and Related
Securities; (iii) currency forward contracts and/or currency futures contracts
and Related Securities; and/or (iv) short-term debt instruments. The Fund seeks
to reduce or eliminate the impact of currency fluctuation through hedging local
currency against the U.S. Dollar.
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<PAGE> 32
The SMI is a capitalization-weighted index of the largest and most liquid stocks
traded on the Electronic Bourse System. As of April 7, 1998, the top five stocks
represented in the UKX and their approximate proportional percentages are
Novartis (21%), Nestle, SA (14.9%), Roche Hldg - Genus (14.5%), Credit Suisse
(10.8%), and Union Bank of Switzerland -Bearer (7.2%).
There are three principal stock exchanges in Switzerland, the largest of which
is Zurich, followed by Geneva and Basel. The Geneva exchange is the oldest and
was formally organized in 1850. The Basel and the Zurich exchanges were founded
in 1876 and 1877, respectively. The Geneva Exchange is a corporation under
public law and in Zurich and Basel the exchanges are institutions under public
law. There are three different market segments for the trading of equities in
Switzerland. The first is the official market, the second is the semi-official
market, and the third is the unofficial market. On the official market, trading
takes place among members of the exchange on the official trading floors.
Trading in the semi-official market also takes place on the floors of the
exchanges, but this market has traditionally been reserved for smaller companies
not yet officially accepted on the exchange. Unofficial market trading is
conducted by members and non-members alike. Typical trading on this market
involves shares with small turnover. Both listed and unlisted securities can,
however, be traded on this market.
Swiss reporting, accounting and auditing standards differ substantially from
U.S. standards. In general, Swiss corporations do not provide all of the
disclosure required by U.S. law and accounting practice, and such disclosure may
be less timely and less frequent than that required of U.S. corporations. As of
August 31, 1997, the total market capitalization of the Swiss equity markets was
approximately CHF 719.7 billion or US$484.9 billion.
Due to its lack of raw materials, Switzerland has based its economic growth on
its highly skilled labor market and technological manufacturing expertise.
Switzerland's strengths lie in chemicals and pharmaceuticals, watches, precision
instruments (machinery equipments), engineering, food, financial services and
tourism. Additionally, its small domestic market's reliance on exports accounted
for 36% of the GDP in 1994.
Historically, Switzerland has experienced low unemployment levels due to its
heavy dependence on foreign labor to supplement its labor force. However, from
1990 through the first half of 1997, the unemployment rate rose substantially,
peaking at 5.7% in mid 1997, resulting from seven years of recession and
stagnation. The falling Swiss franc helped Switzerland post the first real GDP
growth since 1990, at 0.5% for 1997. The growth was driven by a strong demand
for exports, which jumped 8.2% since the second quarter of the prior year
period. This increased demand was due to similar economic recoveries in the rest
of Europe, which consumes 62% of Switzerland's exports. Net exports made a small
positive contribution to growth. Strong export sectors are chemicals,
pharmaceuticals, and watchmakers. Although Asia accounts for 13% of its exports,
Switzerland has not experienced much fallout from the Asian crisis to date. In
contrast, domestic demand remains weak with a growth rate of 0.25%, and consumer
confidence is continuing at low levels. Consumption growth was also slow at 1%
for 1997. Capital investment declined in 1997, falling by 2.75%. Inflationary
pressures remain low, with annual consumer price inflation in January 1998 at
0.1%, the lowest rate since 1986. The inflation rate for 1997 as a whole was
0.5%. The Organization of Economic Cooperation and Development, estimates that
the output gap (i.e. the difference between peak capacity and actual output) in
Switzerland was almost 5% of GDP in 1997, reflecting significant capacity in
Switzerland at present. Nominal short-term interest rates have fallen to 1.25%.
Once growth is established, the Swiss National Bank is expected to return to a
neutral monetary policy. The biggest worry for the future is the success of
monetary union in Europe. If the EMU does not go smoothly, a panic flight to the
Swiss franc could result in significant appreciation, causing the economy to
lapse into a recession.
The UNITED KINGDOM INDEX FUND seeks long-term capital appreciation in line with
local market equity returns. The Fund seeks to track as closely as possible the
performance of United Kingdom's ("UK") FTSE 100 Index (the "UKX"). The Fund will
normally invest at least 95% of its total assets in a combination of: (i) some
or all of the stocks included in the UKX; (ii) UKX futures and Related
Securities; (iii) currency forward contracts and/or
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<PAGE> 33
currency futures contracts and Related Securities; and/or (iv) short-term debt
instruments. The Fund seeks to reduce or eliminate the impact of currency
fluctuation through hedging local currency against the U.S. Dollar.
The UKX is a capitalization-weighted index of the 100 most highly capitalized
companies traded on the London Stock Exchange. As of April 7, 1998, the top five
stocks represented in the UKX and their approximate proportional percentages are
Glaxo Wellcome (5.9%), Lloyds TSB Group (5%), British Petroleum (4.8%),
SmithKline Beecham (4.1%), and Shell Transp-Reg (4.1%).
The UK is Europe's largest equity market in terms of aggregate market
capitalization. Trading is fully computerized under the Stock Exchange Automated
Quotation System. There are 14 stock exchanges in the UK and Ireland which
comprise the Associated Stock Exchange. The most important exchange and the one
that has the major share of the business is the London Stock Exchange. The
London Stock Exchange has the largest volume of trading in international
equities in the world.
Although UK reporting, accounting and auditing standards are among the most
stringent outside the United States, such standards are not identical to U.S.
standards in important respects. Some UK corporations are not required to
provide all of the disclosure required by U.S. law and accounting practice, and
such disclosure may, in certain cases, be less timely and less frequent than
that required of U.S. corporations. As of August 31, 1997, the total market
capitalization of the UK equity markets was approximately GBP 1,191.2 billion or
US$1,931.9 billion.
The 1997 general election resulted in a landslide victory for the Labor Party,
which had been out of office since May 1979. In its first few months, the Labor
Party administration has shown signs of pursuing policies which are very similar
to the market-oriented policies of the outgoing government. It has granted
operational independence to the Bank of England, a step which the Conservative
government had been reluctant to take.
The new government is more open to EMU than the outgoing administration, but
early participation nonetheless remains unlikely. The Labor leadership is in
favor of the EMU in principal, but has stated that any eventual practical
decision to join must be preceded by a greater economic convergence than that
specified by the Maastricht Treaty and a formal referendum.
The UK economy has grown since 1993, and has continued to grow strongly during
early 1997. Measured unemployment has fallen sharply, toward levels more typical
of the United States than of Continental Europe, and corporate profitability has
been approaching levels not seen since the 1960s. With a GDP growth rate of 3.5%
for 1997, Britain sustained a fifth straight year of growth. Fortunately for
consumers, the inflation rate was below that of economic growth. Britain's
economy has sparked some fears of inflation, however, given the tightness of the
labor market. The unemployment rate in 1997 was at 5.5%. Accordingly, the Bank
of England raised interest rates in five quarter-point moves between May and
November. The specter of inflation continued into early 1998, creating public
debate over the necessity of further rate hikes. The consensus is that the
economy is now slowing. Industrial production slowed in both November and
December of 1997. Consumer spending was less robust than in 1996 and rising
interest rates have increased mortgage payments as most mortgage-holders pay
variable rates. The strength of sterling, which is about 25% higher than in
mid-1996, is expected to lead to a surge of imports, which, along with the Asian
crisis, is expected to have a dampening effect on British exports. Fiscal policy
remained unchanged in early 1998, due to these slowdowns, and manufacturing
output continued to fall in early 1998, putting off any imminent interest rate
hikes. Consumer confidence could stimulate the economy since the aggregate
household balance sheet is strong.
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<PAGE> 34
THE FUNDS OF INDEX FUNDS
The EUROPE INDEX FUND is a "fund of funds" which invests in shares of the
France, Germany, Italy, Netherlands, Spain, Sweden, Switzerland, and United
Kingdom Country Index Funds (collectively, the "European Country Index Funds").
The Europe Index Fund seeks long-term capital appreciation in line with local
market equity returns of those European countries in which the underlying
Country Index Funds invest. The Europe Index Fund invests in its underlying
Country Index Funds in proportion to the relative equity market capitalization
of the countries represented by the underlying Country Index Funds. The Europe
Index Fund seeks to reduce or eliminate the impact of currency fluctuation by
investing in the Country Index Funds which are hedged against such risk.
In 1986, the member states of the European Community (the "Member States")
signed the "Single European Act," an agreement to establish a free market. The
development of a unified common European market has promoted the free flow of
goods and services; however, since September 1992, Europe's monetary policy has
been affected by fluctuating currencies. Additionally, 1993's tight monetary
policies and high inflation caused Europe's economies to ebb into recession.
The Maastricht Treaty creating the EMU, is intended to provide its members with
a stable monetary framework. The prospect of EMU has triggered a sharp
convergence of interest rates across Europe, with risk premium over the German
interest rates levels having decreased. Adding to the favorable monetary
conditions, the monetary easing experienced by core countries has triggered a
strong depreciation of their currencies. Consequently, European activity has
accelerated again in 1997.
The prospect of the EMU has reduced the roles of exchange rate depreciation,
fiscal profligacy and political control over central banks on the business
cycle. As a result, the European cycle is becoming less volatile. We believe
that future core European business cycles will resemble those in the US, where
swings in activity are determined mainly by exogenous shocks to the system,
policy mistakes and inventory corrections.
The EMU is set to take place in 1999 with Austria, Belgium, Finland, France,
Germany, Ireland, Luxembourg, Spain, Portugal, and the Netherlands (there is a
chance Italy may still join). The costs associated with a delay and possible
abandonment appear to be too great to allow the political leaders to walk away
from their commitment. The EMU should be a net plus for European investment
spending and for economic growth. In addition, a less volatile business cycle
should be beneficial for future business planning. This should be a net plus for
shareholder value and for the markets in general. The community's future
challenge will be to allow more countries into the EMU while maintaining its
stability. See "ADDITIONAL RISK CONSIDERATIONS" below.
The INTERNATIONAL INDEX FUND a "fund of funds" which invests in shares of the
eight European Country Index Funds and the Australia, Hong Kong and Japan
Country Index Funds.. The International Index Fund seeks long-term capital
appreciation in line with local market equity returns of those countries in
which the underlying Country Index Funds invest. The International Index Fund
invests in its underlying Country Index Funds in proportion to the relative
equity market capitalization of the countries represented by the underlying
Country Index Funds. The International Index Fund seeks to reduce or eliminate
the impact of currency fluctuation by investing in the Country Index Funds which
are hedged against such risk. The Fund will be subject to the country-specific
economic considerations and risks associated which each of the underlying
Country Index Funds in its portfolio.
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<PAGE> 35
ADDITIONAL RISK CONSIDERATIONS
THE EURO
On January 1, 1999, the European Monetary Union (EMU) plans to implement a new
currency unit, the Euro, which is expected to reshape financial markets, banking
systems and monetary policies in Europe and other parts of the world. The
countries initially expected to convert or tie their currencies to the Euro
include Austria, Belgium, France, Germany, Luxembourg, the Netherlands, Ireland,
Finland, Italy, Portugal and Spain. Implementation of this plan will mean that
financial transactions and market information, including share quotations and
company accounts, in participating countries will be denominated in Euros.
Approximately 46% of the stock exchange capitalization of the total European
market may be reflected in Euros, and participating governments will issue their
bonds in Euros. Monetary policy for participating countries will be uniformly
managed by a new central bank, the European Central Bank (ECB).
Although it is not possible to predict the impact of the Euro implementation
plan on the Funds, the transition to the Euro may change the economic
environment and behavior of investors, particularly in European markets. For
example, investors may begin to view those countries participating in the EMU as
a single entity, and the Advisor may need to adapt its investment strategy
accordingly. The process of implementing the Euro also may adversely affect
financial markets world-wide and may result in changes in the relative strength
and value of the U.S. dollar or other major currencies, as well as possible
adverse tax consequences. The transition from current currencies to the Euro,
may be considered a taxable event. The transition to the Euro is likely to have
a significant impact on fiscal and monetary policy in the participating
countries and may produce unpredictable effects on trade and commerce generally.
These resulting uncertainties could create increased volatility in financial
markets world-wide.
YEAR 2000
The Funds depend on the smooth functioning of computer systems in almost every
aspect of their business. Like other mutual funds, businesses and individuals
around the world, the Funds could be adversely affected if the computer systems
used by its service providers do not properly process dates on and after January
1, 2000 and distinguish between the year 2000 and the year 1900. The Funds have
asked their service providers whether they expect to have their computer systems
adjusted for the year 2000 transition, and received assurances from each that
they are devoting significant resources to prevent material adverse consequences
to the Funds. The Funds and their respective shareholders may experience losses
if these assurances prove to be incorrect or as a result of year 2000 computer
difficulties experienced by issuers of portfolio securities or third parties,
such as custodians, banks, broker-dealers or others with which the Funds do
business. Furthermore, many foreign countries are not as prepared as the U.S.
for the year 2000 transition. As a result, computer difficulties in foreign
markets and with foreign institutions as a result of the year 2000 may add to
the possibility of losses to the Funds and their respective shareholders.
GLOBAL CUSTODIANS
In making investment decisions for each Fund, the Advisor evaluates the risks
associated with investing Fund assets in a particular country, including risks
stemming from a country's financial infrastructure and settlement practices; the
likelihood of expropriation, nationalization or confiscation of invested assets;
prevailing or developing custodial practices in the country; the country's laws
and regulations regarding the safekeeping, maintenance and recovery of invested
assets, the likelihood of government-imposed exchange control restrictions which
could impair the liquidity of Fund assets maintained with custodians in that
country, as well as risks from
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<PAGE> 36
political acts of foreign governments ("country risks"). Of course, the Advisor
cannot assure that a Fund will not suffer losses resulting from investing in
foreign countries.
Holding Fund assets in foreign countries through specific foreign custodians
presents additional risks, including but not limited to the risks that a
particular foreign custodian or depository will not exercise proper care with
respect to Fund assets or will not have the financial strength or adequate
practices and procedures to properly safeguard Fund assets.
INVESTMENT POLICIES AND OBJECTIVES
GENERAL
Each Fund's investment objective and permitted investments are described in the
Funds' Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus.
INVESTMENT POLICIES
The Funds are not managed by traditional methods of "active" investment
management which depend on fundamental financial and market analysis and on
relative valuation investment judgments. Instead, each Fund uses a "passive" or
indexed investment approach and attempts to track as closely as possible the
investment performance of its LOCAL MARKET INDEX ("LMI")(SM)(1) by normally
investing at least 95% of its total assets primarily in either some or all
stocks of the LMI in general proportion to the LMI or a statistical sampling of
common stocks designed to track the LMI, LMI futures and Related Securities,
stock swap agreements, currency forward contracts and currency futures contracts
and Related Securities, and/or cash and short-term debt instruments. Each Fund
has a policy of remaining as fully invested as practical in a pool of the
foregoing investment instruments.
Except for the investment flexibility necessary to comply with the requirements
of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"),
and other regulatory requirements and to manage future corporate actions and LMI
changes currently pertaining to the LMIs of Italy and Hong Kong, each Fund will
normally invest at least 95% of its total assets in some or all of these
investment instruments. A Fund may not invest in all of the underlying
securities within each LMI if the Advisor and/or Sub-Advisor determine that some
securities make up a small percentage of the total LMI and such securities will
have no material effect on a Fund's performance.
A Fund may invest its remaining assets in Short-Term Debt Instruments (defined
below), in stocks that are in the relevant Country market but are not in the LMI
and/or in combinations of LMI futures contracts, LMI options, LMI swaps, cash,
local currency and forward currency exchange contracts and Related Securities.
"Short-Term Debt Instruments" are short-term high quality debt securities that
include obligations of the U.S. Government and its agencies and
instrumentalities, commercial paper (rated Prime-I by Moody's Investors
Services, Inc. or A-1 by Standard & Poor's Ratings Group), bank certificates of
deposit, bankers acceptances, repurchase agreements collateralized by the
foregoing securities, participations of interest in these securities and shares
of money market funds.
A Fund may not use long futures contracts to leverage the portfolio at the time
of investment in the futures contracts. Rather, long futures positions will be
used to hedge a Fund's Short-Term Debt Instruments and cash reserves. A Fund
will not invest in Short-Term Debt Instruments, futures contracts, options, swap
agreements or
- --------
(1) The singular "LMI" should be read as "LMIs" in the context of the Funds
- of Index Funds.
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<PAGE> 37
cash reserves as part of a defensive strategy to defend against possible adverse
stock market trends. A Fund may enter into forward currency exchange contracts
to facilitate settlements in local markets, and in connection with LMI futures
positions and to protect against currency exposure with regard to shareholder
distributions.
Each Fund may necessarily concentrate its investments in an industry or
industries if its underlying LMI concentrates in such industry or industries. In
particular, a Fund will maintain 25% or more of its net asset value in
securities of issuers in each industry in which its LMI has a concentration of
25% or more. Changes in LMI industry concentrations will be made passively, as
such changes are made only based upon changes in the constituent common stocks
of the LMI.
A Fund in many cases may not hold all issues that comprise its LMI because of
the costs involved for the Fund and because of relative illiquidity of certain
common stocks in its LMI. As an alternative to holding all securities that are
included in its LMI, the Fund may hold a representative sampling, based upon an
analytical technique known as "portfolio sampling." Portfolio sampling considers
each stock for inclusion into a Fund's portfolio based primarily upon its
capitalization, industry and fundamental investment characteristics. The Fund's
portfolio manager will attempt to construct a portfolio such that in aggregate
the Fund's capitalization, industry and fundamental investment characteristics
perform similarly to its LMI. The Fund's composition will be rebalanced on a
continuous basis to conform to changes in its LMI. Such rebalancing will involve
transaction costs to the Fund. Finally, each Fund reserves the right to invest
in all securities in its LMI, and a Fund with a LMI comprised of relatively few
common stocks may regularly do so.
In addition to common stock LMI futures contracts, a Fund may invest in options
on such futures contracts and stock index options and may enter into stock index
swaps to obtain its investment objective of full investment in its LMI. If LMI
futures contracts are not available or not as favorable an investment as stock
index swaps, then stock index swaps may be used by a Fund as a replacement to
the extent that LMI futures contracts may be invested into by the Fund. The
Advisor may not use these instruments to leverage the net assets of the Fund.
A Fund may lend securities from its portfolio to brokers, dealers and other
financial institutions. Since the government securities or other assets that are
pledged as collateral to the Fund in connection with these securities loans
generate income, securities lending earns income that may partially offset
expenses and improve the Fund's ability to more closely track the price and
yield performance of its LMI. These securities loans may not exceed 331/3% of a
Fund's total assets. Loan documentation will provide that the Fund will receive
collateral at least equal to 100% of the current market value of the loaned
securities, as marked-to-market each day that the Fund determines its net asset
value.
Since each Fund seeks to passively invest in common stocks that primarily
comprise its LMI, a Fund's annual turnover rate for common stocks is expected to
be under fifty percent which is generally a lower turnover rate than that of
many actively managed international equity mutual funds. With regard to LMI
futures contracts and LMI swap agreements both of which seek to closely track a
LMI, such contracts and agreements mature in a relatively short term (usually
under one year). The Funds are managed without specific regard to the tax
effects of investment decisions, but rather seek to closely track the investment
returns of their respective LMIs.
INVESTMENT OBJECTIVE
COUNTRY INDEX FUNDS. Each Country Index Fund seek long-term capital appreciation
in line with local market equity returns. Each Fund seeks to track as closely as
possible the performance of its respective LMI. The Country Index Funds seek to
reduce or eliminate the impact of currency fluctuation through hedging local
currencies against the U.S. Dollar. The above stated investment objective of
each Country Index Fund is a fundamental policy and
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<PAGE> 38
cannot be changed without the approval of the holders of a majority of the
respective Country Index Fund's voting securities.
Although the Country Index Funds seek to track the investment return of their
designated LMI, there can be no assurance that this investment objective can be
achieved. Benchmark indexes are unmanaged and as such bear no management,
transaction, distribution, administration or other expenses or taxes; each
Country Index Fund bears these expenses. Additionally, there may be limits on
investment flexibility, particularly with regard to holding certain minimum
levels of cash to meet normal Fund redemptions and with regard to using
portfolio sampling techniques by which a Fund would not purchase all of the
securities in its LMI. Also, certain Country Index Funds may be subject to
foreign tax withholding at rates different than those assumed in its benchmark
LMI. Finally, all Country Index Funds seek to fully hedge currency risk at all
times, thereby further impeding the Funds from closely tracking the returns of
their respective LMIs.
FUNDS OF INDEX FUNDS. The Europe Index Fund and International Index Fund are
"funds of funds" (the "Funds of Index Funds") which will invest in I Class
shares of a particular group of Country Index Funds. The Funds of Index Funds
seek long-term capital appreciation in line with local market equity returns of
the group of countries in which the underlying Country Index Funds invest. The
Europe Index Fund will invest in the following Country Index Funds: France,
Germany, Italy, Netherlands, Spain, Sweden, Switzerland, and United Kingdom
(collectively, the "European Country Index Funds"). The International Index Fund
will invest in the eight European Country Index Funds and the Australia, Hong
Kong and Japan Country Index Funds. Each Fund of Index Funds invests in its
underlying Country Index Funds in proportion to the relative equity market
capitalization of the countries represented by the underlying Country Index
Funds. The Funds of Index Funds seek to reduce or eliminate the impact of
currency fluctuation by investing in the Country Index Funds which are hedged
against such risk. The above stated investment objective of each Fund of Index
Funds is a fundamental policy and cannot be changed without the approval of the
holders of a majority of the respective Fund of Index Fund's voting securities.
INVESTMENT TECHNIQUES
Unless specified to the contrary, each Fund may engage in the investment
techniques and make the types of investments described and discussed in this
section.
BORROWING
The Funds may borrow money, including borrowing for investment purposes.
Borrowing for investment is known as leveraging. Leveraging investments by
purchasing securities with borrowed money is a speculative technique which
increases investment risk, but also increases investment opportunity. Since
substantially all of a Fund's assets may fluctuate in value, whereas the
interest obligations on borrowing may be fixed, the net asset value per share of
the Fund will increase more when the Fund's portfolio assets increase in value
and decrease more when the Fund's portfolio assets decrease in value than would
otherwise be the case. Moreover, interest costs on borrowing may fluctuate with
changing market rates of interest and may partially offset or exceed the returns
on the borrowed funds. Under adverse conditions, the Funds might have to sell
portfolio securities to meet interest or principal payments at a time investment
considerations would not favor such sales. The Funds intend to use leverage
during periods when the Advisor believes that the respective Fund's investment
objective would be furthered.
Each Fund may borrow money to facilitate management of the Fund's portfolio by
enabling the Fund to meet redemption requests when the liquidation of portfolio
instruments would be inconvenient or disadvantageous. Such borrowing is not for
investment purposes and will be repaid by the borrowing Fund promptly.
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As required by the 1940 Act, a Fund must maintain continuous asset coverage
(total assets, including assets acquired with borrowed funds, less liabilities
exclusive of borrowing) of 300% of all amounts borrowed. If, at any time, the
value of a Fund's assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the amount
of the Fund's borrowing to the extent necessary to meet this 300% coverage.
Maintenance of this percentage limitation may result in the sale of portfolio
securities at a time when investment considerations otherwise indicate that it
would be disadvantageous to do so.
In addition to the foregoing, the Funds are authorized to borrow money from
banks as a temporary measure for extraordinary or emergency purposes in amounts
not in excess of 5% of the value of a Fund's total assets. This borrowing is not
subject to the foregoing 300% asset coverage requirement The Funds are
authorized to pledge portfolio securities as the Advisor deems appropriate in
connection with any borrowing.
FOREIGN ISSUERS
The Funds will invest in issuers located outside the United States. This may be
achieved by purchasing American Depositary Receipts ("ADRs"), European
Depositary Receipts ("EDRs") and/or Global Depositary Receipts ("GDRs")
(collectively, "Depositary Receipts"). Depositary Receipts are typically issued
by a financial institution ("depository") and evidence ownership interests in a
security or a pool of securities ("underlying securities") that have been
deposited with the depository. In ADRs, the depository is typically a U.S.
financial institution and the underlying securities are issued by a foreign
issuer. In other Depositary Receipts, the depository may be a foreign or a U.S.
entity, and the underlying securities may have a foreign or a U.S. issuer.
Depositary Receipts will not necessarily be denominated in the same currency as
their underlying securities. Depositary Receipts may be issued pursuant to
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities underlying unsponsored programs and
there may not be a correlation between such information and the market value of
the Depositary Receipts. For purposes of a Fund's investment policies,
investments in Depositary Receipts will be deemed to be investments in the
underlying securities. Thus, a Depositary Receipt representing ownership of
common stock will be treated as common stock. When Depositary Receipts which are
purchased with and sold for U.S. dollars, this protects the Funds from the
foreign settlement risks described below. Note, however, that Depositary
Receipts are also subject to the risks inherent in investing in foreign
securities generally, other than foreign settlement risks, and that purchasing
and selling Depositary Receipts with U.S. Dollars may not protect the Funds from
these types of risks.
Investing in foreign companies may involve risks not typically associated with
investing in United States companies. The value of securities denominated in
foreign currencies, and of dividends from such securities, can change
significantly when foreign currencies strengthen or weaken relative to the U.S.
dollar. Foreign securities markets generally have less trading volume and less
liquidity than United States markets, and prices in some foreign markets can be
very volatile. Many foreign countries lack uniform accounting and disclosure
standards comparable to those that apply to United States companies, and it may
be more difficult to obtain reliable information regarding a foreign issuer's
financial condition and operations. In addition, the costs of foreign investing,
including withholding taxes, brokerage commissions, and custodial fees,
generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks
distinct from those associated with investing in the United States. Foreign
investment may be affected by actions of foreign governments adverse to the
interests of United States investors, including the possibility of expropriation
or nationalization of assets,
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confiscatory taxation, restrictions on United States investment, or on the
ability to repatriate assets or to convert currency into U.S. dollars. There may
be a greater possibility of default by foreign governments or foreign-government
sponsored enterprises. Investments in foreign countries also involve a risk of
local political, economic, or social instability, military action or unrest, or
adverse diplomatic developments.
NON-U.S. EQUITY PORTFOLIOS
An investment in the Funds involves risks similar to those of investing in a
broadly-based portfolio of equity securities traded on exchanges in the
respective countries covered by the individual Funds. These risks include market
fluctuations caused by such factors as economic and political developments,
changes in interest rates and perceived trends in stock prices. Investing in
securities issued by companies domiciled in countries other than the domicile of
the investor and denominated in currencies other than an investor's local
currency entails certain considerations and risks not typically encountered by
the investor making investments in its home country and in that country's
currency. These considerations include favorable or unfavorable changes in
interest rates, currency exchange rates, exchange control regulations and the
costs that may be incurred in connection with conversions between various
currencies. Investing in a Fund whose portfolio contains non-U.S. issuers
involves certain risks and considerations not typically associated with
investing in the securities of U.S. issuers. These risks include generally less
liquid and less efficient securities markets; generally greater price
volatility; less publicly available information about issuers; the imposition of
withholding or other taxes; restrictions on the expatriation of funds or other
assets of a Fund; higher transaction and custody costs; delays attendant in
settlement procedures; difficulties in enforcing contractual obligations; lesser
liquidity and significantly smaller market capitalization of most non-U.S.
securities markets; lesser levels of regulation of the securities markets; more
substantial government involvement in the economy; higher rates of inflation;
greater social, economic, and political uncertainty; and the risk of
nationalization or expropriation of assets and risk of war.
CURRENCY TRANSACTIONS
Foreign exchange transactions involve a significant degree of risk and the
markets in which foreign exchange transactions are effected are highly volatile,
highly specialized and highly technical. Significant changes, including changes
in liquidity and prices, can occur in such markets within very short periods of
time, often within minutes. Foreign exchange trading risks include, but are not
limited to, exchange rate risk, maturity gaps, interest rate risk and potential
interference by foreign governments through regulation of local exchange
markets, foreign investment, or particular transactions in foreign currency. If
the Advisor utilizes foreign exchange transactions at an inappropriate time or
judges market conditions, trends or correlations incorrectly, foreign exchange
transactions may not serve their intended purpose of improving the correlation
of a Fund's return with the performance of the corresponding LMI and may lower
the Fund's return. A Fund could experience losses if the values of its currency
forwards, options and futures positions were poorly correlated with its other
investments or if it could not close out its positions because of an illiquid
market. In addition, each Fund will incur transaction costs, including trading
commissions, in connection with certain of its foreign currency transactions.
ILLIQUID SECURITIES
The Funds may purchase illiquid securities, including securities that are not
readily marketable and securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the "1933 Act"), but
which can be offered and sold to "qualified institutional buyers" under Rule
144A under the 1933 Act. A Fund will not invest more than 15% of the Fund's net
assets in illiquid securities. The term "illiquid securities" for this purpose
means securities that cannot be disposed of within seven days in the ordinary
course of business at approximately the amount at which the Fund has valued the
securities. Under the current guidelines of the staff of the Securities and
Exchange Commission (the "Commission"), illiquid securities also are considered
to include,
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among other securities, purchased over-the-counter options, certain cover for
over-the-counter options, repurchase agreements with maturities in excess of
seven days, and certain securities whose disposition is restricted under the
Federal securities laws. The Fund may not be able to sell illiquid securities
when the Advisor considers it desirable to do so or may have to sell such
securities at a price that is lower than the price that could be obtained if the
securities were more liquid. In addition, the sale of illiquid securities also
may require more time and may result in higher dealer discounts and other
selling expenses than does the sale of securities that are not illiquid.
Illiquid securities also may be more difficult to value due to the
unavailability of reliable market quotations for such securities, and investment
in illiquid securities may have an adverse impact on net asset value.
Institutional markets for restricted securities have developed as a result of
Rule 144A, which provides a "safe harbor" from 1933 Act registration
requirements for qualifying sales to institutional investors. When Rule 144A
securities present an attractive investment opportunity and otherwise meet
selection criteria, a Fund may make such investments. Whether or not such
securities are "illiquid" depends on the market that exists for the particular
security. The Commission staff has taken the position that the liquidity of Rule
144A restricted securities is a question of fact for a board of trustees to
determine, such determination to be based on a consideration of the
readily-available trading markets and the review of any contractual
restrictions. The staff also has acknowledged that, while a board of trustees
retains ultimate responsibility, the trustees may delegate this function to an
investment adviser. The trustees of the Trust (the "Trustees") have delegated to
the Advisor the responsibility for determining the liquidity of Rule 144A
restricted securities which may be invested in by a Fund. It is not possible to
predict with assurance exactly how the market for Rule 144A restricted
securities or any other security will develop. A security that may have enjoyed
a fair degree of marketability when purchased may subsequently become illiquid.
Accordingly, a security that was deemed to be liquid at the time of acquisition
may subsequently become illiquid. In such event, appropriate remedies will be
considered to minimize the effect on a Fund's liquidity.
LENDING OF PORTFOLIO SECURITIES
Subject to the investment restrictions set forth below, each of the Funds may
lend portfolio securities to brokers, dealers, and financial institutions,
provided that cash equal to at least 100% of the market value of the securities
loaned is deposited by the borrower with the Fund and is maintained each
business day in a segregated account pursuant to applicable regulations. While
such securities are on loan, the borrower will pay the lending Fund any income
accruing thereon, and the Fund may invest the cash collateral in portfolio
securities, thereby earning additional income. A Fund will not lend its
portfolio securities if such loans are not permitted by the laws or regulations
of any state in which the Fund's shares are qualified for sale, and the Funds
will not lend more than 331/3% of the value of the Fund's total assets. Loans
would be subject to termination by the lending Fund on four business days'
notice, or by the borrower on one day's notice. Borrowed securities must be
returned when the loan is terminated. Any gain or loss in the market price of
the borrowed securities which occurs during the term of the loan inures to the
lending Fund and that Fund's shareholders. A lending Fund may pay reasonable
finders, borrowers, administrative, and custodial fees in connection with a
loan.
OPTIONS TRANSACTIONS
Options on Securities. The Funds may buy call options and write (sell) put
options on securities, and may buy put options and write call options on
securities for the purpose of realizing the Fund's investment objective. By
writing a call option on securities, a Fund becomes obligated during the term of
the option to sell the securities underlying the option at the exercise price if
the option is exercised. By writing a put option, a Fund becomes obligated
during the term of the option to purchase the securities underlying the option
at the exercise price if the option is exercised.
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During the term of the option, the writer may be assigned an exercise notice by
the broker-dealer through whom the option was sold. The exercise notice would
require the writer to deliver (in the case of a call) or take delivery of (in
the case of a put) the underlying security against payment of the exercise
price. This obligation terminates upon expiration of the option, or at such
earlier time that the writer effects a closing purchase transaction by
purchasing an option covering the same underlying security and having the same
exercise price and expiration date as the one previously sold. Once an option
has been exercised, the writer may not execute a closing purchase transaction.
To secure the obligation to deliver the underlying security in the case of a
call option, the writer of a call option is required to deposit in escrow the
underlying security or other assets in accordance with the rules of the Option
Clearing Corporation (the "OCC"), an institution created to interpose itself
between buyers and sellers of options. The OCC assumes the other side of every
purchase and sale transaction on an exchange and, by doing so, gives its
guarantee to the transaction.
Options on Security Indexes. The Funds may purchase call options and write put
options, and may purchase put options and write call options, on stock indexes
listed on international securities exchanges or traded in the over-the-counter
market as an investment vehicle for the purpose of realizing a Fund's investment
objective.
Options on indexes are settled in cash, not in delivery of securities. The
exercising holder of an index option receives, instead of a security, cash equal
to the difference between the closing price of the securities index and the
exercise price of the option. When a Fund writes a covered option on an index,
the Fund will be required to deposit and maintain with a custodian, cash or
liquid securities equal in value to the aggregate exercise price of a put or
call option pursuant to the requirements and the rules of the applicable
exchange. If, at the close of business on any day, the market value of the
deposited securities falls below the contract price, the Fund will deposit with
the custodian cash or liquid securities equal in value to the deficiency.
Options on Futures Contracts. Under Commodities Futures Trading Commission
("CFTC") Regulations, a Fund may engage in futures transactions, either for
"bona fide hedging" purposes, as this term is defined in the CFTC Regulations,
or for non-hedging purposes to the extent that the aggregate initial margins and
option premiums required to establish such non-hedging positions do not exceed
5% of the liquidation value of the Fund's portfolio. In the case of an option on
futures contracts that is "in-the-money" at the time of purchase (i.e., the
amount by which the exercise price of the put option exceeds the current market
value of the underlying security, or the amount by which the current market
value of the underlying security exceeds the exercise price of the call option),
the in-the-money amount may be excluded in calculating this 5% limitation.
When a Fund purchases or sells a stock index futures contract, or sells an
option thereon, the Fund "covers" its position. To cover its position, a Fund
may maintain with its custodian bank (and marked-to-market on a daily basis), a
segregated account consisting of cash or liquid securities that, when added to
any amounts deposited with a futures commission merchant as margin, are equal to
the market value of the futures contract or otherwise "cover" its position. If
the Fund continues to engage in the described securities trading practices and
properly segregates assets, the segregated account will function as a practical
limit on the amount of leverage which the Fund may undertake and on the
potential increase in the speculative character of the Fund's outstanding
portfolio securities. Additionally, such segregated accounts will generally
assure the availability of adequate funds to meet the obligations of the Fund
arising from such investment activities.
A Fund may cover its long position in a futures contract by purchasing a put
option on the same futures contract with a strike price (i.e., an exercise
price) as high or higher than the price of the futures contract. In the
alternative, if the strike price of the put is less than the price of the
futures contract, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. A Fund may also cover its long position
in a futures contract by taking a short position in the instruments underlying
the futures contract, or by taking positions in instruments with prices which
are
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expected to move relatively consistently with the futures contract. A Fund may
cover its short position in a futures contract by taking a long position in the
instruments underlying the futures contracts, or by taking positions in
instruments with prices which are expected to move relatively consistently with
the futures contract.
A Fund may cover its sale of a call option on a futures contract by taking a
long position in the underlying futures contract at a price less than or equal
to the strike price of the call option. In the alternative, if the long position
in the underling futures contracts is established at a price greater than the
strike price of the written (sold) call, the Fund will maintain in a segregated
account cash or liquid securities equal in value to the difference between the
strike price of the call and the price of the futures contract. A Fund may also
cover its sale of a call option by taking positions in instruments with prices
which are expected to move relatively consistently with the call option. A Fund
may cover its sale of a put option on a futures contract by taking a short
position in the underlying futures contract at a price greater than or equal to
the strike price of the put option, or, if the short position in the underlying
futures contract is established at a price less than the strike price of the
written put, the Fund will maintain in a segregated account cash or liquid
securities equal in value to the difference between the strike price of the put
and the price of the futures contract. A Fund may also cover its sale of a put
option by taking positions in instruments with prices which are expected to move
relatively consistently with the put option.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with financial institutions. The
Funds each follow certain procedures designed to minimize the risks inherent in
such agreements. These procedures include effecting repurchase transactions only
with large, well-capitalized and well-established financial institutions whose
condition will be continually monitored by the Advisor. In addition, the value
of the collateral underlying the repurchase agreement will always be at least
equal to the repurchase price, including any accrued interest earned on the
repurchase agreement. In the event of a default or bankruptcy by a selling
financial institution, a Fund will seek to liquidate such collateral. However,
the exercising of a Fund's right to liquidate such collateral could involve
certain costs or delays and, to the extent that proceeds from any sale upon a
default of the obligation to repurchase were less than the repurchase price, the
Fund could suffer a loss. It is the current policy of the Funds not to invest in
repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of the Fund's total assets. The investments of a Fund in
repurchase agreements, at times, may be substantial when, in the view of the
Advisor, liquidity or other considerations so warrant.
U.S. GOVERNMENT SECURITIES
Although the Funds have no present intention of doing so, each Fund may at
certain times invest in U.S. Treasury securities, which are backed by the full
faith and credit of the U.S. Treasury and which differ only in their interest
rates, maturities, and times of issuance. U.S. Treasury bills have initial
maturities of one year or less; U.S. Treasury notes have initial maturities of
one to ten years; and U.S. Treasury bonds generally have initial maturities of
greater than ten years. Certain U.S. Government Securities are issued or
guaranteed by agencies or instrumentalities of the U.S. Government including,
but not limited to, obligations of U.S. Government agencies or instrumentalities
such as Fannie Mae, the Government National Mortgage Association, the Small
Business Administration, the Federal Farm Credit Administration, the Federal
Home Loan Banks, Banks for Cooperatives (including the Central Bank for
Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks,
the Tennessee Valley Authority, the Export-Import Bank of the United States, the
Commodity Credit Corporation, the Federal Financing Bank, the Student Loan
Marketing Association, and the National Credit Union Administration.
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Some obligations issued or guaranteed by U.S. Government agencies and
instrumentalities, including, for example, Government National Mortgage
Association pass-through certificates, are supported by the full faith and
credit of the U.S. Treasury. Other obligations issued by or guaranteed by
Federal agencies, such as those securities issued by Fannie Mae, are supported
by the discretionary authority of the U.S. Government to purchase certain
obligations of the Federal agency, while other obligations issued by or
guaranteed by Federal agencies, such as those of the Federal Home Loan Banks,
are supported by the right of the issuer to borrow from the U.S. Treasury. While
the U.S. Government provides financial support to such U.S. Government-sponsored
Federal agencies, no assurance can be given that the U.S. Government will always
do so, since the U.S. Government is not so obligated by law. U.S. Treasury notes
and bonds typically pay coupon interest semi-annually and repay the principal at
maturity. A Fund will invest in such U.S. Government Securities only when the
Advisor is satisfied that the credit risk with respect to the issuer is minimal.
INVESTMENT RESTRICTIONS
FUNDAMENTAL POLICIES
The following investment limitations are fundamental policies of the Funds which
cannot be changed with respect to a Fund without the consent of the holders of a
majority of that Fund's outstanding shares. The term "majority of the
outstanding shares" means the vote of (i) 67% or more of a Fund's shares present
at a meeting, if more than 50% of the outstanding shares of that Fund are
present or represented by proxy, or (ii) more than 50% of that Fund's
outstanding shares, whichever is less.
A Fund may not:
1. Borrow money in an amount exceeding 33 1/3% of the value of its total
assets, provided that, for purposes of this limitation, investment
strategies which either obligate the Fund to purchase securities or
require that Fund to segregate assets are not considered to be borrowing.
Asset coverage of a least 300% is required for all borrowing, except
where the Fund has borrowed money for temporary purposes in amounts not
exceeding 5% of its total assets. The Fund will not purchase securities
while its borrowing exceed 5% of its total assets.
2. Make loans if, as a result, more than 33 1/3% of its total assets would
be lent to other parties, except that the Fund may (i) purchase or hold
debt instruments in accordance with its investment objective and
policies; (ii) enter into repurchase agreements; and (iii) lend its
securities.
3. Purchase or sell real estate, physical commodities, or commodities
contracts, except that the Fund may purchase (i) marketable securities
issued by companies which own or invest in real estate (including real
estate investment trusts), commodities, or commodities contracts; and
(ii) commodities contracts relating to financial instruments, such as
financial futures contracts and options on such contracts.
4. Issue senior securities (as defined in the 1940 Act) except as permitted
by rule, regulation or order of the SEC.
5. Act as an underwriter of securities of other issuers except as it may be
deemed an underwriter in selling a portfolio security.
6. Invest in interests in oil, gas, or other mineral exploration or
development programs and oil, gas or mineral leases.
NON-FUNDAMENTAL POLICIES
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The following investment limitations are non-fundamental policies of the Funds
and may be changed with respect to any Fund by the Board of Trustees.
A Fund may not:
1. Pledge, mortgage or hypothecate assets except to secure borrowing
permitted by the Fund's fundamental limitation on borrowing.
2. Invest in companies for the purpose of exercising control.
3. Invest its assets in securities of any investment company, except as
permitted by the 1940 Act or any rule, regulation or order of the SEC.
4. Purchase or hold illiquid securities, i.e., securities that cannot be
disposed of for their approximate carrying value in seven days or less
(which term includes repurchase agreements and time deposits maturing in
more than seven days) if, in the aggregate, more than 15% of its net
assets would be invested in illiquid securities.
Except for Fundamental Policy number 4, above (which is based on net assets),
the foregoing percentages are based on total assets and, except for
Non-Fundamental Policy number 1, above, will apply at the time of the purchase
of a security and shall not be considered violated unless an excess or
deficiency occurs or exists immediately after and as a result of a purchase of
such security.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Trustees, the Advisor is responsible
for decisions to buy and sell securities for each of the Funds, the selection of
brokers and dealers to effect the transactions, and the negotiation of brokerage
commissions, if any. The Advisor expects that the Funds may execute brokerage or
other agency transactions through registered broker-dealers for a commission, in
conformity with the 1940 Act, the Securities Exchange Act of 1934, and the rules
and regulations thereunder.
The Advisor may serve as an investment manager to a number of clients, including
other investment companies. It is the practice of the Advisor to cause purchase
and sale transactions to be allocated among the Funds and others whose assets
the Advisor manages in such manner as the Advisor deems equitable. The main
factors considered by the Advisor in making such allocations among the Funds and
other client accounts of the Advisor are the respective investment objectives,
the relative size of portfolio holdings of the same or comparable securities,
the availability of cash for investment, the size of investment commitments
generally held, and the opinions of the person or persons responsible, if any,
for managing the portfolios of the Funds and the other client accounts.
The policy of each Fund regarding purchases and sales of securities is that
primary consideration will be given to obtaining the most favorable prices and
efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, each Fund's policy is
to pay commissions which are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
Each Fund believes that a requirement to always seek the lowest possible
commissions could impede effective portfolio management and preclude the Fund
and the Advisor from obtaining high quality brokerage and research services. In
seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Advisor relies upon its experience and knowledge regarding
commissions generally charged by various brokers and on its judgment in
evaluating the brokerage and research services received from the broker
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effecting the transaction. Such determinations are necessarily subjective and
imprecise, as in most cases an exact dollar value for those services is not
ascertainable.
Purchases and sales of U.S. Government securities, if any, are normally
transacted through issuers, underwriters or major dealers in U.S. Government
Securities acting as principals. Such transactions are made on a net basis and
do not involve payment of brokerage commissions. The cost of securities
purchased from an underwriter usually includes a commission paid by the issuer
to the underwriters. Transactions with dealers normally reflect the spread
between bid and asked prices.
In seeking to implement the Funds' policies, the Advisor effects transactions
with those brokers and dealers who the Advisor believes provide the most
favorable prices and are capable of providing efficient executions. If the
Advisor believes such prices and executions are obtainable from more than one
broker or dealer, the Advisor may give consideration to placing portfolio
transactions with those brokers and dealers who also furnish research and other
services to the Funds or the Advisor. Such services may include, but are not
limited to, any one or more of the following: information as to the availability
of securities for purchase or sale; statistical or factual information or
opinions pertaining to investments; wire services; and appraisals or evaluations
of portfolio securities. If the broker-dealer providing these additional
services is acting as a principal for its own account, no commissions would be
payable. If the broker-dealer is not a principal, a higher commission may be
justified at the determination of the Advisor, for the additional services.
The information and services received by the Advisor from brokers and dealers
may be of benefit to the Advisor in the management of accounts of some of the
Advisor's other clients and may not in all cases benefit the Funds directly.
While the receipt of such information and services is useful in varying degrees
and would generally reduce the amount of research or services otherwise
performed by the Advisor and thereby reduce the Advisor's expenses, this
information and these services are of indeterminable value and the management
fee paid to the Advisor is not reduced by any amount that may be attributable to
the value of such information and services.
Consistent with each Fund's investment objectives, the Advisor has the
discretion to select sub-advisers that will determine which securities and the
total amount of securities which are to be bought or sold for each Fund's
account. Each sub-adviser's decision to buy and sell securities is subject to
the overall review of each Fund's Advisor and Trustees. The Advisor selects
sub-advisers whose primary objective in placing orders for the purchase or sale
of securities for a Fund is to obtain the most favorable net results taking into
account such factors as price, commission, size of order, difficulty of
execution and skill required of the broker. The Advisor has ultimate
responsibility for the investment performance of each Fund due to its
responsibility to oversee and direct each sub-adviser and to recommend their
hiring, termination and replacement.
A sub-adviser generally has the authority to select brokers to effect
transactions on a Fund's behalf. When a sub-adviser places orders for the
purchase or sale of portfolio securities for a Fund's account, it uses
reasonable efforts to seek the best combination of price and execution in
selecting brokers. Each sub-adviser selects brokers on the basis of best price
(including commissions) and execution capability. In selecting a broker to
execute a transaction for a Fund, a sub-adviser may consider a variety of
factors, including the following: the broker's capital depth; the broker's
market access; the broker's transaction confirmation and account statement
practices; its knowledge of negotiated commission rates and spreads currently
available; the nature of the security or instrument being traded; the size and
type of the transaction; the nature and character of the markets for the
security or instrument to be purchased or sold; the desired timing of the
transaction; the execution, clearance and settlement capabilities of the broker
selected and others considered; the reputation and perceived soundness of the
broker selected and others considered; the sub-adviser's knowledge of any actual
or apparent operational problems of a broker; and the reasonableness of the
commission or its equivalent for the specific transaction. While each
sub-adviser generally seeks competitive commission rates and dealer spreads, it
will not necessarily pay the lowest commission
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or commission equivalent. Transactions may involve specialized services on the
part of the broker and thereby justify higher commissions or their equivalent
than would be the case with other transactions requiring more routine services.
A Fund may limit a sub-adviser's discretionary authority in any or all of the
situations described above. In particular, a Fund may reserve the right to
direct a sub-adviser to purchase, sell, or transfer securities held for the
Fund's account or to use a particular broker or dealer to execute transactions
for its account. When a Fund directs the use of a particular broker or dealer,
the sub-adviser may not be in a position to freely negotiate commission rates or
spreads, or to select brokers or dealers on the basis of best price and
execution. In addition, transactions for a Fund who directs brokerage may not be
batched for execution with transactions in the same securities for other
clients. As a result, directed brokerage transactions may result in higher
commissions, greater spreads, or less favorable net prices than would be the
case if a sub-adviser were authorized to choose the brokers or dealers through
which to execute transactions for the Fund's account.
Consistent with obtaining best execution for clients, a sub-adviser may direct
brokerage transactions for Fund portfolios to brokers who provide research and
execution services to it and, indirectly, to its clients. These services are of
the type described in Section 28(e) of the Securities Exchange Act of 1934 and
are designed to augment the sub-adviser's own internal research and investment
strategy capabilities. Sub-advisers may not use each particular research
service, however, to service each of its clients. As a result, a client may pay
brokerage commissions that are used, in part, to purchase research services that
are not used to benefit that specific client. Brokers selected by a sub-adviser
may be paid commissions for effecting transactions for its clients that exceed
the amounts other brokers would have charged for effecting these transactions if
a sub-adviser determines in good faith that such amounts are reasonable in
relation to the value of the brokerage and/or research services provided by
those brokers, viewed either in terms of a particular transaction or the
sub-adviser's overall duty to its discretionary client accounts.
Certain items obtained with soft dollars might not be used exclusively for
either brokerage or research services. The cost of such "mixed-use" products or
services will be fairly allocated between soft dollars (paid by clients) and
hard dollars (paid by the sub-adviser), according to the proposed use. For
example, the cost of a computer that is used for both research services and
administrative purposes will be allocated between hard and soft dollars
according to the percentage of time it is used for each purpose. Although such
an allocation will not always be a precise calculation, the sub-adviser will
make a good faith effort to reasonably allocate such services.
ORGANIZATION OF THE TRUST AND THE FUNDS
The Funds are separate series' of an open-end, management investment company
which was organized on June 9, 1998 as a Trust under the laws of the
Commonwealth of Massachusetts, of a type commonly known as a Massachusetts
business trust.
MANAGEMENT OF THE TRUST
The Trustees of the Trust are responsible for the general supervision of the
Trust's business. The day-to-day operations of the Trust are the
responsibilities of the Trust's officers. The names, addresses and ages of the
Trustees and the officers of the Trust and the officers of the Advisor, together
with information as to their principal business occupations during the past five
years, are set forth below. Fees and expenses for non-interested Trustees will
be paid by the Trust.
30
<PAGE> 48
TRUSTEES
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION(S) HELD WITH FUND PAST 5 YEARS
<S> <C> <C>
F. Brian Cerini* President and CEO President, LMI Capital
Management LLC, 1998 to
present; President of Sierra
Capital Management Corporation,
1988 to 1997; President, Sierra
Administration, 1988 to 1997;
Chairman of the Board, Sierra
Advisors, 1988 to 1997; President,
Sierra Investment Services, 1992
to 1998.
</TABLE>
- ------------------------------------
* This trustee is deemed to be an "interested person" of the Trust under the
1940 Act.
OFFICERS
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION(S) DURING
NAME, ADDRESS, AND AGE POSITION(S) HELD WITH FUND PAST 5 YEARS
<S> <C> <C>
Keith B. Pipes CFO and Secretary Senior VP, CFO and Secretary,
Sierra Capital Management
Corporation, 1988 to 1998; CFO,
Secretary and Treasurer, Sierra
Administration, 1988 to 1998;
Executive VP and Secretary,
Sierra Advisors, 1988 to 1998;
Senior VP, CFO and Secretary,
Sierra Investment Services, 1992
to 1998.
Richard W. Grant Assistant Secretary Partner, Morgan, Lewis &
2000 One Logan Square Bockius LLP, 1989 to present.
Philadelphia, PA 19103
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
31
<PAGE> 49
<TABLE>
<S> <C> <C>
W. John McGuire Assistant Secretary Of Counsel, Morgan, Lewis &
1800 M Street, NW Bockius LLP, 1996 to present;
Washington, DC 20036 Counsel, Reed Smith Shaw &
McClay, 1993-1996.
</TABLE>
Unless otherwise noted, the address of each trustee and officer of the Trust is
790 E. Colorado Boulevard, 9th Floor, Pasadena California 91101.
THE ADVISORY AGREEMENT
Under an investment advisory agreement with the Advisor, the Advisor serves as
the investment adviser for, provides investment advice to, and oversees the
day-to-day operations of the Funds, subject to direction and control by the
Trustees and the officers of the Trust.
The Advisor manages the investment and the reinvestment of the assets of each of
the Funds, in accordance with the investment objectives, policies, and
limitations of each Fund, subject to the general supervision and control of the
Trustees and the officers of the Trust. The Advisor bears all costs associated
with providing these advisory services and the expenses of the Trustees of the
Trust who are affiliated with or interested persons of the Advisor. The Advisor,
from its own resources, including profits from advisory fees received from the
Funds, provided such fees are legitimate and not excessive, may make payments to
broker-dealers and other financial institutions for their expenses in connection
with the distribution of Fund shares, and otherwise currently pay all
distribution costs for Fund shares.
COSTS AND EXPENSES
Each Fund bears all expenses of its operations other than those assumed by the
Advisor or the Servicer. Fund expenses include: the management fee; the
servicing fee (including administrative, transfer agent, and shareholder
servicing fees); custodian and accounting fees and expenses; legal and auditing
fees; securities valuation expenses; fidelity bonds and other insurance
premiums; expenses of preparing and printing prospectuses, confirmations, proxy
statements, and shareholder reports and notices; registration fees and expenses;
proxy and annual meeting expenses, if any; all Federal, state, and local taxes
(including, without limitation, stamp, excise, income, and franchise taxes);
organizational costs; non-interested Trustees' fees and expenses; the costs and
expenses of redeeming shares of the Fund; fees and expenses paid to any
securities pricing organization; dues and expenses associated with membership in
any mutual fund organization; and costs for incoming telephone WATTS lines. In
addition, each of the Funds pays an equal portion of the Trustees' fees and
expenses for attendance at Trustee meetings for the Trustees of the Trust who
are not affiliated with or interested persons of the Advisor.
The estimated annual compensation paid by the Trust to each of its Trustees is
set forth in the table below(1):
COMPENSATION TABLE
<TABLE>
<S> <C> <C> <C> <C>
Name of Person, Aggregate Pension or Estimated Accrual Total
Position Compensation Retirement Benefits Upon Compensation
From Fund Benefits Accrued Retirement From Fund and
as Part of Fund Fund Complex
Expenses Paid to Trustees
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
32
<PAGE> 50
<TABLE>
<S> <C> <C> <C> <C>
F. Brian Cerini* -0- -0- -0- -0-
President and CEO
</TABLE>
- ------------------------------
(1) The information provided in this table is based on estimated future payments
which will be made in the upcoming fiscal year.
* Mr. Cerini is an "interested person" of the Trust.
As of the date of this Statement of Additional Information, the Trustees and the
officers of the Trust, as a group, owned, of record and beneficially, less than
1% of the outstanding shares of each Fund.
SHAREHOLDER AND TRUSTEE LIABILITY
The Trust's Declaration of Trust disclaims liability of the shareholders of the
Trust or the Trustees of the Trust for acts or obligations of the Trust which
are binding only on the assets and property of the Trust. The Declaration of
Trust provides for indemnification out of Trust property for all loss and
expense of any Trust shareholder held personally liable for the obligations of
the Trust. The risk of a Trust shareholder incurring financial loss on account
of shareholder liability is limited to circumstances in which the Trust itself
would not be able to meet the Trust's obligations. Accordingly, this risk should
be considered remote.
DETERMINATION OF NET ASSET VALUE
GENERAL
The net asset value of a Fund serves as the basis for the purchase and
redemption price of that Fund's shares. The net asset value per share of a Fund
is calculated by dividing the market value of the Fund's securities plus the
values of its other assets, less all liabilities, by the number of outstanding
shares of the Fund.
FOREIGN SECURITIES
The value of a foreign security is determined as of the close of trading on the
foreign exchange on which it is traded or as of the close of trading on the New
York Stock Exchange (the "NYSE"), if that is earlier. The value is then
converted into its U.S. dollar equivalent at the foreign exchange rate in effect
at noon, New York time, on the day the value of the foreign security is
determined. If no sale is reported at that time, the foreign security is valued
within the range of the most recent quoted bid and ask prices. Occasionally
events that affect the values of foreign securities and foreign exchange rates
may occur between the times at which they are determined and the close of the
exchange and will, therefore, not be reflected in the computation of a Fund's
net asset value. If events materially affecting the values of these foreign
securities occur during this period, the securities will be valued in accordance
with procedures established by the Trustees.
TIMING DIFFERENCES
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE
33
<PAGE> 51
business day. Furthermore, trading takes place in various foreign markets on
days that are not business days for the NYSE and on which a Fund's net asset
value is not calculated. Thus, the calculation of a Fund's net asset value does
not take place contemporaneously with the determination of the prices of many of
the portfolio securities used in the calculation and, if events materially
affecting the values of these foreign securities occur, the securities will be
valued at fair value as determined by management and approved in good faith by
the Trustees.
OPTIONS AND FUTURES
For purposes of determining net asset value per share of a Fund, options and
futures contracts are valued at the closing prices of the exchanges on which
they trade. The value of a futures contract equals the unrealized gain or loss
on the contract that is determined by marking the contract to the current
settlement price for a like contract acquired on the day on which the futures
contract is being valued. The value of options on futures contracts is
determined based upon the current settlement price for a like option acquired on
the day on which the option is being valued. Lacking any sales that day or if
the last sale price is outside the bid and ask prices, options are valued within
the range of the current closing bid and ask prices if the valuation is believed
to fairly reflect the contract's market value. A settlement price may not be
used for the foregoing purposes if the market makes a limited move with respect
to a particular commodity.
ILLIQUID SECURITIES
Illiquid securities, securities for which reliable quotations or pricing
services are not readily available, and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to the Advisor or the officers of
the Trust. The officers of the Trust report, as necessary, to the Trustees
regarding portfolio valuation determinations. The Trustees, from time to time,
will review these methods of valuation and will recommend changes which may be
necessary to assure that the investments of the Funds are valued at fair value.
PERFORMANCE INFORMATION
From time to time, each of the Funds may include a Fund's total return in
advertisements or reports to shareholders or prospective shareholders.
Quotations of average annual total return for a Fund will be expressed in terms
of the average annual compounded rate of return on a hypothetical investment in
the Fund over a period of at least one, five, and ten years, up to the life of
the Fund (the ending date of the period will be stated). Total return of a Fund
is calculated from two factors: the amount of dividends earned by each Fund
share and by the increase or decrease in value of the Fund's share price. See
"Calculation of Return Quotations," below.
Performance information for each of the Funds contained in reports to
shareholders or prospective shareholders, advertisements, and other promotional
literature may be compared to the record of various unmanaged indexes. Such
indexes include, but are not limited to, ones provided by Dow Jones & Company,
Standard & Poor's Corporation, Lipper Analytical Services, Inc., Lehman
Brothers, National Association of Securities Dealers Automated Quotations, The
Frank Russell Company, Value Line Investment Survey, the American Stock
Exchange, the Philadelphia Stock Exchange, the Financial Times Stock Exchange,
Morgan Stanley Capital International, Wilshire Associates, the All Ordinaries
Index, CAC-40, Deutsche Aktienindex, Hang Seng, MIB-30, Nikkei-225, Amsterdam
Exchanges Index, IBEX-35, Stockholm Options Market Index, Swiss Market Index,
and FTSE-100, all of which are unmanaged market indicators. Such comparisons can
be a useful measure of the qualify of a Fund's investment performance.
34
<PAGE> 52
Such unmanaged indexes may assume the reinvestment of dividends, but generally
do not reflect deductions for operating costs and expenses. In addition, a
Fund's total return may be compared to the performance of broad groups of
comparable mutual funds with similar investment goals, as such performance is
tracked and published by such independent organizations as Lipper Analytical
Services, Inc. ("Lipper") and CDA Investment Technologies, Inc., among others.
When Lipper's tracking results are used, a Fund will be compared to Lipper's
appropriate fund category, that is, by fund objective and portfolio holdings.
Rankings may be listed among one or more of the asset-size classes as determined
by Lipper. Since the assets in all mutual funds are always changing, a Fund may
be ranked within one Lipper asset-size class at one time and in another Lipper
asset-size class at some other time. Footnotes in advertisements and other
marketing literature will include the time period and Lipper asset-size class,
as applicable, for the ranking in question. Performance figures are based on
historical results and are not intended to indicate future performance.
Additional investment information sources may include: The Financial Times,
Bloomberg, DRI/McGraw-Hill, the World Bank, the International Monetary Fund,
International Federation of Stock Exchanges, MSCI, Morgan Stanley, PFPC, Inc.,
U.S. government agencies, foreign government agencies, Salomon Brothers, JP
Morgan, The Economist, Morningstar, Ibbottson, Russell, Wall Street Journal, New
York Times, Los Angeles Times, Time, Newsweek, Business Week, Forbes, Fortune,
foreign country stock exchanges, Reuters, Wilshire, Merrill Lynch, Citibank,
Chase Manhattan Bank, Deutsche Bank, Barclays Bank, ING, Bankers Trust, Robert
Fleming, Jardine Fleming, the United Nations, Worldscope, State Street Global
Advisors and State Street Bank.
CALCULATION OF RETURN QUOTATIONS
For purposes of quoting and comparing the performance of a Fund to that of other
mutual funds and to other relevant market indexes in advertisements or in
reports to shareholders, performance for the Fund may be stated in terms of
total return (the purchase fee is included in the total return calculation).
Under the rules of the SEC ("SEC Rules"), a Fund's advertising performance must
include total return quotes calculated according to the following formula:
n
P(1+T) = ERV
Where: P = a hypothetical initial payment of $1,000;
T = average annual total return;
n = number of years (1, 5 or 10); and
ERV = ending redeemable value of a hypothetical $1,000 payment,
made at the beginning of the 1, 5 or 10 year periods, at the
end of the 1, 5, or 10 year periods (or fractional portion
thereof).
Under the foregoing formula, the time periods used in advertising will be based
on rolling calendar quarters, updated to the last day of the most recent quarter
prior to submission of the advertising for publication, and will cover 1, 5, and
10 year periods or a shorter period dating from the effectiveness of the
Registration Statement of the Trust. In calculating the ending redeemable value,
all dividends and distributions by a Fund are assumed to have been reinvested at
net asset value as described in the Prospectuses on the reinvestment dates
during the period. Total return, or "T" in the formula above, is computed by
finding the average annual compounded rates of return over the 1, 5, and 10 year
periods (or fractional portion thereof) that would equate the initial amount
invested to the ending redeemable value.
35
<PAGE> 53
From time to time, each Fund also may include in such advertising a total return
figure that is not calculated according to the formula set forth above in order
to compare more accurately the performance of the Fund with other measures of
investment return. For example, in comparing the total return of a Fund with
data published by Lipper Analytical Services, Inc., each respective Fund
calculates its aggregate total return or the specified periods of time by
assuming the investment of $10,000 in Fund shares and assuming the investment of
each dividend or other distribution at net asset value on the reinvestment date.
Percentage increases are determined by subtracting the initial value of the
investment from the ending value and by dividing the remainder by the beginning
value. Such alternative total return information will be given no greater
prominence in such advertising than the information prescribed under SEC Rules.
INFORMATION ON COMPUTATION OF YIELD
In addition to the total return quotations discussed above, a Fund may advertise
its yield based on a thirty-day (or one month) period ended on the date of the
most recent balance sheet included in the Trust's Registration Statement,
computed by dividing the net investment income per share of a Fund earned during
the period by the maximum offering price per Fund share on the last day of the
period, according to the following formula:
6
a - b
YIELD = 2[(------- + 1) - 1]
cd
Where: a = dividends and interest earned during the period;
b = expenses accrued for the period (net of reimbursements);
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends; and
d = the maximum offering price per share on the last day of the
period.
Under this formula, interest earned on debt obligations for purposes of "a"
above, is calculated by (i) computing the yield to maturity of each obligation
held by a Fund based on the market value of the obligation at the close of
business on the last day of each month, or, with respect to obligations
purchased during the month, the purchase price (plus actual accrued interest),
(ii) dividing that figure by 360 and multiplying the quotient by the market
value of the obligation (including actual accrued interest as referred to above)
to determine the interest income on the obligation that is in the Fund's
portfolio (assuming a month of thirty days), and (iii) computing the total of
the interest earned on all debt obligations and all dividends accrued on all
equity securities during the thirty-day or one month period. In computing
dividends accrued, dividend income is recognized by accruing 1/360 of the stated
dividend rate of a security each day that the security is in the Fund's
portfolio. Undeclared earned income, computed in accordance with generally
accepted accounting principles, may be subtracted from the maximum offering
price calculation required pursuant to "d" above.
A Fund from time to time may also advertise its yield based on a thirty-day
period ending on a date other than the most recent balance sheet included in the
Trust's Registration Statement, computed in accordance with the yield formula
described above, as adjusted to conform with the differing period for which the
yield computation is based.
Any quotation of performance stated in terms of yield (whether based on a
thirty-day or one month period) will be given no greater prominence than the
information prescribed under SEC Rules. In addition, all advertisements
containing performance data of any kind will include a legend disclosing that
such performance data represents
36
<PAGE> 54
past performance and that 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 the original cost of such shares.
PURCHASE AND REDEMPTION OF SHARES
MINIMUM INVESTMENT REQUIREMENTS
Shareholders will be informed of any increase in the minimum investment
requirements by a new prospectus or a prospectus supplement, in which the new
minimum is disclosed. The Trust may redeem an account whose balance (due to
redemptions) has fallen below the minimum investment amount applicable at the
time of the shareholder's most recent purchase of Fund shares (unless the
shareholder brings his or her account value up to the currently applicable
minimum investment).
TAX CONSEQUENCES
Note that in the case of tax-qualified retirement plans, a redemption from such
a plan may have adverse tax consequences. A shareholder contemplating such a
redemption should consult his or her own tax advisor. Other shareholders should
consider the tax consequences of any redemption.
SUSPENSION OF THE RIGHT OF REDEMPTION
The Funds may suspend the right of redemption or the date of payment: (i) for
any period during which the NYSE, the Federal Reserve Bank of New York, the
NASDAQ, the Chicago Mercantile Exchange ("CME"), the CBOT, or any other
exchange, as appropriate, is closed (other than customary weekend or holiday
closings), or trading on the NYSE, the NASDAQ, the CME, the CBOT, or any other
exchange, as appropriate, is restricted; (ii) for any period during which an
emergency exists so that sales of a Fund's investments or the determination of
its net asset value is not reasonably practicable; or (iii) for such other
periods as the SEC may permit for the protection of a Fund's investors.
HOLIDAYS
The NYSE, the Federal Reserve Bank of New York, the NASDAQ, the CME, the CBOT,
and other U.S. exchanges are closed on weekends and on the following holidays:
(i) New Year's Day, Martin Luther King Jr.'s Birthday, Presidents' Day, Good
Friday, Memorial Day, July Fourth, Labor Day, Columbus Day, Thanksgiving Day,
and Christmas Day; and (ii) the preceding Friday if any of these holidays falls
on a Saturday, or the subsequent Monday if any of these holidays falls on a
Sunday. Although the Trust expects the same holiday schedules to be observed in
the future, each of the aforementioned exchanges may modify its holiday schedule
at any time.
DIVIDENDS, DISTRIBUTIONS, AND TAXES
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income and any distributions of net realized
capital gains from each of the Funds will be distributed as described in the
Prospectuses under "Dividends and Distributions." All such distributions of a
Fund normally automatically will be reinvested without charge in additional
shares of the same Fund.
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<PAGE> 55
FOREIGN SECURITIES
Dividend income and other distributions are recorded on the ex-dividend date,
except for certain dividends from foreign securities which are recorded as soon
as the Trust is informed after the ex-dividend date.
REGULATED INVESTMENT COMPANY STATUS
As a regulated investment company (a "RIC") under Subchapter M of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), a Fund would not be
subject to Federal income taxes on the net investment income and capital gains
that the Fund distributes to the Fund's shareholders. The distribution of net
investment income and capital gains will be taxable to Fund shareholders
regardless of whether the shareholder elects to receive these distributions in
cash or in additional shares. Distributions reported to Fund shareholders as
capital gains from property held for more than 18 months, or from property held
for more than 1 year but not for more than 18 months, shall be taxable as such,
regardless of how long the shareholder has owned the shares. Fund shareholders
will be notified annually by the Fund as to the Federal tax status of all
distributions made by the Fund. Distributions may be subject to state and local
taxes. To qualify as a RIC, the Code requires that at the end of each quarter of
the taxable year, (i) at least 50% of the market value of the Fund's total
assets be invested in cash, U.S. Government Securities, the securities of other
regulated investment companies, and other securities, with such securities of
any one issuer limited for the purposes of this calculation to an amount not
greater than 5% of the value of Fund's total assets and 10% of the outstanding
voting securities of any one issuer, and (ii) not more than 25% of the value of
the Fund's total assets be invested in the securities of any one issuer (other
than U.S. Government Securities or the securities of other regulated investment
companies), or of two or more issuers which the Fund controls and which are
determined to be engaged in the same or similar trades or businesses, or related
trades or businesses.
Each of the Funds will seek to qualify for treatment as a RIC under the Code.
Provided that a Fund (i) is a RIC and (ii) distributes at least 90% of the
Fund's net investment income (including, for this purpose, net realized
short-term capital gains), the Fund itself will not be subject to Federal income
taxes to the extent the Fund's net investment income and the Fund's net realized
long and short-term capital gains, if any, are distributed to the Fund's
shareholders. To avoid an excise tax on its undistributed income, each Fund
generally must distribute at least 98% of its income, including its net
long-term capital gains. One of several requirements for RIC qualification is
that the Fund must receive at least 90% of the Fund's gross income each year
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 the Fund's investments in stock, securities, and
foreign currencies (the "90% Test").
In the event of a failure by a Fund to qualify as a RIC, the Fund would be
subject to Federal income taxes on its taxable income and the Fund's
distributions, to the extent that such distributions are derived from the Fund's
current or accumulated earnings and profits, would constitute dividends that
would be taxable to the shareholders of the Fund as ordinary income and would be
eligible for the dividends received deduction for corporate shareholders. This
treatment would also apply to any portion of the distributions that might have
been treated in the shareholder's hands as long-term capital gains, as discussed
below, had the Fund qualified as a RIC.
If a Fund were to fail to qualify as a RIC for one or more taxable years, the
Fund could then qualify (or requalify) as a RIC for a subsequent taxable year
only if the Fund had distributed to the Fund's shareholders a taxable dividend
equal to the full amount of any earnings or profits (less the interest charge
mentioned below, if applicable) attributable to such period. The Fund might also
be required to pay to the U.S. Internal Revenue Service (the "IRS") interest on
50% of such accumulated earnings and profits. In addition, pursuant to the Code
and an interpretative notice issued by the IRS, if the Fund should fail to
qualify as a RIC and should thereafter seek
38
<PAGE> 56
to requalify as a RIC, the Fund may be subject to tax on the excess (if any) of
the fair market of the Fund's assets over the Fund's basis in such assets, as of
the day immediately before the first taxable year for which the Fund seeks to
requalify as a RIC.
If a Fund determines that the Fund will not qualify as a RIC under Subchapter M
of the Code, the Fund will establish procedures to reflect the anticipated tax
liability in the Fund's net asset value.
TRANSACTIONS BY THE FUNDS
If a call option written by a Fund expires, the amount of the premium received
by the Fund for the option will be treated as a gain from the sale or exchange
of a capital asset held for not more than 1 year, i.e., short-term capital gain.
If such an option is closed by a Fund, any gain or loss realized by the Fund as
a result of the closing purchase transaction will be either short-term, mid term
or long-term capital gain or loss, depending on whether the Fund's holding
period for the underlying security or underlying futures contract was not for
more than 1 year (short-term), for more than 1 year but not for more than 18
months (mid-term), or for more than 18 months (long-term). If the holder of a
call option exercises the holder's right under the option, any gain or loss
realized by the Fund upon the sale of the underlying security or underlying
futures contract pursuant to such exercise will be short-term, mid-term or
long-term capital gain or loss to the Fund depending on the Fund's holding
period for the underlying security or underlying futures contract. The amount
paid to the Fund for the option will be added to the amount of the proceeds
received by the Fund.
With respect to call options purchased by a Fund, the Fund will realize
short-term, mid-term or long-term capital gain or loss if such option is sold
and will realize short-term, mid-term or long-term capital loss if the option is
allowed to expire depending on the Fund's holding period for the call option. If
such a call option is exercised, the amount paid by the Fund for the option will
be added to the basis of the stock or futures contract so acquired.
A Fund has available to it a number of elections under the Code concerning the
treatment of option transactions for tax purposes. A Fund will utilize the tax
treatment that, in the Fund's judgment, will be most favorable to a majority of
investors in the Fund. Taxation of these transactions will vary according to the
elections made by the Fund. These tax considerations may have an impact on
investment decisions made by the Fund.
Each of the Funds also may utilize options on foreign stock indexes. Options on
broad-based stock indexes are classified as "nonequity options" under the Code.
Gains and losses resulting from the expiration, exercise, or closing of such
options, as well as gains and losses resulting from futures contract
transactions, will be treated as regular income.
The trading strategies of each of the Funds involving nonequity options on stock
indexes may constitute "straddle" transactions. "Straddles" may affect the
taxation of such instruments and may cause the postponement of recognition of
losses incurred in certain closing transactions. Each of the Funds will also
have available to the Fund a number of elections under the Code concerning the
treatment of option transactions for tax purposes. Each such Fund will utilize
the tax treatment that, in the Fund's judgment, will be most favorable to a
majority of investors in the Fund. Taxation of these transactions will vary
according to the elections made by the Fund. These tax considerations may have
an impact on investment decisions made by the Fund.
A Fund's transactions in options, under some circumstances, could preclude the
Fund's qualifying for the special tax treatment available to investment
companies meeting the requirements of Subchapter M of the Code. However, it is
the intention of each Fund's portfolio management to limit gains from such
investments to less than 10% of the gross income of the Fund during any fiscal
year in order to maintain this qualification.
39
<PAGE> 57
BACK-UP WITHHOLDING
Each Fund is required to withhold and remit to the U.S. Treasury 31% of (i)
reportable taxable dividends and distributions; and (ii) the proceeds of any
redemptions of Fund shares with respect to any shareholder who is not exempt
from withholding and who fails to furnish the Trust with a correct taxpayer
identification number, who fails to report fully dividend or interest income, or
who fails to certify to the Trust that the shareholder has provided a correct
taxpayer identification number and that the shareholder is not subject to
withholding. (An individual's taxpayer identification number is the individual's
social security number.) The 31% "back-up withholding tax" is not an additional
tax and may be credited against a taxpayer's regular Federal income tax
liability.
FOREIGN TAX CONSIDERATIONS
The Country Index Funds may elect to "pass through" to shareholders of those
Funds the foreign income taxes paid by the Funds. If this election is made
because it was deemed to be in the best interest of shareholders, shareholders
would be required to include in their gross income their proportional share of
the foreign taxes paid by their respective Fund. Shareholders will, however, be
able to treat this income as either an itemized deduction or a foreign tax
credit (but not both) against U.S. income taxes. The U.S. shareholders of the
Country Index Funds may claim a foreign tax credit or deduction by reason of the
Fund's election under Section 853 of the Code, provided that more than 50% of
the value of the total assets of the Fund at the close of the taxable year
consists of securities of foreign corporations. The foreign tax credit and
deduction available to shareholders is subject to certain limitations imposed by
the Code. Also, under Section 63 of the Code, no deduction for foreign taxes may
be claimed by shareholders who do not itemize deductions on their federal income
tax returns, although any such shareholder may claim a credit for foreign taxes
and in any event will be treated as having taxable income in respect to the
shareholder's pro rata share of foreign taxes paid by the Fund.
If the Country Index Funds elect to "pass through" foreign taxes to
shareholders, the tax credit would not pass through to Funds of Index Funds
shareholders. Because the Funds of Index Funds hold shares of the Country Index
Funds which are U.S. business entities, and do not hold shares of foreign
securities, the Funds of Index Funds cannot pass through the tax credit to
shareholders. The Funds of Index Funds may, however, claim a deduction for any
foreign taxes paid by the underlying Country Index Funds. The effective rate of
foreign taxes to which a Fund will be subject depends on the specific countries
in which each Fund's assets will be invested and the extent of the assets
invested in each such country and, therefore, cannot be determined in advance.
FOREIGN CURRENCY GAINS AND LOSSES
Under the Code, gains or losses attributable to fluctuations in exchange rates,
including foreign currency gain or loss attributable to a forward contract, a
futures contract, or option, which occur between the time a Fund accrues income
or other receivables or accrues expenses or other liabilities denominated in a
foreign currency and the time a Fund actually collects such receivables or pays
such liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on the disposition of debt securities denominated in a foreign
currency and on the disposition of certain options, futures, forward and other
contracts, gain or loss attributable to fluctuations in the value of foreign
currency between the date of acquisition of the security or contract and the
date of disposition also are treated as ordinary gain or loss. These gains or
losses, referred to under the Code as "Section 988" gains or losses, may
increase or decrease the amount of a Fund's net investment income to be
distributed to its shareholders. If Section 988 losses exceed other investment
company taxable income (which includes, among other items, dividends, interest
and the excess, if any, of net short-term capital gains over net long-term
capital losses) during the taxable year, a Fund would not be able to make any
ordinary dividend distributions, and
40
<PAGE> 58
distributions made before the losses were realized would be recharacterized as a
return of capital to shareholders or, in some cases, as capital gain, rather
than as an ordinary dividend.
OTHER ISSUES
Each Fund may be subject to tax or taxes in certain states where the Fund does
business. Furthermore, in those states which have income tax laws, the tax
treatment of a Fund and of Fund shareholders with respect to distributions by
the Fund may differ from Federal tax treatment.
Shareholders are urged to consult their own tax advisors regarding the
application of the provisions of tax law described in this SAI in light of the
particular tax situations of the shareholders and regarding specific questions
as to Federal, state, or local taxes.
EXPERTS
Morgan, Lewis & Bockius, LLP, 1800 M Street, N.W., Washington, D.C. 20036, serve
as counsel to the Trust and each of the Funds.
41
<PAGE> 59
PART C: OTHER INFORMATION
<TABLE>
<CAPTION>
Item 23. Exhibits:
<S> <C>
(a) Agreement and Declaration of Trust of Worldwide Index Funds
(b) By-Laws
(c) Not Applicable
(d)(1) Form of Investment Advisory Agreement between Registrant and LMI
Investment Advisors LLC is filed herewith
(d)(2) Form of Sub-Advisory Agreement between LMI Investment Advisors LLC
and State Street Global Advisors is filed herewith
(e) Form of Distribution Agreement between the registrant and First Data
Distributors, Inc. *
(f) Not Applicable
(g) Form of Custodian Agreement between the Registrant and State Street
Bank and Trust Company *
(h) Form of Services Agreement between the Registrant and First Data
Investor Services Group, Inc. *
(i) Legal Opinion of Morgan, Lewis and Bockius LLP *
(j) Not Applicable
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Financial Data Schedules *
(o) Registrant's Rule 18f-3 Plan *
</TABLE>
* TO BE FILED BY AMENDMENT
ii
<PAGE> 60
Item 24. Persons Controlled by or under Common Control with the Fund
Not applicable.
Item 25. Indemnification
Article VIII of the Declaration of Trust, filed as Exhibit 1(a) to the
Registration Statement, is incorporated by reference.
Item 26. Business and other Connections of the Investment Adviser:
ADVISER
LMI Investment Advisors LLC (the "Adviser") is the investment adviser for the
Trust. The principal address of the Adviser is 790 East Colorado Boulevard, 9th
Floor, Pasadena, California 91101. The Adviser is an investment adviser
registered under the Advisers Act.
The list required by this Item 28 of officers and directors of the Adviser,
together with information as to any other business profession, vocation or
employment of substantial nature engaged in by such officers and directors
during the past two years is incorporated by reference to Schedules A and D of
Form ADV filed by the Adviser to the Advisers Act (SEC File No. 801-55369).
Item 27. Principal Underwriters
(a) Furnish the name of each investment company (other than the Registrant)
for which each principal underwriter currently distributing the
securities of the Registrant also acts as a principal underwriter,
distributor or investment adviser.
First Data Distributors, Inc., a wholly-owned subsidiary of First Data
Corporation, acts as distributor for ABN AMRO Funds pursuant to a
distribution agreement dated February 26, 1998. First Data Distributors,
Inc. also acts as underwriter for BT Insurance Funds Trust, First Choice
Funds Trust, The Galaxy Fund, The Galaxy VIP Fund, Galaxy Fund II,
Panorama Trust, CT&T Funds, Wilshire Target Funds, Inc., Potomac Funds,
Undiscovered Managers Funds, LKCM Funds, IBJ Funds Trust and the ICM
Series Trust. The Distributor is registered with the Securities and
Exchange Commission as a broker-dealer and is a member of the National
Association of Securities Dealers. The Distributor is a wholly-owned
subsidiary of First Data Corporation and is located at 4400 Computer
Drive, Westborough, Massachusetts 01581.
iii
<PAGE> 61
(b) The information required by this Item 27 (b) with respect to each
director, officer, or partner of First Data Distributors, Inc. is incorporated
by reference to Schedule A of Form BD filed by First Data Distributors, Inc.
with the Securities and Exchange Commission pursuant to the Securities Exchange
Act of 1934 (File No. 8-45467.)
(c) Not Applicable
Item 28. Location of Accounts and Records
Books or other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, and the rules promulgated thereunder, are
maintained as follows:
(a) With respect to Rules 31a-1(a); 31a-1(b)(1); (2)(a) and (b); (3);
(6); (8); (12); and 31a-1(d), the required books and records will be
maintained at the offices of Registrant's Custodian:
State Street Bank &Trust Company
Boston, MA 02110
(b)/(c) With respect to Rules 31a-1(a); 31a-1(b),(4); (2)(C) and (D);
(4); and 31a-1(f), the required books and records are maintained at the
offices of Registrant's Administrator:
First Data Investor Services, Inc.
One Exchange Place
Boston, MA 02109
(c) With respect to Rules 31a-1(b)(5), (6), (9), (10) and (11) and
31a-1(f), the required books and records are maintained at the principal
offices of the Registrant's Adviser:
LMI Investment Advisors LLC
790 East Colorado Boulevard, 9th Floor
Pasadena, CA 91101
Item 29. Management Services
Not applicable
Item 30. Undertakings
"Insofar as indemnification for liability arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the
iv
<PAGE> 62
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed
in the Act and will be governed by the final adjudication of such issue."
v
<PAGE> 63
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Pre-Effective Amendment No. 1 to the Registration Statement (File No. 811-08805)
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Pasadena, State of California on this 28th day of July, 1998.
Worldwide Index Funds
By:/s/ F. Brian Cerini
---------------------
F. Brian Cerini
President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacity on the dates indicated.
<TABLE>
<S> <C> <C>
/s/ F. Brian Cerini Trustee July 28, 1998
- ------------------------
F. Brian Cerini
/s/ Keith B. Pipes Chief Financial Officer July 28, 1998
- ------------------------
Keith B. Pipes
</TABLE>
vi
<PAGE> 64
EXHIBIT INDEX
<TABLE>
<CAPTION>
Name Exhibit Page
- ---- ------------
<S> <C>
Agreement and Declaration of Trust of the EX-99. a
Worldwide Index Funds
By-Laws EX-99. b
Not Applicable EX-99. c
Form of Investment Advisory Agreement EX-99. d 1
between Registrant and LMI Investment
Advisors LLC is filed herewith
Form of Sub-Advisory Agreement between EX-99. d 2
LMI Investment Advisors LLC and State
Street Global Advisors is filed herewith
Form of Distribution Agreement between the EX-99. e
Registrant and First Data Distributors, Inc. *
Not Applicable EX-99. f
Form of Custodian Agreement between the EX-99. g
registrant and State Street Bank and Trust
Company *
Form of Services Agreement between the EX-99. h
Registrant and First Data Investor Services
Group, Inc. *
Legal Opinion of Morgan, Lewis and Bockius EX-99. i
LLP *
Not Applicable EX-99. j
Not Applicable EX-99. k
Not Applicable EX-99. l
Not Applicable EX-99. m
Financial Data Schedules * EX-99. Bn
Registrant's Rule 18f-3 Plan * EX-99. o
</TABLE>
* TO BE FILED BY AMENDMENT
vii
<PAGE> 1
EXHIBIT (d)(1)
WORLDWIDE INDEX FUNDS
FORM OF
INVESTMENT MANAGEMENT AGREEMENT
INVESTMENT MANAGEMENT AGREEMENT (this "Agreement"), dated July ___,
1998, between Worldwide Index Funds, a Massachusetts business trust, (the
"Trust"), on behalf of each of its series which are listed on the signature page
of this Agreement (each referred to herein as a "Fund" and, collectively, the
"Funds") and LMI Investment Advisors LLC, a Delaware limited liability company
(the "Manager").
W I T N E S S E T H
WHEREAS, the Trust is an open-end series management investment
company, registered under the Investment Company Act of 1940 (the "1940 Act");
and
WHEREAS, the Trust, desires to retain the Manager to render
investment management services to each Fund, and the Manager is willing to
render such services;
NOW, THEREFORE, in consideration of the premises and the mutual
agreements herein contained, the parties hereto agree as follows:
1. Appointment. The Trust hereby appoints the Manager to act as
investment manager to each Fund for the period and on the terms set forth in
this Agreement. The Manager accepts such appointment and agrees to render the
services herein described, for the compensation herein provided.
2. Management. Subject to the supervision of the Board of Trustees of
the Trust, the Manager shall manage the investment operations of each Fund and
the composition of each Fund's portfolio, including the purchase, retention and
disposition of securities therefor, in accordance with the Fund's investment
objectives, policies and restrictions as stated in the Prospectus and Statement
of Additional Information (as such terms are hereinafter defined) and
resolutions of the Trust's Board of Trustees and subject to the following
understandings:
(a) The Manager shall provide supervision of each
Fund's investments, furnish a continuous investment program for each
Fund's portfolio and determine from time to time what securities
will be purchased, retained, or sold by each Fund, and what portion
of the assets will be invested or held as cash.
(b) The Manager, in the performance of its duties
and obligations under this Agreement, shall act in conformity with
the Trust's Declaration of Trust and the investment policies of the
Funds as determined by the Board of Trustees of the Trust.
(c) The Manager shall determine the securities to
be purchased or sold by each Fund and shall place orders for the
purchase and sale of portfolio securities pursuant to its
determinations with brokers or dealers selected by the Manager. In
executing portfolio transactions and selecting brokers or dealers,
the Manager shall use
<PAGE> 2
its best efforts to seek on behalf of each Fund the best overall
terms available. In assessing the best overall terms available for
any transaction, the Manager may consider all factors it deems
relevant, including the breadth of the market in the security, the
price of the security, the size of the transaction, the timing of
the transaction, the reputation, financial condition, experience,
and execution capability of a broker or dealer, the amount of
commission, and the value of any brokerage and research services (as
those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934, provided by a broker or dealer. The Manager is
authorized to pay to a broker or dealer who provides such brokerage
and research services a commission for executing a portfolio
transaction for a Fund which is in excess of the amount of
commission another broker or dealer would have charged for effecting
the transaction if the Manager determines in good faith that such
commission was reasonable in relation to the value of the brokerage
and research services provided by such broker or dealer, viewed in
terms of that particular transaction or in terms of the overall
responsibilities of the Manager to the Fund and/or other accounts
over which the Manager exercises investment discretion.
(d) On occasions when the Manager deems the
purchase or sale of a security to be in the best interest of a Fund
as well as other fiduciary accounts for which it has investment
responsibility, the Manager, to the extent permitted by applicable
laws and regulations, may aggregate the securities to be so sold or
purchased in order to obtain the best execution, most favorable net
price or lower brokerage commissions.
(e) Subject to the provisions of the Trust's
Declaration of Trust and the 1940 Act, the Manager, at its expense,
may select and contract with one or more investment advisers (the
"Sub-adviser") for each Fund to perform some or all of the services
for which it is responsible pursuant to this Section 2. The Manager
shall be solely responsible for the compensation of any Sub-adviser
of a Fund for its services to such Fund. The Manager may terminate
the services of any Sub-adviser at any time in its sole discretion,
and shall at such time assume the responsibilities of such Sub-
adviser unless and until a successor Sub-adviser is selected. To the
extent that more than one Sub-adviser is selected, the Manager
shall, in its sole discretion, determine the amount of the Fund's
assets allocated to each such Sub-adviser.
3. Services Not Exclusive. The investment management services rendered
by the Manager hereunder to the Funds are not to be deemed exclusive, and the
Manager shall have the right to render similar services to others, including,
without limitation, other investment companies.
4. Expenses. During the term of this Agreement, the Manager shall pay
all expenses incurred by it in connection with its activities under this
Agreement including the salaries and expenses of any of the officers or
employees of the Manager who act as officers, Trustees or employees of the Trust
but excluding the cost of securities purchased for the Funds and the amount of
any brokerage fees and commissions incurred in executing portfolio transactions
for the Funds, and shall provide the Funds with suitable office space. Other
expenses to be incurred in the operation of the Funds (other than those borne by
any third party), including
2
<PAGE> 3
without limitation, taxes, interest, brokerage fees and commissions, fees of
Trustees who are not officers, directors, or employees of the Manager, federal
registration fees and state Blue Sky qualification fees, administration fees,
bookkeeping, charges of custodians, transfer and dividend disbursing agents'
fees, certain insurance premiums, industry association fees, outside auditing
and legal expenses, costs of maintaining the Funds' or the Trust's existence,
costs of independent pricing services, costs attributable to investor services
(including, without limitation, telephone and personnel expenses), costs of
preparing, printing and distributing prospectuses to existing shareholders,
costs of stockholders' reports and meetings of shareholders and Trustees of the
Funds or the Trust, as applicable, and any extraordinary expenses will be borne
by the Fund.
5. Compensation. For the services provided pursuant to this Agreement,
the Trust shall pay to the Manager as full compensation therefor a monthly fee
computed on the average daily net assets at the annual rate for each Fund as
stated in Schedule A attached hereto. The Trust acknowledges that the Manager,
as agent for the Funds, will allocate a portion of the fee equal to the
sub-advisory fee payable to the sub-advisor, if any, under its sub-advisory
agreement to the sub-advisor for sub-advisory services. This payment would be
made from revenue which otherwise would be considered profit to the Manager for
its services.
6. Limitation of Liability. The Manager shall not be liable for any
error of judgment or mistake of law or for any loss suffered by the Trust in
connection with the matters to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on its part in
the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
7. Delivery of Documents. The Trust has heretofore delivered to the
Manager true and complete copies of each of the following documents and shall
promptly deliver to it all future amendments and supplements thereto, if any:
(a) Declaration of Trust as presently in effect and as
amended from time to time;
(b) Bylaws of the Trust;
(c) Registration Statement under the Securities Act of 1933
and under the 1940 Act of the Trust on Form N-1A, and all amendments
thereto, as filed with the Securities and Exchange Commission (the
"Registration Statement") relating to the Trust and the shares of
the Funds;
(d) Notification of Registration of the Trust under the 1940
Act on Form N-8A;
(e) Prospectus of the Trust relating to shares of the Funds
(such prospectus as is presently in effect and/or as amended or
supplemented from time to time, the "Prospectus"); and
3
<PAGE> 4
(f) Statement of Additional Information of the Trust
relating to shares of the Funds (such statement as is presently in
effect and/or as amended or supplemented from time to time, the
"Statement of Additional Information").
8. Duration and Termination. This Agreement shall become effective as
of the date first above-written for an initial period of two years and shall
continue thereafter so long as such continuance is specifically approved at
least annually by (i) the vote of the Board of Trustees including a majority of
those members of the Trust's Board of Trustees who are not parties to this
Agreement or "interested persons" of any such party, cast in person at a meeting
called for that purpose, or (ii) by vote of a majority of the outstanding voting
securities of each Fund. Notwithstanding the foregoing, (i) this Agreement may
be terminated with respect to any Fund at any time, without the payment of any
penalty, by either the Trust (by vote of the Trust's Board of Trustees or by
vote of a majority of the outstanding voting securities of the Fund) or the
Manager, on sixty (60) days prior written notice to the other and (ii) shall
automatically terminate in the event of its assignment. As used in this
Agreement, the terms "majority of the outstanding voting securities,"
"interested persons" and "assignment" shall have the meanings assigned to such
terms in the 1940 Act.
9. Amendments. No provision of this Agreement may be amended, modified,
waived or supplemented except by a written instrument signed by the party
against which enforcement is sought. No amendment of this Agreement shall be
effective until approved in accordance with any applicable provisions of the
1940 Act.
10. Use of Name and Logo. The Trust agrees that it shall furnish to the
Manager, prior to any use or distribution thereof, copies of all prospectuses,
statements of additional information, proxy statements, reports to stockholders,
sales literature, advertisements, and other material prepared for distribution
to stockholders of the Trust or to the public, which in any way refer to or
describe the Manager or which include any trade names, trademarks or logos of
the Manager or of any affiliate of the Manager. The Trust further agrees that it
shall not use or distribute any such material if the Manager reasonably objects
in writing to such use or distribution within five (5) business days after the
date such material is furnished to the Manager.
The Manager and/or its affiliates own the name "LMI" and any other
names which may be listed from time to time on a Schedule B to be attached
hereto that they may develop for use in connection with the Trust, which names
may be used by the Trust only with the consent of the Manager and/or its
affiliates. The Manager, on behalf of itself and/or its affiliates, consents to
the use by the Trust of such names or any other names embodying such names, but
only on condition and so long as (i) this Agreement shall remain in full force,
(ii) the Fund and the Trust shall fully perform, fulfill and comply with all
provisions of this Agreement expressed herein to be performed, fulfilled or
complied with by it, and (iii) the Manager is the manager of each Fund of the
Trust. No such name shall be used by the Trust at any time or in any place or
for any purposes or under any conditions except as provided in this section. The
foregoing authorization by the Manager, on behalf of itself and/or its
affiliates, the Trust to use such names as part of a business or name is not
exclusive of the
4
<PAGE> 5
right of the Manager and/or its affiliates themselves to use, or to authorize
others to use, the same; each Fund and the Trust acknowledges and agrees that as
between the Manager and/or its affiliates and a Fund or the Trust, the Manager
and/or its affiliates have the exclusive right so to use, or authorize others to
use, such names, and the Trust agrees to take such action as may reasonably be
requested by the Manager, on behalf of itself and/or its affiliates, to give
full effect to the provisions of this section (including, without limitation,
consenting to such use of such names). Without limiting the generality of the
foregoing, the Trust agrees that, upon (i) any violation of the provisions of
this Agreement by the Trust or (ii) any termination of this Agreement, by either
party or otherwise, the Trust will, at the request of the Manager, on behalf of
itself and/or its affiliates, made within six months after such violation or
termination, use its best efforts to change the name of the Trust so as to
eliminate all reference, if any, to such names and will not thereafter transact
any business in a name containing such names in any form or combination
whatsoever, or designate itself as the same entity as or successor to an entity
of such names, or otherwise use such names or any other reference to the Manager
and/or its affiliates, except as may be required by law. Such covenants on the
part of the Trust shall be binding upon it, its Trustees, officers,
shareholders, creditors and all other persons claiming under or through it.
The provisions of this section shall survive termination of this
Agreement.
11. Notices. Any notice or other communication required to be given
pursuant to this Agreement shall be deemed duly given if delivered or mailed by
registered mail, postage prepaid, if to the Trust: 790 Colorado Boulevard, 9th
Floor, Pasadena, California 91101; or if to the Manager: 790 Colorado Boulevard,
9th Floor, Pasadena, California 91101; or to either party at such other address
as such party shall designate to the other by a notice given in accordance with
the provisions of this section.
12. Miscellaneous.
(a) Except as otherwise expressly provided herein
or authorized by the Board of Trustees of the Trust from time to
time, the Manager for all purposes herein shall be deemed to be an
independent contractor and shall have no authority to act for or
represent the Trust in any way or otherwise be deemed an agent of
the Trust.
(b) The Trust shall furnish or otherwise make
available to the Manager such information relating to the business
affairs of the Trust as the Manager at any time or from time to time
reasonably requests in order to discharge its obligations hereunder.
(c) This Agreement shall be governed by and
construed in accordance with the laws of the Commonwealth of
Massachusetts and shall inure to the benefit of the parties hereto
and their respective successors.
(d) If any provision of this Agreement shall be
held or made invalid or by any court decision, statute, rule or
otherwise, the remainder of this Agreement shall not be affected
thereby.
5
<PAGE> 6
13. Declaration of Trust and Limitation of Liability. A copy of the
Trust's Declaration of Trust is on file with the Secretary of State of the
Commonwealth of Massachusetts, and notice is hereby given that this Agreement is
executed by an officer of the Trust on behalf of the Trustees of the Trust, as
trustees and not individually, on further behalf of the Funds, and that the
obligations of this Agreement with respect to a Fund shall be binding upon the
assets and properties of that Fund only and shall not be binding upon the assets
and properties of any other Fund or series of the Trust or upon any of the
Trustees, officers, employees, agents or shareholders of the Funds or the Trust
individually.
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed by their officers designated below as of the date first
above-written.
WORLDWIDE INDEX FUNDS, on behalf of its series
AUSTRALIA INDEX FUND,
FRANCE INDEX FUND,
GERMANY INDEX FUND,
HONG KONG INDEX FUND,
ITALY INDEX FUND,
JAPAN INDEX FUND,
NETHERLANDS INDEX FUND,
SPAIN INDEX FUND,
SWEDEN INDEX FUND,
SWITZERLAND INDEX FUND,
UNITED KINGDOM INDEX FUND,
EUROPE INDEX FUND, and
INTERNATIONAL INDEX FUND.
By: /s/ F. Brian Cerini
-----------------------------
Name: F. Brian Cerini
Title: President
Attest:
By: /s/ Keith B. Pipes
--------------------
Name: Keith B. Pipes
Title:
LMI INVESTMENT ADVISERS LLC
By: /s/ F. Brian Cerini
-----------------------------
Name: F. Brian Cerini
Title: Member
Attest:
By: /s/ Keith B. Pipes
--------------------
Name: Keith B. Pipes
Title:
7
<PAGE> 8
SCHEDULE A
WORLDWIDE INDEX FUNDS
INVESTMENT MANAGEMENT AGREEMENT
The fees to be charged to Worldwide Index Funds for services provided under this
Agreement (including any sub-advisory fees) are as follows:
AUSTRALIA INDEX FUND................................................... __%
FRANCE INDEX FUND...................................................... __%
GERMANY INDEX FUND..................................................... __%
HONG KONG INDEX FUND................................................... __%
ITALY INDEX FUND....................................................... __%
JAPAN INDEX FUND....................................................... __%
NETHERLANDS INDEX FUND................................................. __%
SPAIN INDEX FUND....................................................... __%
SWEDEN INDEX FUND...................................................... __%
SWITZERLAND INDEX FUND................................................. __%
UNITED KINGDOM INDEX FUND.............................................. __%
EUROPE INDEX FUND...................................................... __%
INTERNATIONAL INDEX FUND............................................... __%
<PAGE> 1
EXHIBIT (d)(2)
FORM OF
INVESTMENT SUB-ADVISORY AGREEMENT
Effective as of
---------------
State Street Global Advisors
225 Franklin Street
Boston, Massachusetts 02110
Ladies and Gentlemen:
The Worldwide Index Funds (the "Company"), an business trust
organized under the laws of the Commonwealth of Massachusetts, and LMI
Investment Advisors LLC ("LMI"), a limited liability company organized under the
laws of the state of Delaware, hereby agree with State Street Bank and Trust
Company, a trust company organized under the laws of the Commonwealth of
Massachusetts, acting through its division, State Street Global Advisors (the
"Sub-Advisor"), as follows:
1. INVESTMENT DESCRIPTION; APPOINTMENT
The Company desires to employ the capital of the Company's
investment funds listed on Annex A hereto (individually, a "Fund" and
collectively, the "Funds") by investing and reinvesting in investments of the
kind and in accordance with the limitations specified in its Agreement and
Declaration of Trust, as amended ("Declaration of Trust"), and in their
Prospectus and Statement of Additional Information relating to the Funds as in
effect and which may be amended from time to time, and in such manner and to
such extent as may from time to time be approved by the Board of Trustees of the
Company. Copies of the Funds' Prospectus and Statement of Additional Information
and the Company's Declaration of Trust, as amended, have been or will be
submitted to the Sub-Advisor. The Company agrees to provide copies of all
amendments to the Funds' Prospectus and Statement of Additional Information and
the Company's Declaration of Trust to the Sub-Advisor on an on-going basis. The
Company desires to employ and hereby appoints the Sub-Advisor to act as
investment sub-advisor to the Funds. The Sub-Advisor accepts the appointment and
agrees to furnish the services described herein for the compensation set forth
below.
2. SERVICES AS INVESTMENT SUB-ADVISOR
Subject to the supervision of the Board of Trustees of the
Company and of LMI, the Funds' investment adviser, the Sub-Advisor will (a) act
in conformity with the Company's Declaration of Trust, the Investment Company
Act of 1940, the Investment Advisers Act of 1940
<PAGE> 2
(as applicable) and the Internal Revenue Code of 1986, as the same may from time
to time be amended, (b) make investment decisions for the Funds in accordance
with the Funds' investment objectives and policies as stated in the Funds'
Prospectus and Statement of Additional Information as in effect and, after
notice to the Sub-Advisor, which may be amended from time to time, (c) place
purchase and sale orders on behalf of the Funds to effectuate the investment
decisions made, (d) maintain books and records with respect to the securities
transactions of the Funds and furnish the Company's Board of Trustees such
periodic, regular and special reports as the Board may request; and (e) treat
confidentially and as proprietary information of the Company, all records and
other information relative to the Company and prior, present or potential
shareholders; and will not use such records and information for any purpose
other than performance of its responsibilities and duties hereunder, except
after prior notification to and approval in writing by the Company, which
approval shall not be unreasonably withheld and such records may not be withheld
where the Sub-Advisor may be exposed to civil or criminal contempt proceedings
for failure to comply, when requested to divulge such information by duly
constituted authorities, or when so requested by the Company. In providing those
services, the Sub-Advisor will supervise the Funds' investments and conduct a
continual program of investment, evaluation and, if appropriate, sale and
reinvestment of the Funds' assets. In addition, the Sub-Advisor will furnish the
Funds or LMI with whatever statistical information the Funds or LMI may
reasonably request with respect to the instruments that the Funds may hold or
contemplate purchasing.
3. BROKERAGE
In executing transactions for the Funds and selecting brokers
or dealers, the Sub- Advisor will use its best efforts to seek the best overall
terms available and shall execute or direct the execution of all such
transactions in a manner permitted by law and in a manner that is in the best
interest of the Funds and their shareholders. In assessing the best overall
terms available for any Funds transactions, the Sub-Advisor will consider all
factors it deems relevant including, but not limited to, breadth of the market
in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of any
commission for the specific transaction and on a continuing basis. Pursuant to
its investment determinations for the Funds, in placing orders with brokers and
dealers, the Sub-Advisor will attempt to obtain the best net price and the most
favorable execution of its orders. Consistent with this obligation, when the
execution and price offered by two or more brokers or dealers are comparable,
the Sub-Advisor may, in its discretion, purchase and sell portfolio securities
to and from brokers and dealers who provide the Company with research advice and
other services. LMI hereby authorizes the Sub-Adviser to execute security
transactions through State Street Brokerage Services, Inc., an affiliate of
Sub-Advisor, at the discretion of Sub-Advisor, to the extent that such
transactions are consistent with requirements of the Investment Company Act of
1940 and are executed on terms which are at least as favorable as are generally
available from other brokers. If LMI or the Company requests the Sub-Advisor to
execute transactions through a specific broker, the Sub-Advisor shall not be
liable for any loss by reason thereof.
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<PAGE> 3
LMI authorizes and empowers the Sub-Advisor to direct the
Company's custodian (the "Custodian") to open and maintain brokerage accounts
for securities and other property, including financial and commodity futures and
commodities and options thereon (all such accounts hereinafter called "brokerage
accounts") for and in the name of the Company and to execute for the Company as
its agent and attorney-in-fact any required standard customer agreements with
such broker or brokers as the Sub-Advisor shall select as provided above. The
Sub-Advisor may, using such of the securities and other property of the Funds as
the Sub- Advisor deems necessary or desirable, direct the Custodian to deposit
for the Company original and maintenance brokerage and margin deposits and
otherwise direct payments of cash, cash equivalents and securities and other
property into such brokerage accounts and to such brokers as the Sub-Advisor
deems desirable or appropriate.
The Sub-Advisor further shall have the authority to instruct the Custodian (i)
to pay cash for securities and other property delivered to the Custodian for the
Funds, (ii) to deliver securities and other property against payment for the
Funds, and (iii) to transfer assets and funds to such brokerage accounts as the
Sub-Advisor may designate, all consistent with the powers, authorities and
limitations set forth herein. The Sub-Advisor shall not have authority to cause
the Custodian to deliver securities and other property or pay cash to the
Sub-Advisor.
4. INFORMATION PROVIDED TO THE COMPANY
The Sub-Advisor will keep the Company and LMI informed of
developments materially affecting the Funds, and will on its own initiative,
furnish the Company and LMI on at least a quarterly basis with whatever
information the Sub-Advisor believes is appropriate for this purpose.
5. STANDARD OF CARE
The Sub-Advisor shall exercise its best judgment in rendering
the services described in paragraphs 2 and 3 above. The Sub-Advisor shall not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Funds in connection with the matters to which this Agreement relates, except
(a) a loss resulting from a breach of fiduciary duty with respect to the receipt
of compensation for services (in which case any award of damages shall be
limited to the period and the amount set forth in Section 36(b)(3) of the
Investment Company Act of 1940, as amended) or (b) a loss resulting from willful
misfeasance, bad faith or gross negligence on its part in the performance of its
duties or from reckless disregard by it of its obligations and duties under this
Agreement (each such breach, act or omission described in (a) or (b) shall be
referred to as "Disqualifying Conduct").
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<PAGE> 4
6. COMPENSATION
In consideration of the services rendered pursuant to this
Agreement, LMI will pay the Sub-Advisor on the first business day of each month
a fee for the previous month as detailed in Annex A attached to this Agreement.
The Sub-Advisor shall have no right to obtain compensation directly from the
Funds or the Company for services provided hereunder and agrees to look solely
to LMI for payment of fees due. Upon any termination of this Agreement before
the end of a month, the fee for such part of that month shall be prorated
according to the proportion that such period bears to the full monthly period
and shall be payable upon the date of termination of this Agreement. For the
purpose of determining fees payable to the Sub-Advisor, the value of the Funds'
net assets shall be computed at the times and in the manner specified in the
Funds' Prospectus or Statement of Additional Information relating to the Funds
as from time to time in effect.
Should it be determined that the Investment Sub-Advisory
Agreements between the Company, LMI and Sub-Advisor for the Funds listed in
Annex A, are terminated as a result of the assignment thereof prior to the
effective date of this Agreement, compensation hereunder shall commence as of
the date of such termination.
7. EXPENSES
The Sub-Advisor will bear all expenses in connection with the
performance of its services under this Agreement, which expenses shall not
include brokerage fees or commissions in connection with the effectuation of
securities transactions. The Company will bear certain other expenses to be
incurred in its operation, including but not limited to: organizational
expenses, taxes, interest, brokerage fees and commissions, if any; fees of
trustees of the Company who are not officers, directors or employees of the
Sub-Advisor, LMI, the Funds' sub- administrator or any of their affiliates;
Securities and Exchange Commission fees and state Blue Sky qualification fees;
out-of-pocket expenses of custodians, transfer and dividend disbursing agents
and the Company's sub-administrator and transaction charges of custodians;
insurance premiums; outside auditing and legal expenses; costs of maintenance of
the Company's existence; costs attributable to investor services, including
without limitation, telephone and personnel expenses; costs of preparing and
printing prospectuses and statements of additional information for regulatory
purposes and for distribution to existing shareholders; costs of shareholders'
reports and meetings of the shareholders of the Funds and of the officers or
Board of Trustees of the Company; and any extraordinary expenses.
8. SERVICES TO OTHER COMPANIES OR ACCOUNTS
The Company understands that the Sub-Advisor now acts, will
continue to act and may act in the future as investment adviser to fiduciary and
other managed accounts and as investment adviser to one or more other investment
companies or series of investment
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<PAGE> 5
companies, and the Company has no objection to the Sub-Advisor so acting,
provided that whenever the Funds and one or more other accounts or investment
companies advised by the Sub-Advisor have available funds for investment,
investments suitable and appropriate for each will be allocated in accordance
with procedures believed to be equitable to each entity. Similarly,
opportunities to sell securities will be allocated in an equitable manner. The
Company recognizes that in some cases this procedure may limit the size of the
position that may be acquired or disposed of for the Funds. In addition, the
Company understands that the persons employed by the Sub-Advisor to assist in
the performance of the Sub-Advisor's duties hereunder will not devote their full
time to such service and nothing contained herein shall be deemed to limit or
restrict the right of the Sub-Advisor or any affiliate of the Sub-Advisor to
engage in and devote time and attention to other business or to render services
of whatever kind or nature.
9. TERM OF AGREEMENT
This Agreement shall become effective as of the date first
written above, shall continue for a period of two years thereafter, and shall
continue in effect for a period of more than two years thereafter only so long
as such continuance is specifically approved at least annually by (i) the Board
of Trustees of the Company or (ii) a vote of a "majority" (as defined in the
Investment Company Act of 1940, as amended) of the Funds' outstanding voting
securities, provided that in either event the continuance is also approved by a
majority of the Board of Trustees who are not "interested persons" (as defined
in said Act) of any party to this Agreement, by vote cast in person at a meeting
called for the purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' written notice, by LMI, the Board of Trustees of
the Company or by vote of holders of a majority of a Fund's shares, or upon 90
days' written notice by the Sub-Advisor, and will terminate automatically upon
any termination of the advisory agreement between the Company and LMI. In
addition, this Agreement will also terminate automatically in the event of its
assignment (as defined in said Act). The Sub-Advisor agrees to notify the
Company of any circumstances that might result in this Agreement being deemed to
be assigned.
10. REPRESENTATIONS OF THE COMPANY AND THE SUB-ADVISOR
The Company represents that: (i) a copy of its Declaration of
Trust, dated June 1, 1998, together with all amendments thereto, is on file in
the office of the Secretary of the Commonwealth of Massachusetts; (ii) the
appointment of the Sub-Advisor has been duly authorized; and (iii) it has acted
and will continue to act in conformity with the Investment Company Act of 1940,
as amended, and other applicable laws.
LMI represents that: (i) it is authorized to perform the
services herein; (ii) the appointment of the Sub-Advisor has been duly
authorized; and (iii) it will act in conformity with the Investment Company Act
of 1940, as amended, and other applicable laws.
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<PAGE> 6
The Sub-Advisor represents that it is authorized to perform
the services described herein.
11. INDEMNIFICATION
LMI shall indemnify and hold harmless the Sub-Advisor from and
against any and all claims, losses, liabilities or damages (including reasonable
attorneys' fees and other related expenses), howsoever arising from or in
connection with this Agreement or the performance by the Sub-Advisor of its
duties hereunder; provided, however, that nothing contained herein shall require
that the Sub-Advisor be indemnified for Disqualifying Conduct.
12. AMENDMENT OF THIS AGREEMENT
No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge or
termination is sought. No amendment of this Agreement shall be effective with
respect to any Fund until approved by vote of a majority of the outstanding
voting securities of such Fund.
13. LIMITATION OF LIABILITY
This Agreement has been executed on behalf of the Company by
the undersigned officer of the Company in his capacity as an officer of the
Company. The obligations of this Agreement shall be binding upon the assets and
property of each Fund only and not upon the assets and property of any other
investment fund of the Company and shall not be binding upon any Trustee,
officer or shareholder of the Fund and/or the Company individually.
14. ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the
parties hereto.
15. GOVERNING LAW
This Agreement shall be governed in accordance with the laws
of the Commonwealth of Massachusetts.
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<PAGE> 7
If the foregoing accurately sets forth our agreement, kindly
indicate your acceptance hereof by signing and returning the enclosed copy
hereof.
Very truly yours,
WORLDWIDE INDEX FUNDS
Dated: By: /s/ F. Brian Cerini
-------------------- -------------------
Name: F. Brian Cerini
Title: President
LMI INVESTMENT ADVISORS LLC
Dated: By: /s/ F. Brian Cerini
-------------------- -------------------
Name: F. Brian Cerini
Title: Member
Accepted:
STATE STREET BANK AND TRUST
COMPANY
By Dated:
---------------------------- ----------------------
Name:
Title:
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<PAGE> 8
ANNEX A
For the services provided and expenses assumed pursuant to the
Agreement, the Sub-Advisor will be paid a monthly fee, absent fee waivers, based
upon each Fund's average daily net assets as follows:
FUND FEE
- ---- ---
AUSTRALIA INDEX FUND.................................................. __%
FRANCE INDEX FUND..................................................... __%
GERMANY INDEX FUND.................................................... __%
HONG KONG INDEX FUND.................................................. __%
ITALY INDEX FUND...................................................... __%
JAPAN INDEX FUND...................................................... __%
NETHERLANDS INDEX FUND................................................ __%
SPAIN INDEX FUND...................................................... __%
SWEDEN INDEX FUND..................................................... __%
SWITZERLAND INDEX FUND ............................................... __%
UNITED KINGDOM INDEX FUND............................................. __%
EUROPE INDEX FUND..................................................... __%
INTERNATIONAL INDEX FUND.............................................. __%
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