<PAGE> 1
As filed with the Securities and Exchange Commission on September 30, 1998
File No. 333-____
File No. 811-____
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ X ]
Pre-Effective Amendment No. ____ [ ]
Post-Effective Amendment No. ____ [ ]
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [ X ]
Amendment No. ____ [ ]
NEW COVENANT FUNDS
(Exact Name of Registrant as Specified in Charter)
200 East Twelfth Street
Jeffersonville, Indiana 47130
-----------------------------
(Address of Principal Executive Offices)
(502) 569-5977
--------------
(Registrant's Telephone Number)
Nancy H. Strapp, President
New Covenant Funds
200 East Twelfth Street, Suite B
Jeffersonville, Indiana 47130
-----------------------------
(Name and Address of Agent for Service)
Copies to:
Patrick W. D. Turley, Esq. Ms. Sandra L. Adams
Dechert Price & Rhoads First Data Investor Services Group
1775 Eye Street, N.W. 3200 Horizon Drive
Washington, DC 20006-2401 King of Prussia, PA 19406-0903
Approximate Date of Proposed Public Offering: As soon as practicable after the
effective date of this Registration Statement.
Title of Securities Being Registered: Shares of Beneficial Interest of the New
Covenant Funds.
Registrant will file a notice pursuant to Rule 24f-2 under the Investment
Company Act of 1940, as amended, within ninety days after its fiscal year end.
Registrant hereby amends this Registration Statement under the Securities Act of
1933 on such date or dates as may be necessary to delay its effective date until
Registrant shall file a further amendment which specifically states that such
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until such
Registration Statement shall become effective on such date as the Securities and
Exchange Commission, acting pursuant to said Section 8(a), may determine.
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[OUTSIDE BACK COVER]
- --------------------
ADDITIONAL INFORMATION
- ----------------------
Annual/Semi-Annual Report to Shareholders:
These reports include financial statements and a
complete listing of the portfolio of investments for each Fund.
Statement of Additional Information (SAI):
The SAI contains more detailed information on all
aspects of the Funds. It has been filed with the Securities
and Exchange Commission and is incorporated by reference.
To request a free copy of the current annual/semi-annual
report or SAI, please write or call:
First Data Distributors, Inc.
3200 Horizon Drive
King of Prussia, PA 19406
(800) __________
You may visit the Securities and Exchange Commission's
Internet website (www.sec.gov) to view reports and other
information about the Funds.
In addition, this information may be obtained in person at
the SEC's Public Reference Room in Washington, DC
(telephone 800-SEC-0330) or by mail by sending your request,
along with a duplicating fee, to the SEC's Public Reference
Section, Washington, DC 20549-6009
SEC file #811-________
[OUTSIDE FRONT COVER]
PROSPECTUS
December _ , 1998
NEW COVENANT FUNDS
New Covenant Growth Fund
New Covenant Income Fund
New Covenant Balanced Growth Fund
New Covenant Balanced Income Fund
200 East Twelfth Street
Jeffersonville, IN 47130
An investment in any of the Funds is not a deposit with the Funds' investment
adviser, New Covenant Trust Company, N.A. or any depository institution. Shares
are not insured or guaranteed by the Federal Deposit Insurance Corporation, the
Federal Reserve or any other government agency.
The securities described in this prospectus have not been approved or
disapproved by the Securities and Exchange Commission. The Securities and
Exchange Commission does not guarantee that the information in this prospectus
is accurate or complete nor have they passed on its adequacy. Any representation
to the contrary is a criminal offense.
2
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CONTENTS
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THE FUNDS 4
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Concise fund-by-fund descriptions are provided on the following pages.
Each description provides the specific Fund objectives, strategies,
risks, suitability and performance. Before investing, make sure that
the Fund's objectives match your own. The Funds cannot be certain that
they will achieve their objectives. Please keep this prospectus with
your investment records.
A DESCRIPTION OF EACH FUND
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Objectives, Strategies, Risks, Suitability and Performance
New Covenant Growth Fund 4
New Covenant Income Fund 5
New Covenant Balanced Growth Fund 7
New Covenant Balanced Income Fund 8
PERFORMANCE
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Performance of the Funds 9
Past Performance 9
FEES AND EXPENSES OF THE FUNDS
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Shareholder Fees 9
Annual Fund Operating Expenses 10
Example 10
OTHER POLICIES AND RISKS 11
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RISK MANAGEMENT 12
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MANAGEMENT OF THE FUNDS
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The Advisor 13
The Sub-Advisors 13
YOUR INVESTMENT
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Buying Shares 15
Selling Shares 17
Exchange or Transfer of Shares 19
SHAREHOLDER SERVICES 20
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DISTRIBUTIONS AND TAXES 20
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3
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SUBJECT TO COMPLETION, DATED SEPTEMBER , 1998
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE.
THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT
SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
THE FUNDS
---------
The New Covenant Funds have been organized with participation from the
Presbyterian Church (U.S.A.) Foundation to facilitate responsible financial
management of the investment and endowment assets of the Presbyterian Church
(U.S.A.) and of charitable organizations which are part of or associated with
the Presbyterian Church (U.S.A.). The Foundation is a charitable, religious
organization that supports the mission of the Presbyterian Church (U.S.A.). The
Funds may also serve the investment needs of certain other charitable or
religious organizations, including organizations that are part of a religious
denomination with which the Presbyterian Church (U.S.A.) has a relationship.
The investment needs of other ecumenical and charitable organizations may also
be met. There are currently four separate investment portfolios (Funds) in
which you may invest.
The investment adviser to the Funds is New Covenant Trust Company, N.A. (the
"Advisor"). The Advisor, which is a federally chartered national trust bank, is
a subsidiary of the Foundation and provides certain investment advisory services
that were previously offered by the Foundation. The Advisor acts as a "manager
of managers" for the Funds pursuant to which it selects and retains various
sub-advisers (the "Sub-Advisors") who manage portions of the assets of the Funds
that are allocated to them by the Advisor. The Sub-Advisors employ portfolio
managers who make the day-to-day investment decisions regarding the portfolio
holdings of the Funds. The Advisor oversees the investment activities and
performance of the Sub-Advisors and it maintains an investment committee that
assists with this review process.
A DESCRIPTION OF EACH FUND
--------------------------
INVESTMENT PRINCIPLES
- ---------------------
In addition to each Fund's objectives and strategies, each of our Funds has the
common objective of making investments consistent with social-witness principles
adopted by the General Assembly of the Presbyterian Church (U.S.A). These
principles include, among others, certain limitations on investments in military
contractors, distillers of alcoholic beverages and tobacco companies, and
gambling companies or manufacturers of gambling equipment. Under these
principles, the Funds may be required to sell otherwise profitable investments
in companies which have been identified as being in conflict with the
established social-witness principles of the Presbyterian Church (U.S.A.).
Beyond these principles, each Fund pursues different investment objectives and
strategies. You should carefully consider these objectives and strategies before
deciding to invest.
Each Fund's investment objective is fundamental, which means that it may not be
changed without a shareholder vote. All investment policies of each Fund which
are not specifically identified as fundamental may be changed by the Board of
Trustees without approval of Fund shareholders.
NEW COVENANT GROWTH FUND
------------------------
INVESTMENT OBJECTIVE
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The GROWTH FUND'S investment objective is long-term capital
appreciation. Dividend income, if any, will be incidental.
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PRINCIPAL STRATEGIES
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Under normal market conditions, at least 80% of the Fund's assets
will be invested in a diversified portfolio of common stocks of
companies that the Fund's portfolio managers believe have
long-term growth potential.
The Fund invests in common stocks and other equity securities of
companies of all sizes, domestic and foreign. Up to 40% of the
Fund's assets may be invested in securities of foreign issuers.
In selecting stocks, the portfolio managers search for stocks that
are the best values based on fundamental and cash-flow analyses.
This means that the portfolio managers believe that the stocks are
reasonably priced and have above-average appreciation potential.
The portfolio managers seek to manage risk by diversifying
investments across companies, industries and investment
strategies.
On occasion, up to 20% of the Fund's assets may be invested in
bonds which are rated within the four highest grades assigned by
independent rating agencies or in unrated equivalents (investment
grade) or in commercial paper within the two highest rating
categories of independent rating agencies. The Fund may also use
options and futures contracts as hedging techniques.
The remainder of the Fund's assets may be invested in cash or cash
equivalents.
RISK CONSIDERATIONS
- -------------------
- The main risk is stock market risk, or the risk that the prices
of securities held by the Fund will fall due to various conditions
or circumstances that may be unpredictable. Stock prices generally
fall or stagnate when interest rates rise.
- Performance of the Fund's investments in non-U.S. companies and
in companies operating internationally or in foreign countries
will depend principally on economic conditions in their product
markets, the securities markets where their securities are traded,
and on currency exchange rates.
- As with any investment, there is the risk of a decline in your
principal investment in the Fund.
- The success of the Fund's investments depends on the portfolio
managers' skill in assessing the potential of the stocks they buy.
INVESTOR SUITABILITY
- --------------------
The Fund may be appropriate for investors who:
- prefer a fund that uses an appreciation-oriented strategy
- can accept the risks of investing in a portfolio of common stocks
- can tolerate performance which can vary substantially from year
to year
- have a long-term investment horizon
The Fund probably will not be suitable for you if you have a short-term
investment horizon, are investing emergency reserve money, are seeking ordinary
dividend and interest income, or find it difficult to deal with an investment
that may go up and down in value.
NEW COVENANT INCOME FUND
------------------------
INVESTMENT OBJECTIVE
- --------------------
The INCOME FUND'S investment objective is a high level of current
income with preservation of capital.
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PRINCIPAL STRATEGIES
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Under normal market conditions, at least 80% of the Fund's assets will
be invested in a diversified portfolio of bonds and other debt
obligations of varying maturities.
The Fund invests in corporate and government bonds issued or guaranteed
by the U.S. Government or one of its agencies and, to a lesser extent,
by foreign governments. The Fund may also invest, to a lesser extent,
in mortgage-backed and asset-backed securities. The corporate bonds in
which the Fund invests have been issued by domestic and international
companies that operate in a wide variety of industries.
At least 65% of the Fund's assets will be invested in bonds which are
rated within the four highest grades assigned by independent rating
agencies or in unrated equivalents (investment grade). The Fund may
invest up to 20% of its assets in bonds that are rated below investment
grade. On occasion, up to 20% of the Fund's assets may be invested in
commercial paper within the two highest rating categories of
independent rating agencies. The Fund may also invest up to 40% of its
assets in the fixed-income securities of foreign issuers. The Fund may
also use options and futures contracts as hedging techniques.
Investments for the Fund will be selected based on:
- a traditional bond management style
- the use of interest-rate and yield-curve analyses
- investing opportunistically in fixed-income securities based
on credit analysis and, to a lesser extent, investing in
bonds issued by foreign governments and companies; and
- using the above disciplines to invest in high-yield bonds and
fixed-income securities of foreign issuers
The remainder of the Fund's assets may be invested in cash or cash
equivalents.
RISK CONSIDERATIONS
- -------------------
- The main risk is that the value of the securities the Fund holds
will fall as a result of upward changes in interest rates. The
market value of bonds generally declines when interest rates rise.
This risk is greater for bonds with longer maturities.
- The Fund's investments will decrease in value if any of the bonds
it owns are downgraded in credit rating or default on principal or
interest payments.
- To a lesser extent, the Fund may be subject to prepayment risk
when the Fund invests in mortgage-backed securities.
- Foreign securities carry additional risks, including currency,
natural event, and political risks.
- As with any investment, there is the risk of a decline in your
principal investment in the Fund.
- The success of the Fund's investments depends on the portfolio
managers' skill in assessing the potential of the bonds they buy.
INVESTOR SUITABILITY
- --------------------
The Fund may be appropriate for investors who:
- Prefer a bond fund that invests in both corporate and U.S.
Government securities
- Desire income to complement a portfolio of more aggressive
investments
- Can tolerate performance which may vary from year to year
- Prefer a relatively conservative investment for income
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The Fund probably will not be suitable for you if you have a short-term
investment horizon, are investing emergency reserve money, or are seeking high
growth or maximum investment return.
NEW COVENANT BALANCED GROWTH FUND
---------------------------------
INVESTMENT OBJECTIVE
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The BALANCED GROWTH FUND'S investment objective is to produce
reasonable long-term capital appreciation with less risk than would be
present in a portfolio of only common stocks.
PRINCIPAL STRATEGIES
- --------------------
To pursue its objective, the Fund invests primarily in shares of the
GROWTH FUND and the INCOME FUND, with a majority of its assets
generally invested in shares of the GROWTH FUND. These are referred to
as the "underlying funds".
Between 45% and 75% of the Fund's assets (with a "neutral" position of
approximately 60%) is invested in shares of the GROWTH FUND, with the
balance of its assets invested in shares of the INCOME FUND.
The Fund will periodically rebalance its investments in the GROWTH FUND
and the INCOME FUND, within the limits described above. In implementing
this rebalancing strategy, past and anticipated future performance of
both Funds is taken into account.
The remainder of the Fund's assets may be invested in cash or cash
equivalents.
RISK CONSIDERATIONS
- -------------------
- Investing in any balanced mutual fund represents a compromise
among competing investing strategies. This creates a risk that,
under any given set of market conditions, a balanced fund will
under-perform another mutual fund pursuing another strategy of
investing not resulting from such a compromise.
- Investors in the Fund bear to some extent the risks of the
underlying Funds (GROWTH FUND and INCOME FUND). These risks are
the same as the ones you would bear if you invested most of your
assets in the GROWTH FUND and the balance of your assets in the
INCOME FUND. See "Risk Considerations" as described previously for
these Funds.
- Rebalancing activities, while maintaining the Fund's investment
risk to reward ratio, may cause the Fund to under-perform relative
to its performance if rebalancing had not taken place.
- As with any investment, there is the risk of a decline in your
principal investment in the Fund.
- Performance depends on the performance of the underlying funds in
which it invests.
INVESTOR SUITABILITY
- --------------------
The Fund may be appropriate for you if you:
- prefer a balanced investment program which allocates assets
between growth and income portfolios, with an emphasis on growth
- can tolerate the level of risk represented by the common stock
portion of the portfolio allocation
- can tolerate performance which will vary from year to year
- have a longer-term investment horizon
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The Fund probably will not be suitable for you if you have a short-term
investment horizon, are investing emergency reserve money, desire only income
or prefer to avoid an investment that may go up and down in value.
NEW COVENANT BALANCED INCOME FUND
---------------------------------
INVESTMENT OBJECTIVE
- --------------------
The BALANCED INCOME FUND'S investment objective is to produce
reasonable current income and some long-term growth of capital.
PRINCIPAL STRATEGIES
- --------------------
To pursue its objective, the Fund invests primarily in shares of the
GROWTH FUND and the INCOME FUND, with a majority of its assets
generally invested in shares of the INCOME FUND. These are referred to
as the "underlying funds".
Between 50% and 80% of the Fund's assets (with a "neutral" position of
approximately 65%) is invested in shares of the INCOME FUND, with the
balance of its assets invested in shares of the GROWTH FUND.
The Fund will periodically rebalance its investments in the GROWTH FUND
and the INCOME FUND, within the limits described above. In implementing
this rebalancing strategy, past and anticipated future performance of
both Funds is taken into account.
The remainder of the Fund's assets may be invested in cash or cash
equivalents.
RISK CONSIDERATIONS
- -------------------
- Investing in any balanced mutual fund represents a compromise
among competing investing strategies. This creates a risk that,
under any given set of market conditions, a balanced fund will
under-perform another mutual fund pursuing another strategy of
investing not resulting from such a compromise.
- Investors in the Fund bear to some extent the risks of the
underlying Funds (GROWTH FUND and INCOME FUND). These risks are
the same as if you invested most of your assets in the INCOME FUND
and the balance of your assets in the GROWTH FUND. See "Risk
Considerations" as described previously for these Funds.
- Rebalancing activities, while maintaining the Fund's investment
risk to reward ratio, may cause the Fund to under-perform relative
to its performance if rebalancing had not taken place.
- As with any investment, there is the risk of a decline in your
principal investment in the Fund.
- Performance depends on the performance of the underlying funds in
which it invests.
INVESTOR SUITABILITY
- --------------------
The Fund may be appropriate for you if you:
- prefer a balanced investment program which allocates assets
between growth and income portfolios, with an emphasis on income
- prefer that more than half of the portfolio be
fixed-income-producing securities
- can tolerate performance which will vary from year to year
- have a longer-term investment horizon
The Fund probably will not be suitable for you if you have a short-term
investment horizon, are investing emergency reserve money, require only growth
or prefer to avoid an investment that may go up and down in value.
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PERFORMANCE
-----------
PERFORMANCE OF THE FUNDS
- ------------------------
Although past performance of a fund is no guarantee of how it will perform in
the future, historical performance may give you some indication of the risks of
investing in a fund. Performance demonstrates how a fund's returns have varied
over time. The Funds are recently organized as registered investment companies
and have no performance history as registered investment companies. Once the
Funds have a return for at least one calendar year as registered investment
companies, the Funds will have bar charts and performance tables showing the
Funds annual returns compared to the returns of a benchmark index.
PAST PERFORMANCE
- ----------------
Set forth below is certain past performance information for four privately
managed investment funds that were previously managed by the Presbyterian Church
(U.S.A.) Foundation (the predecessor investment entity to the Advisor), each of
whose assets were transferred to their corresponding Fund upon the establishment
of the Funds. These private funds had investment objectives and policies
substantially similar to those of the Funds and were managed subject to the same
"manager of managers" investment style that is utilized by the Funds. These
private funds were not subject to the requirements of the Investment Company Act
of 1940 or the Internal Revenue Code of 1986, the limitations of which might
have adversely affected performance results. The prior performance depicted has
been restated to reflect the imposition of the total estimated expenses of the
Funds for their initial fiscal year rather than the actual expenses of the
private funds. Past performance is not indicative of future results, which may
be higher or lower that the performance shown below.
Average Annual Total Return For the Periods Indicated
-----------------------------------------------------
Through September 30, 1998
--------------------------
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Income Pool(1)
<S> <C> <C> <C> <C>
Lehman Brothers Intermediate
Government/ Corporate Bond Index(2)
1 The Income Pool was managed in the same manner that the Income Fund is
managed.
2 The Lehman Brothers Intermediate Government/Corporate Bond Index (the
"Lehman Index") is an unmanaged index, generally representative of the
intermediate fixed-income market.
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Growth Pool(1)
Wilshire 5000 Equity Index (75%
weighting) and the Morgan Stanley
Capital International
Europe/Africa/Far East Index (25%
weighting)2
1 The Growth Pool was managed in the same manner that the Growth Fund is
managed.
2 The Wilshire 5000 Equity Index (the "Wilshire Index") is an unmanaged
index representing over 5000 companies that are traded on various U.S.
securities exchanges. The Morgan Stanley Capital International
Europe/Africa/Far East Index (the "EAFE Index") is an unmanaged index
consisting of securities listed on the exchanges in European,
Australasian and Far Eastern Markets.
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
Balanced Growth Pool(1)
</TABLE>
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<TABLE>
<CAPTION>
The Balanced Growth Composite Index(2)
1 The Balanced Growth Pool was managed in the same manner that the
Balanced Growth Fund is managed.
2 The Balanced Growth Composite Index represents a weighted composite of
each of the Indexes utilized for the Income Pool and the Growth Pool,
as set forth above.
One Year Three Years Five Years Ten Years
-------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Balanced Income Pool(1)
The Balanced Income Composite Index(2)
1 The Balanced Income Pool was managed in the same manner that the
Balanced Income Fund is managed.
2 The Balanced Income Composite Index represents a weighted composite of
each of the Indices utilized for the Income Pool and the Growth Pool,
as set forth above.
</TABLE>
FEES AND EXPENSES OF THE FUNDS
------------------------------
This section describes the fees and expenses that you may pay if you buy and
hold shares of the Funds. Shareholder fees are costs that are charged to you
directly. These fees are not charged on dividend reinvestments or exchanges.
Annual fund operating expenses are deducted from the Funds' assets every year,
so they are paid indirectly by all investors. The Funds have no sales charge
(load).
SHAREHOLDER FEES - ALL FUNDS
- ----------------------------
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price)...................None
Maximum Deferred Sales Load (as a
percentage of offering price).........................None
Maximum Sales Load on reinvested dividends
(as a percentage of offering price)...................None
Redemption Fees (1)...................................None
Exchange Fee..........................................None
Maximum Account Fee...................................None
(1) To redeem shares by wire transfer, the Funds' transfer agent charges a fee
of $9.00 for each wire redemption.
ANNUAL FUND OPERATING EXPENSES - ALL FUNDS
- ------------------------------------------
<TABLE>
<CAPTION>
MANAGEMENT DISTRIBUTION OTHER TOTAL ANNUAL FUND
FUND NAME FEES FEES EXPENSES (2) OPERATING EXPENSES
--------- ---------- ------------ ----------- ------------------
<S> <C> <C> <C> <C>
GROWTH FUND ______ None ______ _____
INCOME FUND ______ None ______ _____
BALANCED GROWTH FUND (1) None None ______ _____
BALANCED INCOME FUND (1) None None ______ _____
</TABLE>
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(1) The BALANCED FUNDS invest their assets primarily in the GROWTH FUND and
the INCOME FUND. As investors in those Funds, each of the two BALANCED
FUNDS bears its pro-rata share of the fees and other expenses of those
Funds. The fees and expenses included in this table for the two BALANCED
FUNDS include both (a) their own respective fees and expenses, and (b)
their respective pro-rata share of the fees and expenses of the Funds in
which each BALANCED FUND invests. Total fees and expenses to be borne by
investors in either BALANCED FUND will depend on the portion of the Funds'
assets invested in the GROWTH FUND and in the INCOME FUND. The amounts
reported in the table are based on the BALANCED GROWTH FUND'S targeted
asset allocation of 60% invested in the GROWTH FUND and 40% invested in
the INCOME FUND, and on the BALANCED INCOME FUND'S targeted asset
allocation of 65% in the INCOME FUND and 35% in the GROWTH FUND. Within
limits, these asset allocations will change. A change in the asset
allocations of either BALANCED FUND could increase or reduce the fees and
expenses actually borne by investors in that Fund.
(2) "Other Expenses" is based on estimated amounts for the first fiscal year.
EXAMPLE
- -------
This example is designed so that you may compare the cost of investing in the
Funds with the cost of investing in other mutual funds. The example assumes
that:
- you invest $10,000 for the time periods indicated;
- you redeem all of your shares at the end of the time periods;
- your investment has a hypothetical 5% return each year;
- all distributions are reinvested; and
- each Fund's operating expenses remain the same.
Because actual return and expenses will be different, the example is for
comparison purposes only. Each Fund's actual performance and expenses may be
higher or lower. Based on the above assumptions, your costs for each Fund would
be:
<TABLE>
<CAPTION>
FUND NAME 1 YEAR 3 YEARS
--------- ------ -------
<S> <C> <C>
GROWTH FUND ____ ____
INCOME FUND ____ ____
BALANCED GROWTH FUND ____ ____
BALANCED INCOME FUND ____ ____
</TABLE>
OTHER POLICIES AND RISKS
------------------------
Each of the Fund's portfolio securities and investment practices offer certain
opportunities and carry various risks. Major investments and risk factors are
outlined in the front of the Prospectus. Below are brief descriptions of other
securities and practices, along with their risks, which apply to the GROWTH FUND
and the INCOME FUND.
SOCIAL-WITNESS PRINCIPLES: Since the Funds have made investing in accordance
with social-witness principles approved by the General Assembly of the
Presbyterian Church (U.S.A.) one of their investment policies, they may choose
not to make, or to divest, investments otherwise consistent with their
individual investment objectives. This means that there is a risk that the Funds
may under-perform other similar mutual funds that do not consider social-witness
principles in their investing.
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TAX STATUS IMPLICATIONS: The Funds have been organized primarily to serve the
investment needs of tax-exempt organizations. This focus permits the portfolio
managers of the Funds to use trading and investing strategies that might be
unfavorable to investors who pay income taxes. These strategies do not adversely
affect investors who are tax-exempt organizations and may be implemented in
order to increase the investment returns realized by such organizations.
INVESTMENT TECHNIQUES: To a limited extent, the GROWTH FUND and the INCOME FUND
may engage in securities lending arrangements, enter into repurchase agreements,
and may hold certain derivative securities, principally put and call options for
hedging purposes. The Funds pursue these activities to marginally increase their
investment returns, but these activities also marginally increase the Funds'
risks.
PUT AND CALL OPTIONS: The value of call options tends to increase or decrease in
the same direction as the price change of the securities underlying them, and
the value of put options tends to increase or decrease in the opposite direction
as the price change of the securities underlying them. However, because these
options can be purchased for a fraction of the costs of the underlying security,
their price changes can be very large in relation to the amount invested in
them. This means that options are volatile investments. As a result, options are
riskier investments than the securities underlying them. A call or put may be
purchased only if, after the purchase, the value of all call and put options
held by a Fund will not exceed 20% of the Fund's total assets.
WHEN-ISSUED SECURITIES: The Funds may invest in securities prior to their date
of issue. These securities could rise or fall in value by the time they are
actually issued, which may be any time from a few days to over a year.
REPURCHASE AGREEMENTS: The Funds may buy securities with the understanding that
the seller will buy them back with interest at a later date. If the seller is
unable to honor its commitment to repurchase the securities, the Funds could
lose money.
MORTGAGE-BACKED SECURITIES: These securities, which represent interests in pools
of mortgages, may offer attractive yields but generally carry additional risks.
The prices and yields of mortgage-related securities typically assume that the
securities will be redeemed at a given time before maturity. When interest rates
fall substantially, these securities usually are redeemed early because the
underlying mortgages are often prepaid. The Fund would then have to reinvest the
money at a lower rate.
ASSET-BACKED SECURITIES: These securities represent interests in pools of debt
such as credit-card accounts. The principal risks of asset-backed securities are
that on the underlying obligations, payments may be made more slowly, and rates
of default may be higher than expected. In addition, because some of these
securities are new or complex, unanticipated problems may affect their value or
liquidity.
REITS: Equity REITs invest directly in real property while mortgage REITs invest
in mortgages on real property. REITs may be subject to certain risks associated
with the direct ownership of real estate including declines in the value of real
estate, risks related to general and local economic conditions, overbuilding and
increased competition, increases in property taxes, and variations in rental
income. Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while mortgage REITs may be affected by the
quality of credit extended. REITs may have limited financial resources, may
trade less frequently and in a limited volume and may be subject to more abrupt
or erratic price movements than larger company securities.
INVESTMENT GRADE SECURITIES: There are four categories that are referred to as
investment grade. These are the four highest ratings or categories as defined by
Moody's Investors Service, Inc. and Standard & Poor's Corporation. Securities in
the fourth investment grade are considered to have speculative characteristics.
NON-INVESTMENT GRADE SECURITIES: The INCOME FUND may invest in securities rated
below investment grade. These securities, while generally offering higher yields
than investment grade securities with similar maturities, involve greater risks,
including the possibility of default or bankruptcy. They are regarded as
speculative with respect to the issuer's capacity to pay interest and to repay
principal. The market values of these securities may be more sensitive to
individual corporate developments and changes in economic conditions than
higher-quality securities. In addition, lower-rated securities tend to be less
marketable than higher-quality securities because the
12
<PAGE> 13
market for them may not be as broad or active. The lack of a liquid secondary
market may have an adverse effect on market price and the Fund's ability to sell
particular securities rated below investment grade.
ILLIQUID SECURITIES: Each Fund may invest up to 15% of its net assets in
illiquid investments. An illiquid investment is a security or other position
that cannot be disposed of quickly in the normal course of business (generally
within seven days). The Funds' percentage limitation on these investments does
not apply to certain restricted securities that are eligible for resale to
qualified institutional purchasers.
DEFENSIVE INVESTING: The Funds may, from time to time, take temporary defensive
positions that are inconsistent with each Fund's principal investment strategies
in attempting to respond to adverse market, economic, political or other
conditions. When a Fund takes a temporary defensive position, it may not achieve
its stated investment objective. A principal defensive investment position would
be the purchase of cash equivalents.
YEAR 2000 ISSUES: Like all mutual funds, the Funds' operations depend on the
seamless functioning of computer systems in the financial services industry,
including those of their Advisor (and Sub-Advisors), their custodian, fund
accounting agent, and transfer agent. The failure of computer systems to
properly process data containing dates occurring after December 31, 1999
(because of the method by which dates are encoded) could adversely affect the
handling of securities trades, pricing and account servicing for the Funds. The
Funds' Advisor and other service providers have advised the Funds that they are
taking steps they believe are reasonably designed to address the year 2000
problem. The Funds do not believe that the year 2000 problem will have a
material adverse impact on their operations or on their investors.
INVESTMENTS IN OTHER INVESTMENT COMPANIES: The BALANCED GROWTH FUND and BALANCED
INCOME FUND, by investing primarily in shares of the GROWTH FUND and the INCOME
FUND, indirectly pay a portion of the operating expenses, management expenses
and brokerage costs of such companies as well as their own operating expenses.
Thus, shareholders of the BALANCED GROWTH FUND and BALANCED INCOME FUND may
indirectly pay slightly higher total operating expenses and other costs than
they would pay by owning shares of the underlying funds directly. The GROWTH
FUND and INCOME FUND may invest in shares of other investment companies, subject
to certain provisions of federal securities laws.
RISK MANAGEMENT
---------------
The GROWTH FUND and the INCOME FUND have a number of non-fundamental policies
and procedures intended to reduce the risks borne by their investors. These
policies and procedures should also reduce the risks borne by investors in the
BALANCED FUNDS because they invest exclusively in shares of the GROWTH FUND and
the INCOME FUND.
- Each Fund invests principally in U.S. issuers, but also may
invest in geographically diverse foreign and international
companies. This policy may reduce the effect on the Fund of
adverse events affecting particular nations or regions. If a Fund
holds a position in securities priced in non-U.S. currency, it may
engage in hedging transactions to reduce currency risk.
- When market conditions threatening a Fund's ability to achieve
its investment objectives appear imminent, the Fund may take
temporary defensive positions designed to reduce risk, even though
these temporary positions are inconsistent with the Fund's
customary strategies. The GROWTH FUND may increase its bond and
cash-equivalent holdings, and the INCOME FUND may increase its
cash-equivalent holdings.
- Within each Fund, each Sub-Advisor pursues the Fund's objective
through its own investment strategy. Since any investment strategy
has its own strengths and weaknesses, depending on market
conditions, the use of multiple strategies should reduce the
effect of changing market conditions on Fund performance.
13
<PAGE> 14
MANAGEMENT OF THE FUNDS
-----------------------
THE ADVISOR
- -----------
The Funds' investment advisor is New Covenant Trust Company, N.A., which was
founded in 1998. Although the Advisor has no prior experience in managing
registered investment companies, it is a subsidiary of the Presbyterian Church
(U.S.A.) Foundation, founded 1799, which for many years has provided investment
management services to institutions. As of September 30, 1998, the Foundation
managed approximately $1.6 billion of assets. The members of the Advisor's
investment committee are responsible for managing the Funds. All members of this
investment committee previously served on the Foundation's investment committee
and had the same responsibility for managing the assets of the Foundation's
portfolios. The committee's responsibilities include formulating investment
policies for the Funds and monitoring the selection and retention of the
Sub-Advisors.
Under the terms of the investment advisory agreements between the Advisor and
each Fund, the Advisor is responsible for formulating each Fund's investment
programs, subject to each Fund's fundamental policies. The GROWTH FUND and the
INCOME FUND pay the Advisor an annual advisory fee, payable monthly, based on
each Fund's average daily net assets. The fee is equal to __% of the average
daily net assets in the GROWTH FUND and ___% of the average daily net assets in
the INCOME FUND. The total advisory fees paid to the Advisor for these Funds
will be used to pay the fees of the Sub-Advisors. The Advisor will not be paid a
management fee for the BALANCED FUNDS. The Advisor has an investment committee
for the purpose of Fund management. No member of the investment committee is
solely responsible for making investment recommendations.
The GROWTH FUND and the INCOME FUND have Sub-Advisors. The Advisor is
responsible for allocating the assets of these Funds among Sub-Advisors, and for
monitoring and evaluating the investment programs and performance of the
Sub-Advisors. The Advisor is also responsible for periodically rebalancing the
investments of the BALANCED FUNDS between the GROWTH FUND and the INCOME FUND.
The Advisor also furnishes corporate officers, provides office space, services
and equipment, and supervises all matters relating to the Funds' investment
activities. The Sub-Advisory fees are paid directly by the Advisor from its own
assets and are not a further expense of the Funds.
The Funds have applied to the SEC for an exemptive order that would permit the
Advisor, subject to approval by the Board of Trustees, to engage and terminate
Sub-Advisors without shareholder approval. There is no assurance that the SEC
will grant such exemptive order. In the event the exemptive relief is granted,
shareholders would receive information regarding all changes in the Sub-Advisors
and information about any new Sub-Advisors selected. While shareholders would
not be permitted to vote on the selection of new Sub-Advisors, they would retain
the right to vote on the continuation of the Advisor.
THE SUB-ADVISORS
- ----------------
Each Sub-Advisor is responsible for the selection and management of portfolio
investments for its segment of a particular Fund on a day-to-day basis, in
accordance with that Fund's investment objectives and policies and under
supervision of the Advisor. Allocation of assets to each Sub-Advisor is at the
discretion of the Advisor. The Sub-Advisors place purchase and sell orders for
portfolio transactions in the Funds, subject to the general direction of the
Advisor.
The following organizations act as Sub-Advisors to the noted Funds:
SUB-ADVISORS FOR THE GROWTH FUND
- --------------------------------
WILLIAM BLAIR & COMPANY, L.L.C.
- -------------------------------
William Blair & Company, L.L.C. was founded in 1935 and is located in Chicago,
Illinois. The firm serves individual and institutional clients around the world,
providing comprehensive financing, brokerage, research, and investment- advisory
services. The firm focuses on high-quality growth companies that are dominant in
their industry and have unique products, pricing flexibility, strong marketing
and high-quality management. The focus is on stock selection in five growth
sectors: specialty consumer, health care, applied technology, service and light
cyclicals. More than $10 billion in client accounts are managed by a group of
twenty-eight investment counselors.
John P. Nicholas, Principal of the firm, is the portfolio manager for the Fund.
Mr. Nicholas joined the firm in 1972 as a securities analyst. For thirteen years
he provided investment research on several mid-West growth companies and became
a leading analyst of the healthcare industry. In 1985, he joined the investment
management department and is currently one of the department's Senior Portfolio
Managers. Mr. Nicholas has an M.B.A. from Northwestern University Kellogg
Graduate School of Management, a B.B.A. from Loyola University and is a
Chartered Financial Analyst.
14
<PAGE> 15
JOHN W. BRISTOL & CO.
- ---------------------
John W. Bristol & Co., founded in 1954 and located in New York, New York, is the
successor to a firm which was organized in 1937 to become investment adviser to
the endowment funds of Princeton University and Swarthmore College. The firm is
owned by employees and is an independent registered investment adviser. Activity
of the firm centers around tax-exempt portfolios, with primary emphasis on the
management of endowments and foundations. Currently the firm manages equity and
balanced accounts totaling approximately $5.7 billion for 55 clients.
Robert F. Coviello, Managing Director, worked for nine years as an analyst with
U.S. and Foreign Securities before joining John W. Bristol & Co. in 1983. Mr.
Coviello was previously an analyst with Citibank and Lazard Freres. Mr. Coviello
is a graduate of Columbia College where he currently serves as a member of its
Board of Visitors. He also received his M.B.A. from Columbia University in 1968.
CAPITAL GUARDIAN TRUST COMPANY
- ------------------------------
Capital Guardian Trust Company is an investment management firm founded in 1968
and located in Los Angeles, California. The parent company is The Capital Group
Companies, Inc. which is employee-owned. The sub-advisor's approach to
international investing follows a value-oriented, research-driven process
relying on extensive field research and direct company contact. The sub-advisor
provides investment management services to large institutional, corporate and
individual clients. As of June 30, 1998, total assets under management were over
$79 billion.
The portion of the Fund's assets allocated to this sub-advisor is managed by a
committee of portfolio managers.
CARL DOMINO ASSOCIATES, L.P.
- ----------------------------
Carl Domino Associates, L.P., founded in 1987 and located in West Palm Beach,
Florida, is a registered investment advisory firm. The firm is a fundamental
value investor, building defensive portfolios and providing total return
investment management. The strategy utilized by the firm attempts to provide
downside protection through the selection of stocks paying above-average cash
dividends. Carl Domino Associates, L.P. provides portfolio management services
to corporations, institutions, foundations, unions, public funds and high net
worth individuals. As of June 30, 1998, total assets under management were $2.1
billion.
Paul Scoville, Jr., a Partner of the firm, is the portfolio manager for the
Fund. Mr. Scoville has been with the firm since 1989. He has managed mutual
funds, pension funds and the assets of high net worth individuals. Prior to
joining the firm, he was a Managing Director and Senior Portfolio Manager at
Criterion Investment Management in Houston, where he personally managed equity
funds in excess of $450 million. Mr. Scoville holds an undergraduate degree from
the University of Georgia and a law degree from Emory University.
E.I.I. REALTY SECURITIES
- ------------------------
E.I.I. Realty Securities, which was founded in 1983 and is located in New York,
New York, is a registered investment adviser. The parent company is European
Investors, Inc. The firm invests in real estate securities of publicly traded
companies. The firm pursues total return by seeking a combination of current
dividend yield and price appreciation. As of June 30, 1998, total assets under
management were $1.9 billion.
Richard J. Adler is a Managing Director of E.I.I. Mr. Adler serves as investment
strategist for E.I.I. and co-portfolio manager of the Fund, to which he provides
investment strategy as well as expertise in convertible and other securities.
Mr. Adler is a 1968 graduate of Yale University where he earned a B.A. degree in
Economics. He is a 1973 graduate, with Honors, of Harvard Business School where
he earned an M.B.A. Mr. Adler has served as an officer in the U.S. Navy and was
a Vice President of Goldman, Sachs & Co. in New York from 1973 to 1983, where he
worked with foreign investors.
David P. O'Connor is a Managing Director of E.I.I. Mr. O'Connor serves as
co-portfolio manager of the Fund, jointly responsible for its day-to-day
operations. Mr. O'Connor has served as a REIT analyst or co-portfolio manager
for E.I.I. since February of 1994. Prior to joining E.I.I., Mr. O'Connor served
as an investment executive at Kidder, Peabody and Co., Inc., where he
specialized in real estate securities. From 1987 to 1992, Mr. O'Connor was
employed by a management affiliate of Presidential Realty Corp. (an AMEX listed
REIT) and subsequently served as a real estate analyst at Lane Webber
Properties, a private real estate development and investment firm. Mr. O'Connor
is a 1986 graduate of the Boston College School of Management and received an
M.S. in Real Estate Development and Investment from New York University.
[Insert biography of co-portfolio manager]
- ------------------------------------------
15
<PAGE> 16
LAZARD ASSET MANAGEMENT
- -----------------------
Lazard Asset Management is a division of Lazard Freres & Co., LLC, located in
New York, New York. Lazard Freres & Co., LLC originated in 1848 in a business
that became one of the first global investment banks. The firm provides
financial advisory services in asset management, investment banking, corporate
finance and real estate finance. Investment-management services are also
provided by Lazard Asset Management Limited, based in London, Lazard Japan Asset
Management KK, based in Tokyo, Lazard Asset Management Egypt, based in Cairo and
Lazard Asset Management Pacific Co., based in Sydney, Australia, all of which
are controlled by Lazard Asset Management in New York. Lazard also works closely
with Lazard Freres Gestion based in Paris. Investment research is undertaken on
a global basis utilizing global investment team members worldwide. Other Lazard
entities are located in Milan, Frankfurt, Singapore, Mumbai and Beijing. Lazard
began managing separate-account international equity portfolios in 1985 and
global equity portfolios in 1986. As of June 30, 1998, total assets under
management were $67 million.
Herbert W. Gullquist, Managing Director, is a portfolio manager for the Fund.
Mr. Gullquist is Chief Investment Officer of Lazard Asset Management and a
Vice-Chairman of Lazard Freres & Co. LLC. He has 37 years of investment
experience. Prior to joining Lazard in 1982, Mr. Gullquist served as a General
Partner of Oppenheimer & Company, Inc. and as a Managing Director and the Chief
Investment Officer of Oppenheimer Capital Corp. He had previously been Founder,
Director and Senior Investment Officer with Stuyvesant Asset Management. Prior
to that, he was with First National Bank of Chicago as Vice President in charge
of the discretionary pension fund group. He has a B.A. from Northwestern
University.
John R. Reinsberg, Managing Director, is a portfolio manager for the Fund. Mr.
Reinsberg is responsible for international/global equity management and
overseeing the day-to-day operations of Lazard's international equity investment
team. He has 17 years of investment experience. Prior to joining Lazard in 1991,
Mr. Reinsberg served as Executive Vice President of General Electric Investment
Corporation and Trustee of the General Electric Pension Trust. His other past
affiliations include Jardine Mathson (Hong Kong) and Hill & Knowlton, Inc. Mr.
Reinsberg has an M.B.A. from Columbia University and a B.A. from the University
of Pennsylvania.
Michael S. Rome, Managing Director, is a portfolio manager for the Fund. Mr.
Rome is responsible for U.S./global equity management and overseeing the
day-to-day operations of the U.S. core equity investment team. He has 15 years
of investment experience. Prior to joining Lazard in 1991, Mr. Rome served as
Senior Vice President with Mark Partners. Previous to that, he was associated
with Goldman, Sachs & Co. He has an M.B.A. from Cornell University and a B.A.
from the University of Rochester.
SENECA CAPITAL MANAGEMENT
- -------------------------
Seneca Capital Management, founded in 1989 and located in San Francisco,
California, is a registered investment adviser. The firm conducts intensive
fundamental analyses to select companies with strong and sustainable earnings
and prospects. Disciplined portfolio construction limits risk and reduces
volatility. Seneca provides investment management services to foundations,
endowments, corporation, public funds and private clients. As of June 30, 1998,
total assets under management were $5.9 billion.
Gail Seneca, Ph.D., Chief Investment Officer and Managing Partner, is the
portfolio manager for the Fund. Ms. Seneca has over seventeen years of
investment experience. Prior to founding Seneca Capital Management in 1989, Ms.
Seneca served as Senior Vice President of the Asset Management Division of Wells
Fargo Bank, where she managed assets in excess of $10 billion. Prior to that,
Ms. Seneca was Chief Investment Strategist for Chase Lincoln Bank. Ms. Seneca
earned a B.A., an M.A. and a Ph.D. from New York University.
SUB-ADVISORS FOR THE INCOME FUND
- --------------------------------
STANDISH, AYER & WOOD
- ---------------------
Standish, Ayer & Wood was founded in 1933 and is located in Boston,
Massachusetts. The firm is a registered investment adviser that provides
investment management services for institutions and high net worth individuals.
With over $44 billion in assets under management and 464 clients, Standish
offers both domestic and global investment management services in both separate
accounts and mutual funds. The Standish approach to fixed income management is
built on the belief that discovering pockets of inefficiency is the key to
adding value to fixed
16
<PAGE> 17
income investments. Both fundamental and quantitative analysis are employed to
identify fixed income opportunities. Extensive research capabilities have been
developed in less widely followed segments of the fixed income markets in the
belief that there is more to be gained by identifying securities with initial
yield advantage and appreciation potential, than by betting on direction of
interest rates.
Austin C. Smith, Vice President, Treasurer and Director, is the portfolio
manager for the portion of the Fund's assets invested in bonds. He has 28 years
of investment management experience with 17 of those years at Standish. He is a
graduate of Denison University and Indiana University (M.A.) and is also a
Chartered Financial Analyst.
Dolores S. Driscoll, Managing Director and Co-Director of Taxable Bond Research,
is the portfolio manager for the portion of the Fund's assets invested in
high-yield bonds. She has 24 years investment management experience, all at
Standish. She is a graduate of Indiana University and Boston University (M.B.A.)
and is also a Chartered Financial Analyst.
TATTERSALL ADVISORY GROUP
- -------------------------
Tattersall Advisory Group, founded in 1997 and located in Richmond, Virginia,
was spun off from Lowe, Brockenbrough & Tattersall, Inc. It is a privately owned
investment advisory firm with over $5 billion in assets under management. The
firm employs a traditional bond management style, using in-house interest rate
analysis, yield-curve analysis, and extensive sector valuation to identify
attractive risk versus reward opportunities. As of June 30, 1998, the firm
managed over $5.2 billion in assets for corporate pension plans, corporate cash
and insurance reserves, foundations, endowments, Taft-Hartley plans and public
entities located throughout the country. Tattersall Advisory Group incorporates
a team management approach whereby the Fund's portfolio would benefit from the
expertise of each investment specialist.
Kevin D. Girts, Managing Director, is the lead portfolio manager for the Fund.
Mr. Girts has eighteen years of investment experience. Mr. Girts previously
served as Vice President for bank investments and was a member of the Asset
Liability Committee at Key Centurion Banks (Banc One Corporation). Mr. Girts
holds a B.S. in business and an M.B.A. from West Virginia University.
YOUR INVESTMENT
---------------
BUYING SHARES
- -------------
FOR ASSISTANCE
- --------------
Most development staff of the Presbyterian Church (U.S.A.) Foundation are
representatives of the Funds' distributor and can assist you in opening an
account. They can be reached (by telephone or by mail) at numerous development
offices throughout the country. For information about the nearest development
office to you, and to speak to a local registered representative of the Funds,
contact the offices of the Foundation at:
Presbyterian Church (U.S.A.) Foundation
200 East Twelfth Street
Jeffersonville, IN 47130
Tel. (800) 858-6127
You may also call or write the distributor for the Funds at:
FIRST DATA DISTRIBUTORS, INC.
3200 Horizon Drive
P.O. Box 61503
King of Prussia, PA 19406-0903
(800) ___-____
PURCHASE AMOUNTS:
- -----------------
MINIMUM INITIAL INVESTMENT FOR THE FUNDS: $500 for all accounts
MINIMUM ADDITIONAL INVESTMENTS FOR THE FUNDS: $100 for all accounts
17
<PAGE> 18
PURCHASE INSTRUCTIONS
- ---------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------- ---------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN ACCOUNT
- ----------------------------------------------------------- ---------------------------------------------------------
BY MAIL BY MAIL
- ----------------------------------------------------------- ---------------------------------------------------------
<S> <C>
Complete the application. Fill out an investment slip from a previous
confirmation and write your account number on your
Mail the application and your check to: check. Mail the slip and your check to:
First Data Investor Services Group
3200 Horizon Drive First Data Investor Services Group
P.O. Box 61503 P.O. Box 412797
King of Prussia, PA 19406-0903 Kansas City, Missouri 64141-2797
Please make check payable to the name of the Fund in Please make check payable to the name of the Fund in
which you wish to invest. which you wish to invest.
- ----------------------------------------------------------- ---------------------------------------------------------
BY WIRE BY WIRE
- ----------------------------------------------------------- ---------------------------------------------------------
To make a same-day wire investment, call (800) ________ Call (800) ________. The wire must be received by 4:00
by 4:00 p.m. Eastern time. An account number will be p.m. Eastern time for same day processing.
assigned to you.
Follow the instructions under TO OPEN AN ACCOUNT - By
Call your bank with instructions to transmit funds to: Wire.
- UMB Bank, NA, ABA #10-10-00695
- For: First Data Investor Services Group
- Account #98-7037-071-9
- The Fund name
- Name(s) of account registration
Your bank may charge a wire fee.
Mail your completed application to First Data Investor
Services Group at the address above.
- ----------------------------------------------------------- ---------------------------------------------------------
BY AUTOMATIC INVESTMENT BY AUTOMATIC INVESTMENT
- ----------------------------------------------------------- ---------------------------------------------------------
With an initial investment, indicate on your application If you wish to add the Automatic Investment Plan after
that you would like to participate in the Automatic your account has initially been opened, call (800)
Investment Plan. Return your application with your _______ to request the form.
initial investment.
Complete and return the form along with any other
Subsequent monthly investments must be for a minimum of required materials.
$50 and will be drawn from your bank account and invested
into the Fund(s). Subsequent investments will be drawn from your bank
account and invested into the Fund(s).
- ----------------------------------------------------------- ---------------------------------------------------------
BY EXCHANGE BY EXCHANGE
- ----------------------------------------------------------- ---------------------------------------------------------
Call (800) ______ to request an exchange of shares into Call (800) ________ to request an exchange of shares
another Fund. into another Fund.
- ----------------------------------------------------------- ---------------------------------------------------------
</TABLE>
18
<PAGE> 19
PURCHASE PRICE:
- ---------------
You pay no sales charge to invest in any of the Funds. Shares of the Funds are
sold at the net asset value per share (NAV) next determined after receipt of the
order by First Data Investor Services Group. The NAV multiplied by the number of
Fund shares you own equals the value of your investment. The NAV for each Fund
is calculated at the close of regular trading hours of the New York Stock
Exchange, which is normally 4:00 p.m. Eastern time. Each Fund calculates NAV by
adding up the total value of the Fund's investments and other assets,
subtracting liabilities, and then dividing that figure by the number of the
Fund's outstanding shares. Each Fund's investments are valued based on market
value, or where market quotations are not readily available on fair value as
determined in good faith by the Funds' Board of Trustees.
TIMING OF REQUESTS:
- -------------------
All requests received by First Data Investor Services before the close of the
New York Stock Exchange will be executed the same day, at that day's closing
share price. Orders received after the close of the New York Stock Exchange will
be executed the following day, at that day's closing share price. All
investments must be in U.S. dollars. Shares will not be priced and are not
available for purchase or sale on days when the New York Stock Exchange is
closed.
STOCK EXCHANGE CLOSINGS:
- ------------------------
The New York Stock Exchange is typically closed for trading on New Year's Day,
Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
RIGHTS RESERVED BY THE FUNDS:
- -----------------------------
The Funds reserve the right to:
- reject any purchase order
- suspend the offering of shares
- reject any exchange request
- vary the initial and subsequent investment minimums
- waive the minimum investment requirement for any investor
The Funds will automatically redeem shares if a purchase check is returned for
insufficient funds. The Funds reserve the right to reject any third party check.
However, third party checks issued by the Foundation will be accepted. The Funds
may change or discontinue the exchange privilege, or temporarily suspend this
privilege during unusual market conditions. The Funds also reserve the right to
make a "redemption in kind" payment in portfolio securities rather than cash if
the amount you are redeeming is large enough to affect fund operations.
THIRD PARTY INVESTMENTS:
- ------------------------
If you invest through a third party (rather than directly), the policies and
fees may be different than those described here. Banks, brokers and financial
advisors may charge transaction fees and set different minimum investments or
limitations on buying or selling shares. You will not be charged fees if you
purchase shares of the Funds through development staff of the Presbyterian
Church (U.S.A) Foundation or the Funds' distributor.
SELLING SHARES
- --------------
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
BY MAIL
- --------------------------------------------------------------------------------
19
<PAGE> 20
- --------------------------------------------------------------------------------
HOW TO SELL SHARES
- --------------------------------------------------------------------------------
Write a letter of instruction that includes:
- The fund name, your account number, the name(s) in which the
account is registered and the dollar value or number of shares you
wish to sell.
- Include all signatures and any additional documents that may be
required.
- Mail your request to:
First Data Investor Services Group
P.O. Box 61503
King of Prussia, PA 19406-0903
- A check will be mailed to the name(s) and address in which the
account is registered.
- --------------------------------------------------------------------------------
BY TELEPHONE
- --------------------------------------------------------------------------------
Call (800) _________. If you have previously selected the telephone
redemption option. Telephone redemptions will not be available for
amounts less than $_______. The proceeds will be paid to the
registered owner: (1) by mail at the address on the account, or (2)
by wire to the bank account designated on the form.
- --------------------------------------------------------------------------------
BY EXCHANGE
- --------------------------------------------------------------------------------
Call (800) ________ to request an exchange of shares into another New
Covenant Fund.
- --------------------------------------------------------------------------------
TIMING OF REQUESTS:
- -------------------
All requests received in good order by First Data Investor Services Group before
the close of the New York Stock Exchange, typically 4:00 p.m. Eastern time, will
be executed the same day, at that day's closing share price. Requests after the
close of the New York Stock Exchange, typically 4:00 p.m. Eastern time, will be
executed the following business day, at that day's closing share price.
SELLING RECENTLY PURCHASED SHARES:
- ----------------------------------
Redemption of recently purchased Fund shares that have been paid for by check
may be delayed until there is a reasonable belief that your check has cleared.
This may take up to fifteen calendar days after we receive your check. If you
think you may wish to redeem your newly purchased shares within fifteen calendar
days, you should pay for your shares by federal funds wire transfer.
SIGNATURE GUARANTEES:
- ---------------------
The Funds may require additional documentation, or signature guarantees on any
redemptions in amounts over $______ in value or for the redemption of corporate,
partnership or fiduciary accounts, or for certain types of transfer requests or
account registration changes. A signature guarantee helps protect against fraud.
You can obtain one from most banks or securities dealers, but not from a notary
public. Please call (800) ________ for information on obtaining a signature
guarantee.
REDEMPTIONS BY WIRE:
- --------------------
In the case of redemption proceeds that are wired to a bank, we will transmit
the payment only on days that commercial banks are open for business and only to
the bank and account previously authorized on your application or your
signature-guaranteed letter of instruction. The Funds and First Data Investor
Services will not be responsible for any delays in wired redemption proceeds due
to heavy wire traffic over the Federal Reserve System.
REDEMPTION POLICIES
- -------------------
20
<PAGE> 21
Payment for redemptions of Fund shares is usually made within one business day,
but not later than seven calendar days after receipt of your redemption request,
unless the check used to purchase the shares has not yet cleared.
OTHER DOCUMENTS
- ---------------
Additional documents may be required when shares are registered in the name a
corporation, partnership, association, agent, fiduciary, trust, estate or other
organization. For further information, call First Data Investor Services
toll-free at (800) ___________.
EXCHANGE OR TRANSFER OF SHARES
------------------------------
EXCHANGE PRIVILEGE
- ------------------
You may exchange shares of one of our Funds for shares in another Fund at net
asset value without payment of any fee or charge. You can do this by contacting
First Data Investor Services Group in writing or by telephone. Shareholders who
are not tax-exempt organizations should know that an exchange is considered a
sale of shares of one Fund and the purchase of another Fund. The exchange may
result in gain or loss for Federal income tax purposes. If you wish to use this
exchange privilege, you may elect the service on your account application or by
a signature-guaranteed letter of instruction.
If First Data Investor Services Group receives your exchange instructions in
writing or by telephone at (800) _________ in good order by the valuation time
on any business day, we will make your exchange on that day.
For an exchange request to be in good order, it must include:
- your name exactly as it appears on your account
- your account number
- the amount to be exchanged
- the names of the Funds from which and to which the exchange is to be
made
TRANSFER OF OWNERSHIP
- ---------------------
You may transfer Fund shares or change the name or form in which your shares are
registered by writing to First Data Investor Services Group. Your letter of
instruction must clearly identify the account number, name(s) and number of
shares to be transferred, and provide a certified tax identification number by
way of a completed new account application or W-9 form, and include the
signature(s) of all registered owners, and any share certificates issued. The
signature(s) on the transfer instructions or any stock power must be guaranteed.
SHAREHOLDER SERVICES
--------------------
TELEPHONE INFORMATION
- ---------------------
- Your Account: If you have questions about your account, including
purchases, redemptions and distributions, call
First Data Investor Services Group, from Monday
through Friday, 9:00 a.m. to 7:00 p.m., Eastern
time. Call toll-free (800) ____________.
- The Funds: If you have questions about the Funds, call the
Funds' telephone representatives Monday through
Friday, 9:00 a.m. to 5:00 p.m., Eastern time. Call
toll-free (800) _____________.
ACCOUNT STATEMENTS
- ------------------
We provide you with these helpful services and information about your account:
21
<PAGE> 22
- a statement after every transaction;
- an annual account statement reflecting all transactions for
the year;
- tax information which will be mailed by January 31 of each
year, a copy of which will also be filed with the Internal
Revenue Service, if necessary; and
- financial statements with a summary of portfolio composition
and performance will be mailed at least twice a year.
We provide the above shareholder services without charge, but we may charge for
special services such as requests for historical transcripts of accounts. First
Data Investor Services Group currently charges $10 per year for duplication of
historical account activity records, with a maximum fee of $100.
INTEGRATED VOICE RESPONSE SYSTEM
- --------------------------------
You may obtain access to account information by calling (800) ________. The
System provides share price and price change information for all the Funds and
gives account balances and information on the most recent transactions and
allows sales or exchanges of shares.
ACCOUNT MINIMUM
- ---------------
You must keep at least $500 worth of shares in your account to keep the account
open. If, after giving you thirty days prior written notice, your account value
is still below $500 we may redeem your shares and send you a check for the
redemption proceeds.
TELEPHONE TRANSACTIONS
- ----------------------
To use telephone purchase, redemption and exchange privileges, you must have
selected these services on your original account application or submitted a
subsequent request in writing to add these services to your account. Each of the
Funds and First Data Investor Services Group reserve the right to refuse any
telephone transaction when they are unable to confirm to their satisfaction that
a caller is the account owner or a person preauthorized by the account owner.
First Data Investor Services Group has established security procedures to
prevent unauthorized account access. The telephone transaction privilege may be
suspended, limited, modified or terminated at any time without prior notice by
the Funds or First Data Investor Services Group. Neither the Funds nor any of
its service contractors will be liable for any loss or expense in acting upon
telephone instructions that are reasonably believed to be genuine.
AUTOMATIC INVESTMENT PLAN
- -------------------------
Once an account has been opened with a minimum investment of $500, you can make
additional purchases of shares of the Funds and the automatic withdrawal of
monies from your bank account. Amounts may be withdrawn from your bank account
on a monthly or quarterly basis in minimum amounts of $50.
SYSTEMATIC WITHDRAWAL PLAN
- --------------------------
Once you have established an account with $5,000 or more, you may automatically
receive funds from your account on a monthly, quarterly or semi-annual basis
(minimum of $50). Call us to request a form to start the Systematic Withdrawal
Plan.
DISTRIBUTIONS AND TAXES
-----------------------
DISTRIBUTIONS
- -------------
The Funds pass along to your account your share of investment earnings in the
form of dividends and distributions. Fund dividends are the net interest and
dividends earned on investments after Fund expenses. The Funds will at least
annually declare and pay dividends from their net investment income and
distribute any net capital gains obtained through Fund investment transactions.
Interest and dividend payments will normally be distributed as income dividends
on a quarterly basis for each of the Funds.
Unless you elect otherwise, all dividends and distributions paid by a Fund will
be reinvested in additional shares of that Fund. They will be credited to your
account in that Fund at the same net asset value per share as would apply to
22
<PAGE> 23
cash purchases on the applicable dividend payment date. Unless you are a
tax-exempt organization, all distributions a Fund pays to you will be taxable
when paid, regardless of whether they are taken in cash or reinvested in shares
of the Fund. To change your dividend election, you must notify First Data
Investor Services Group in writing at least fifteen days prior to the record
date.
TAXES
- -----
Each Fund intends to qualify as a regulated investment company. This status
exempts the Funds from paying federal income tax on the earnings or capital
gains it distributes to its shareholders.
Unless you are a tax-exempt organization, your investment in the Funds will be
subject to the following tax consequences:
- Ordinary dividends received by the Funds and passed through to
shareholders are taxable as ordinary income
- Dividends from capital gains are taxable as capital gain, which
may be taxed at different rates depending on the length of time
the Fund held those assets.
- Dividends may also be subject to state and local taxes
- Certain dividends paid to you in January will be taxable as if
they had been paid the previous December
If you are subject to tax, after the end of each calendar year, you will receive
a statement (Form 1099) of the federal income tax status of each Fund's
dividends and other distributions paid during the year. You should keep all of
your Fund statements for accurate tax-accounting purposes.
If you are subject to tax (are not a tax-exempt organization), and you purchase
shares shortly before a record date for a dividend or distribution, a portion of
your investment will be returned as a taxable distribution.
You must provide the Funds with your correct taxpayer identification number and
certify that you are not subject to backup withholding. If you fail to do so,
the IRS may require the Funds to withhold 31% of your taxable distributions and
redemptions.
You should consult your tax advisor concerning state or local taxation of such
dividends, and the federal, state and local taxation of capital-gains
distributions.
23
<PAGE> 24
[COVER PAGE]
STATEMENT OF ADDITIONAL INFORMATION
December _, 1998
NEW COVENANT FUNDS
New Covenant Growth Fund
New Covenant Income Fund
New Covenant Balanced Growth Fund
New Covenant Balanced Income Fund
200 East Twelfth Street
Jeffersonville, Indiana 47130
(800) ___- _____
This Statement of Additional Information is not a prospectus. It should be read
in conjunction with the Funds' Prospectus dated December __, 1998, and is
incorporated by reference in its entirety into the Prospectus. You may obtain a
Prospectus without charge by calling (800) __________.
<PAGE> 25
CONTENTS
Page
History of the Funds......................................................... 3
Description of Investments and Risks......................................... 3
Investment Restrictions......................................................17
Portfolio Turnover...........................................................18
Management of the Funds......................................................19
Other Service Providers......................................................21
Brokerage....................................................................22
General Information..........................................................22
Purchases, Redemptions and Pricing of Shares.................................23
Taxation of the Funds........................................................24
Calculation of Performance Data..............................................28
Financial Statements.........................................................30
Appendix A - Description of Securities Ratings...............................31
2
<PAGE> 26
HISTORY OF THE FUNDS
New Covenant Funds (the "Trust") is a Delaware business trust organized pursuant
to a Trust Instrument dated September 30, 1998. The Trust is organized to offer
separate series of shares and currently offers four separate series: New
Covenant Growth Fund ("Growth Fund"), New Covenant Income Fund ("Income Fund"),
New Covenant Balanced Growth Fund ("Balanced Growth Fund") and New Covenant
Balanced Income Fund ("Balanced Income Fund"). Currently, there is one class of
shares issued by the Trust. The Board of Trustees may issue additional classes
of shares or series at any time without prior approval of the shareholders. The
Balanced Growth Fund and Balanced Income Fund may also be referred to as the
"Balanced Funds."
The Funds are classified as open-end, management investment companies. The Funds
are diversified, which means that, with respect to 75% of its total assets, a
Fund will not invest more than 5% of its assets in the securities of any single
issuer. The Balanced Funds are diversified by virtue of the fact that the
underlying funds in which they invest (Growth Fund and Income Fund) are
diversified.
DESCRIPTION OF INVESTMENTS AND RISKS
Shareholders should understand that all investments involve risk and there can
be no guarantee against loss resulting from an investment in the Funds. Unless
otherwise indicated, all percentage limitations governing the investments of the
Funds apply only at the time of transaction.
The following supplements and should be read in conjunction with sections of
the Funds' Prospectus entitled "Investment Objective", "Principal Strategies",
"Risk Considerations" and "Other Policies and Risks." The investment practices
described below, which apply to the Growth Fund and the Income Fund, are not
fundamental and may be changed by the Board of Trustees without approval, of
the shareholders.
FORWARD COMMITMENTS, WHEN-ISSUED SECURITIES AND DELAYED DELIVERY TRANSACTIONS
The Growth Fund and the Income Fund may purchase or sell securities on a
when-issued or delayed-delivery basis and make contracts to purchase or sell
securities for a fixed price at a future date beyond customary settlement time.
Debt securities are often issued on this basis. No income will accrue on
securities purchased on a when-issued or delayed-delivery basis until the
securities are delivered. The Funds will establish a segregated account in which
it will maintain cash and U.S. Government securities or other high-grade debt
obligations at least equal in value to commitments for when-issued securities.
Securities purchased or sold on a when-issued, delayed-delivery or
forward-commitment basis involve a risk of loss if the value of the security to
be purchased declines prior to settlement date. Although the Funds would
generally purchase securities on a when-issued, delayed-delivery or a
forward-commitment basis with the intention of acquiring the securities, the
Funds may dispose of such securities prior to settlement if the Advisor deems it
appropriate to do so.
The Funds may dispose of or renegotiate a when-issued or forward commitment. The
Funds will normally realize a capital gain or loss in connection with these
transactions. For purposes of determining the Income Fund's average
dollar-weighted maturity, the maturity of when-issued or forward-commitment
securities will be calculated from the commitment date.
When the Funds purchase securities on a when-issued, delayed-delivery or
forward-commitment basis, the Funds' custodian will maintain in a segregated
account cash, U.S. Government securities or other high-grade liquid debt
obligations having a value (determined daily) at least equal to the amount of
the Funds' purchase commitments. In the case of a forward-commitment to sell
portfolio securities, the custodian will hold the portfolio securities in a
segregated account while the commitment is outstanding. These procedures are
designed to ensure that the Funds will maintain sufficient assets at all times
to cover its obligations under when-issued purchases, forward-commitments and
delayed-delivery transactions.
HIGH YIELD/HIGH RISK SECURITIES
The Income Fund may invest a limited amount of assets in debt securities which
are rated below investment grade (hereinafter referred to as "lower-rated
securities") or which are unrated but deemed equivalent to those rated below
investment grade by the Advisor. The lower the ratings of such debt securities,
the greater their risks. These debt instruments generally offer a higher-current
yield than that available from higher grade issues, and typically involve
3
<PAGE> 27
greater risk. The yields on high-yield/high-risk bonds will fluctuate over time.
In general, prices of all bonds rise when interest rates fall and fall when
interest rates rise. While less sensitive to changing interest rates than
investment-grade debt, lower-rated securities are especially subject to adverse
changes in general economic conditions and to changes in the financial condition
of their issuers. During periods of economic downturn or rising interest rates,
issuers of these instruments may experience financial stress that could
adversely affect their ability to make payments of principal and interest, and
increase the possibility of default.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may also decrease the values and liquidity of these securities,
especially in a market characterized by only a small amount of trading and with
relatively few participants. These factors can also limit the Fund's ability to
obtain accurate market quotations for these securities, making it more difficult
to determine the Fund's net asset value.
In cases where market quotations are not available, lower-rated securities are
valued using guidelines established by the Fund's Board of Trustees. Perceived
credit quality in this market can change suddenly and unexpectedly, and may not
fully reflect the actual risk posed by a particular lower-rated or unrated
security.
VARIABLE AND FLOATING RATE INSTRUMENTS
With respect to variable and floating-rate instruments that may be acquired by
the Income Fund, the Advisor will consider the earning power, cash flows and
other liquidity ratios of the issuers and guarantors of such instruments and, if
the instruments are subject to demand features, will monitor their financial
status to meet payment on demand. Where necessary to ensure that a variable or
floating-rate instrument meets the Fund's quality requirements, the issuer's
obligation to pay the principal of the instrument will be backed by an
unconditional bank letter or line of credit, guarantee or commitment to lend.
FUTURES CONTRACTS
The Funds may each enter into financial futures contracts. Such contracts may be
either based on indices of particular groups or varieties of securities ("Index
Futures Contracts"), or be for the purchase or sale of debt obligations ("Debt
Futures Contracts"). Such futures contracts are traded on exchanges licensed and
regulated by the Commodity Futures Trading Commission. The Funds enter into
futures contracts to gain a degree of protection against anticipated changes in
interest rates that would otherwise have an adverse effect upon the economic
interests of the Funds. However, the costs of and possible losses from futures
transactions will reduce a Fund's yield from interest on its holdings of debt
securities. Income from futures transactions constitutes taxable gain.
For the Funds, the custodian places cash, U.S. government securities and other
high-grade debt obligations into a segregated account in an amount equal to the
value of the total assets committed to the consummation of futures positions. If
the value of the securities placed in the segregated account declines,
additional cash or securities are required to be placed in the account on a
daily basis so that the value of the account equals the amount of the Funds'
commitments with respect to such contracts. Alternatively, the Funds may cover
such positions by purchasing offsetting positions, or covering such positions
partly with cash, U.S. government securities and other high grade debt
obligations, and partly with offsetting positions.
A Debt Futures Contract is a binding contractual commitment that, if held to
maturity, requires the Fund to make or accept delivery, during a particular
month, of obligations having a standardized face value and rate of return. By
purchasing a Debt Futures Contract, the Fund legally obligates itself to accept
delivery of the underlying security and to pay the agreed price; by selling a
Debt Futures Contract it legally obligates itself to make delivery of the
security against payment of the agreed price. However, positions taken in the
futures markets are normally not held to maturity. Instead they are liquidated
through offsetting transactions which may result in a profit or loss. While Debt
Futures Contract positions taken by the Fund are usually liquidated in this
manner, the Fund may instead make or take delivery of the underlying securities
whenever it appears economically advantageous.
A clearing corporation, associated with the exchange on which futures contracts
are traded, assumes responsibility for close-outs of such contracts and
guarantees that the sale or purchase, if still open, is performed on settlement
date.
By entering into futures contracts, the Funds seek to establish more certainly
than would otherwise be possible the effective rate of return on its portfolio
securities. The Funds may, for example, take a "short" position in the futures
4
<PAGE> 28
market by selling a Debt Futures Contract for future delivery of securities held
by the Fund in order to hedge against an anticipated rise in interest rates that
would adversely affect the value of such securities. Or it might sell an Index
Futures Contract based on a group of securities whose price trends show a
significant correlation with those of securities held by a Fund. When hedging of
this character is successful, any depreciation in the value of portfolio
securities is substantially offset by appreciation in the value of the futures
position. On other occasions the Fund may take a "long" position by purchasing
futures contracts. This is done when a Fund is not fully invested or expects to
receive substantial proceeds from the sale of portfolio securities or of Fund
shares, and anticipates the future purchase of particular securities but expects
the rate of return then available in the securities markets to be less favorable
than rates that are currently available in the futures markets. The Funds expect
that, in the normal course, securities will be purchased upon termination of a
long futures position, but under unusual market conditions, a long futures
position may be terminated without a corresponding purchase of securities.
Debt Futures Contracts currently involve only taxable obligations and do not
encompass municipal securities. The value of Debt Futures Contracts on taxable
securities, as well as Index Futures Contracts, may not vary in direct
proportion with the value of the Fund's securities, limiting the ability of the
Fund to hedge effectively against interest-rate risk.
The investment restriction concerning futures contracts does not specify the
types of index-based futures contracts into which the Fund may enter because it
is impossible to foresee what particular indices may be developed and traded or
may prove useful to the Fund in implementing their overall risk-management
strategies. For example, price trends for a particular index-based futures
contract may show a significant correlation with price trends in the securities
held by the Fund, even though the securities comprising the index are not
necessarily identical to those held by the Fund. In any event, the Fund would
not enter into a particular index-based futures contract unless the Advisor
determined that such a correlation existed.
Index Futures Contracts and Debt Futures Contracts currently are traded actively
on the Chicago Board of Trade and the International Monetary Market at the
Chicago Mercantile Exchange.
SEGREGATED ACCOUNTS
The Funds may be required to segregate assets (such as cash, U.S. Government
securities and other high-grade debt obligations) or otherwise provide coverage
consistent with applicable regulatory policies. This would be in respect to the
Funds' permissible obligations under the call and put options it writes, the
forward foreign currency exchange contracts it enters into and the futures
contracts it enters into.
OPTIONS ON FUTURES CONTRACTS
To attempt to gain additional protection against the effects of interest-rate
fluctuations, the Funds may purchase and write (sell) put and call options on
futures contracts that are traded on a U.S. exchange or board of trade and enter
into related closing transactions. There can be no assurance that such closing
transactions will be available at all times. In return for the premium paid,
such an option gives the purchaser the right to assume a position in a futures
contract at any time during the option period for a specified exercise price.
The Fund may purchase put options on futures contracts in lieu of, and for the
same purpose as, sale of a futures contract. It also may purchase such put
options in order to hedge a long position in the underlying futures contract.
The purchase of call options on futures contracts is intended to serve the same
purpose as actual purchase of the futures contracts. The Fund may purchase call
options on futures contracts in anticipation of a market advance when it is not
fully invested.
The Fund may write (sell) a call option an a futures contract in order to hedge
against a decline in the price of the index or debt securities underlying the
futures contract. If the price of the futures contract at expiration is below
the exercise price, the Fund would retain the option premium, which would
offset, in part, any decline in the value of its portfolio securities.
The writing (selling) of put options on futures contracts is similar to purchase
of the futures contracts, except that, if market price declines, the Fund would
pay more than the current market price for the underlying securities or index
5
<PAGE> 29
units. The net cost to the Fund would be reduced, however, by the premium
received on sale of the puts, less any transaction costs.
COVERED CALL OPTIONS
The Funds may write (sell) covered call options on their portfolio securities in
an attempt to enhance investment performance. No more than 20% of a Fund's net
assets may be subject to covered options.
When the Fund writes (sells) a covered call option, it gives the purchaser of
the option the right to buy the underlying security at the price specified in
the option (the "exercise price") at any time during the option period,
generally ranging up to nine months. If the option expires unexercised, the Fund
will realize gain to the extent of the amount received for the option (the
"premium") less any commission paid. If the option is exercised, a decision over
which the Fund has no control, the Fund must sell the underlying security to the
option holder at the exercise price. By writing a covered option, the Fund
forgoes, in exchange for the premium less the commission ("net premium"), the
opportunity to profit during the option period from an increase in the market
value of the underlying security above the exercise price.
When the Fund sells an option, an amount equal to the net premium received by
the Fund is included in the liability section of the Fund's Statement of Assets
and Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked-to-market to reflect the current market value of the option
written. The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked price. If
an option expires on its stipulated expiration date or if the Fund enters into a
closing purchase transaction (i.e., the Fund terminates its obligation as the
writer of the option by purchasing a call option on the same security with the
same exercise price and expiration date as the option previously written), the
Fund will realize a gain (or loss if the cost of a closing purchase transaction
exceeds the net premium received when the option was sold) and the deferred
credit related to such option will be eliminated. If an option is exercised, the
Fund will realize a long-term or short-term gain or loss from sale of the
underlying security, and proceeds of the sale will be increased by the net
premium originally received. The writing of covered options may be deemed to
involve pledge of the securities against which the option is being written.
Securities against which options are written will be segregated on the books of
the Fund's custodian.
RISKS OF FUTURES AND OPTIONS INVESTMENTS
A Fund will incur brokerage fees in connection with its futures and options
transactions, and it will be required to segregate Funds for the benefit of
brokers as margin to guarantee performance of its futures and options contracts.
In addition, while such contracts will be entered into to reduce certain risks,
trading in these contracts entails certain other risks. Thus, while a Fund may
benefit from the use of futures contracts and related options, unanticipated
changes in interest rates may result in a poorer overall performance for that
Fund than if it had not entered into any such contracts. Additionally, the
skills required to invest successfully in futures and options may differ from
skills required for managing other assets in a Fund's portfolio.
The Funds may engage in over-the-counter options transactions with
broker-dealers who make markets in these options. The Advisor will consider risk
factors such as their creditworthiness when determining a broker-dealer with
which to engage in options transactions. The ability to terminate
over-the-counter option positions is more limited than with exchange-traded
option positions because the predominant market is the issuing broker rather
than an exchange, and may involve the risk that broker-dealers participating in
such transactions will not fulfill their obligations. Certain over-the-counter
options may be deemed to be illiquid securities and may not be readily
marketable. The Advisor will monitor the creditworthiness of dealers with whom
the Funds enter into such options transactions under the general supervision of
the Funds' Trustees.
PURCHASING CALL OPTIONS
The Funds may purchase call options to the extent that premiums paid by the Fund
do not aggregate more than 20% of the Fund's total assets. When a Fund purchases
a call option, in return for a premium paid by a Fund to the writer of the
option, the Fund obtains the right to buy the security underlying the option at
a specified exercise price at any time during the term of the option. The writer
of the call option, who receives the premium upon writing the option, has the
obligation, upon exercise of the option, to deliver the underlying security
against payment of the exercise price. The advantage of purchasing call options
is that the Funds may alter portfolio characteristics and modify portfolio
maturities without incurring the cost associated with those transactions.
6
<PAGE> 30
The Funds may, following purchase of a call option, liquidate its position by
effecting a closing sale transaction. This is accomplished by selling an option
of the same series as the option previously purchased. The Funds will realize a
profit from a closing sale transaction if the price received on the transaction
is more than the premium paid (less any commissions) to purchase the original
call option; the Funds will realize a loss from a closing sale transaction if
the price received on the transaction is less than the premium paid (less any
commissions) to purchase the original call option.
Although the Funds will generally purchase only those call options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time, and for some options no secondary market on an exchange
may exist. In such event, it may not be possible to effect closing transactions
in particular options, with the result that the Fund would have to exercise its
options in order to realize any profit and would incur brokerage commissions
upon the exercise of such options and upon the subsequent disposition of the
underlying securities acquired through exercise of such options. Further, unless
the price of the underlying security changes sufficiently, a call option
purchased by the Funds may expire without any value to the Funds, in which event
the Funds would realize a capital loss that would be characterized as short-term
unless the option was held for more than one year.
PURCHASING PUT OPTIONS
The Funds may invest up to 20% of their total assets in the purchase of put
options. The Funds will, at all times during which it holds a put option, own
the security covered by such option. The purchase of the put on substantially
identical securities held will constitute a short sale for tax purposes, the
effect of which is to create short-term capital gain on sale of the security and
to suspend running of its holding period (and treat it as commencing on the date
of the closing of the short sale) or that of a security acquired to cover the
same if, at the time the put was acquired, the security had not been held for
more than one year.
A put option purchased by the Funds gives it the right to sell one of its
securities for an agreed-upon price up to an agreed date. The Funds may purchase
put options in order to protect against a decline in the market value of the
underlying security below the exercise price less the premium paid for the
option ("protective puts"). The ability to purchase put options will allow the
Funds to protect unrealized gains in an appreciated security in their portfolios
without actually selling the security. If the security does not drop in value,
the Funds will lose the value of the premium paid. The Funds may sell a put
option which it has previously purchased prior to sale of the securities
underlying such option. Such sale will result in a net gain or loss depending
upon whether the amount received on the sale is more or less than the premium
and other transaction costs paid on the put option which is sold.
The Funds may sell a put option purchased on individual portfolio securities.
Additionally, the Funds may enter into closing sale transactions. A closing sale
transaction is one in which the Funds, when it is the holder of an outstanding
option, liquidates its position by selling an option of the same series as the
option previously purchased.
WRITING PUT OPTIONS
The Funds may also write put options on a secured basis, which means that the
Funds will maintain, in a segregated account with its custodian, cash or U.S.
Government securities in an amount not less than the exercise price of the
option at all times during the option period. The amount of cash or U.S.
Government securities held in the segregated account will be adjusted on a daily
basis to reflect changes in the market value of the securities covered by the
put options written by the Funds. Secured put options will generally be written
in circumstances where the Advisor wishes to purchase the underlying security
for the Fund's portfolio at a price lower than the current market price of the
security. In such event, the Funds would write a secured put option at an
exercise price which, reduced by the premium received on the option, reflects
the lower price it is willing to pay. With regard to the writing of put options,
the Funds will limit the aggregate value of the obligations underlying such put
options to 20% of their total net assets.
Following the writing of a put option, the Funds may wish to terminate the
obligation to buy the security underlying the option by effecting a closing
purchase transaction. This is accomplished by buying an option of the same
series as the option previously written. The Funds may not, however, effect such
a closing transaction after it has been notified of the exercise of the option.
7
<PAGE> 31
LIMITATIONS ON FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
The Funds will not engage in transactions in futures contracts or related
options for speculation but only as a hedge against changes resulting from
market conditions in the values of debt securities held in its portfolio or
which it intends to purchase and where the transactions are appropriate to the
reduction of the Funds' risks. The Trustees have adopted policies (which are not
fundamental and may be modified by the Trustees without a shareholder vote)
that, immediately after the purchase for a Fund of a futures contract or a
related option, the value of the aggregate initial margin deposits with respect
to all futures contracts (both for receipt and delivery), and premiums paid on
related options entered into on behalf of the Fund, will not exceed 5% of the
fair market value of the Fund's total assets. Additionally, the value of the
aggregate premiums paid for all put and call options held by a Fund will not
exceed 20% of its net assets. Futures contracts and put options written (sold)
by a Fund will be offset by assets of the Fund held in a segregated account in
an amount sufficient to satisfy obligations under such contracts and options.
FOREIGN SECURITIES
The Funds may invest up to 40% of their total assets in foreign securities. The
Funds may invest without limit in U.S. dollar denominated foreign securities.
The Income Fund may invest up to 40% of its assets in foreign bonds denominated
in foreign currencies. No more than 20% of a Fund's total assets will be
represented by a given foreign currency.
Investors should recognize that investing in foreign securities involves certain
special considerations, including those set forth below, which are not typically
associated with investing in U.S. securities and which may favorably or
unfavorably affect the Funds' performance. As foreign companies are not
generally subject to uniform accounting, auditing and financial reporting
standards, practices and requirements comparable to those applicable to domestic
companies, there may be less publicly available information about a foreign
company than about a domestic company. Many foreign securities markets, while
growing in volume of trading activity, have substantially less volume than the
U.S. market, and securities of some foreign issuers are less liquid and more
volatile than securities of domestic issuers. Similarly, volume and liquidity in
most foreign bond markets is less than in the U.S. and, at times, volatility of
price can be greater than in the U.S. Fixed commissions on some foreign
securities exchanges and bid-to-asked spreads in foreign bond markets are
generally higher than commissions and bid-to-asked spreads in U.S. markets,
although the Funds will endeavor to achieve the most favorable net results on
their portfolio transactions. There is generally less government supervision and
regulation of securities exchanges, brokers and listed companies than in the
U.S. It may be more difficult for the Funds' agents to keep currently informed
about corporate actions that may affect the prices of portfolio securities.
Communications between the U.S. and foreign countries may be less reliable than
within the U.S., thus increasing the risk of delayed settlements of portfolio
transactions or loss of certificates for portfolio securities. Payment for
securities without delivery may be required in certain foreign markets. In
addition, with respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social instability, or
diplomatic developments that could affect U.S. investments in those countries.
Investments in foreign securities may also entail certain risks such as possible
currency blockages or transfer restrictions, and the difficulty of enforcing
rights in other countries. Moreover, individual foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position. Further, to the extent
investments in foreign securities involve currencies of foreign countries, the
Funds may be affected favorably or unfavorably by changes in currency rates and
in exchange control regulations, and may incur costs in connection with
conversion between currencies.
Investments in companies domiciled in developing countries may be subject to
potentially greater risks than investments in developed countries. The
possibility of revolution and the dependence on foreign economic assistance may
be greater in these countries than in developed countries. Each Fund seeks to
mitigate the risks associated with these considerations through diversification
and active professional management.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS
The Funds may enter into forward foreign currency exchange contracts in
connection with its investments in foreign securities. A forward foreign
currency exchange contract ("forward contract") involves an obligation to
purchase or sell a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. These contracts are traded in the
interbank market
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conducted directly between currency traders (usually large commercial banks) and
their customers. A forward contract generally has no deposit requirement, and no
commissions are charged at any stage for trades.
The maturity date of a forward contract may be any fixed number of days from the
date of the contract agreed upon by the parties, rather than a predetermined
date in a given month, and forward contracts may be in any amount agreed upon by
the parties rather than predetermined amounts. Also, forward contracts are
traded directly between banks or currency dealers so that no intermediary is
required. A forward contract generally requires no margin or other deposit.
Closing transactions with respect to forward contracts are effected with the
currency trader who is a party to the original forward contract.
The Funds may enter into foreign-currency futures contracts in several
circumstances. First, when a Fund enters into a contract for the purchase or
sale of a security denominated in a foreign currency, or when a Fund anticipates
the receipt in a foreign currency of interest and dividend payments on such a
security which it holds, the Fund may desire to "lock in" the U.S. dollar price
of the security or the U.S. dollar equivalent of such interest and dividend
payments, as the case may be. By entering into a forward contract for the
purchase or sale, for a fixed amount of U.S. dollars, of the amount of foreign
currency involved in the underlying transaction, the Fund will attempt to
protect itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar and the applicable foreign currency during
the period between the date on which the security is purchased or sold, or on
which the dividend payment is declared, and the date on which such payments are
made or received.
The Funds' activities involving forward contracts may be limited by the
requirements of Subchapter M of the Internal Revenue Code for qualification as a
regulated investment company.
REPURCHASE AGREEMENTS
The Funds may enter into repurchase agreements with any member bank of the
Federal Reserve System and any broker-dealer which is recognized as a reporting
government securities dealer, whose creditworthiness has been determined by the
Advisor to be at least equal to that of issuers of commercial paper rated within
the two highest grades assigned by any of the nationally-recognized rating
services, including Moody's and S&P, two of the most widely recognized rating
services for the types of securities in which the Funds invest. A repurchase
agreement, which provides a means for the Funds to earn income on monies for
periods as short as overnight, is an arrangement under which the purchaser
(i.e., the fund) acquires a security ("Obligation") and the seller agrees, at
the time of sale, to repurchase the Obligation at a specified time and price.
The repurchase price may be higher than the purchase price, the difference being
income to the Funds, or the purchase and repurchase prices may be the same, with
interest at a stated rate due to the Funds at the time of repurchase. In either
case, the income to the Funds is unrelated to the interest-rate on the
Obligation itself. For purposes of the Investment Company Act of 1940, as
amended, a repurchase agreement is deemed to be a loan to the seller of the
Obligation and is therefore covered by the Funds' investment restrictions
applicable to loans. Each repurchase agreement entered into by the Funds
requires that if the market value of the Obligation becomes less than the
repurchase price (including interest), the Funds will direct the seller of the
Obligation, on a daily basis, to deliver additional securities so that the
market value of all securities subject to the repurchase agreement will equal or
exceed the repurchase price. In the event that the Funds are unsuccessful in
seeking to enforce the contractual obligation to deliver additional securities,
and the seller defaults on its obligation to repurchase, the Funds bear the risk
of any drop in market value of the Obligation(s). In the event that bankruptcy
or insolvency proceedings were commenced with respect to a bank or broker-dealer
before its repurchase of the obligation, the Funds might encounter delay and
incur costs before being able to sell the security. Delays may involve loss of
interest or decline in price of the Obligation. In the case of repurchase
agreements, it is not clear whether a court would consider a repurchase
agreement as being owned by the particular Funds or as being collateral for a
loan by the Funds. If a court were to characterize the transaction as a loan and
the Funds had not perfected a security interest in the Obligation, the Funds
could be required to return the Obligation to the bank's estate and be treated
as an unsecured creditor. As an unsecured creditor, the Funds would be at risk
of losing some or all of the principal and income involved in that transaction.
The Advisor seeks to minimize the risk of loss through repurchase agreements by
analyzing the creditworthiness of the obligor, in this case the seller of the
Obligations.
Securities subject to a repurchase agreement are held in a segregated account
and the amount of such securities is adjusted on a daily basis so as to provide
a market value at least equal to the repurchase price.
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The Funds may not invest more than 15% of their net assets in repurchase
agreements maturing in more than seven days.
REVERSE REPURCHASE AGREEMENTS
Each Fund may obtain funds for temporary defensive purposes by entering into
reverse repurchase agreements with banks and broker-dealers. Reverse repurchase
agreements involve sales by a Fund of portfolio assets concurrently with an
agreement by that Fund to repurchase the same assets at a later date at a fixed
price. During the reverse repurchase agreement period, the Fund continues to
receive principal and interest payments on these securities. During the time a
reverse repurchase agreement is outstanding, the Fund will maintain a segregated
custodial account consisting of cash, U.S. Government securities or other
high-grade liquid debt obligations having a value at least equal to the
repurchase price, plus accrued interest, subject to the agreement. Reverse
repurchase agreements involve the risk that the market value of the securities
sold by the Fund may decline below the price of the securities the Fund is
obligated to repurchase. Reverse repurchase agreements are considered borrowings
by the Fund, and as such are subject to the investment limitations discussed in
the section entitled "Borrowing."
SECURITIES LENDING
To increase return on portfolio securities, the Growth Fund and the Income Fund
may lend their portfolio securities on a short-term basis to banks,
broker-dealers and other institutional investors pursuant to agreements
requiring that the loans be continuously secured by collateral equal at all
times in value to at least the market value of the securities loaned. Collateral
will consist of U.S. Government securities, cash equivalents or irrevocable
letters of credit. The Funds will not lend portfolio securities in excess of
one-third of the value of their respective total assets. There may be risks of
delay in receiving additional collateral or in recovering the securities loaned
or even a loss of rights in the collateral should the borrower of the securities
fail financially. In determining whether to lend securities, the Funds consider
all relevant factors and circumstances, including creditworthiness of the
borrower.
SECURITIES OF OTHER INVESTMENT COMPANIES
The Funds may invest in securities issued by other investment companies that
invest in securities in which the Funds are permitted to invest. In addition,
the Funds may invest in securities of other investment companies within the
limits prescribed by the Investment Company Act of 1940, as amended, which
include limits to its investments in securities issued by other investment
companies so that, as determined immediately after a purchase of such securities
is made: (i) not more than 5% of the value of the Funds' total assets will be
invested in the securities of any one investment company; (ii) not more than 10%
of their total assets will be invested in the aggregate in securities of
investment companies as a group; and (iii) not more than 3% of the outstanding
voting stock of any one investment company will be owned by the Fund or Funds as
a whole. As a shareholder of another investment company, the Funds would bear
along with other shareholders its pro rata portion of the investment company's
expenses, including advisory fees.
The Growth Fund and the Income Fund currently intend to invest only in shares of
other open-end money-market funds within the guidelines outlined above.
As described in the Prospectus, the Balanced Funds invest solely in the shares
of the Growth Fund and the Income Fund. The Balanced Funds believe that this
diversification offers the opportunity to benefit from a variety of investment
approaches and strategies employed by experienced investment professionals.
MORTGAGE-BACKED SECURITIES AND MORTGAGE PASS-THROUGH SECURITIES
The Income Fund may invest in mortgage-backed securities, which are interests in
pools of mortgage loans, including mortgage loans made by savings and loan
institutions, mortgage bankers, commercial banks and others. The Fund invests in
mortgage-backed securities guaranteed primarily by the Government National
Mortgage Association. Pools of mortgage loans are assembled as securities for
sale to investors by various governmental, government-related and private
organizations as further described below. The Fund may also invest in debt
securities that are secured with collateral consisting of mortgage-backed
securities (see "Collateralized Mortgage Obligations"), and in other types of
mortgage-related securities.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages, and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right will tend to limit to some degree the increase in net
asset value of the Fund because the
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value of the mortgage-backed securities held by the Fund may not appreciate as
rapidly as the price of non-callable debt securities.
When interest rates rise, mortgage prepayment rates decline, thus lengthening
the life of a mortgage-related security and increasing the price volatility of
that security, affecting the price volatility of the Fund's shares.
Interests in pools of mortgage-backed securities differ from other forms of debt
securities, which normally provide for periodic payment of interest in fixed
amounts, with principal payments at maturity or specified call dates. Instead,
these securities provide a monthly payment that consists of both interest and
principal payments. In effect, these payments are a "pass-through" of the
monthly payments made by the individual borrowers on their mortgage loans, net
of any fees paid to the issuer or guarantor of such securities. Additional
payments are caused by repayments of principal resulting from sale of the
underlying property, refinancing or foreclosure, net of fees or costs which may
be incurred. Some mortgage-related securities (such as securities issued by the
Government National Mortgage Association) are described as "modified
pass-through." These securities entitle the holder to receive all interest and
principal payments owed on the mortgage pool, net of certain fees, at scheduled
payment dates regardless of whether or not the mortgagor actually makes the
payment.
The principal governmental guarantor of mortgage-related securities is the
Government National Mortgage Association ("GNMA"). GNMA is a wholly-owned U.S.
Government corporation within the Department of Housing and Urban Development.
GNMA is authorized to guarantee, with the full faith and credit of the U.S.
Government, timely payment of principal and interest on securities issued by
institutions approved by GNMA (such as savings and loan institutions, commercial
banks and mortgage bankers) and backed by pools of FHA-insured or VA-guaranteed
mortgages. These guarantees, however, do not apply to the market value or yield
of mortgage-backed securities or to the value of the Fund's shares. Also, GNMA
securities often are purchased at a premium over the maturity value of the
underlying mortgages. This premium is not guaranteed and will be lost if
prepayment occurs.
Government-related guarantors (i.e., not backed by the full faith and credit of
the U.S. Government) include the Federal National Mortgage Association ("FNMA")
and the Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private stockholders. It is
subject to general regulation by the Secretary of Housing and Urban Development.
FNMA purchases conventional (i.e., not insured or guaranteed by any government
agency) mortgages from a list of approved seller/servicers which include state
and federally-chartered savings and loan associations, mutual savings banks,
commercial banks and credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal and interest by
FNMA but are not backed by the full faith and credit of the U.S.
Government.
FHLMC is a corporate instrumentality of the U.S. Government and was created by
Congress in 1970 for the purpose of increasing the availability of mortgage
credit for residential housing. Its stock is owned by twelve Federal Home Loan
Banks. FHLMC issues Participation Certificates ("PCs") which represent interests
in conventional mortgages from FHLMC's national portfolio. FHLMC guarantees the
timely payment of interest and ultimate collection of principal, but PCs are not
backed by the full faith and credit of the U.S. Government.
Commercial banks, savings and loan institutions, private mortgage insurance
companies, mortgage bankers and other secondary market issuers also create
pass-through pools of conventional mortgage loans. Such issuers may, in
addition, be the originators and/or servicers of the underlying mortgage loans
as well as the guarantors of the mortgage-related securities. Pools created by
such non-governmental issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. However, timely payment of interest
and principal of these pools may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit. The insurance and guarantees are issued by governmental
entities, private insurers and the mortgage poolers. Such insurance and
guarantees and the creditworthiness of the issuers thereof will be considered in
determining whether a mortgage-related security meets the Fund's investment
quality standards. There can be no assurance that the private insurers or
guarantors can meet their obligations under the insurance policies or guarantee
arrangements. The Fund may buy mortgage-related securities without insurance or
guarantees, if through an examination of the loan experience and practices of
the originators/servicers and poolers, the Advisor determines that the
securities
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meet the Fund's quality standards. Although the market for such securities is
becoming increasingly liquid, securities issued by certain private organizations
may not be readily marketable.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOS")
The Income Fund may invest in CMOs which are hybrids between mortgage-backed
bonds and mortgage pass-through securities. Similar to a bond, interest and
prepaid principal are paid, in most cases, semiannually. CMOs may be
collateralized by whole mortgage loans, but are more typically collateralized by
portfolios of mortgage pass-through securities guaranteed by GNMA, FHLMC, or
FNMA, and their income streams.
CMOs are structured into multiple classes, each bearing a different stated
maturity. Actual maturity and average life will depend upon the prepayment
experience of the collateral. CMOs provide for a modified form of call
protection through a de facto breakdown of the underlying pool of mortgages
according to how quickly the loans are repaid. Monthly payment of principal
received from the pool of underlying mortgages, including prepayments, is first
returned to investors holding the shortest maturity class. Investors holding the
longer maturity classes receive principal only after the first class has been
retired. An investor is partially guarded against a sooner-than-desired return
of principal because of the sequential payments.
In a typical CMO transaction, a corporation issues multiple series, (e.g., A, B,
C, Z) of CMO bonds ("Bonds"). Proceeds of the Bond offering are used to purchase
mortgages or mortgage pass-through certificates ("Collateral"). The Collateral
is pledged to a third party trustee as security for the Bonds. Principal and
interest payments from the Collateral are used to pay principal on the Bonds in
the order A, B, C, Z. The Series A, B, and C Bonds all bear current interest.
Interest on the Series Z Bond is accrued and added to principal and a like
amount is paid as principal on the Series A, B, or C Bonds currently being paid
off. When the Series A, B, and C Bonds are paid in full, interest and principal
on the Series Z Bond begins to be paid currently. With some CMOs, the issuer
serves as a conduit to allow loan originators (primarily builders or savings and
loan associations) to borrow against their loan portfolios.
OTHER ASSET-BACKED SECURITIES
The Income Fund may also invest in other asset-backed securities. The
securitization techniques used to develop mortgage-backed securities are now
being applied to a broad range of assets. Through the use of trusts and special-
purpose corporations, various types of assets, including automobile loans,
computer leases and credit-card receivables, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a structure similar to the CMO structure. The Income Fund
may invest in these and other types of asset-backed securities that may be
developed in the future. In general, the collateral supporting these securities
is of shorter maturity than mortgage loans and is less likely to experience
substantial prepayments with interest-rate fluctuations.
Several types of asset-backed securities have already been offered to investors,
including Certificates of Automobile ReceivablesSM ("CARSSM"). CARSSM represent
undivided fractional interests in a trust ("Trust") whose assets consist of a
pool of motor vehicle retail installment-sales contracts and security interests
in the vehicles securing the contracts. Payments of principal and interest on
CARSSM are passed through monthly to certificate holders, and are guaranteed up
to certain amounts and for a certain time period by a letter of credit issued by
a financial institution unaffiliated with the trustee or originator of the
Trust. An investor's return on CARSSM may be affected by early prepayment of
principal on the underlying vehicle sales contracts. If the letter of credit is
exhausted, the Trust may be prevented from realizing the full amount due on a
sales contract because of state law requirements and restrictions relating to
foreclosure sales of vehicles and the obtaining of deficiency judgments
following such sales or because of depreciation, damage or loss of a vehicle,
the application of federal and state bankruptcy and insolvency laws, or other
factors. As a result, certificate holders may experience delays in payments or
losses if the letter of credit is exhausted.
Asset-backed securities present certain risks that are not presented by
mortgage-backed securities. Primarily, these securities may not have the benefit
of any security interest in the related assets. Credit-card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. There is the possibility that recoveries on repossessed collateral
may not, in some cases, be available to support payments on these securities.
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Asset-backed securities are often backed by a pool of assets representing the
obligations of a number of different parties. To lessen the effect of failures
by obligors on underlying assets to make payments, the securities may contain
elements of credit support which fall into two categories: (i) liquidity
protection, and (ii) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection refers to the
provision of advances, generally by the entity administering the pool of assets,
to ensure that the receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses results from payment of the insurance
obligations on at least a portion of the assets in the pool. This protection may
be provided through guarantees, policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of such approaches. The Fund will not pay
any additional or separate fees for credit support. The degree of credit support
provided for each issue is generally based on historical information reflecting
the level of credit risk associated with the underlying assets. Delinquency or
loss in excess of that anticipated or failure of the credit support could
adversely affect the return on an investment in such a security.
The Fund may also invest in residual interests in asset-backed securities. In
the case of asset-backed securities issued in a pass-through structure, the cash
flow generated by the underlying assets is applied to make required payments on
the securities and to pay related administrative expenses. The residual in an
asset-backed security pass-through structure represents the interest in any
excess cash flow remaining after making the foregoing payments. The amount of
residual cash flow resulting from a particular issue of asset-backed securities
will depend on, among other things, characteristics of the underlying assets,
coupon rates on the securities, prevailing interest rates, administrative
expenses and actual prepayment experience on the underlying assets. Asset-backed
security residuals not registered under the Securities Act of 1933 may be
subject to certain restrictions on transferability. In addition, there may be no
liquid market for such securities.
The availability of asset-backed securities may be affected by legislative or
regulatory developments. It is possible that such developments may require the
Fund to dispose of any existing holdings of such securities.
ZERO COUPON SECURITIES
The Income Fund may invest in zero coupon securities, which pay no cash income
and are sold at substantial discounts from their value at maturity. When held to
maturity, their entire income, which consists of accretion of discount, comes
from the difference between the issue price and their value at maturity. Zero
coupon securities are subject to greater market-value fluctuations from changing
interest rates than debt obligations of comparable maturities which make current
distributions of interest (cash). Zero coupon securities which are convertible
into common stock offer the opportunity for capital appreciation as increases
(or decreases) in market value of such securities closely follow movements in
the market value of the underlying common stock. Zero coupon convertible
securities generally are expected to be less volatile than the underlying common
stocks, as they usually are issued with maturities of 15 years or less and are
issued with options and/or redemption features, exercisable by the holder of the
obligation, entitling the holder to redeem the obligation and receive a defined
cash payment.
Zero coupon securities include securities issued directly by the U.S. Treasury,
and U.S. Treasury bonds or notes and their unmatured interest coupons and
receipts for their underlying principal ("coupons") which have been separated by
their holder, typically a custodian bank or investment brokerage firm. A holder
will separate the interest coupons from the underlying principal (the "corpus")
of the U.S. Treasury security. A number of securities firms and banks have
stripped the interest coupons and receipts and then resold them in custodial
receipt programs with a number of different names, including "Treasury Income
Growth Receipts" (TIGRS(TM)) and Certificate of Accrual on Treasuries
(CATS(TM)). The underlying U.S. Treasury bonds and notes themselves are held in
book-entry form at the Federal Reserve Bank or, in the case of bearer securities
(i.e., unregistered securities which are owned ostensibly by the bearer or
holder thereof), in trust on behalf of the owners thereof. Counsel to the
underwriters of these certificates or other evidences of ownership of the U.S.
Treasury securities have stated that, for federal tax and securities purposes,
in their opinion purchasers of such certificates, such as the Fund, most likely
will be deemed the beneficial holder of the underlying U.S. Government
securities. The Fund understands that the staff of the SEC no longer considers
such privately stripped obligations to be U.S. Government securities, as defined
in the Investment Company Act of 1940; therefore, the Fund intends to adhere to
this staff position and will not treat such privately stripped obligations to be
U.S. Government securities for the purpose of determining if the Fund is
"diversified" under the 1940 Act.
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The U.S. Treasury has facilitated transfers of ownership of zero coupon
securities by accounting separately for the beneficial ownership of particular
interest coupon and corpus payments on Treasury securities through the Federal
Reserve book-entry record-keeping system. The Federal Reserve program as
established by the Treasury Department is known as "STRIPS" or "Separate Trading
of Registered Interest and Principal of Securities." Under the STRIPS program,
the Fund will be able to have its beneficial ownership of zero coupon securities
recorded directly in the book-entry record-keeping system in lieu of having to
hold certificates or other evidences of ownership of the underlying U.S.
Treasury securities.
When U.S. Treasury obligations have been stripped of their unmatured interest
coupons by the holder, the principal or corpus is sold at a deep discount
because the buyer receives only the right to receive a future fixed payment on
the security and does not receive any rights to periodic interest (cash)
payments. Once stripped or separated, the corpus and coupons may be sold
separately. Typically, the coupons are sold separately or grouped with other
coupons with like maturity dates and sold bundled in such form. Purchasers of
stripped obligations acquire, in effect, discount obligations that are
economically identical to the zero coupon securities that the Treasury sells
itself.
RESETS
The interest rates paid on the Adjustable Rate Mortgages (ARMs) and CMOs in
which the Income Fund may invest generally are readjusted at intervals of one
year or less to an increment over some predetermined interest-rate index. There
are three main categories of indices: those based on U.S. Treasury securities;
those derived from a calculated measure such as a cost-of-funds index; or a
moving average of mortgage rates.
CAPS AND FLOORS
The underlying mortgages which collateralize the ARMS and CMOs in which the
Income Fund invests will frequently have caps and floors that limit the maximum
amount by which the loan rate to the residential borrower may change up or down
(1) per reset or adjustment interval and (2) over the life of the loan. Some
residential mortgage loans restrict periodic adjustments by limiting changes in
the borrower's monthly principal and interest payments rather than by limiting
interest-rate changes. These payment caps may result in negative amortization.
STRIPPED MORTGAGE-BACKED SECURITIES
The Income Fund may also invest in stripped mortgage-backed securities, which
are derivative multi-class mortgage securities. The stripped mortgage-backed
securities in which the Fund may invest will only be issued or guaranteed by the
U.S. Government, its agencies or instrumentalities. Stripped mortgage-backed
securities have greater market volatility than other types of mortgage
securities in which the Fund may invest.
Stripped mortgage-backed securities are usually structured with two classes that
receive different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage-backed security will
have one class receiving some of the interest and most of the principal from the
mortgage assets, while the other class will receive most of the interest and the
remainder of the principal. In the most extreme case, one class will receive all
of the interest (the interest-only or "IO" class), while the other class will
receive all of the principal (the principal-only or "PO" class). The yield to
maturity on an IO class is extremely sensitive not only to changes in prevailing
interest rates but also to the rate of principal payments (including
prepayments) on the related underlying mortgage assets. A rapid rate of
principal payments may have a material adverse effect on the yield to maturity
of any such IOs held by the Fund. If the underlying mortgage assets experience
greater than anticipated prepayments of principal, the Fund may fail to recoup
fully its initial investment in these IO securities even if the securities are
rated in the highest rating categories, AAA or Aaa, by S&P or Moody's,
respectively.
Stripped mortgage-backed securities are purchased and sold by institutional
investors through several investment banking firms acting as brokers or dealers.
The staff of the U.S. Securities and Exchange Commission has indicated that it
views such securities as illiquid. The Fund's investment in stripped mortgage
securities will be treated as illiquid and will, together with any other
illiquid investments, not exceed 15% of the Fund's net assets.
RISKS OF MORTGAGE-BACKED SECURITIES
Mortgage-backed securities differ from conventional bonds in that principal is
paid back over the life of the mortgage security rather than at maturity. As a
result, the holder of mortgage-backed securities (I.E., the Income
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Fund) receives monthly scheduled payments of principal and interest, and may
receive unscheduled principal payments representing prepayments on the
underlying mortgages. When the holder reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest that is
lower than the rate on the existing mortgage securities. For this reason,
mortgage-backed securities may be less effective than other types of U.S.
Government securities as a means of "locking in" long-term interest rates.
A decline in interest rates may lead to a faster rate of repayment of the
underlying mortgages and expose the Fund to a lower rate of return upon
reinvestment. To the extent that such mortgage-backed securities are held by the
Fund, the prepayment right of mortgagors may decrease or limit the increase in
net asset value of the Fund because the value of the mortgage-backed securities
held by the Fund may decline more than, or may not appreciate as much as, the
price of noncallable debt securities. To the extent market interest rates
increase beyond the applicable cap or maximum rate on a mortgage security, the
market value of the mortgage-backed security would likely decline to the same
extent as a conventional fixed-rate security.
In addition, to the extent mortgage-backed securities are purchased at a
premium, mortgage foreclosures and unscheduled principal prepayments may result
in some loss of the holder's principal investment to the extent of the premium
paid. On the other hand, if mortgage-backed securities are purchased at a
discount, both a scheduled payment of principal and an unscheduled prepayment of
principal will increase current and total returns and will accelerate the
recognition of income which, when distributed to taxable shareholders, will be
taxable as ordinary income.
The Fund may also invest in pass-through certificates issued by non-governmental
issuers. Pools of conventional residential mortgage loans created by such
issuers generally offer a higher rate of interest than government and
government-related pools because there are no direct or indirect government
guarantees of payment. Timely payment of interest and principal of these pools
is, however, generally supported by various forms of insurance or guarantees,
including individual loan, title, pool and hazard insurance. The insurance and
guarantees are issued by government entities, private insurance and the mortgage
poolers. Such insurance and guarantees and the creditworthiness of the issuers
thereof will be considered in determining whether a mortgage-related security
meets the Fund's quality standards. The Fund may buy mortgage-related securities
without insurance or guarantees if through an examination of the loan experience
and practices of the poolers, the investment manager determines that the
securities meet the Fund's quality standards.
With respect to pass-through mortgage pools issued by non-governmental issuers,
there can be no assurance that the private insurers associated with such
securities can meet their obligations under the policies. Although the market
for such non-governmental issued or guaranteed mortgage securities is becoming
increasingly liquid, securities issued by certain private organizations may not
be readily marketable. The purchase of such securities is subject to the Fund's
limit with respect to investment in illiquid securities.
OTHER MORTGAGE-BACKED SECURITIES
The Advisor expects that governmental, government-related or private entities
may create mortgage loan pools and other mortgage-related securities offering
mortgage pass-through and mortgage-collateralized investments in addition to
those described above. The mortgages underlying these securities may include
alternative mortgage instruments, that is, mortgage instruments the principal or
interest payments of which may vary or the terms to maturity of which may differ
from customary long-term fixed-rate mortgages. As new types of mortgage-related
securities are developed and offered to investors, the Advisor will, consistent
with the Income Fund's investment objectives, policies and quality standards,
consider making investments in such new types of mortgage-related securities.
The Fund will not invest in any new types of mortgage-related securities without
prior disclosure to shareholders of the Fund.
RULE 144A SECURITIES
The Funds may purchase securities which are not registered under the Securities
Act but which can be sold to "qualified institutional buyers" in accordance with
Rule 144A under the Securities Act. In some cases, such securities are
classified as "illiquid securities", however, any such security will not be
considered illiquid so long as it is determined by the Advisor, under guidelines
approved by the Board of Trustees, that an adequate trading market exists for
that security. This investment practice could have the effect of increasing the
level of illiquidity in the
15
<PAGE> 39
Fund during any period that qualified institutional buyers become uninterested
in purchasing these restricted securities.
ILLIQUID SECURITIES
The Funds will not invest more than 15% of the value of their net assets in
securities that are illiquid because of restrictions on transferability or other
reasons. Repurchase agreements with deemed maturities in excess of seven days
and securities that are not registered under the Securities Act of 1933, as
amended, but that may be purchased by institutional buyers pursuant to Rule 144A
are subject to this 15% limit (unless such securities are variable amount master
demand notes with maturities of nine months or less or unless the Board
determines that a liquid trading market exists).
CONVERTIBLE SECURITIES
Common stock occupies the most junior position in a company's capital structure.
Convertible securities entitle the holder to exchange those securities for a
specified number of shares of common stock, usually of the same company, at
specified prices within a certain period of time and to receive interest or
dividends until the holder elects to convert. The provisions of any convertible
security determine its ranking in a company's capital structure. In the case of
subordinated convertible debentures, the holder's claims on assets and earnings
are subordinated to the claims of other creditors, but are senior to the claims
of preferred and common shareholders. In the case of preferred stock and
convertible preferred stock, the holder's claims on assets and earnings are
subordinated to the claims of all creditors but are senior to the claims of
common shareholders.
SWAPS
To help enhance the value of its portfolio or manage its exposure to different
types of investments, the Income Fund may enter into interest-rate, currency and
mortgage-swap agreements and may purchase and sell interest-rate "caps",
"floors" and "collars". The potential loss from investing in swap agreements is
much greater than the amount initially invested. This would protect the Fund
from a decline in the value of the underlying security due to rising rates, but
would also limit its ability to benefit from falling interest rates. The Fund
will enter into interest-rate swaps only on a net basis (i.e. the two payment
streams will be netted out, with the Fund receiving or paying as the case may
be, only the net amount of the two payments). The net amount of the excess, if
any, of the Fund's obligations over its entitlements with respect to each
interest-rate swap will be accrued on a daily basis and an amount of cash or
liquid high-grade debt securities having an aggregate value at least equal to
the accrued excess will be maintained in a segregated account by the Fund's
custodian bank. Interest-rate swaps do not involve the delivery of securities or
other underlying assets or principal. Thus, if the other party to an
interest-rate swap defaults, the Fund's risk of loss consists of the net amount
of interest payments that the Fund is contractually entitled to receive.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest-rate cap has the right to receive payments to the extent a specified
interest-rate exceeds an agreed-upon level; the purchaser of an interest-rate
floor has the right to receive payments to the extent a specified interest-rate
falls below an agreed-upon level. A collar entitles the purchaser to receive
payments to the extent a specified interest-rate falls outside an agreed-upon
range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on a Fund's performance.
Swap agreements involve risks depending upon the other party's creditworthiness
and ability to perform, as judged by the Advisor, as well as the Fund's ability
to terminate its swap agreements or reduce its exposure through offsetting
transactions.
REITS
Each Fund may invest up to 10% of its net assets in real estate investment
trusts ("REITs"). Equity REITs invest directly in real property while mortgage
REITs invest in mortgages on real property. REITs may be subject to certain
risks associated with the direct ownership of real estate, including declines in
the value of real estate, risks related to general and local economic
conditions, overbuilding and increased competition, increases in property taxes
and operating expenses, and variations in rental income. Generally, increases in
interest rates will decrease the value of high-yielding securities and increase
the costs of obtaining financing, which could decrease the value of a REIT's
investments. In addition, equity REITs may be affected by changes in the value
of the underlying property owned by the REITs, while mortgage REITs may be
affected by the quality of credit extended. Equity and mortgage
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<PAGE> 40
REITs are dependent upon management skill, and are subject to the risks of
financing projects. REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation.
BORROWING
Each Fund has a fundamental policy that it may not borrow money, except that it
may (1) borrow money from banks for temporary or emergency purposes and not for
leveraging or investment and (2) enter into reverse repurchase agreements for
any purpose, so long as the aggregate amount of borrowings and reverse
repurchase agreements does not exceed one-third of the Fund's total assets less
liabilities (other than borrowings). No Fund will purchase securities while
borrowings in excess of 5% of its total assets are outstanding.
OTHER INVESTMENTS
Subject to prior disclosure to shareholders, the Board of Trustees may, in the
future, authorize the Income Fund to invest in securities other than those
listed here and in the prospectus, provided that such investment would be
consistent with the Fund's investment objective and that it would not violate
any fundamental investment policies or restrictions applicable to the Fund.
TEMPORARY DEFENSIVE PURPOSES
For temporary defensive purposes, the Funds may invest without limit in
high-quality money-market securities. The Funds may also, for temporary
defensive purposes, invest in shares of no-load, open-end money-market funds.
INVESTMENT RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The following investment restrictions are considered fundamental which means
that they may only be changed by the vote of a majority of a Fund's outstanding
shares, which as used herein and in the Prospectus, means the lesser of: (1) 67%
of such Fund's outstanding shares present at a meeting, if the holders of more
than 50% of the outstanding shares are present in person or by proxy, or (2)
more than 50% of such Fund's outstanding shares. The percentage restrictions
described below are applicable only at the time of investment and require no
action by the Funds as a result of subsequent changes in value of the
investments or the size of the Fund.
RESTRICTIONS APPLICABLE TO ALL FUNDS:
The Funds may not:
1. Purchase securities which would cause more than 25% of the value of the
Fund's total assets at the time of such purchase to be invested in the
securities of one or more issuers conducting their principal activities in
the same industry. For purposes of this limitation, U.S. government
securities are not considered members of any industry.
2. Borrow money or issue senior securities as defined in the 1940 Act except
that (a) the Funds may borrow money in an amount not exceeding one-third of
the Fund's total assets at the time of such borrowings, and (b) the Fund
may issue multiple classes of shares. The purchase or sale of futures
contracts and related options shall not be considered to involve the
borrowing of money or the issuance of shares of senior securities.
3. With respect to 75% of the Fund's total assets, purchase securities of any
one issuer (other than securities issued or guaranteed by the U.S.
government and its instrumentalities) if, as a result, (a) more than 5% of
the Fund's total assets would be invested in the securities of that issuer,
or (b) the Fund would hold more than 10% of the outstanding voting
securities of that issuer. This restriction shall not apply to shares of
the Balanced Funds.
4. Make loans or lend securities, if as a result thereof, more than one-third
of the Fund's total assets would be subject to all such loans. For purposes
of this limitation debt instruments and repurchase agreements shall not be
treated as loans.
5. Purchase or sell real estate unless acquired as a result of ownership of
securities or other instruments (but this shall not prevent the Funds from
investing in REITS, securities or other instruments backed by real estate,
17
<PAGE> 41
including mortgage loans, or securities of companies that engage in real
estate business or invest or deal in real estate or interests therein).
6. Underwrite securities issued by any other person, except to the extent that
the purchase of securities and later disposition of such securities in
accordance with the Funds' investment program may be deemed an
underwriting.
7. Purchase or sell commodities except that the Fund may enter into future
contracts and related options, forward investing contracts and other
similar instruments.
The Funds have adopted the following non-fundamental restrictions. These
non-fundamental restrictions may be changed without shareholder approval, in
compliance with applicable law and regulatory policy.
1. The Funds shall not invest in companies for purposes of exercising control
or management.
2. The Funds will not purchase or retain the securities of any issuer if the
officers or trustees of the Funds, its advisers, or managers, owning
beneficially more than one half of one percent of the securities of such
issuer, together own beneficially more than 5% of such securities.
3. The Funds shall not purchase securities on margin, except that the Funds
may obtain such short-term credits as are necessary for the clearance of
transactions and provided that margin payments in connection with futures
contracts and options shall not constitute purchasing securities on margin.
4. The Funds shall not sell securities short, unless it owns or has the right
to obtain securities equivalent in kind an amount to the securities sold
short, and provided that transactions in futures contracts and options are
not deemed to constitute selling short.
5. The Funds will not purchase securities of issuers, including their
predecessors, that have been in operation for less than three years, if by
reason thereof, the value of the Fund's investment in securities would
exceed 5% of the Fund's total assets.
6. The Funds shall not purchase any security while borrowings representing
more than 5% of the Fund's total assets are outstanding (investment in
repurchase agreements will not be considered to be loans for purposes of
this restriction).
7. The Funds will invest no more than 15% of the value of their net assets in
illiquid securities, including repurchase agreements with remaining
maturities in excess of seven days, time deposits with maturities in excess
of seven days and other securities which are not readily marketable.
PORTFOLIO TURNOVER
The Funds' portfolio managers may take the tax-exempt character of the Funds'
investors into account in developing trading strategies. This permits them, when
appropriate, to trade more frequently than they might if most shareholders were
subject to income tax, and they sought to reduce or manage the adverse tax
effects of frequent trading on those investors.
While high rates of portfolio turnover will not generate unnecessary taxable
income or taxes for the Funds' tax-exempt shareholders, it does entail certain
costs. The higher the turnover, the higher the overall brokerage commissions,
dealer mark-ups and mark-downs, and other direct transaction costs incurred. The
Funds' portfolio managers do take these costs into account, since they affect
overall investment performance.
Although we cannot accurately predict the Funds' annual turnover rates, it is
estimated that annual turnover rates will not exceed, assuming normal market
conditions, approximately 80% for the Growth Fund, 60% for the Income Fund and
an intermediate (but different) percentage for each of the two Balanced Funds. A
100% annual turnover rate would occur if all of a Fund's securities were
replaced one time during a one-year period.
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<PAGE> 42
MANAGEMENT OF THE FUNDS
THE BOARD OF TRUSTEES
The operations of each Fund are under the direction of a Board of Trustees. The
Board establishes each Fund's policies and oversees and reviews the management
of each Fund. The Board meets regularly to review the activities of the
officers, who are responsible for day-to-day operations of the Funds. The Board
reviews the various services provided by the investment adviser to ensure that
each Fund's general investment policies and programs are being carried out and
administrative services are being provided to the Funds in a satisfactory
manner.
THE INVESTMENT ADVISER
To assist the Trustees and officers in carrying out their duties and
responsibilities, the Funds have employed New Covenant Trust Company, N.A. as
their investment adviser (the "Advisor"). Although the Advisor has no prior
experience in managing registered investment companies, it is a wholly-owned
subsidiary of the Presbyterian Church (U.S.A.) Foundation, which for many years
has provided investment management services to institutions. As of September 30,
1998, the Foundation managed approximately $1.__ billion of assets.
The Funds and the Advisor have entered into investment advisory agreements with
respect to each Fund which are renewable annually by the Board of Trustees or by
votes of a majority of each Fund's outstanding voting securities. The Agreements
are for an initial term of two years. The Agreements continue in effect from
year to year thereafter only if such continuance is approved annually by either
the Board of Trustees or by a vote of a majority of the outstanding voting
securities of the respective Funds, and in either case by the vote of a majority
of the Trustees who are not parties to the Agreements or "interested persons" of
any party to the Agreements, voting in person at a meeting called for the
purpose of voting on such approvals. The Agreements may be terminated at any
time without penalty by the Board of Trustees of a Fund, by votes of the
shareholders or by the Advisor, upon sixty days written notice. The Agreements
terminate automatically if assigned.
For providing investment advisory services and assuming certain Fund expenses,
the Growth Fund pays the Advisor a monthly fee at the annual rate of __% of the
value of the Growth Fund's average daily net assets and the Income Fund pays the
Advisor a monthly fee at the annual rate of ____% of the value of the Income
Fund's average daily net assets. The total advisory fees received by the Advisor
are used to pay the fees of the Sub-Advisors. The Advisor does not receive
advisory fees for the Balanced Funds.
In addition to managing the investments, the Advisor also makes recommendations
with respect to other aspects and affairs of the Funds. The Advisor also
furnishes the Funds with certain administrative services, office space and
equipment. All other expenses incurred in the operation of the Funds are borne
by the respective Funds.
The Trustees and executive officers of the Funds and their principal occupations
during the past five years are set forth below. An asterisk indicates a director
who may be deemed to be an "interested person" of the Funds (as that term is
defined in the 1940 Act).
<TABLE>
<CAPTION>
Positions Held
NAME AND AGE WITH THE FUNDS PRINCIPAL OCCUPATION(S) DURING PAST FIVE YEARS
- ------------ -------------- ----------------------------------------------
<S> <C> <C>
</TABLE>
[TO BE ADDED BY AMENDMENT]
No officer or employee of the Advisor receives any compensation from the Funds
for serving as an officer or Trustee of the Funds. The Funds do not compensate
the officers or Trustees of the Trust for the services they provide to the
Trust. The Funds do reimburse officers and Trustees of the Trust for expenses
incurred in providing their services to the Trust.
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<PAGE> 43
The following table indicates the compensation each Trustee is expected to
receive from the Trust for the twelve month period ending __________, 1999.
Total Compensation from the
Aggregate Compensation Trust and Fund Complex
Name of Board Member From the Trust Paid to Board Member
[TO BE ADDED BY AMENDMENT]
AUTHORITY TO ACT AS INVESTMENT ADVISOR
Banking laws and regulations currently prohibit a bank holding company
registered under the Bank Holding Company Act of 1956, as amended, or any bank
or non-bank affiliate thereof from sponsoring, organizing, controlling, or
distributing the shares of a registered, open-end investment company
continuously engaged in the issuance of its shares, and prohibit banks generally
from issuing, underwriting, selling, or distributing securities such as shares
of the Funds, but do not prohibit such a bank holding company or its affiliates
or banks generally from acting as investment adviser, transfer agent or
custodian to such an investment company or from purchasing shares of such a
company as agent for and upon the order of customers. Should legislative,
judicial or administrative action prohibit or restrict the activities of such
companies in connection with their services to the Funds, the Funds might be
required to alter materially or discontinue its arrangements with such companies
and change its method of operation. It is anticipated, however, that any
resulting change in the Funds' method of operation would not affect a Fund's net
asset value per share or result in financial losses to any shareholder.
THE SUB-ADVISORS
The Advisor has entered into Sub-Advisory Agreements with nine Sub-Advisors to
assist in the selection and management of each Fund's investment securities. It
is the responsibility of the Sub-Advisors, under the direction of the Advisor,
to make day-to-day investment decisions for the Funds. The Sub-Advisors also
place purchase and sell orders for portfolio transactions of the Funds
consistent with social-witness principles adopted by the General Assembly of the
Presbyterian Church (U.S.A.) and in accordance with each Fund's investment
objectives and policies.
The Advisor pays each Sub-Advisor a monthly fee for their services in managing
assets of the Funds. Such fees are based on the annual rates noted below. The
Advisor pays the Sub-Advisors' fees directly from its own advisory fees. The
Sub-Advisory fees are based on the assets of a Fund to which a Sub-Advisor is
responsible for making investment decisions. The Advisor allocates the portion
of each Fund's assets for which a Sub-Advisor will make investment decisions.
Reallocations may be made at any time at the Advisor's discretion.
<TABLE>
<CAPTION>
NAME OF SUB-ADVISOR FUND NAME ANNUAL SUB-ADVISORY FEE AS A PERCENTAGE OF ASSETS ALLOCATED
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
1. William Blair & Company, LLC Growth Fund ___% of the average daily net assets
2. John W. Bristol & Co. Growth Fund ___% of the average daily net assets
3. Capital Guardian Trust Company Growth Fund ___% of the average daily net assets
4. Carl Domino & Associates, L.P. Growth Fund ___% of the average daily net assets
5. E.I.I. Realty Securities Growth Fund ___% of the average daily net assets
6. Lazard Asset Management Growth Fund ___% of the average daily net assets
7. Seneca Capital Management Growth Fund ___% of the average daily net assets
8. Standish, Ayer & Wood Income Fund ___% of the average daily net assets
</TABLE>
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<PAGE> 44
<TABLE>
<S> <C> <C>
9. Tattersall Advisory Group Income Fund ___% of the average daily net assets
</TABLE>
Continuance of the Sub-Advisory Agreements, after the first two years, must be
specifically approved at least annually (i) by vote of the Trustees or by vote
of the shareholders of the Funds, and (ii) by vote of a majority of the Trustees
who are not parties to the Sub-Advisory Agreements or "interested persons" of
any part thereto, cast in person at a meeting called for the purpose of voting
on such approval. The Sub-Advisory Agreements will terminate if assigned, and
are terminable at any time without penalty by the Sub-Advisor or by the Trustees
of the Funds, or by a majority of the outstanding shares of the Funds, on 60
days' written notice to the Advisor and the Sub-Advisors.
The Funds have applied to the SEC for an exemptive order that would permit the
Advisor, subject to approval by the Board of Trustees, to engage and terminate
Sub-Advisors without shareholder approval. There is no assurance that the SEC
will grant such exemptive order.
EXPENSES
Each Fund pays all expenses not assumed by the Advisor, including, but not
limited to: Trustees' expenses, audit fees, legal fees, interest expenses,
brokerage commissions, registration and notification of shares for sale with the
SEC and with various state securities commissions, taxes, cost of insurance,
fees of the Funds' administrator, transfer agent or other service providers,
costs of obtaining quotations of portfolio securities and the pricing of Fund
shares.
OTHER SERVICE PROVIDERS
THE DISTRIBUTOR
First Data Distributors, Inc., ("FDDI") 4400 Computer Drive, Westborough, MA
01581, is the primary and exclusive distributor of the Funds' shares. FDDI
serves as the Funds' distributor on a best efforts basis pursuant to separate
Distribution Agreements for each Fund. The Distribution Agreements are renewable
annually.
THE TRANSFER AGENT
First Data Investor Services Group, Inc., ("Investor Services Group"), a
wholly-owned subsidiary of First Data Corporation, which has its principal
business address at 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406, provides transfer agency and dividend disbursing agent services for the
Funds. As part of these services, Investor Services Group will maintain records
pertaining to the sale, redemption, and transfer of Fund shares and will
distribute each Fund's cash dividends to shareholders. For such services, each
Fund will pay Investor Services Group fees which management believes are
comparable to fees charged by others who perform such transfer agency services.
ADMINISTRATIVE SERVICES
Investor Services Group also serves as the Administrator for the Funds. Investor
Services Group provides each Fund with administrative services pursuant to an
Administration Agreement. The services under this Agreement include the
day-to-day administration of matters necessary to each Fund's operations,
maintenance of its records and the books of the Trust, preparation of reports,
and compliance monitoring of its activities. For providing administrative
services to the Funds, Investor Services Group will receive from each Fund a
fee, computed daily and paid monthly, at the annual rate of .__% of the first
$__ million of combined average daily net assets of the Funds, .__% of the next
$__ million of combined average daily net assets, .__% of the next $__ million
of combined average daily net assets and .__% of combined average daily net
assets in excess of $__ million (with a minimum annual fee of $_____ for each
Fund).
ACCOUNTING SERVICES
The Funds have entered into an Accounting Services Agreement with State Street
Bank & Trust Co., 1776 Heritage Drive, North Quincy, MA 02171. This agreement
requires State Street to calculate each Fund's net asset value in accordance
with the provisions of the Funds' current Prospectus and to prepare for Fund
approval and use various government reports, tax returns, and proxy materials.
Each Fund will pay _______________________. Management believes that the fees
for these services are comparable to those charged by others who perform such
accounting services.
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<PAGE> 45
THE CUSTODIAN
State Street Bank Trust Co. also serves as custodian for the Funds. As
custodian, State Street is responsible for, among other things, safeguarding and
controlling each Fund's cash and securities, handling the receipt and delivery
of securities and collecting interest and dividends on each Fund's investments.
None of the trustees, officers or other employees of the Funds ever have
personal possession of any Fund's investments. These services do not include any
managerial or policy making functions of the Funds. The Funds have agreed to pay
the custodian such compensation as may be agreed upon from time to time, but
currently the custodian is voluntarily waiving the receipt of any fees for
custodial services.
INDEPENDENT ACCOUNTANTS
The accounting firm of Ernst & Young, LLP [ADDRESS], has been designated as
independent accountants for each Fund. Ernst & Young, L.L.P. performs annual
audits of each Fund and is periodically called upon to provide accounting and
tax advice.
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street, N.W., Washington, DC 20006 serves as
the legal counsel for the Trust.
BROKERAGE
The Advisor and Sub-Advisors, in effecting the purchases and sales of portfolio
securities for the account of the Funds, will seek execution of trades either,
(1) at the most favorable and competitive rate of commission charged by any
broker, dealer or member of an exchange, or (2) at a higher rate of commission
charged, if reasonable in relation to brokerage and research services provided
to the Trust or the Advisor or Sub-Advisor by such member, broker or dealer.
Such services may include, but are not limited to, information as to the
availability of securities for purchase or sale and statistical or factual
information or opinions pertaining to investments. The Advisor or Sub-Advisors
may use research and services provided to it by brokers and dealers in servicing
all its clients. Fund orders may be placed with an affiliated broker-dealer.
Portfolio orders will be placed with an affiliated broker-dealer only where the
price being charged and the services being provided compare favorably with those
charged to the Funds by non-affiliated broker-dealers. Over-the-counter
transactions are usually placed with a principal market-maker unless a better
net security price is obtainable elsewhere.
GENERAL INFORMATION
SHARES OF BENEFICIAL INTEREST
There are no conversion or preemptive rights in connection with any shares of
the Funds, nor are there cumulative voting rights with respect to the shares of
any of the Funds. Each of a Fund's shares has equal voting rights. Each issued
and outstanding share of each Fund is entitled to participate equally in
dividends and distributions declared by such Fund and in the net assets of such
Fund upon liquidation or dissolution remaining after satisfaction of outstanding
liabilities.
All issued and outstanding shares of each Fund will be fully paid and
non-assessable and will be redeemable at net asset value per share. The
interests of shareholders in the Funds will not be evidenced by a certificate or
certificates representing shares of a Fund.
The authorized capitalizations of the Funds consist of an unlimited number of
shares for each of the Funds, each Fund having a par value of $0.001 per share.
The Board of Trustees has authority, without necessity of a shareholder vote, to
create any number of new series or classes. The Trustees have authorized one
class of shares to be issued currently.
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<PAGE> 46
PURCHASES, REDEMPTIONS, AND PRICING OF SHARES
NET ASSET VALUE
Shares of each Fund are purchased at net asset value. The net asset value per
share of each Fund is calculated by adding the value of securities and other
assets of that Fund, subtracting liabilities and dividing by the number of its
outstanding shares. Each Fund's share price will be determined at the close of
regular trading hours of the New York Stock Exchange, normally 4:00 p.m. Eastern
Time. Orders received by the transfer agent after 4:00 p.m. will be confirmed at
the next business day's price.
VALUATION
Each Fund's securities are valued based on market value or, where market
quotations are not readily available, based on fair value as determined in good
faith by the Trust's Board of Trustees. Certain securities may be valued by an
independent pricing service approved by the Board of Trustees.
Equity securities which are traded in the over-the-counter market only, but
which are not included in the NASDAQ National Market System, will be valued at
the mean between the last preceding bid and asked prices. Valuations may also be
obtained from pricing services when such prices are believed to reflect fair
market value. Securities with a remaining maturity of sixty days or less are
valued at amortized cost, which approximates market value. Short-term notes are
valued at cost. Corporate bonds, municipal bonds, receivables and portfolio
securities not currently quoted as indicated above, and other assets will be
valued at fair value as determined in good faith by the Board of Trustees.
The Funds translate prices for investments quoted in foreign currencies into
U.S. dollars at current exchange rates. As a result, changes in the value of
those currencies in relation to the U.S. dollar may affect the Funds' NAV.
Because foreign markets may be open at different times than the New York Stock
Exchange, the value of the Funds' shares may change on days when shareholders
are not able to buy or sell them. If events materially affecting the values of
the Funds' foreign investments occur between the close of foreign markets and
the close of regular trading on the New York Stock Exchange, these investments
will be valued at their fair value.
REDEMPTIONS IN KIND
The Funds reserve the right to pay redemptions in kind with portfolio securities
in lieu of cash. In accordance with its election pursuant to Rule 18f-1 under
the 1940 Act, the Funds may limit the amount of redemption proceeds paid in
cash. The Funds may, under unusual circumstances, limit redemptions in cash with
respect to each shareholder during any ninety-day period to the lesser of (i)
$250,000 or (ii) 1% of the net asset value of the Fund at the beginning of such
period. In the case of requests for redemptions in excess of such amount, the
Board of Trustees reserves the right to make payments in whole or in part in
securities or other assets in case of an emergency, or any time a cash
distribution would impair the liquidity of the Funds to the detriment of the
existing shareholders. If the recipient sold such securities, a brokerage charge
might be incurred.
SUSPENSION OF REDEMPTIONS
The right of redemption may be suspended or the date of payment postponed during
(a) any period when the New York Stock Exchange is closed (other than customary
weekend and holiday closings) or trading on the New York Stock Exchange is
restricted, (b) any period in which an emergency exists as determined by the SEC
so that disposal of the Funds' investments or determination of its net asset
values is not reasonably practicable, or (c) such other periods as the SEC by
order may permit to protect the Funds' shareholders.
EXCHANGE OF SHARES
An exchange is effected by redemption of shares of one Fund and the issuance of
shares of another Fund, and only with delivery of the current Prospectus. With
respect to an exchange among the Funds, a capital gain or loss for Federal
income tax purposes will be realized upon the exchange, depending upon the cost,
other basis of the shares redeemed, and the tax status of the shareholder. The
exchange privilege is not designed for use in connection with short-term trading
or market-timing strategies. The exchange privilege may be terminated or
suspended or its terms changed at any time, subject to 60 days' prior notice.
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<PAGE> 47
TELEPHONE INSTRUCTIONS
Neither the Funds nor any of their service providers will be liable for any loss
or expense in acting upon telephone instructions that are reasonably believed to
be genuine. In attempting to confirm that telephone instructions are genuine,
the Funds will use procedures that are considered reasonable. Shareholders
assume the risk to the full extent of their accounts that telephone requests may
be unauthorized. To the extent that a Fund fails to use reasonable procedures to
verify the genuineness of telephone instructions, it and/or its service
contractors may be liable for any such instructions that prove to be fraudulent
or unauthorized.
All telephone conversations with Investor Services Group will be recorded.
AUTOMATIC INVESTING
A shareholder may authorize automatic investing through automatic withdrawals
from his/her bank accounts on a regular basis.
SYSTEMATIC WITHDRAWAL PLAN
Shareholders who purchase or already own $ _____ or more of any Fund's shares,
valued at the current public offering price, and who wish to receive periodic
payments from their account(s) may establish a Systematic Withdrawal Plan by
completing an application provided for this purpose. If you participate in this
plan, you will receive monthly, quarterly or annual checks in the amount
designated. While no particular withdrawal amount is necessarily recommended,
the minimum is $25. The amount of payment may be changed at any time. Dividends
and capital gains distributions on a Fund's shares in the Plan are automatically
reinvested in additional shares at net asset value. Payments are made from
proceeds derived from the redemption of Fund shares owned by the planholder.
With respect to the Funds, the redemption of shares may result in a gain or loss
that is reportable by the investor on their income tax return, if the investor
is a taxable entity.
Redemptions required for payments may reduce or use up the planholder's
investment, depending upon the size and frequency of withdrawal payments and
market fluctuations. Accordingly, Plan payments cannot be considered as yield or
income on the investment. Additional purchases may be made under the Systematic
Withdrawal Plan in amounts of $_____ or more.
First Data Investor Services Group, as agent for the shareholder, may charge for
services rendered beyond those normally assumed by the Funds. No such charge is
currently assessed, but such a charge may be instituted by First Data Investor
Services Group upon notice in writing to shareholders. This Plan may be
terminated at any time without penalty upon written notice by the shareholder,
by the Funds, or by First Data Investor Services Group.
INTEGRATED VOICE RESPONSE (IVR) SYSTEM
Shareholders in the Funds can obtain toll-free access to account information, as
well as certain transactions, by calling (800) ______. IVR provides share price,
price change, account balances and history (i.e., last transaction, latest
dividend distribution, redemptions by check during the last three months); and
allows sales or exchanges of shares.
TAXATION OF THE FUNDS
Set forth below is a discussion of certain U.S. federal income tax issues
concerning the Funds and the purchase, ownership, and disposition of Fund
shares. This discussion does not purport to be complete or to deal with all
aspects of federal income taxation that may be relevant to shareholders in light
of their particular circumstances. This discussion is based upon present
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
regulations promulgated thereunder, and judicial and administrative ruling
authorities, all of which are subject to change, which change may be
retroactive. Prospective investors should consult their own tax advisors with
regard to the federal tax consequences of the purchase, ownership, or
disposition of Fund shares, as well as the tax consequences arising under the
laws of any state, foreign country, or other taxing jurisdiction. Unless
otherwise noted, references to "the Fund" apply to each of the four Funds
discussed herein.
TAX STATUS OF THE FUNDS
Each Fund intends to be taxed as a regulated investment company under Subchapter
M of the Code. Accordingly, each Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to certain securities loans, and gains from the sale or
other disposition of stock,
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<PAGE> 48
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities or currencies; and (b) diversify
its holdings so that, at the end of each fiscal quarter, (i) at least 50% of the
value of each Fund's total assets is represented by cash and cash items, U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of the Fund's total assets
and 10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its total assets is invested in the securities of any
one issuer (other than U.S. Government securities and the securities of other
regulated investment companies).
As a regulated investment company, the Fund generally is not subject to U.S.
federal income tax on income and gains that it distributes to shareholders, if
at least 90% of the Fund's investment company taxable income (which includes,
among other items, dividends, interest and the excess of any net short-term
capital gains over net long-term capital losses) for the taxable year is
distributed. Each Fund intends to distribute substantially all of such income.
Amounts not distributed on a timely basis in accordance with a calendar year
distribution requirement are subject to a nondeductible 4% excise tax at the
Fund level. To avoid the tax, each Fund must distribute during each calendar
year an amount equal to the sum of (1) at least 98% of its ordinary income (not
taking into account any capital gains or losses) for the calendar year, (2) at
least 98% of its capital gains in excess of its capital losses (adjusted for
certain ordinary losses) for a one-year period generally ending on October 31 of
the calendar year, and (3) all ordinary income and capital gains for previous
years that were not distributed during such years. To avoid application of the
excise tax, each Fund intends to make distributions in accordance with the
calendar year distribution requirement.
A distribution will be treated as paid on December 31 of a calendar year if it
is declared by the Fund in October, November or December of that year with a
record date in such a month and paid by the Fund during January of the following
year. Such distributions will be taxable to shareholders in the calendar year in
which the distributions are declared, rather than the calendar year in which the
distributions are received.
FUND INVESTMENTS
MARKET DISCOUNT. If the Fund purchases a debt security at a price lower than the
stated redemption price of such debt security, the excess of the stated
redemption price over the purchase price is "market discount". If the amount of
market discount is more than a de minimis amount, a portion of such market
discount must be included as ordinary income (not capital gain) by the Fund in
each taxable year in which the Fund owns an interest in such debt security and
receives a principal payment on it. In particular, the Fund will be required to
allocate that principal payment first to the portion of the market discount on
the debt security that has accrued but has not previously been includable in
income. In general, the amount of market discount that must be included for each
period is equal to the lesser of (i) the amount of market discount accruing
during such period (plus any accrued market discount for prior periods not
previously taken into account) or (ii) the amount of the principal payment with
respect to such period. Generally, market discount accrues on a daily basis for
each day the debt security is held by the Fund at a constant rate over the time
remaining to the debt security's maturity or, at the election of the Fund, at a
constant yield to maturity which takes into account the semi-annual compounding
of interest. Gain realized on the disposition of a market discount obligation
must be recognized as ordinary interest income (not capital gain) to the extent
of the "accrued market discount."
ORIGINAL ISSUE DISCOUNT. Certain debt securities acquired by the Fund may be
treated as debt securities that were originally issued at a discount. Very
generally, original issue discount is defined as the difference between the
price at which a security was issued and its stated redemption price at
maturity. Although no cash income on account of such discount is actually
received by the Fund, original issue discount that accrues on a debt security in
a given year generally is treated for federal income tax purposes as interest
and, therefore, such income would be subject to the distribution requirements
applicable to regulated investment companies. Some debt securities may be
purchased by the Fund at a discount that exceeds the original issue discount on
such debt securities, if any. This additional discount represents market
discount for federal income tax purposes (see above).
OPTIONS, FUTURES AND FORWARD CONTRACTS. Any regulated futures contracts and
certain options (namely, nonequity options and dealer equity options) in which
the Fund may invest may be "section 1256 contracts." Gains (or losses) on these
contracts generally are considered to be 60% long-term and 40% short-term
capital gains or losses. Also,
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<PAGE> 49
section 1256 contracts held by the Fund at the end of each taxable year (and on
certain other dates prescribed in the Code) are "marked to market" with the
result that unrealized gains or losses are treated as though they were realized.
Transactions in options, futures and forward contracts undertaken by the Fund
may result in "straddles" for federal income tax purposes. The straddle rules
may affect the character of gains (or losses) realized by the Fund, and losses
realized by the Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized. In
addition, certain carrying charges (including interest expense) associated with
positions in a straddle may be required to be capitalized rather than deducted
currently. Certain elections that the Fund may make with respect to its straddle
positions may also affect the amount, character and timing of the recognition of
gains or losses from the affected positions.
Because only a few regulations implementing the straddle rules have been
promulgated, the consequences of such transactions to the Fund are not entirely
clear. The straddle rules may increase the amount of short-term capital gain
realized by the Fund, which is taxed as ordinary income when distributed to
shareholders. Because application of the straddle rules may affect the character
of gains or losses, defer losses and/or accelerate the recognition of gains or
losses from the affected straddle positions, the amount which must be
distributed to shareholders as ordinary income or long-term capital gain may be
increased or decreased substantially as compared to a fund that did not engage
in such transactions.
CONSTRUCTIVE SALES. Under certain circumstances, the Fund may recognize gain
from a constructive sale of an "appreciated financial position" it holds if it
enters into a short sale, forward contract or other transaction that
substantially reduces the risk of loss with respect to the appreciated position.
In that event, the Fund would be treated as if it had sold and immediately
repurchased the property and would be taxed on any gain (but not loss) from the
constructive sale. The character of gain from a constructive sale would depend
upon the Fund's holding period in the property. Loss from a constructive sale
would be recognized when the property was subsequently disposed of, and its
character would depend on the Fund's holding period and the application of
various loss deferral provisions of the Code. Constructive sale treatment does
not apply to transactions closed in the 90-day period ending with the 30th day
after the close of the taxable year, if certain conditions are met.
SECTION 988 GAINS OR LOSSES. Gains or losses attributable to fluctuations in
exchange rates which occur between the time the Fund accrues income or other
receivables or accrues expenses or other liabilities denominated in a foreign
currency and the time the Fund actually collects such receivables or pays such
liabilities generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of some investments, including debt securities and
certain forward contracts denominated in a foreign currency, gains or losses
attributable to fluctuations in the value of the foreign currency between the
acquisition and disposition of the position also are treated as ordinary gain or
loss. These gains and losses, referred to under the Code as "section 988" gains
or losses, increase or decrease the amount of the Fund's investment company
taxable income available to be distributed to its shareholders as ordinary
income. If section 988 losses exceed other investment company taxable income
during a taxable year, the Fund would not be able to make any ordinary dividend
distributions, or distributions made before the losses were realized would be
recharacterized as a return of capital to shareholders, rather than as an
ordinary dividend, reducing each shareholder's basis in his or her Fund shares.
PASSIVE FOREIGN INVESTMENT COMPANIES. The Fund may invest in shares of foreign
corporations that may be classified under the Code as passive foreign investment
companies ("PFICs"). In general, a foreign corporation is classified as a PFIC
if at least one-half of its assets constitute investment-type assets, or 75% or
more of its gross income is investment-type income. If the Fund receives a
so-called "excess distribution" with respect to PFIC stock, the Fund itself may
be subject to a tax on a portion of the excess distribution, whether or not the
corresponding income is distributed by the Fund to shareholders. In general,
under the PFIC rules, an excess distribution is treated as having been realized
ratably over the period during which the Fund held the PFIC shares. The Fund
will itself be subject to tax on the portion, if any, of an excess distribution
that is so allocated to prior Fund taxable years and an interest factor will be
added to the tax, as if the tax had been payable in such prior taxable years.
Certain distributions from a PFIC as well as gain from the sale of PFIC shares
are treated as excess distributions. Excess distributions are characterized as
ordinary income even though, absent application of the PFIC rules, certain
excess distributions might have been classified as capital gain.
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<PAGE> 50
The Fund may be eligible to elect alternative tax treatment with respect to PFIC
shares. Under an election that currently is available in some circumstances, the
Fund would be required to include in its gross income its share of the earnings
of a PFIC on a current basis, regardless of whether distributions were received
from the PFIC in a given year. If this election were made, the special rules,
discussed above, relating to the taxation of excess distributions, would not
apply. In addition, another election would involve marking to market the Fund's
PFIC shares at the end of each taxable year, with the result that unrealized
gains would be treated as though they were realized and reported as ordinary
income. Any mark-to-market losses and any loss from an actual disposition of
PFIC shares would be deductible as ordinary losses to the extent of any net
mark-to-market gains included in income in prior years.
DISTRIBUTIONS
Distributions of investment company taxable income are taxable to a U.S.
shareholder as ordinary income, whether paid in cash or shares. Dividends paid
by the Fund to a corporate shareholder, to the extent such dividends are
attributable to dividends received by the Fund from U.S. corporations, may,
subject to limitation, be eligible for the dividends received deduction.
However, the alternative minimum tax applicable to corporations may reduce the
value of the dividends received deduction.
The excess of net long-term capital gains over the short-term capital losses
realized and distributed by the Fund, whether paid in cash or reinvested in Fund
shares, will generally be taxable to shareholders as long-term gain, regardless
of how long a shareholder has held Fund shares. Net capital gains from assets
held for one year or less will be taxed as ordinary income.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of newly
issued shares will receive a report as to the net asset value of the shares
received.
If the net asset value of shares is reduced below a shareholder's cost as a
result of a distribution by the Fund, such distribution generally will be
taxable even though it represents a return of invested capital. Investors should
be careful to consider the tax implications of buying shares of the Fund just
prior to a distribution. The price of shares purchased at this time will include
the amount of the forthcoming distribution, but the distribution will generally
be taxable to the shareholder.
DISPOSITIONS
Upon a redemption, sale or exchange of shares of the Fund, a shareholder will
realize a taxable gain or loss depending upon his or her basis in the shares. A
gain or loss will be treated as capital gain or loss if the shares are capital
assets in the shareholder's hands, and the rate of tax will depend upon the
shareholder's holding period for the shares. Any loss realized on a redemption,
sale or exchange will be disallowed to the extent the shares disposed of are
replaced (including through reinvestment of dividends) within a period of 61
days, beginning 30 days before and ending 30 days after the shares are disposed
of. In such a case the basis of the shares acquired will be adjusted to reflect
the disallowed loss. If a shareholder holds Fund shares for six months or less
and during that period receives a distribution taxable to the shareholder as
long-term capital gain, any loss realized on the sale of such shares during such
six-month period would be a long-term loss to the extent of such distribution.
BACKUP WITHHOLDING
The Fund generally will be required to withhold federal income tax at a rate of
31% ("backup withholding") from dividends paid, capital gain distributions, and
redemption proceeds to shareholders if (1) the shareholder fails to furnish the
Fund with the shareholder's correct taxpayer identification number or social
security number, (2) the IRS notifies the shareholder or the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (3) when required to do
so, the shareholder fails to certify that he or she is not subject to backup
withholding. Any amounts withheld may be credited against the shareholder's
federal income tax liability.
OTHER TAXATION
Distributions may be subject to additional state, local and foreign taxes,
depending on each shareholder's particular situation. Non-U.S. shareholders may
be subject to U.S. tax rules that differ significantly from those summarized
above, including the likelihood that ordinary income dividends to them would be
subject to withholding of U.S. tax at a rate of 30% (or a lower treaty rate, if
applicable).
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CALCULATION OF PERFORMANCE DATA
From time to time, the Funds advertise their various respective performance
measures, such as: 30-day yield and average annual total return. Performance
will vary and the results shown herein and in the Funds' Prospectus are
historical information and will not be representative of future results. Factors
affecting the Funds' performance include general market conditions, operating
expenses, and portfolio management. No adjustment has been made for taxes, if
any, payable on dividends and distributions.
TOTAL PERCENTAGE INCREASE
Total percentage increase is calculated for the specified periods of time by
assuming a hypothetical investment of $1,000 in a Fund's shares. Each dividend
or other distribution is treated as having been reinvested at net asset value on
the payment date. The percentage increases stated are the percent that an
original investment would have increased during the applicable period.
AVERAGE ANNUAL TOTAL RETURN
The Funds compute their average annual total returns by determining the average
annual compounded rates of return during specified periods that equate the
initial amount invested to the ending redeemable value of such investment. This
is done by dividing the ending redeemable value of a hypothetical $1,000 initial
payment by $1,000 and raising the quotient to a power equal to one divided by
the number of years (or fractional portion thereof) covered by the computation
and subtracting one from the result. This calculation can be expressed as
follows:
l/n
[ERV]
Average Annual Total Return= ----- -l
[ P ]
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
n = period covered by the computation, expressed in
terms of years.
The Funds that compute their aggregate total returns over a specified period do
so by determining the aggregate compounded rate of return during such specified
period that likewise equates over a specified period the initial amount invested
to the ending redeemable value of such investment. The formula for calculating
aggregate total return is as follows:
[ERV - P]
Aggregate Total Return= ---------
P
Where: ERV = ending redeemable value at the end of the period
covered by the computation of a hypothetical $1,000
payment made at the beginning of the period.
P = hypothetical initial payment of $1,000.
The calculations of average annual total return and aggregate total return
assume the reinvestment of all dividends and capital gain distributions on the
payment dates during the period. The ending redeemable value (variable "ERV" in
each formula) is determined by assuming complete redemption of the hypothetical
investment and the deduction of all nonrecurring charges at the end of the
period covered by the computations. Such calculations are not indicative of
future results and do not take into account Federal, state and local taxes, if
any, that shareholders must pay on a current basis.
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Since performance will fluctuate, performance data for the Fund should not be
used to compare an investment in a Fund's shares with bank deposits, savings
accounts and similar investment alternatives which often provide an agreed or
guaranteed fixed yield for a stated period of time. Shareholders should remember
that performance is generally a function of the kind and quality of the
instruments held in a portfolio, portfolio maturity, operating expenses and
market conditions.
30-DAY YIELD CALCULATIONS
The Income Fund may calculate a 30-day yield by dividing the net investment
income per share (as described below) earned by the Fund during a 30-day (or one
month) period by the maximum offering price per share on the last day of the
period. The result is then annualized on a semi-annual basis by adding one to
the quotient, raising the sum to the power of six, subtracting one from the
result and then doubling the difference. The Fund's net investment income per
share earned during the period is based on the average daily number of shares
outstanding during the period entitled to receive dividends and includes
dividends and interest earned during the period minus expenses accrued for the
period, net of reimbursements. This calculation can be expressed as follows:
YIELD = 2 [( a - b + 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.
d = maximum offering price per share on the last day
of the period.
For the purpose of determining net investment income earned during the period
(variable "a" in the formula), dividend income on equity securities held by a
fund is recognized by accruing 1/360 of the stated dividend rate of the security
each day that the security is in the fund. Except as noted below, interest
earned on any debt obligations held by a fund is calculated by computing the
yield to maturity of each obligation held by that fund based on the market value
of the obligation (including actual accrued interest) at the close of business
on the last business day of the month, the purchase price (plus actual accrued
interest) and dividing the result by 360 and multiplying the quotient by the
market value of the obligation (including actual accrued interest) in order to
determine the interest income on the obligation for each day of the subsequent
month that the obligation is held by that fund. For purposes of this
calculation, it is assumed that each month contains thirty days. The date on
which the obligation reasonably may be expected to be called for, or if none,
the maturity date. With respect to debt obligations purchased at a discount or
premium, the formula generally calls for amortization of the discount premium.
The amortization schedule will be adjusted monthly to reflect changes in the
market values of such debt obligations.
Expenses accrued for the period (variable "b" in the formula) include all
recurring fees charged by a fund to all shareholder accounts in proportion to
the length of the base period and the Fund's mean (or median) account size.
Undeclared earned income will be subtracted from the offering price per capital
share (variable "d" in the formula).
With regard to mortgage or other receivables-backed obligations which are
expected to be subject to monthly payments of principal and interest
("pay-downs"): (i) gain or loss attributable to actual monthly pay-downs are
accounted for as an increase or decrease to interest income during the period;
and (ii) the Fund may elect either (a) to amortize the discount and premium on
the remaining security, based on the cost of the security, to the weighted
average maturity date, if such information is available, or to the remaining
term of the security, if any, if the weighted average date is not available or
(b) not to amortize discount or premium on the remaining security.
COMPARING PERFORMANCE
Performance information for the Funds may be compared, in reports and
promotional literature, to indices including, but not limited to: (i) the
Standard & Poor's 500 Composite Stock Price Index, the Dow Jones Industrial
Average, or other appropriate unmanaged domestic or foreign indices of
performance of various types of investments so that
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<PAGE> 53
investors may compare a Fund's results with those of indices widely regarded by
investors as representative of the securities markets in general; (ii) other
groups of mutual funds tracked by Lipper Analytical Services, Inc., a
widely-used independent research firm which ranks mutual funds by overall
performance, investment objectives and assets, or tracked by other services,
companies, publications, or persons who rank mutual funds on overall performance
or other criteria; (iv) the Consumer Price Index (a measure of inflation) to
assess the real rate of return from an investment in a Fund; and (v) products
managed by a universe of money managers with similar performance objectives.
Unmanaged indices may assume the reinvestment of dividends but generally do not
reflect deductions or administrative and management costs and expenses.
FINANCIAL STATEMENTS
REPORTS TO SHAREHOLDERS
Shareholders will receive unaudited semi-annual reports describing the Funds'
investment operations and annual financial statements audited by independent
certified public accountants.
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APPENDIX A -- DESCRIPTIONS OF SECURITIES RATINGS
COMMERCIAL PAPER RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S"): "PRIME-1" and "PRIME-2" are Moody's
two highest commercial paper rating categories. Moody's evaluates the salient
features that affect a commercial paper issuer's financial and competitive
position. The appraisal includes, but is not limited to the review of such
factors as:
1. Quality of management.
2. Industry strengths and risks.
3. Vulnerability to business cycles.
4. Competitive position.
5. Liquidity measurements.
6. Debt structures.
7. Operating trends and access to capital markets.
Differing degrees of weight are applied to the above factors as deemed
appropriate for individual situations.
STANDARD & POOR'S RATINGS GROUP, A DIVISION OF MCGRAW-HILL COMPANIES, INC.
("S&P"): "A-1" and "A-2" are S&P's two highest commercial paper rating
categories and issuers rated in these categories have the following
characteristics:
1. Liquidity ratios are adequate to meet cash requirements.
2. Long-term senior debt is rated ?A? or better.
3. The issuer has access to at least two additional channels of
borrowing.
4. Basic earnings and cash flow have an upward trend with
allowance made for unusual circumstances.
5. Typically, the issuer is in a strong position in a
well-established industry or industries. 6. The reliability
and quality of management is unquestioned.
Relative strength or weakness of the above characteristics determine whether an
issuer's paper is rated ?A-1" or "A-2". Additionally, within the "A-1"
designation, those issues determined to possess overwhelming safety
characteristics are denoted with a plus (+) rating category.
BOND RATINGS
S&P: An S&P bond rating is a current assessment of the creditworthiness of an
obligor with respect to a specific debt obligation. This assessment may take
into consideration obligors such as guarantors, insurers or lessees.
The bond ratings are not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The ratings are based on current information furnished by the issuer or obtained
by S&P from other sources it considers reliable. S&P does not perform any audit
in connection with any ratings and may, on occasion, rely on unaudited financial
information. The ratings may be changed, suspended or withdrawn as a result of
changes in, or unavailability of, such information, or for other circumstances.
The ratings are based, in varying degrees, on the following considerations:
I. Likelihood of default-capacity and willingness of the obligor as to the
timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
II. Nature of and provisions of the obligation;
III. Protection afforded by, and relative position of, the obligation in the
event of bankruptcy, reorganization or other arrangement under the laws
of bankruptcy and other laws affecting creditor's rights.
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The bond ratings of S&P and their meanings are:
"AAA" Bonds rated "AAA" have the highest rating assigned by S&P to a
- ----- debt obligation. Capacity to pay interest and repay principal is
extremely strong.
"AA" Bonds rated "AA" have a very strong capacity to pay interest and
- ---- repay principal and differ from the highest rated issues only in
small degree.
"A" Bonds rated "A" have a strong capacity to pay interest and repay
- --- principal although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions than bonds in higher rated categories.
"BBB" Bonds rated "BBB" are regarded as having an adequate capacity to
- ----- pay interest and repay principal. Whereas they normally exhibit
adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay principal for bonds in this
category than for bonds in higher rated categories.
"BB" Bonds rated "BB" are regarded as less vulnerable in the near term
- ---- than lower rated obligors. However, they face major ongoing
uncertainties and exposure to adverse business, financial, or
economic conditions that could lead to the obligor's inadequate
capacity to meet its financial commitments.
"B" Bonds rated "B" are regarded as more vulnerable than obligors
- --- rated "B", but the obligor currently has the capacity to meet its
financial commitments. Adverse business, financial, or economic
conditions will impair the obligor's capacity or willingness to
meet its financial commitments.
"CCC" An obligor rated "CCC" is currently vulnerable, and is dependent
- ----- upon favorable business, financial, or economic conditions to meet
its financial commitments.
"CC" An obligor rated "CC" is currently highly vulnerable.
- ----
Plus (+) or Minus (-): The ratings from "AA" to "CC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
PROVISIONAL RATINGS The letter "P" indicates a provisional rating which assumes
successful completion of a project financed by the bonds being rated and
indicates that payment of debt service requirements is largely or entirely
dependent upon the successful and timely completion of the project. This rating,
while addressing credit quality subsequent to completion of the project, makes
no comment on the likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise his own judgement with respect to such
likelihood and risk.
Under present commercial bank regulations issued by the Comptroller of the
Currency, bonds rated in the top four categories ("AAA", "AA", "A", "BBB",
commonly known as "investment-grade" ratings) are generally regarded as eligible
for bank investment.
MOODY'S.: The ratings of Moody's and their meanings are:
"Aaa" Bonds rated "Aaa" are judged to be of the best quality. They carry
- ----- the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or
by an exceptionally stable margin and principal is secure. While
the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally
strong position of such issues.
"Aa" Bonds rated "Aa" are judged to be of high quality by all
- ---- standards. Together with the "Aaa" group they comprise what are
generally known as high-grade bonds. They are rated lower then the
best bonds because margins of protection may not be as large as in
"Aaa" securities or fluctuation of
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<PAGE> 56
protective elements may be of greater amplitude or there may be
other elements present which make the long-term risks appear
somewhat larger than in "Aaa" securities.
"A" Bonds rated "A" possess many favorable investment attributes and
- --- are to be considered as upper medium-grade obligations. Factors
giving security to principal and interest are considered adequate,
but elements may be present which suggest a susceptibility to
impairment sometime in the future.
"Baa" Bonds rated "Baa" are considered as medium-grade obligations;
- ----- i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
"Ba" Bonds rated "Ba" judged to have speculative elements; their future
- ---- cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and thereby
not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
"B" Bonds rated "B" generally lack characteristics of the desirable
- --- investment. Assurance of interest and principal payments or
maintenance of other terms of the contract over any long period of
time may be small.
"Caa" Bonds rated "Caa" are of poor standing. Such issues may be in
- ----- default or there may be present elements of danger with respect to
principal or interest.
"Ca" Bonds rated "Ca" represent obligations that are speculative in a
- ---- high degree. Such issues are often in default or have other marked
shortcomings.
"C" Bonds rated "C" are the lowest rated class of bonds, and issues so
- --- rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
"Con." Bonds rated "Con." are bonds for which the security depends on the
- ------ completion of some act or the fulfillment of some condition are
rated conditionally. These are bonds secured by: (a) earnings of
projects under construction, (b) earnings of projects unseasoned
in operating experience, (c) rentals that begin when facilities
are completed, or (d) payments to which some other limiting
condition attaches. Parenthetical rating denotes probable credit
stature upon completion of construction or elimination of basis of
condition.
33
<PAGE> 57
NEW COVENANT FUNDS
PART C - OTHER INFORMATION
Item 23. EXHIBITS:
(a) Trust Instrument - filed herewith.
(a)(1) Certificate of Trust - filed herewith
(b) By-Laws - filed herewith.
(c) Instruments Defining Rights of Security Holders. Not
applicable
(d) Investment Advisory Contracts and Sub-Advisory Contracts - to
be filed by Amendment.
(e) Underwriting Contracts - to be filed by Amendment.
(f) Bonus or Profit Sharing Contracts -- None.
(g) Custodian Agreement - to be filed by Amendment.
(h) Other Material Contracts.
a. Transfer Agent Services Agreement - to be filed by
Amendment.
b. Administration Agreement - to be filed by Amendment.
c. Accounting Services Agreement - to be filed by
Amendment.
(i) Legal Opinion - to be filed by Amendment.
(j) Consent of Independent Accountants - to be filed by Amendment.
(k) Omitted Financial Statements -- None
(l) Initial Capital Agreements - to be filed by Amendment.
(m) Rule 12b-1 Plan - not applicable.
(n) Financial Data Schedule - to be filed by Amendment.
(o) Rule 18f-3 Plan. None
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None
Item 25. INDEMNIFICATION.
Reference is made to Article IX of the Registrant's Trust
Instrument filed herewith.
The Trust Instrument limits the liabilities of a Trustee to
that of gross negligence and in the event a Trustee is sued
for his or her activities concerning the Trust, the Trust will
indemnify that Trustee to the fullest extent permitted by law,
except if a Trustee engages in willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved
in the conduct of his or her office.
The Registrant intends to purchase Errors and Omissions
insurance with Directors and Officers liability coverage.
<PAGE> 58
Item 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
New Covenant Trust Company, N.A. (the "Adviser"), is a
trust company that is the investment adviser for the Funds.
Other substantial business, professional, vocational or employment
activities of each director and officer of the Registrant's
Investment Adviser during the past two fiscal years are:
<TABLE>
<CAPTION>
Substantial Business Activities
Name and Position During Past Two Fiscal Years
-------------------------- -----------------------------------------------
<S> <C>
Ralph R. Allen, Director Vice President and Assistant Secretary, Presbyterian
Church (U.S.A.) Foundation, 200 East Twelfth Street,
Jeffersonville, IN 47130 from 3/95 to present.
Thomas W. Baylor, Director Vice President and Controller, Presbyterian Church
(U.S.A.) Foundation, 200 East Twelfth Street,
Jeffersonville, IN 47130 from 1/93 to present.
Larry D. Carr, Director Chief Executive Officer, Presbyterian Church
(U.S.A.) Foundation, 200 East Twelfth Street,
Jeffersonville, IN 47130 from 3/93 to present.
Stewart B. Clifford, Director Senior Advisor/Consultant, Munn, Bernhard, & Assoc.,
Inc. from 12/94 to present. Senior Vice President,
Citibank, N.A. from 1956 to 1994. Life Trustee, Spence
School, New York, NY; Trustee and Investment Committee
member, Princeton Theological Seminary, Princeton, NJ;
Trustee - YWCA, New York, NY; Trustee - Brick PC,
New York, NY; President, Wooltey - Clifford Foundation,
New York, NY.
Chapman B. Cox, Director Senior Vice President, Lockheed Martin IMS,
1200 K Street, Suite 1200, Washington, DC from 1996
to present.
R. Keith Cullinan, Director President and part owner of, Cullinan Associates, Inc.,
1406 Browns Lane, 2nd Floor, Louisville, KY 40207 from
1990 to present.
Frank S. Deming, Director Retired 2/97. Previously, Attorney, Montgomery,
McCracken, Walker & Rhoads, 123 S. Broad Street,
Philadelphia, PA from 1952 to 1997. Member of the
following: American Pennsylvania and Philadelphia
Bar Assoc., Fellow of American College of Trust and
Estate Counsel, Beta Gamma Sigma and Beta Alpha Psi.
Edwin T. Johnson, Director Retired since 1993; Previously, Officer for
Noble Lowndes Johnson, London, England, an employee
benefits firm, from 1990 to 1993; Trustee and a member
of the Governing Board of Jackson Laboratory; Director,
Precision Systems Integrated; Director, Lincoln and
Soldiers Institute.
John S. Keck, Director Vice President, General Counsel and
Assistant Secretary, Presbyterian Church (U.S.A.)
Foundation, 200 East Twelfth Street, Jeffersonville,
IN 47130 from 7/94 to present.
William C. Lauderbach, Director Senior Vice President, Chemical Bank & Trust
Company, Midland, MI from 1973 to present.
Dennis J. Murphy, Director Senior Vice President and Chief Financial
Officer, Presbyterian Church (U.S.A.) Foundation, 200
East Twelfth Street, Jeffersonville, IN 47130 from
1/82 to present.
Aubrey B. Patterson, Jr., Director Chairman to CEO, Bancorp South, Inc., Tupelo, MS
</TABLE>
<PAGE> 59
<TABLE>
<S> <C>
from 1972 to present.
Merrell M. Peters, Director Attorney, Peters Law Office, Fort Dodge, IA from
4/96 to present.
Bridget O. Piper, Director Vice President-Corporate Development, Sterling
Savings, Spokane, WA from 1988 to present.
W. Taylor Reveley, III, Director Dean, the Marshall-Wythe School of Law,
The College of William and Mary, Williamsburg, VA
from 8/98 to present. Previously, Attorney, Hunton &
Williams, Richmond, VA from 1970 to 1998.
Ray U. Tanner, Director Retired. Formerly, Chairman, President and Chief
Executive Officer, Jackson National Bank, Jackson,
TN from 1970 to 1995.
</TABLE>
John W. Bristol & Co., Inc. is sub-advisor for the Growth Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-13942) filed pursuant to the Investment Advisers Act of
1940.
William Blair & Company is sub-advisor for the Growth Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-00688) filed pursuant to the Investment Advisers Act of
1940.
Carl Domino Associates, L.P. is sub-advisor for the Growth Fund.
For information as to any other business, vocation, or employment
of a substantial nature during the last two fiscal years in which
each director, officer or partner of the sub-advisor has been
engaged for his own account or in the capacity of director,
officer, employee, partner or trustee, reference is made to the
Form ADV (File #801-30266) filed pursuant to the Investment
Advisers Act of 1940.
Lazard Freres & Co. is sub-advisor for the Growth Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-6568) filed pursuant to the Investment Advisers Act of
1940.
Seneca Capital Management is sub-advisor for the Growth Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-61669) filed pursuant to the Investment Advisers Act of
1940.
E.I.I. Realty Securities is sub-advisor for the Growth Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-44099) filed pursuant to the Investment Advisers Act of
1940.
<PAGE> 60
Tattersall Advisory Group is sub-advisor for the Income Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-53633) filed pursuant to the Investment Advisers Act of
1940.
Standish, Ayer & Woods is sub-advisor for the Income Fund. For
information as to any other business, vocation, or employment of a
substantial nature during the last two fiscal years in which each
director, officer or partner of the sub-advisor has been engaged
for his own account or in the capacity of director, officer,
employee, partner or trustee, reference is made to the Form ADV
(File #801-584) filed pursuant to the Investment Advisers Act of
1940.
Capital Guardian Trust Company is a sub-advisor for the Growth
Fund. Information with respect to Capital Guardian Trust Company
and its officers and directors is set forth below:
<TABLE>
<CAPTION>
Substantial Business Activities
Name and Position During Past Two Fiscal Years
-------------------------------- --------------------------------------------------
<S> <C>
Andrew F. Barth, Director Executive Vice President and Research Manager,
Capital Guardian Research Company.
Michael D. Beckman, Senior Vice Director, Capital Guardian Trust Company of Nevada;
President, Treasurer and Director Treasurer, Capital Guardian Research Company
Larry P. Clemmensen, Director Director, American Funds Distributors, Inc.; Chairman of
the Board, American Funds Service Company; Director and
President, The Capital Group Companies, Inc.; Senior
Vice President and Director, Capital Research and
Management Company; President and Director, Capital
Management Services, Inc.; Treasurer, Capital Strategy
Research, Inc.; Senior Vice President, Capital Income
Builder, Inc. and Capital World Growth & Income Fund,
Inc.
Roberta A. Conroy, Senior Vice Senior Vice President and Secretary, Capital
President, Director and Counsel International, Inc. and Emerging Markets Growth Fund,
Inc.; Assistant General Counsel, The Capital Group
Companies, Inc.; Secretary, Capital Management Services,
Inc.
John B. Emerson, Senior Vice Deputy Assistant to the President, White House
President Coordinator, Deputy Director of Presidential Personnel,
The White House.
Michael E. Ericksen, Senior Vice Senior Vice President, Capital International, Limited.
President
David I. Fisher, Chairman and Chairman and Director, The Capital Group Companies, Inc.
Director Vice Chairman and Director, Capital International, Inc.,
Capital International K.K., Capital International Limited
and Emerging Markets Growth Fund, Inc.; President and
Director, Capital Group International, Inc. and Capital
International Limited (Bermuda); Presidente du Conseil,
Capital International S.A.; Director, Capital
</TABLE>
<PAGE> 61
<TABLE>
<S> <C>
Group Research, Inc., Capital Research International,
EuroPacific Growth Fund and New Perspective Fund.
Richard N. Havas, Senior Vice Senior Vice President, Capital International Limited,
President Capital Research International and Capital Guardian
Canada, Inc.
Frederick M. Hughes, Jr., Senior Vice Senior Vice President, Capital Guardian Trust Company
President
Robert G. Kirby, Chairman Emeritus Senior Partner, The Capital Group Partners, L.P.
Nancy J. Kyle, Senior Vice President and President, Capital Guardian Canada, Inc. and Vice
Director President, Emerging Markets Growth Fund, Inc.
Karin L. Larson, Director Director, The Capital Group Companies, Inc.; President,
Director, and Director of Research, Capital Guardian
Research Company; Chairperson, President and Director,
Capital Group Research, Inc.; President, Director and
Director of International Research, Capital Research
International.
D. James Martin, Director Senior Vice President and Director, Capital Guardian
Research Company.
John R. McIlwraith, Senior Vice Senior Vice President and Director, Capital International
President and Director Limited
James R. Mulally, Senior Vice Senior Vice President, Capital International Limited;
President and Director Director, Capital Guardian Research Company; Vice
President, Capital Research Company.
Shelby Notkin, Senior Vice President Director, Capital Guardian Trust Company of Nevada
Mary M. O'Hern, Senior Vice Senior Vice President Capital International Limited; Vice
President President, Capital International, Inc.
Jeffrey C. Paster, Senior Vice Senior Vice President, Capital Guardian Trust Company
President
Robert V. Pennington, Senior Vice President, Capital Guardian Trust Company of Nevada
President
Jason M. Pilalas, Director Senior Vice President and Director, Capital Guardian
Research Company
Robert Ronus, President and Director Chairman and Director, Capital Guardian Canada, Inc.,
Capital Guardian Research Company and Capital Research
Company and Capital Research International; Director, The
Capital Group Companies, Inc., Capital Group
International, Inc. and Capital International Fund S.A.;
Directeur, Capital International S.A.; Senior Vice
</TABLE>
<PAGE> 62
<TABLE>
<S> <C>
President, Capital International Limited.
Theodore R. Samuels, Senior Vice Director, Capital Guardian Research Company.
President and Director
John H. Seiter, Executive Vice Senior Vice President, Capital Group International, Inc.;
President of Client Relations & Vice President, The Capital Group Companies, Inc.
Marketing and Director
Robert L. Spare, Senior Vice Senior Vice President, Capital Guardian Trust Company
President and Director
Eugene P. Stein, Executive Vice Director, Capital Guardian Research Company
President and Director
Philip A. Swan, Senior Vice Senior Vice President, Capital Guardian Trust Company
President
Shaw B. Wagener, Director Director, Capital International Asia Pacific Management
Company, S.A., Capital International Management Company,
Capital International Emerging Countries Fund and Capital
International Latin American Fund; President and Director,
Capital International, Inc.; Senior Vice President,
Capital Group International, Inc. and Emerging Markets
Growth Fund, Inc.
William H. Hurt, Senior Vice Chairman, Capital Guardian Trust Company of Nevada and
President and Director Capital Strategy Research, Inc.
</TABLE>
Item 27. PRINCIPAL UNDERWRITERS
(a) First Data Distributors, Inc. ("FDDI"), 4400 Computer Drive,
Westborough, MA 01581-5120 serves as distributor of the shares of
the Funds. FDDI is a wholly-owned subsidiary of First Data Investor
Services Group. FDDI currently acts as principal underwriter for
the following entities:
The Galaxy Fund
The Galaxy VIP Fund
Galaxy Fund IICT&T Funds
Wilshire Target Funds, Inc.
Potomac Funds
Panorama Trust
First Choice Funds Trust
Undiscovered Managers Funds
LKCM Funds.
BT Insurance Funds Trust
ABN AMRO
IBJ Funds Trust
ICM Series Trust
Forward Funds, Inc.
Light Index
<PAGE> 63
(b) The information required by this Item 27(b) with respect to
each director, officer or partner of FDDI is incorporated by
reference to Schedule A of Form BD filed by FDDI with the SEC
pursuant to the Securities Act of 1934 (File #8-45467). No
director, officer or partner of FDDI holds a position or office
with the Registrant.
(c) Not Applicable.
Item 28. LOCATION OF ACCOUNTS AND RECORDS. All records described in Section
31(a) of the 1940 Act and the Rules 17 CFR 270.31a-1 to 31a-3
promulgated thereunder, are maintained by the Trust's Investment
Adviser, New Covenant Trust Company, N.A., except for those
maintained by the Funds' Custodian, State Street Bank & Trust Co.,
1776 Heritage Drive, North Quincy, MA 02171, the Trust's
Administrator and Transfer Agent, First Data Investor Services
Group, 3200 Horizon Drive, P.O. Box 61503, King of Prussia, PA
19406-0903, and the Funds' Accounting Agent, State Street Bank &
Trust Co., 1776 Heritage Drive, North Quincy, MA 02171.
Item 29. MANAGEMENT SERVICES. Not Applicable.
Item 30. UNDERTAKINGS.
(a) Registrant hereby undertakes to promptly call a meeting of
shareholders for the purpose of voting upon the question of removal
of any trustee or trustees when requested in writing to do so by
the recordholders of not less than 10% of the Registrant's
outstanding shares and to assist its shareholders in accordance
with the requirements of Section 16(c) of the Investment Company
Act relating to shareholder communications.
(b) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest
annual report, upon request and without charge.
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, the Registrant has duly caused this
Registration Statement on Form N-1A to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Jeffersonville and the
State of Indiana on this 30th day of September, 1998.
NEW COVENANT FUNDS
(Registrant)
By: /s/ Nancy H. Strapp
--------------------------------
Nancy H. Strapp, President
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
SIGNATURE TITLE DATE
/s/ Nancy H. Strapp Initial Trustee September 30, 1998
- ---------------------------
Nancy H. Strapp
/s/ Nancy H. Strapp President And Principal September 30, 1998
- --------------------------- Executive Officer
Nancy H. Strapp
/s/ Nancy H. Strapp Principal Financial And September 30, 1998
- --------------------------- Accounting Officer
Nancy H. Strapp
<PAGE> 65
NEW COVENANT FUNDS
EXHIBIT INDEX TO PART "C"
OF
REGISTRATION STATEMENT
ITEM NO. DESCRIPTION
-------- -----------
99(a) Trust Instrument
99(a)(1) Certificate of Trust
99(b) By-Laws
<PAGE> 1
NEW COVENANT FUNDS
(A Delaware Business Trust)
TRUST INSTRUMENT
September 30, 1998
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I DEFINITIONS...............................................................................1
ARTICLE II THE TRUSTEES..............................................................................2
Section 1. Management of the Trust....................................................................2
Section 2. Initial Trustee and Number of Trustees.....................................................2
Section 3. Term of Office of Trustees.................................................................2
Section 4. Vacancies; Appointment of Trustees.........................................................2
Section 5. Temporary Vacancy or Absence...............................................................3
Section 6. Chairman...................................................................................3
Section 7. Action by the Trustees.....................................................................3
Section 8. Ownership of Trust Property................................................................3
Section 9. Effect of Trustees Not Serving.............................................................4
Section 10. Trustees, Etc. as Holders..................................................................4
ARTICLE III POWERS OF THE TRUSTEES....................................................................4
Section 1. Powers.....................................................................................4
Section 2. Certain Transactions.......................................................................7
ARTICLE IV SERIES; CLASSES; SHARES...................................................................7
Section 1. Establishment of Series....................................................................7
Section 2. Shares.....................................................................................7
Section 3. Investment in the Trust....................................................................8
Section 4. Assets and Liabilities of Series...........................................................8
Section 5. Ownership and Transfer of Shares...........................................................9
Section 6. Status of Interests: Limitation of Holder Liability.......................................9
ARTICLE V DISTRIBUTIONS AND REDEMPTIONS.............................................................9
Section 1. Distributions..............................................................................9
Section 2. Redemptions...............................................................................10
Section 3. Determination of Net Asset Value..........................................................10
Section 4. Suspension of Right of Redemption.........................................................10
Section 5. Redemptions Necessary for Qualification as Registered
Investment Company.......................................................................10
ARTICLE VI SHAREHOLDERS' VOTING POWERS AND MEETINGS.................................................11
Section 1. Voting Powers.............................................................................11
Section 2. Meetings of Shareholders..................................................................11
Section 3. Quorum; Required Vote.....................................................................11
</TABLE>
-ii-
<PAGE> 3
<TABLE>
<S> <C> <C>
ARTICLE VII CONTRACTS WITH SERVICE PROVIDERS ........................................................12
Section 1. Investment Adviser .......................................................................12
Section 2. Principal Underwriter ....................................................................12
Section 3. Transfer Agency, Shareholder Services
and Administration Agreements .........................................................12
Section 4. Custodian.................................................................................13
Section 5. Parties to Contracts with Service Providers...............................................13
ARTICLE VIII EXPENSES OF THE TRUST AND SERIES.........................................................13
ARTICLE IX LIMITATION OF LIABILITY AND INDEMNIFICATION..............................................14
Section 1. Limitation of Liability...................................................................14
Section 2. Indemnification...........................................................................14
Section 3. Indemnification of Shareholders ..........................................................15
ARTICLE X MISCELLANEOUS............................................................................16
Section 1. Trust Not a Partnership...................................................................16
Section 2. Trustee Action; Expert Advice; No Bond or Surety..........................................16
Section 3. Record Dates..............................................................................16
Section 4. Termination of the Trust..................................................................16
Section S. Reorganization; Merger, Consolidation.....................................................17
Section 6. Trust Instrument..........................................................................17
Section 7. Applicable Law............................................................................17
Section 8. Amendments................................................................................18
Section 9. Fiscal Year ..............................................................................18
Section 10.Severability ..............................................................................18
</TABLE>
-iii-
<PAGE> 4
NEW COVENANT FUNDS
TRUST INSTRUMENT
This TRUST INSTRUMENT is made on September 30, 1998, by the
Trustees, to establish a business trust under the law of Delaware for the
investment and reinvestment of funds contributed to the Trust by investors. The
Trustees declare that all money and property contributed to the Trust shall be
held and managed in trust pursuant to this Trust Instrument. The name of the
Trust created by this Trust Instrument is New Covenant Funds.
ARTICLE I
DEFINITIONS
-----------
Unless otherwise provided or required by the context:
(a) "Bylaws" means the Bylaws of the Trust adopted by the
Trustees, which Bylaws are incorporated by reference herein in their entirety,
as amended from time to time;
(b)"Class" means the class of Shares of a Series established
pursuant to Article IV;
(c) "Code" means the Internal Revenue Code of 1986, as amended
from time to time, and the rules and regulations thereunder, as adopted or
amended from time to time;
(d) "Commission," "Interested Person," and "Principal
Underwriter" have the meanings provided in the 1940 Act;
(e) "Covered Person" means a person so defined in Article IX,
Section 2;
(f) "Delaware Act" means Chapter 38 of Title 12 of the
Delaware Code entitled "Treatment of Delaware Business Trusts," as amended from
time to time;
(g) "Majority Shareholder Vote" means "the vote of a majority
of the outstanding voting securities" as defined in the 1940 Act;
(h) "Outstanding Shares" means Shares shown in the books of
the Trust or its transfer agent as then outstanding;
(i) "Series" means a series of Shares established pursuant to
Article IV;
(j) "Shareholder" means a record owner of Outstanding Shares;
(k) "Shares" mean the equal proportionate transferable units
of interest into which the beneficial interest of each Series or Class is
divided from time to time (including whole Shares and fractions of Shares);
<PAGE> 5
(l) "Trust" means New Covenant Funds established hereby, and
reference to the Trust, when applicable to one or more Series, refers to those
Series;
(m) "Trustees" means the person or persons who have
signed this Trust Instrument, so long as they shall continue in office in
accordance with the terms hereof, and all other persons who may from time to
time be duly qualified and serving as Trustees in accordance with Article II, in
all cases in their capacities as Trustees hereunder;
(n) "Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the Trust or
the Trustees on behalf of the Trust or any Series;
(o) The "1940 Act" means the Investment Company Act of 1940,
as amended from time to time.
ARTICLE II
THE TRUSTEES
------------
SECTION 1. MANAGEMENT OF THE TRUST. The business and affairs
of the Trust shall be managed by or under the direction of the Trustees, and
they shall have all powers necessary or desirable to carry out that
responsibility. The Trustees may execute all instruments and take all action
they deem necessary or desirable to promote the interests of the Trust. Any
determination made by the Trustees in good faith as to what is in the interests
of the Trust shall be conclusive.
SECTION 2. INITIAL TRUSTEE AND NUMBER OF TRUSTEES. The initial
Trustee shall be the person signing this Trust Instrument. The exact number of
Trustees (other than the initial Trustee) shall be fixed from time to time by a
majority of the Trustees, provided, that there shall be at least one (1)
Trustee. Other than the initial Trustee and Trustees appointed to fill vacancies
pursuant to Section 4 of this Article, the Shareholders shall elect the Trustees
on such dates as the Trustees may fix from time to time.
SECTION 3. TERM OF OFFICE OF TRUSTEES. Each Trustee shall hold
office for life or until his successor is elected and qualified or the Trust
terminates; except that (a) any Trustee may resign by delivering to the other
Trustees or to any Trust officer a written resignation effective upon such
delivery or a later date specified therein; (b) any Trustee who requests to be
retired, or who has become physically or mentally incapacitated or is otherwise
unable to serve, may be retired by a written instrument signed by a majority of
the other Trustees, specifying the effective date of retirement; (c) any Trustee
shall be retired or removed with or without cause at any time upon the unanimous
written request of the remaining Trustees; and (d) any Trustee may be removed at
any meeting of the Shareholders by a vote of at least two-thirds of the
Outstanding Shares.
SECTION 4. VACANCIES; APPOINTMENT OF TRUSTEES. Whenever a
vacancy shall exist, regardless of the reason for such vacancy, the remaining
Trustees shall appoint any person as they determine in their sole discretion to
fill that vacancy, consistent with the limitations under the 1940 Act. Such
appointment shall be made by a written instrument signed by a majority of the
Trustees or by a resolution of the Trustees, duly adopted and recorded in the
records of the Trust, specifying the
-2-
<PAGE> 6
effective date of the appointment. The Trustees may appoint a new Trustee as
provided above in anticipation of a vacancy expected to occur because of the
retirement, resignation or removal of a Trustee, or an increase in number of
Trustees, provided that such appointment shall become effective only at or after
the expected vacancy occurs. As soon as any such Trustee has accepted his or her
appointment in writing, the Trust estate shall vest in the new Trustee, together
with the continuing Trustees, without any further act or conveyance, and he or
she shall be deemed a Trustee hereunder.
SECTION 5. TEMPORARY VACANCY OR ABSENCE. Whenever a vacancy in
the Trustees shall occur, until such vacancy is filled, or while any Trustee is
absent from his domicile (unless that Trustee has made arrangements to be
informed about, and to participate in, the affairs of the Trust during such
absence), or is physically or mentally incapacitated, the remaining Trustees
shall have all the powers hereunder and their certificate as to such vacancy,
absence or incapacity shall be conclusive. Any Trustee may, by power of
attorney, delegate his powers as Trustee for a period not to exceed six (6)
months, unless otherwise extended for one or more additional consecutive six (6)
month periods, to any other Trustee or Trustees.
SECTION 6. CHAIRMAN. The Trustees shall appoint one of their
number to be Chairman of the Trustees. The Chairman shall preside at all
meetings of the Trustees, and shall be responsible for the execution of policies
established by the Trustees and the administration of the Trust.
SECTION 7. ACTION BY THE TRUSTEES. The Trustees shall act by
majority vote at a meeting duly called (including at a telephonic meeting at
which all participants can hear one another, unless the 1940 Act requires that a
particular action be taken only at a meeting of the Trustees in person) at which
a quorum is present or by written consent of a majority of Trustees (or such
greater number as may be required by applicable law) without a meeting.
One-third of the Trustees shall constitute a quorum at any meeting. Meetings of
the Trustees may be called orally or in writing by the Chairman of the Trustees
or by any two other Trustees. Notice of the time, date and place of all Trustees
meetings shall be given to each Trustee by telephone, facsimile or other
electronic mechanism sent to his home or business address at least twenty-four
hours in advance of the meeting or by written notice mailed to his home or
business address at least seventy-two hours in advance of the meeting. Notice
need not be given to any Trustee who attends the meeting without objecting to
the lack of notice or who signs a waiver of notice either before, at or after
the meeting. Subject to the requirements of the 1940 Act, the Trustees by
majority vote may delegate to any Trustee or Trustees authority to approve
particular matters or take particular actions on behalf of the Trust. Any
written consent or waiver may be provided and delivered to the Trust by
facsimile or other similar electronic mechanism.
SECTION 8. OWNERSHIP OF TRUST PROPERTY. The Trust Property of
the Trust and of each Series shall be held separate and apart from any assets
now or hereafter held in any capacity other than as Trustee hereunder by the
Trustees or any successor Trustees. All of the Trust Property and legal title
thereto shall at all times be considered as vested in the Trust, provided that
the Trustees may cause legal title to any Trust Property to be held by or in the
name of the Trustees acting on behalf of the Trust, or in the name of any person
as nominee. No Shareholder shall be deemed to have a severable ownership in any
individual asset of the Trust or of any Series or any right of partition or
possession thereof, but each Shareholder shall have, as provided in Article IV,
a proportionate undivided beneficial interest in the Trust or Series represented
by Shares. The Trust or the Trustees on behalf of the Trust
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shall be deemed to hold legal and beneficial ownership of any income earned on
securities held by the Trust issued by any business entity formed, organized or
existing under the laws of any jurisdiction other than a state, commonwealth,
possession or colony of the United States or the laws of the United States.
SECTION 9. EFFECT OF TRUSTEES NOT SERVING. The death,
resignation, retirement, removal, incapacity or inability or refusal to serve of
the Trustees, or any one of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Trust
Instrument.
SECTION 10. TRUSTEES, ETC. AS SHAREHOLDERS. Subject to any
restrictions in the Bylaws, any Trustee, officer, agent or independent
contractor of the Trust may acquire, own and dispose of Shares to the same
extent as any other Shareholder, and the Trustees may issue and sell Shares to
and buy Shares from any such person or any firm or company in which such person
is interested, subject only to any general limitations herein.
ARTICLE III
POWERS OF THE TRUSTEES
----------------------
SECTION 1. POWERS. The Trustees in all instances shall act as
principals, free of the control of the Shareholders. The Trustees shall have
full power and authority to take or refrain from taking any action and to
execute any contracts and instruments that they may consider necessary or
desirable in the management of the Trust. The Trustees shall not in any way be
bound or limited by current or future laws or customs applicable to trust
investments, but shall have full power and authority to make any investments
which they, in their sole discretion, deem proper to accomplish the purposes of
the Trust. The Trustees may exercise all of their powers without recourse to any
court or other authority. Subject to any applicable limitation herein or in the
Bylaws or resolutions of the Trust, the Trustees shall have power and authority,
without limitation:
(a) To invest and reinvest cash and other property, and
to hold cash or other property uninvested, without in any event being bound or
limited by any current or future law or custom concerning investments by
trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the Trust Property; to invest in obligations,
securities and assets of any kind, and without regard to whether they may mature
before or after the possible termination of the Trust; and without limitation to
invest all or any part of its cash and other assets and property in securities
issued by any investment company or series thereof;
(b) To operate as and carry on the business of an investment
company, and exercise all the powers necessary and proper to conduct such a
business;
(c) To adopt Bylaws not inconsistent with this Trust
Instrument providing for the conduct of the business of the Trust and to amend
and repeal them to the extent such right is not reserved to the Shareholders;
(d) To elect and remove such officers and appoint and
terminate such agents, independent contractors and delegates as they deem
appropriate;
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(e) To employ an investment adviser (subject to such
general or specific instruments as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of Trust Property on behalf of the
Trustees or may authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of any such
investment adviser;
(f) To employ as custodian of any Trust Property, subject to
any provisions herein or in the Bylaws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such;
(g) To retain one or more transfer agents, dividend disbursing
agents, placement agents, administrators, or Shareholder servicing agents, or
both;
(h) To provide for the distribution of Shares, either through
a Principal Underwriter or distributor as provided herein, or by the Trust
itself, or both, or pursuant to a distribution plan of any kind;
(i) To set record dates in the manner provided for herein or
in the Bylaws;
(j) To delegate such authority as they consider desirable to
any officers of the Trust and to any agent, subagent, independent contractor,
delegate, manager, investment adviser, custodian or underwriter;
(k) To sell or exchange any or all of the Trust Property;
(l) To vote or give assent, or exercise any rights of
ownership, with respect to securities or other property; and to execute and
deliver powers of attorney delegating such power to other persons;
(m) To exercise powers and rights of subscription or otherwise
which in any manner arise out of ownership of securities;
(n) To hold any security or other Trust Property (i) in a form
not indicating any trust, whether in bearer, book entry, unregistered or other
negotiable form, or (ii) either in the Trust's or Trustees' own name or in the
name of a custodian or a nominee or nominees, subject to safeguards according to
the usual practice of business trusts or investment companies;
(o) To establish separate and distinct Series with separately
defined investment objectives, policies or restrictions and distinct investment
purposes, and with separate Shares representing beneficial interests in such
Series, and to establish separate Classes, all in accordance with the provisions
of Article IV;
(p) To the full extent permitted by Section 3806 of the
Delaware Act, to allocate assets, liabilities and expenses of the Trust to a
particular Series and liabilities and expenses to a particular Class or to
apportion the same between or among two or more Series or Classes, provided that
any liabilities or expenses incurred by a particular Series or Class shall be
payable solely out of the assets belonging to that Series or Class as provided
for in Article IV, Section 4;
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(q) To consent to or participate in any plan for the
liquidation, reorganization, consolidation or merger of any corporation or
concern whose securities are held by the Trust; to consent to any contract,
lease, mortgage, purchase or sale of property by such corporation or concern;
and to pay calls or subscriptions with respect to any security held by the
Trust;
(r) To compromise, arbitrate or otherwise adjust claims in
favor of or against the Trust or any matter in controversy including, but not
limited to, claims for taxes;
(s) To make distributions of income and of capital gains to
Shareholders in the manner provided in this Trust Instrument or in the Bylaws;
(t) To borrow money and in connection therewith to issue notes
or other evidences of indebtedness and to pledge or grant security interests in
Trust Property as security therefor;
(u) To establish committees for such purposes, with such
membership, and with such responsibilities, as the Trustees may consider proper;
(v) To issue, sell, repurchase, redeem, cancel, retire,
acquire, hold, resell, reissue, dispose of and otherwise deal in Shares; to
establish terms and conditions regarding the issuance, sale, repurchase,
redemption, cancellation, retirement, acquisition, holding, resale, reissuance,
disposition of or dealing in Shares; and, subject to Articles IV and V, to apply
to any such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property of the Trust or of the particular Series with
respect to which such Shares are issued;
(w) To sell all or a portion of the Shares to another
investment company that is registered under the 1940 Act, in the Trustees' sole
discretion, without the vote or approval of any Shareholder or Shareholders,
notwithstanding any other provision of this Trust Instrument or the Bylaws to
the contrary; and
(x) To carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary or
desirable to accomplish any purpose or to further any of the foregoing powers,
and to take every other action incidental to the foregoing business or purposes,
objects or powers.
The clauses above shall be construed as objects and powers,
and the enumeration of specific powers shall not limit in any way the general
powers of the Trustees. Any action by one or more of the Trustees in their
capacity as such hereunder shall be deemed an action on behalf of the Trust or
the applicable Series, and not an action in an individual capacity. No one
dealing with the Trustees shall be under any obligation to make any inquiry
concerning the authority of the Trustees, or to see to the application of any
payments made or property transferred to the Trustees or upon their order. In
construing this Trust Instrument, the presumption shall be in favor of a grant
of power to the Trustees.
SECTION 2. CERTAIN TRANSACTIONS. Except as prohibited by
applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
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member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
Interested Person of such person. The Trust may employ any such person or entity
in which such person is an Interested Person, as broker, legal counsel,
registrar, investment adviser, administrator, distributor, transfer agent,
dividend disbursing agent, custodian or in any other capacity upon customary
terms.
ARTICLE IV
SERIES; CLASSES; SHARES
-----------------------
SECTION 1. ESTABLISHMENT OF SERIES OR CLASSES. The Trust shall
consist of one or more Series. The Trustees hereby establish the Series listed
in Schedule A attached hereto and made a part hereof. Each additional Series
shall be established by the adoption of a resolution of the Trustees. The
Trustees may designate the relative rights and preferences of the Shares of each
Series. The Trustees may divide the Shares of any Series into Classes. In such
case each Class of a Series shall represent interests in the assets of that
Series and have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that expenses allocated to a Class may be
borne solely by such Class as determined by the Trustees and a Class may have
exclusive voting rights with respect to matters affecting only that Class. The
Trust shall maintain separate and distinct records for each Series and hold and
account for the assets thereof separately from the other assets of the Trust or
of any other Series. A Series may issue any number of Shares and need not issue
Shares. Each Share of a Series shall represent an equal beneficial interest in
the net assets of such Series. Each holder of Shares of a Series shall be
entitled to receive his pro rata share of all distributions made with respect to
such Series. Upon redemption of his Shares, such Shareholder shall be paid
solely out of the funds and property of such Series. The Trustees may change the
name of any Series or Class. At any time that there are no Shares outstanding of
any particular Series previously established and designated, the Trustees may by
a majority vote abolish that Series and rescind the establishment and
designation thereof.
SECTION 2. SHARES. The beneficial interest in the Trust shall
be divided into Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of each Series and Class is
unlimited and each Share shall have a par value of $0.001 per Share. All Shares
issued hereunder shall be fully paid and nonassessable. Shareholders shall have
no preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust. The Trustees shall have full power and
authority, in their sole discretion and without obtaining Shareholder approval:
to issue original or additional Shares at such times and on such terms and
conditions as they deem appropriate; to issue fractional Shares and Shares held
in the treasury; to establish and to change in any manner Shares of any Series
or Classes with such preferences, terms of conversion, voting powers, rights and
privileges as the Trustees may determine (but the Trustees may not change
Outstanding Shares in a manner materially adverse to the Shareholders of such
Shares); to divide or combine the Shares of any Series or Classes into a greater
or lesser number; to classify or reclassify any unissued Shares of any Series or
Classes into one or more Series or Classes of Shares; to abolish any one or more
Series or Classes of Shares; to issue Shares to acquire other assets (including
assets subject to, and in connection with, the assumption of liabilities) and
businesses; and to take such other action with respect to the Shares as the
Trustees may deem desirable. Shares held in the treasury shall
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not confer any voting rights on the Trustees and shall not be entitled to any
dividends or other distributions declared with respect to the Shares.
SECTION 3. INVESTMENT IN THE TRUST. The Trustees shall accept
or redeem investments in any Series from such persons and on such terms as they
may from time to time authorize. At the Trustees' discretion, such investments,
subject to applicable law, may be in the form of cash or securities in which
that Series is authorized to invest, valued as provided in Article V, Section 3.
Investments in a Series shall be credited to each Shareholder's account in the
form of full Shares at the Net Asset Value per Share next determined after the
investment is received or accepted as may be determined by the Trustees;
provided, however, that the Trustees may, in their sole discretion, (a) impose a
sales charge upon investments in any Series or Class, (b) issue fractional
Shares, or (c) determine the Net Asset Value per Share of the initial capital
contribution. The Trustees shall have the right to refuse to accept investments
in any Series at any time without any cause or reason therefor whatsoever and to
redeem any investments in the same manner.
SECTION 4. ASSETS AND LIABILITIES OF SERIES. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof (including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be), shall be held and accounted for separately from the other assets
of the Trust and every other Series and are referred to as "assets belonging to"
that Series. The assets belonging to a Series shall belong only to that Series
for all purposes, and to no other Series, subject only to the rights of
creditors of that Series. Any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular Series shall be allocated by the Trustees between and among one
or more Series as the Trustees deem fair and equitable. Each such allocation
shall be conclusive and binding upon the Shareholders of all Series for all
purposes, and such assets, earnings, income, profits or funds, or payments and
proceeds thereof shall be referred to as assets belonging to that Series. The
assets belonging to a Series shall be so recorded upon the books of the Trust,
and shall be held by the Trustees in trust for the benefit of the Shareholders
of that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of
the Trustees to allocate general liabilities, expenses, costs, charges or
reserves as herein provided, the debts, liabilities, obligations and expenses
incurred, contracted for or otherwise existing with respect to a particular
Series shall be enforceable against the assets of such Series only, and not
against the assets of the Trust generally or of any other Series. Notice of this
contractual limitation on liabilities among Series may, in the Trustees'
discretion, be set forth in the certificate of trust of the Trust (whether
originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the Delaware Act, and
upon the giving of such notice in the certificate of trust, the
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statutory provisions of Section 3806 of the Delaware Act relating to limitations
on liabilities among Series (and the statutory effect under Section 3806 of
setting forth such notice in the certificate of trust) shall become applicable
to the Trust and each Series. Any person extending credit to, contracting with
or having any claim against any Series may look only to the assets of that
Series to satisfy or enforce any debt, liability, obligation or expense
incurred, contracted for or otherwise existing with respect to that Series. No
Shareholder or former Shareholder of any Series shall have a claim on or any
right to any assets allocated or belonging to any other Series.
SECTION 5. OWNERSHIP AND TRANSFER OF SHARES. The Trust shall
maintain a register containing the names and addresses of the Shareholders of
each Series, the number of Shares of each Series and Class thereof, and a record
of all Share transfers. The register shall be conclusive as to the identity of
Shareholders of record and the Shares held by them from time to time. The
Trustees may authorize the issuance of certificates representing Shares and
adopt rules governing their use. The Trustees may make rules governing the
transfer of Shares, whether or not represented by certificates.
SECTION 6. STATUS OF SHARES: LIMITATION OF SHAREHOLDER
LIABILITY. Shares shall be deemed to be personal property giving Shareholders
only the rights provided in this Trust Instrument. Every Shareholder, by virtue
of having acquired an Share, shall be held expressly to have assented to and
agreed to be bound by the terms of this Trust Instrument. No Shareholder shall
be personally liable for the debts, liabilities, obligations and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
any Series. Neither the Trust nor the Trustees shall have any power to bind any
Shareholder personally or to demand payment from any Shareholder for anything,
other than as agreed by the Shareholder. Shareholders shall have the same
limitation of personal liability as is extended to shareholders of a private
corporation for profit incorporated in the State of Delaware. Every written
obligation of the Trust or any Series shall contain a statement to the effect
that such obligation may only be enforced against the assets of the Trust or
such Series; however, the omission of such statement shall not operate to bind
or create personal liability for any Shareholder or Trustee.
ARTICLE V
DISTRIBUTIONS AND REDEMPTIONS
-----------------------------
SECTION 1. DISTRIBUTIONS. The Trustees may declare and pay
dividends and other distributions, including dividends on Shares of a particular
Series and other distributions from the assets belonging to that Series. The
amount and payment of dividends or distributions and their form, whether they
are in cash, Shares or other Trust Property, shall be determined by the
Trustees. Dividends and other distributions may be paid pursuant to a standing
resolution adopted once or more often as the Trustees determine. All dividends
and other distributions on Shares of a particular Series shall be distributed
pro rata to the Shareholders of that Series in proportion to the number of
Shares of that Series they held on the record date established for such payment,
except that such dividends and distributions shall appropriately reflect
expenses allocated to a particular Class of such Series. The Trustees may adopt
and offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or similar plans as the Trustees deem appropriate.
SECTION 2. REDEMPTIONS. Each Shareholder of a Series shall
have the right at such times as may be permitted by the Trustees to require the
Series to redeem all or any part of his Shares
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at a redemption price per Share equal to the Net Asset Value per Share at such
time as the Trustees shall have prescribed by resolution. In the absence of such
resolution, the redemption price per Share shall be the Net Asset Value next
determined after receipt by the Series of a request for redemption in proper
form less such charges as are determined by the Trustees and described in the
Trust's Registration Statement for that Series under the Securities Act of 1933.
The Trustees may specify conditions, prices, and places of redemption, and may
specify binding requirements for the proper form or forms of requests for
redemption. Payment of the redemption price may be wholly or partly in
securities or other assets at the value of such securities or assets used in
such determination of Net Asset Value, or may be in cash. Upon redemption,
Shares may be reissued from time to time. The Trustees may require Shareholders
to redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if required
to do so, or to have the minimum investment required, or to pay when due for the
purchase of Shares issued to him. To the extent permitted by law, the Trustees
may retain the proceeds of any redemption of Shares required by them for payment
of amounts due and owing by a Shareholder to the Trust or any Series or Class.
Notwithstanding the foregoing, the Trustees may postpone payment of the
redemption price and may suspend the right of the Shareholders to require any
Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
SECTION 3. DETERMINATION OF NET ASSET VALUE. The Trustees
shall cause the Net Asset Value of Shares of each Series or Class to be
determined from time to time in a manner consistent with applicable laws and
regulations. The Trustees may delegate the power and duty to determine Net Asset
Value per Share to one or more Trustees or officers of the Trust or to a
custodian, depository or other agent appointed for such purpose. The Net Asset
Value of Shares shall be determined separately for each Series or Class at such
times as may be prescribed by the Trustees or, in the absence of action by the
Trustees, as of the close of trading on the New York Stock Exchange on each day
for all or part of which such Exchange is open for unrestricted trading.
SECTION 4. SUSPENSION OF RIGHT OF REDEMPTION. If, as referred
to in Section 2 of this Article, the Trustees postpone payment of the redemption
price and suspend the right of Shareholders to redeem their Shares, such
suspension shall take effect at the time the Trustees shall specify, but not
later than the close of business on the business day next following the
declaration of suspension. Thereafter Shareholders shall have no right of
redemption or payment until the Trustees declare the end of the suspension. If
the right of redemption is suspended, a Shareholder may either withdraw his
request for redemption or receive payment based on the Net Asset Value per Share
next determined after the suspension terminates.
SECTION 5. REDEMPTIONS NECESSARY FOR QUALIFICATION AS
REGULATED INVESTMENT COMPANY. If the Trustees shall determine that direct or
indirect ownership of Shares of any Series has or may become concentrated in any
person to an extent which would disqualify any Series as a regulated investment
company under the Internal Revenue Code of 1986, as amended or superseded from
time to time ("Internal Revenue Code"), then the Trustees shall have the power
(but not the obligation) by lot or other means they deem equitable to (a) call
for redemption by any such person of a number, or principal amount, of Shares
sufficient to maintain or bring the direct or indirect ownership of Shares into
conformity with the requirements for such qualification and (b) refuse to
transfer or issue Shares to any person whose acquisition of Shares in question
would, in the Trustees' judgment, result in such disqualification. Any such
redemption shall be effected at the redemption price and in the
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manner provided in this Article. Shareholders shall upon demand disclose to the
Trustees in writing such information concerning direct and indirect ownership of
Shares as the Trustees deem necessary to comply with the requirements of any
taxing authority.
ARTICLE VI
SHAREHOLDERS' VOTING POWERS AND MEETINGS
----------------------------------------
SECTION 1. VOTING POWERS. The Shareholders shall have power to
vote only with respect to (a) the election of Trustees; (b) the removal of
Trustees; (c) the amendment of this Trust Instrument to the extent and as
provided in Article X, Section 8; and (d) such additional matters relating to
the Trust as may be required by law, this Trust Instrument, or the Bylaws or any
registration of the Trust with the Commission or any State, or as the Trustees
may consider desirable.
On any matter submitted to a vote of the Shareholders, all
Shares shall be voted by individual Series or Class, except (a) when required by
the 1940 Act, Shares shall be voted in the aggregate and not by individual
Series or Class, and (b) when the Trustees have determined that the matter
affects the interests of more than one Series or Class, then the Shareholders of
all such Series or Classes shall be entitled to vote thereon. Each whole Share
shall be entitled to one vote as to any matter on which it is entitled to vote,
and each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy or in any manner provided for in the Bylaws. The
Bylaws may provide that proxies may be given by any electronic or
telecommunications device or in any other manner, but if a proposal by anyone
other than the officers or Trustees is submitted to a vote of the Shareholders
of any Series or Class, or if there is a proxy contest or proxy solicitation or
proposal in opposition to any proposal by the officers or Trustees, Shares may
be voted only in person or by written proxy. Until Shares of a Series are
issued, as to that Series, the Trustees may exercise all rights of Shareholders
and may take any action required or permitted to be taken by Shareholders by
law, this Trust Instrument or the Bylaws.
SECTION 2. MEETINGS OF SHAREHOLDERS. The first Shareholders'
meeting shall be held to elect Trustees at such time and place as the Trustees
designate, provided, however, that such election may be accomplished by the
Shareholders' written consent. Special meetings of the Shareholders of any
Series or Class may be called by the Trustees and shall be called by the
Trustees upon the written request of Shareholders owning at least ten percent
(10%) of the Outstanding Shares of such Series entitled to vote. Shareholders
shall be entitled to at least ten days notice of any meeting, given as
determined by the Trustees.
SECTION 3. QUORUM; REQUIRED VOTE. One third of the Outstanding
Shares of each Series or Class, or one third of the Outstanding Shares of the
Trust, entitled to vote in person or by proxy shall be a quorum for the
transaction of business at a Shareholders meeting with respect to such Series or
Class, or with respect to the entire Trust, respectively. Except when a larger
vote is required by law, this Trust Instrument or the Bylaws, at any meeting at
which a quorum is present, a majority of the total Shares voted in person or by
proxy shall decide any matters to be voted upon with respect to the entire Trust
and a plurality of such Shares shall elect a Trustee; provided, that if this
Trust Instrument or applicable law permits or requires that Shares be voted on
any matter by individual Series or Classes, then a majority of the Shares of
that Series or Class (or, if required by law, a
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Majority Shareholder Vote of that Series) voted in person or by proxy on the
matter shall decide that matter insofar as that Series or Class is concerned.
Shareholders may act as to the Trust or any Series or Class by the written
consent of a majority (or such greater amount as may be required by applicable
law) of the Outstanding Shares of the Trust or of such Series or Class, as the
case may be.
Notwithstanding any other provision herein or in the Bylaws,
any meeting of Shareholders, whether or not a quorum is present, may be
adjourned from time to time by the vote of the majority of the total Shares
represented at that meeting, either in person or by proxy. Any adjourned session
of a meeting of Shareholders may be held within a reasonable time without
further notice.
ARTICLE VII
CONTRACTS WITH SERVICE PROVIDERS
--------------------------------
SECTION 1. INVESTMENT ADVISER. Subject to a Majority
Shareholder Vote (or in reliance upon applicable exemptive relief obtained from
the Commission), the Trustees may enter into one or more investment advisory
contracts on behalf of the Trust or any Series, providing for investment
advisory services, statistical and research facilities and services, and other
facilities and services to be furnished to the Trust or Series on terms and
conditions acceptable to the Trustees. Any such contract may provide for the
investment adviser to effect purchases, sales or exchanges of portfolio
securities or other Trust Property on behalf of the Trustees or may authorize
any officer or agent of the Trust to effect such purchases, sales or exchanges
pursuant to recommendations of the investment adviser. The Trustees may
authorize the investment adviser to employ one or more subadvisers. Any
reference in this Trust Instrument to the investment adviser shall be deemed to
include such subadvisers, unless the context otherwise requires.
SECTION 2. PRINCIPAL UNDERWRITER. The Trustees may enter into
contracts on behalf of the Trust or any Series or Class, providing for the
distribution and sale of Shares by the other party, either directly or as sales
agent, on terms and conditions acceptable to the Trustees. The Trustees may
adopt a plan or plans of distribution with respect to Shares of any Series or
Class and enter into any related agreements, whereby the Series or Class
finances directly or indirectly any activity that is primarily intended to
result in sales of its Shares, subject to the requirements of Section 12 of the
1940 Act, Rule 12b-1 thereunder, and other applicable rules and regulations.
SECTION 3. TRANSFER AGENCY, SHAREHOLDER SERVICES AND
ADMINISTRATION AGREEMENTS. The Trustees, on behalf of the Trust or any Series or
Class, may enter into transfer agency agreements, Shareholder service agreements
and administration and management agreements with any party or parties on terms
and conditions acceptable to the Trustees or delegate to a service provider the
arrangement of these and other services.
SECTION 4. CUSTODIAN. The Trustees shall at all times place
and maintain the securities and similar investments of the Trust and of each
Series in custody meeting the requirements of Section 17(f) of the 1940 Act and
the rules thereunder. The Trustees, on behalf of the Trust or any Series, may
enter into an agreement with a custodian on terms and conditions acceptable to
the Trustees, providing for the custodian, among other things, to (a) hold the
securities owned by the Trust or any Series and deliver the same upon written
order or oral order confirmed in writing, (b) receive and receipt for any
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moneys due to the Trust or any Series and deposit the same in its own banking
department or elsewhere, (c) disburse such funds upon orders or vouchers, and
(d) employ one or more sub-custodians.
SECTION 5. PARTIES TO CONTRACTS WITH SERVICE PROVIDERS. The
Trustees may enter into any contract referred to in this Article with any
entity, although one or more of the Trustees or officers of the Trust may be an
officer, director, trustee, partner, shareholder or member of such entity, and
no such contract shall be invalidated or rendered void or voidable because of
such relationship. No person having such a relationship shall be disqualified
from voting on or executing a contract in his capacity as Trustee and/or
Shareholder, or be liable merely by reason of such relationship for any loss or
expense to the Trust with respect to such a contract or accountable for any
profit realized directly or indirectly therefrom.
Any contract referred to in Sections 1 and 2 of this Article
shall be consistent with and subject to the applicable requirements of Section
15 of the 1940 Act and the rules and orders thereunder with respect to its
continuance in effect, its termination and the method of authorization and
approval of such contract or renewal. No amendment to a contract referred to in
Section 1 of this Article shall be effective unless assented to in a manner
consistent with the requirements of Section 15 of the 1940 Act, and the rules
and orders thereunder.
ARTICLE VIII
EXPENSES OF THE TRUST AND SERIES
--------------------------------
Subject to Article IV, Section 4, the Trust or a particular
Series shall pay, directly or indirectly through contractual arrangements, or
shall reimburse the Trustees from the Trust estate or the assets belonging to
the particular Series, for their expenses and disbursements, including, but not
limited to, interest charges, taxes, brokerage fees and commissions; expenses of
pricing Trust portfolio securities; expenses of sale, addition and reduction of
Shares; certain insurance premiums; applicable fees, interest charges and
expenses of third parties, including the Trust's investment advisers, managers,
administrators, distributors, custodians, transfer agents and fund accountants;
fees of pricing, interest, dividend, credit and other reporting services; costs
of membership in trade associations; telecommunications expenses; funds
transmission expenses; auditing, legal and compliance expenses; costs of forming
the Trust and its Series and maintaining its existence; costs of preparing and
printing the prospectuses of the Trust and each Series, statements of additional
information and Shareholder reports and delivering them to Shareholders;
expenses of meetings of Shareholders and proxy solicitations therefor; costs of
maintaining books and accounts; costs of reproduction, stationery and supplies;
fees and expenses of the Trustees; compensation of the Trust's officers and
employees and costs of other personnel performing services for the Trust or any
Series; costs of Trustee meetings; Commission registration fees and related
expenses; registration fees and related expenses under state or foreign
securities or other laws; and for such non-recurring items as may arise,
including litigation to which the Trust or a Series (or a Trustee or officer of
the Trust acting as such) is a party, and for all losses and liabilities by them
incurred in administering the Trust. The Trustees shall have a lien on the
assets belonging to the appropriate Series, or in the case of an expense
allocable to more than one Series, on the assets of each such Series, prior to
any rights or interests of the Shareholders thereto, for the reimbursement to
them of such expenses, disbursements, losses and liabilities. This Article shall
not preclude the Trust from directly paying any of the aforementioned fees and
expenses.
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<PAGE> 17
ARTICLE IX
LIMITATION OF LIABILITY AND INDEMNIFICATION
-------------------------------------------
SECTION 1. LIMITATION OF LIABILITY. All persons contracting
with or having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such contract
or claim; and neither the Trustees nor any of the Trust's officers, employees or
agents, whether past, present or future, shall be personally liable therefor.
Every written instrument or obligation on behalf of the Trust or any Series
shall contain a statement to the foregoing effect, but the absence of such
statement shall not operate to make any Trustee or officer of the Trust liable
thereunder. Provided they have exercised reasonable care and have acted under
the reasonable belief that their actions are in the best interest of the Trust,
the Trustees, officers, employees and managers of the Trust shall not be
responsible or liable for any act or omission or for neglect or wrongdoing of
them or any officer, agent, employee, manager, investment adviser, delegate or
independent contractor of the Trust, but nothing contained in this Trust
Instrument or in the Delaware Act shall protect any Trustee, officer, employee
or manager of the Trust against liability to the Trust or to Shareholders to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of the duties involved in the conduct of
his office.
SECTION 2. INDEMNIFICATION.
(a) Subject to the exceptions and limitations contained in
subsection (b) below:
(i) every person who is, or has been, a Trustee, officer,
employee, manager or agent of the Trust (including persons who serve at the
Trust's request as directors, trustees, officers or agents of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Person") shall be indemnified by the Trust or the
appropriate Series to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by such person in connection
with any claim, action, suit or proceeding in which such person becomes involved
as a party or otherwise by virtue of being or having been a Covered Person and
against amounts paid or incurred by such person in the settlement thereof,
whether or not such person is a Covered Person at the time such expenses are
incurred;
(ii) as used herein, the words "claim," "action," "suit," or
"proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include, without
limitation, attorney's fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a
Covered Person:
(i) who shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, or (B)
not to have acted in good faith in the reasonable belief that his action was in
or not opposed to the best interests of the Trust; or
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<PAGE> 18
(ii) in the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office: (A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither Interested Persons
of the Trust nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial type inquiry); or (C) by written
opinion of independent legal counsel based upon a review of readily available
facts (as opposed to a full trial type inquiry).
(c) To the maximum extent permitted by applicable law,
expenses in connection with the preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in subsection (a)
of this Section may be paid by the Trust or applicable Series from time to time
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by such person
to the Trust or applicable Series if it is ultimately determined that such
person is not entitled to indemnification under this Section; provided, however,
that either (i) such Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a full trial type inquiry) that there is
reason to believe that such Covered Person will not be disqualified from
indemnification under this Section.
(d) The rights of indemnification herein provided shall
be severable, shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled, and shall inure to the benefit
of the heirs, executors and administrators of a Covered Person.
(e) By action of the Trustees, and notwithstanding any
interest of the Trustees in the action, the Trust shall have power to purchase
and maintain insurance, in such amounts as the Trustees deem appropriate, on
behalf of any Covered Person, whether or not such person is indemnified against
such liability or expense under the provisions of this Article IX and whether or
not the Trust would have the power or would be required to indemnify such person
against such liability under the provisions of this Article IX or of the
Delaware Act or by any other applicable law, subject only to any limitations
imposed by the 1940 Act.
(f) Any repeal or modification of this Article IX by the
Shareholders of the Trust, or adoption or modification of any other provision of
the Trust Instrument or Bylaws inconsistent with this Article, shall be
prospective only, to the extent that such repeal or modification would, if
applied retrospectively, adversely affect any limitation on the liability of any
Covered Person or indemnification available to any Covered Person with respect
to any act or omission which occurred prior to such repeal, modification or
adoption.
SECTION 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder
or former Shareholder of any Series shall be held personally liable solely by
reason of being or having been a Shareholder and not because of acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
such person's heirs, executors, administrators or other legal representatives or
in the case of any entity, its general successor) shall be entitled out of the
assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
on behalf of the affected Series, shall, upon request by such Shareholder,
assume the defense of any such
-15-
<PAGE> 19
claim made against such Shareholder for any act or obligation of the Series and
satisfy any judgment thereon from the assets of the Series.
ARTICLE X
MISCELLANEOUS
-------------
SECTION 1. TRUST NOT A PARTNERSHIP. This Trust Instrument
creates a trust and not a partnership, except to the extent such trust is deemed
to constitute a partnership under the Code and applicable state tax laws. No
Trustee shall have any power to bind personally either the Trust's officers or
any Shareholder.
SECTION 2. TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY.
The exercise by the Trustees of their powers and discretion hereunder in good
faith and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Article IX, the
Trustees shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Trust Instrument, and subject to the provisions of
Article IX, shall not be liable for any act or omission in accordance with such
advice or for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is obtained.
SECTION 3. RECORD DATES. The Trustees may fix in advance a
date up to ninety (90) days before the date of any Shareholders meeting, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of Shares shall go into effect as a record date for the determination
of the Shareholders entitled to notice of, and to vote at, any such meeting, or
to receive any such allotment of rights, or to exercise such rights in respect
of any such change, conversion or exchange of Shares. Any Shareholder who was a
Shareholder at the date and time so fixed shall be entitled to vote at such
meeting or any adjournment thereof.
SECTION 4. TERMINATION OF THE TRUST.
(a) Except as provided herein, the Trust shall have
perpetual existence. The Trust may be terminated at any time by vote of a
majority of the Shares of each Series entitled to vote, voting separately by
Series, or by the Trustees by written notice to the Shareholders. Any Series of
Shares or Class thereof may be terminated at any time by vote of a majority of
the Shares of such Series or Class entitled to vote or by the Trustees by
written notice to the Shareholders of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the
Trustees to terminate the Trust or any one or more Series or any Class thereof,
after making reasonable provision for the payment of all known liabilities of
the Trust or any affected Series, the Trustees shall distribute the remaining
proceeds or assets (as the case may be) ratably among the Shareholders of the
Trust or any affected Series or Class; however, the payment to any particular
Class of such Series may be reduced by any fees, expenses or charges allocated
to that Class. Upon completion of the distribution of the remaining proceeds or
assets, the Trust or affected Series or Class shall terminate and the Trustees
and the Trust shall be discharged of any and all further liabilities and duties
hereunder with respect thereto and the right, title and interest of all parties
therein shall be canceled and discharged.
-16-
<PAGE> 20
(c) Upon termination of the Trust, following completion
of winding up of its business, the Trustees shall cause a certificate of
cancellation of the Trust's certificate of trust to be filed in accordance with
the Delaware Act, which certificate of cancellation may be signed by any one
Trustee.
SECTION 5. REORGANIZATION; MERGER; CONSOLIDATION.
(a) Notwithstanding anything else herein, to change the
Trust's form of organization the Trustees may, without Shareholder approval to
the extent permitted by applicable law, (i) cause the Trust to merge or
consolidate with or into one or more entities, if the surviving or resulting
entity is the Trust or another open-end management investment company under the
1940 Act, or a series thereof, that will succeed to or assume the Trust's
registration under the 1940 Act, (ii) cause the Shares to be exchanged under or
pursuant to any state or federal statute to the extent permitted by law, (iii)
sell the assets of the Trust in exchange for shares of another management
investment company, or (iv) cause the Trust to incorporate under the laws of
Delaware. Any agreement of merger or consolidation or certificate of merger may
be signed by a majority of Trustees and facsimile signatures conveyed by
electronic or telecommunication means shall be valid.
(b) Pursuant to and in accordance with the provisions of
Section 3815(f) of the Delaware Act, an agreement of merger or consolidation
approved in accordance with this Section 5 may effect any amendment to the
governing instrument of the Trust or effect the adoption of a new trust
instrument of the Trust if it is the surviving or resulting trust in the merger
or consolidation.
(c) The Trustees may create one or more business trusts
to which all or any part of the assets, liabilities, profits, or losses of the
Trust or any Series or Class thereof may be transferred and may provide for the
conversion of Shares in the Trust or any Series or Class thereof into beneficial
interests in any such newly created trust or trusts or any series or classes
thereof.
SECTION 6. TRUST INSTRUMENT. The original or a copy of this
Trust Instrument and of each amendment hereto or Trust Instrument supplemental
shall be kept at the office of the Trust where it may be inspected by any
Shareholder. Anyone dealing with the Trust may rely on a certificate by a
Trustee or an officer of the Trust as to the authenticity of the Trust
Instrument or any such amendments or supplements and as to any matters in
connection with the Trust. The masculine gender herein shall include the
feminine and neuter genders. Headings herein are for convenience only and shall
not affect the construction of this Trust Instrument. This Trust Instrument may
be executed in any number of counterparts, each of which shall be deemed an
original.
SECTION 7. APPLICABLE LAW. This Trust Instrument and the Trust
created hereunder are governed by and construed and administered according to
the Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware
Code, or (b) any provisions of the laws (statutory or common) of the State of
Delaware (other than the Delaware Act) pertaining to trusts which relate to or
regulate (i) the filing with any court or governmental body or agency of trustee
accounts or schedules of trustee fees and charges, (ii) affirmative requirements
to post bonds for trustees, officers, agents or employees of a trust, (iii) the
necessity for obtaining court or other governmental approval concerning the
acquisition, holding or disposition of real or personal property, (iv) fees or
other sums payable to trustees, officers, agents or employees of a trust, (v)
the
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<PAGE> 21
allocation of receipts and expenditures to income or principal, (vi)
restrictions or limitations on the permissible nature, amount or concentration
of trust investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of fiduciary or
other standards of responsibility or limitations on the acts or powers of
trustees, which are inconsistent with the limitations on liabilities or
authority and powers of the Trustees set forth or referenced in this Trust
Instrument. The Trust shall be of the type commonly called a Delaware business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust under Delaware law. The
Trust specifically reserves the right to exercise any of the powers or
privileges afforded to trusts or actions that may be engaged in by trusts under
the Delaware Act, and the absence of a specific reference herein to any such
power, privilege or action shall not imply that the Trust may not exercise such
power or privilege or take such actions.
SECTION 8. AMENDMENTS. The Trustees may, without any
Shareholder vote, amend or otherwise supplement this Trust Instrument by making
an amendment, a Trust Instrument supplemental hereto or an amended and restated
trust instrument; provided, that Shareholders shall have the right to vote on
any amendment (a) which would affect the voting rights of Shareholders granted
in Article VI, Section 1, (b) to this Section 8, (c) required to be approved by
Shareholders by law or by the Trust's registration statement(s) filed with the
Commission, and (d) submitted to them by the Trustees in their discretion. Any
amendment submitted to Shareholders which the Trustees determine would affect
the Shareholders of any Series or Class shall be authorized by vote of the
Shareholders of such Series or Class and no vote shall be required of
Shareholders of a Series or Class not affected.
Notwithstanding anything else herein, any amendment to Article
IX which would have the effect of reducing the indemnification and other rights
provided thereby to Trustees, officers, employees and agents of the Trust or to
Shareholders or former Shareholders, and any repeal or amendment of this
sentence, shall each require the affirmative vote of the holders of two-thirds
(2/3) of the Outstanding Shares of the Trust entitled to vote thereon.
SECTION 9. FISCAL YEAR. The fiscal year of the Trust shall end
on the date set by resolution approved by the Trustees. The Trustees may change
the fiscal year of the Trust without Shareholder approval.
SECTION 10. SEVERABILITY. The provisions of this Trust
Instrument are severable. If the Trustees determine, with the advice of counsel,
that any provision hereof conflicts with the 1940 Act, the regulated investment
company or other provisions of the Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Trust Instrument; provided, however, that such determination
shall not affect any of the remaining provisions of this Trust Instrument or
render invalid or improper any action taken or omitted prior to such
determination. If any provision hereof shall be held invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall attach only to such
provision only in such jurisdiction and shall not affect any other provision of
this Trust Instrument.
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<PAGE> 22
IN WITNESS WHEREOF, the undersigned, being the initial
Trustee, has executed this Trust Instrument as of the date first above written.
/s/ Nancy H. Strapp
---------------------------------
Nancy H. Strapp, as Trustee and
not individually
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<PAGE> 23
SCHEDULE A
SERIES OF THE TRUST
-------------------
New Covenant Growth Fund
New Covenant Balanced Growth Fund
New Covenant Income Fund
New Covenant Balanced Income Fund
-20-
<PAGE> 1
CERTIFICATE OF TRUST
OF
NEW COVENANT FUNDS
This Certificate of Trust of New Covenant Funds (the "Trust")
is filed in accordance with the provisions of the Delaware Business Trust Act
(Del. Ann. Cod tit. 12, Section 3801 et seq.) and sets forth the following:
1. The name of the Trust is: New Covenant Funds
2. The business address of the registered office of the
Trust and of the registered agent of the Trust is:
The Corporation Trust Company
1209 Orange Street
Wilmington, Delaware 19801
3. This Certificate shall be effective upon filing.
4. The Trust is a Delaware business trust to be
registered under the Investment Company Act of 1940,
as amended.
5. Notice is hereby given that the Trust shall consist
of one or more series. The debts, liabilities,
obligations and expenses incurred, contracted for or
otherwise existing with respect to a particular
series of the Trust shall be enforceable against the
assets of such series only and not against the assets
of the Trust generally.
IN WITNESS WHEREOF, the undersigned, being the sole trustee of
the Trust, has duly executed this Certificate of Trust as of the 30th day of
September, 1998.
/s/ Nancy H. Strapp
----------------------------------
Nancy H. Strapp, as Trustee and
not individually
<PAGE> 1
NEW COVENANT FUNDS
(A Delaware Business Trust)
BYLAWS
September 30, 1998
<PAGE> 2
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
ARTICLE I NAME OF TRUST, PRINCIPAL OFFICE AND SEAL...............................................1
Section 1. Principal Office.......................................................................1
Section 2. Delaware Office........................................................................1
Section 3. Seal...................................................................................1
ARTICLE II MEETINGS OF TRUSTEES...................................................................1
Section 1. Meetings...............................................................................1
Section 2. Action Without a Meeting...............................................................1
Section 3. Expenses of Trustees...................................................................2
ARTICLE III COMMITTEES.............................................................................2
Section 1. Organization...........................................................................2
Section 2. Executive Committee....................................................................2
Section 3. Nominating Committee...................................................................2
Section 4. Audit Committee........................................................................2
Section 5. Other Committees.......................................................................2
Section 6. Proceedings and Quorum.................................................................2
Section 7. Expenses of Committee Members..........................................................3
ARTICLE IV OFFICERS...............................................................................3
Section 1. General................................................................................3
Section 2. Election, Tenure and Qualifications of
Officers...............................................................................3
Section 3. Vacancies and Newly Created Offices....................................................3
Section 4. Removal and Resignation................................................................3
Section 5. President..............................................................................3
Section 6. Vice President.........................................................................4
Section 7. Treasurer and Assistant Treasurers.....................................................4
Section 8. Secretary and Assistant Secretaries....................................................4
Section 9. Subordinate Officers...................................................................4
Section 10. Expenses of Officers...................................................................4
Section 11. Surety Bond............................................................................5
ARTICLE V MEETINGS OF SHAREHOLDERS...............................................................5
Section 1. Annual Meetings........................................................................5
Section 2. Special Meetings.......................................................................5
Section 3. Notice of Meetings.....................................................................5
Section 4. Validity of Proxies....................................................................6
Section 5. Place of Meeting.......................................................................6
</TABLE>
-ii-
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 6. Action Without a Meeting...............................................................6
ARTICLE VI SHARES IN THE TRUST....................................................................6
Section 1. Certificates...........................................................................6
ARTICLE VII CUSTODY OF SECURITIES..................................................................7
Section 1. Employment of a Custodian..............................................................7
Section 2. Termination of Custodian Agreement.....................................................7
Section 3. Other Arrangements.....................................................................7
ARTICLE VIII FISCAL YEAR AND ACCOUNTANT.............................................................7
Section 1. Fiscal Year............................................................................7
Section 2. Accountant.............................................................................7
ARTICLE IX AMENDMENTS.............................................................................8
Section 1. General................................................................................8
ARTICLE X MISCELLANEOUS..........................................................................8
Section 1. Inspection of Books....................................................................8
Section 2. Severability...........................................................................8
Section 3. Headings...............................................................................8
</TABLE>
-iii-
<PAGE> 4
BYLAWS
OF
NEW COVENANT FUNDS
(A Delaware Business Trust)
These Bylaws of New Covenant Funds (the "Trust"), a Delaware business trust, are
subject to the Trust Instrument of the Trust dated September 30, 1998, as from
time to time amended, supplemented or restated (the "Trust Instrument").
Capitalized terms used herein have the same meaning as in the Trust Instrument.
ARTICLE I
NAME OF TRUST, PRINCIPAL OFFICE AND SEAL
----------------------------------------
SECTION 1. PRINCIPAL OFFICE. The principal office of the Trust shall be
located in Jeffersonville, Indiana, or such other location as the Trustees may
from time to time determine. The Trust may establish and maintain other offices
and places of business as the Trustees may from time to time determine.
SECTION 2. DELAWARE OFFICE. The Trustees shall establish a registered
office in the State of Delaware and shall appoint as the Trust's registered
agent for service of process in the State of Delaware an individual resident of
the State of Delaware or a Delaware corporation or a corporation authorized to
transact business in the State of Delaware and in any case the business office
of such registered agent for service of process shall be identical with the
registered Delaware office of the Trust.
SECTION 3. SEAL. The Trustees may adopt a seal which shall be in such
form and have such inscription as the Trustees may from time to time determine.
Any Trustee or officer of the Trust shall have authority to affix the seal to
any document, provided that the failure to affix the seal shall not affect the
validity or effectiveness of any document.
ARTICLE II
MEETINGS OF TRUSTEES
--------------------
SECTION 1. MEETINGS. Meetings of the Trustees may be held at such
places and such times as the Trustees may from time to time determine. Such
meetings may be called orally or in writing by the Chairman of the Trustees or
by any two other Trustees. Each Trustee shall be given notice of any meeting as
provided in Article II, Section 7, of the Trust Instrument.
SECTION 2. ACTION WITHOUT A MEETING. Actions may be taken by the
Trustees without a meeting or by a telephone meeting, as provided in Article II,
Section 7, of the Trust Instrument.
<PAGE> 5
SECTION 3. EXPENSES OF TRUSTEES. The Trustees are not compensated for
their services as Trustees, provided however, that each Trustee shall receive
from the Trust for his or her services reimbursement for his or her expenses as
may be incurred from time to time.
ARTICLE III
COMMITTEES
----------
SECTION 1. ORGANIZATION. The Trustees may designate one or more
committees of the Trustees. The Chairmen of such committees shall be elected by
the Trustees. The number composing such committees and the powers conferred upon
the same shall be determined by the vote of a majority of the Trustees. All
members of such committees shall hold office at the pleasure of the Trustees.
The Trustees may abolish any such committee at any time in their sole
discretion. Any committee to which the Trustees delegate any of their powers
shall maintain records of its meetings and shall report its actions to the
Trustees. The Trustees shall have the power to rescind any action of any
committee, but no such rescission shall have retroactive effect. The Trustees
shall have the power at any time to fill vacancies in the committees. The
Trustees may delegate to these committees any of its powers, subject to the
limitations of applicable law.
SECTION 2. EXECUTIVE COMMITTEE. The Trustees may elect from their own
number an Executive Committee which shall have any or all the powers of the
Trustees when the Trustees are not in session. The Chairman of the Trustees
shall be a member of the Executive Committee.
SECTION 3. NOMINATING COMMITTEE. The Trustees may elect from their own
number a Nominating Committee composed entirely of Trustees who are not
Interested Persons which shall have the power to select and nominate Trustees
who are not Interested Persons, and shall have such other powers and perform
such other duties as may be assigned to it from time to time by the Trustees.
SECTION 4. AUDIT COMMITTEE. The Trustees may elect from their own
number an Audit Committee composed entirely of Trustees who are not Interested
Persons which shall have the power to review and evaluate the audit function,
including recommending independent certified public accountants, and shall have
such other powers and perform such other duties as may be assigned to it from
time to time by the Trustees.
SECTION 5. OTHER COMMITTEES. The Trustees may appoint other committees
whose members need not be Trustees. Each such committee shall have such powers
and perform such duties as may be assigned to it from time to time by the
Trustees, but shall not exercise any power which may lawfully be exercised only
by the Trustees or a committee thereof.
SECTION 6. PROCEEDINGS AND QUORUM. In the absence of an appropriate
resolution of the Trustees, each committee may adopt such rules and regulations
governing its proceedings, quorum and manner of acting as it shall deem proper
and desirable. In the event any member of any committee is absent from any
meeting, the members present at the meeting, whether or not they constitute a
quorum, may appoint a Trustee to act in the place of such absent member.
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<PAGE> 6
SECTION 7. EXPENSES OF COMMITTEE MEMBERS. Trustees serving on
committees are not compensated for such committee services, provided however,
that each committee member shall receive from the Trust for his or her services
reimbursement for his or her expenses as may be incurred from time to time.
ARTICLE IV
OFFICERS
--------
SECTION 1. GENERAL. The officers of the Trust shall be a President, a
Treasurer, a Secretary, and may include one or more Vice Presidents, Assistant
Treasurers or Assistant Secretaries, and such other officers as the Trustees may
from time to time elect. It shall not be necessary for any Trustee or other
officer to be a Shareholder of the Trust.
SECTION 2. ELECTION, TENURE AND QUALIFICATIONS OF OFFICERS. The
officers of the Trust, except those appointed as provided in Section 9 of this
Article, shall be elected by the Trustees. Each officer elected by the Trustees
shall hold office until his or her successor shall have been elected and
qualified or until his or her earlier resignation. Any person may hold one or
more offices of the Trust except that no one person may serve concurrently as
both President and Secretary. A person who holds more than one office in the
Trust may not act in more than one capacity to execute, acknowledge or verify an
instrument required by law to be executed, acknowledged or verified by more than
one officer. No officer need be a Trustee.
SECTION 3. VACANCIES AND NEWLY CREATED OFFICES. Whenever a vacancy
shall occur in any office, regardless of the reason for such vacancy, or if any
new office shall be created, such vacancies or newly created offices may be
filled by the Trustees or, in the case of any office created pursuant to Section
9 of this Article, by any officer upon whom such power shall have been conferred
by the Trustees.
SECTION 4. REMOVAL AND RESIGNATION. Any officer may be removed from
office at any time, with or without cause, by the Trustees. In addition, any
officer or agent appointed in accordance with the provisions of Section 9 of
this Article may be removed, with or without cause, by any officer upon whom
such power of removal shall have been conferred by the Trustees. Any officer may
resign from office at any time by delivering a written resignation to the
Trustees, the President, the Secretary, or any Assistant Secretary. Unless
otherwise specified therein, such resignation shall take effect upon delivery.
SECTION 5. PRESIDENT. Subject to the direction of the Trustees, the
President shall have general charge of the business affairs, policies and
property of the Trust and general supervision over its officers, employees and
agents. In the absence of the Chairman of the Trustees or if no Chairman of the
Trustees has been elected, the President shall preside at all Shareholders'
meetings and at all meetings of the Trustees and shall in general exercise the
powers and perform the duties of the Chairman of the Trustees. Except as the
Trustees may otherwise order, the President shall have the power to grant,
issue, execute or sign such powers of attorney, proxies, agreements or other
documents as may be deemed advisable or necessary in the furtherance of the
interests of the Trust or any Series or Class thereof. The President also shall
have the power to employ attorneys, accountants and other advisers and agents
for the Trust. The President shall exercise such other powers and perform such
other duties as the Trustees may from time to time assign to the President.
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SECTION 6. VICE PRESIDENT. The Trustees may from time to time elect one
or more Vice Presidents who shall have such powers and perform such duties as
may from time to time be assigned to them by the Trustees or the President. At
the request or in the absence or disability of the President, the Vice President
(or, if there are two or more Vice Presidents, then the first appointed of the
Vice Presidents present and able to act) may perform all the duties of the
President and, when so acting, shall have all the powers of and be subject to
all the restrictions upon the President.
SECTION 7. TREASURER AND ASSISTANT TREASURERS. The Treasurer shall be
the principal financial and accounting officer of the Trust and shall have
general charge of the finances and books of the Trust. The Treasurer shall
deliver all funds and securities of the Trust to such company as the Trustees
shall retain as custodian in accordance with the Trust Instrument, these Bylaws,
and applicable law. The Treasurer shall make annual reports regarding the
business and financial condition of the Trust as soon as possible after the
close of the Trust's fiscal year. The Treasurer also shall furnish such other
reports concerning the business and financial condition of the Trust as the
Trustees may from time to time require. The Treasurer shall perform all acts
incidental to the office of Treasurer, subject to the supervision of the
Trustees, and shall perform such additional duties as the Trustees may from time
to time designate.
Any Assistant Treasurer may perform such duties of the Treasurer as the
Trustees or the Treasurer may assign, and, in the absence of the Treasurer, may
perform all the duties of the Treasurer.
SECTION 8. SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall
record all votes and proceedings of the meetings of Trustees and Shareholders in
books to be kept for that purpose. The Secretary shall be responsible for giving
and serving of all notices of the Trust. The Secretary shall have custody of any
seal of the Trust. The Secretary shall be responsible for the records of the
Trust, including the Share register and such other books and papers as the
Trustees may direct and such books, reports, certificates and other documents
required by law. All of such records and documents shall at all reasonable times
be kept open by the Secretary for inspection by any Trustee for any proper Trust
purpose. The Secretary shall perform all acts incidental to the office of
Secretary, subject to the supervision of the Trustees, and shall perform such
additional duties as the Trustees may from time to time designate.
Any Assistant Secretary may perform such duties of the Secretary as the
Trustees or the Secretary may assign, and, in the absence of the Secretary, may
perform all the duties of the Secretary.
SECTION 9. SUBORDINATE OFFICERS. The Trustees may appoint from time to
time such other officers and agents as they may deem advisable, each of whom
shall have such title, hold office for such period, have such authority and
perform such duties as the Trustees may determine. The Trustees may delegate
from time to time to one or more officers or committees of Trustees the power to
appoint any such subordinate officers or agents and to prescribe their
respective rights, terms of office, authorities and duties. Any officer or agent
appointed in accordance with the provisions of this Section 9 may be removed,
either with or without cause, by any officer upon whom such power of removal
shall have been conferred by the Trustees.
SECTION 10. EXPENSES OF OFFICERS. Officers of the Trust are not
compensated for their services as officers, provided however, that each officer
shall receive from the Trust for his or her services reimbursement for his or
her expenses as may be incurred from time to time.
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SECTION 11. SURETY BOND. The Trustees may require any officer or agent
of the Trust to execute a bond (including, without limitation, any bond required
by the Investment Company Act of 1940 and the rules and regulations of the
Securities and Exchange Commission) to the Trust in such sum and with such
surety or sureties as the Trustees may determine, conditioned upon the faithful
performance of his or her duties to the Trust, including responsibility for
negligence and for the accounting of any of the Trust's property, funds or
securities that may come into his or her hands.
ARTICLE V
MEETINGS OF SHAREHOLDERS
------------------------
SECTION 1. ANNUAL MEETINGS. There shall be no annual Shareholders'
meetings except as required by law or as hereinafter provided.
SECTION 2. SPECIAL MEETINGS. Special meetings of Shareholders of the
Trust or of any Series or Class shall be called by the President or Secretary
whenever ordered by the Trustees, and shall be held at such time and place as
may be stated in the notice of the meeting.
Special meetings of the Shareholders of the Trust or of any Series or
Class shall be called by the Secretary upon the written request of Shareholders
owning at least ten percent (10%) of the Outstanding Shares entitled to vote at
such meeting, provided that (1) such request shall state the purposes of such
meeting and the matters proposed to be acted on, and (2) the Shareholders
requesting such meeting shall have paid to the Trust the reasonably estimated
cost of preparing and mailing the notice thereof, which the Secretary shall
determine and specify to such Shareholders.
If the Secretary fails for more than thirty days to call a special
meeting, the Trustees or the Shareholders requesting such a meeting may, in the
name of the Secretary, call the meeting by giving the required notice. If the
meeting is a meeting of Shareholders of any Series or Class, but not a meeting
of all Shareholders of the Trust, then only a special meeting of Shareholders of
such Series or Class need be called and, in such case, only Shareholders of such
Series or Class shall be entitled to notice of and to vote at such meeting.
SECTION 3. NOTICE OF MEETINGS. Except as provided in Section 2 of this
Article, the Secretary shall cause written notice of the place, date and time,
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called. Notice shall be given as determined by the Trustees at least
ten (10) and not more than sixty (60) days before the date of the meeting. The
written notice of any meeting may be delivered or mailed, postage prepaid, to
each Shareholder entitled to vote at such meeting. If mailed, notice shall be
deemed to be given when deposited in the United States mail directed to the
Shareholder at his or her address as it appears on the records of the Trust.
Notice of any Shareholders' meeting need not be given to any Shareholder if a
written waiver of notice, executed before, at or after such meeting, is filed
with the record of such meeting, or to any Shareholder who is present at such
meeting in person or by proxy unless the Shareholder is present solely for the
purpose of objecting to the call of the meeting. Notice of adjournment of a
Shareholders' meeting to another time or place need not be given, if such time
and place are announced at the meeting at which the adjournment is taken and the
adjourned meeting is held within a reasonable time after the date set for the
original meeting. At the adjourned meeting the Trust may transact any business
which might have been transacted at the original meeting. If after the
adjournment a new record date is fixed for the
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adjourned meeting, a notice of the adjourned meeting shall be given to
Shareholders of record entitled to vote at such meeting. Any irregularities in
the notice of any meeting or the nonreceipt of any such notice by any of the
Shareholders shall not invalidate any action otherwise properly taken at any
such meeting.
SECTION 4. VALIDITY OF PROXIES. Subject to the provisions of the Trust
Instrument, Shareholders entitled to vote may vote either in person or by proxy,
provided that either (1) a written instrument authorizing such proxy to act has
been signed and dated by the Shareholder or by his or her duly authorized
attorney, or (2) the Trustees adopt by resolution an electronic, telephonic,
computerized or other alternative to execution of a written instrument
authorizing the proxy to act, but if a proposal by anyone other than the
officers or Trustees is submitted to a vote of the Shareholders of the Trust or
of any Series, or if there is a proxy contest or proxy solicitation or proposal
in opposition to any proposal by the officers or Trustees, Shares may be voted
only in person or by written proxy. Unless the proxy provides otherwise, it
shall not be valid if executed more than eleven months before the date of the
meeting. All proxies shall be delivered to the Secretary or other person
responsible for recording the proceedings before being voted. A proxy with
respect to Shares held in the name of two or more persons shall be valid if
executed by one of them unless at or prior to exercise of such proxy the Trust
receives a specific written notice to the contrary from any one of them. Unless
otherwise specifically limited by their terms, proxies shall entitle the
Shareholder to vote at any adjournment of a Shareholders meeting. At every
meeting of Shareholders, unless the voting is conducted by inspectors, all
questions concerning the qualifications of voters, the validity of proxies, and
the acceptance or rejection of votes, shall be decided by the chairman of the
meeting. Subject to the provisions of the Trust Instrument or these Bylaws, all
matters concerning the giving, voting or validity of proxies shall be governed
by the General Corporation Law of the State of Delaware relating to proxies, and
judicial interpretations thereunder, as if the Trust were a Delaware corporation
and the Shareholders were shareholders of a Delaware corporation.
SECTION 5. PLACE OF MEETING. All special meetings of Shareholders shall
be held at the principal place of business of the Trust or at such other place
as the Trustees may from time to time designate.
SECTION 6. ACTION WITHOUT A MEETING. Any action to be taken by
Shareholders may be taken without a meeting if a majority (or such other amount
as may be required by law) of the Outstanding Shares entitled to vote on the
matter consent to the action in writing and such written consents are filed with
the records of the Shareholders' meetings. Such written consent shall be treated
for all purposes as a vote at a meeting of the Shareholders held at the
principal place of business of the Trust. If the unanimous written consent of
all Shareholders entitled to vote shall not have been received, the Secretary
shall give prompt notice of the action approved by the Shareholders without a
meeting.
ARTICLE VI
SHARES IN THE TRUST
-------------------
SECTION 1. CERTIFICATES. No certificates certifying the ownership of
Shares shall be issued. In lieu of issuing certificates of Shares, the Trustees
or the transfer agent or Shareholder servicing agent may either issue receipts
or may keep accounts upon the books of the Trust for record holders of such
Shares. In either case, the record holders shall be deemed, for all purposes, to
be holders of certificates
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<PAGE> 10
for such Shares as if they accepted such certificates and shall be held to have
expressly consented to the terms thereof.
ARTICLE VII
CUSTODY OF SECURITIES
---------------------
SECTION 1. EMPLOYMENT OF A CUSTODIAN. The Trust shall at all times
place and maintain all funds, securities and similar investments of the Trust
and of each Series in the custody of a Custodian, including any sub-custodian
for the Custodian (the "Custodian"). The Custodian shall be one or more banks or
trust companies of good standing having an aggregate capital surplus, and
undivided profits of not less than two million dollars ($2,000,000), or such
other financial institutions or other entities as shall be permitted by rule or
order of the Securities and Exchange Commission. The Custodian shall be
appointed from time to time by the Trustees, who shall determine its
remuneration.
SECTION 2. TERMINATION OF CUSTODIAN AGREEMENT. Upon termination of the
Custodian Agreement or inability of the Custodian to continue to serve, the
Trustees shall promptly appoint a successor Custodian. If so directed by
resolution of the Trustees or by vote of a majority of Outstanding Shares of the
Trust, the Custodian shall deliver and pay over all property of the Trust or any
Series held by it as specified in such vote.
SECTION 3. OTHER ARRANGEMENTS. The Trust may make such other
arrangements for the custody of its assets (including deposit arrangements) as
may be required by any applicable law, rule or regulation.
ARTICLE VIII
FISCAL YEAR AND ACCOUNTANT
--------------------------
SECTION 1. FISCAL YEAR. The fiscal year of the Trust shall be as
determined by the Trustees.
SECTION 2. ACCOUNTANT. The Trust shall employ independent certified
public accountants as its accountant ("Accountant") to examine the accounts of
the Trust and to sign and certify financial statements filed by the Trust. The
Accountant's certificates and reports shall be addressed both to the Trustees
and to the Shareholders.
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ARTICLE IX
AMENDMENTS
----------
SECTION 1. GENERAL. All Bylaws of the Trust shall be subject to
amendment, alteration or repeal, and new Bylaws may be made by the affirmative
vote of a majority of either: (1) the Outstanding Shares of the Trust entitled
to vote at any meeting; or (2) the Trustees at any meeting. In no event will
Bylaws be adopted that are in conflict with the Trust Instrument, the Delaware
Act, the Investment Company Act of 1940, or applicable securities laws.
ARTICLE X
MISCELLANEOUS
-------------
SECTION 1. INSPECTION OF BOOKS. The Trustees shall from time to time
determine whether and to what extent, and at what times and places, and under
what conditions the accounts and books of the Trust or any Series shall be open
to the inspection of Shareholders. No Shareholder shall have any right to
inspect any account or book or document of the Trust except as conferred by law
or otherwise by the Trustees.
SECTION 2. SEVERABILITY. The provisions of these Bylaws are severable.
If the Trustees determine, with the advice of counsel, that any provision hereof
conflicts with the Investment Company Act of 1940, the regulated investment
company or other provisions of the Internal Revenue Code or with other
applicable laws and regulations the conflicting provision shall be deemed never
to have constituted a part of these Bylaws; provided, however, that such
determination shall not affect any of the remaining provisions of these Bylaws
or render invalid or improper any action taken or omitted prior to such
determination. If any provision hereof shall be held invalid or unenforceable in
any jurisdiction, such invalidity or unenforceability shall attach only to such
provision only in such jurisdiction and shall not affect any other provision of
these Bylaws.
SECTION 3. HEADINGS. Headings are placed in these Bylaws for
convenience of reference only and in case of any conflict, the text of these
Bylaws rather than the headings shall control.
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