Rule 497(c)
Registration No. 333-84623
TD WATERHOUSE TRUST
Seven portfolios to choose from:
o TD WATERHOUSE BOND INDEX FUND
o TD WATERHOUSE 500 INDEX FUND
o TD WATERHOUSE EXTENDED MARKET INDEX FUND
o TD WATERHOUSE ASIAN INDEX FUND
o TD WATERHOUSE EUROPEAN INDEX FUND
o TD WATERHOUSE TECHNOLOGY FUND
o TD WATERHOUSE TAX MANAGED GROWTH FUND
PROSPECTUS
[LOGO]
August 23, 2000
As with any mutual fund, the Securities and Exchange Commission (SEC) has not
approved or disapproved the Funds' shares or determined whether this prospectus
is adequate or complete. Any representation to the contrary is a criminal
offense.
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TD WATERHOUSE TRUST
TABLE OF CONTENTS
INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND PRINCIPAL RISKS ........... 4
Fund Overview ............................................................. 4
Index Funds ............................................................... 4
Actively Managed Funds .................................................... 9
Who May Want to Invest .................................................... 11
Past Fund Performance ..................................................... 11
FEES AND EXPENSES OF THE FUNDS ............................................ 12
INVESTMENT STRATEGIES ..................................................... 13
Index Funds ............................................................... 13
Actively Managed Funds .................................................... 14
General ................................................................... 17
INVESTMENT RISKS .......................................................... 18
HOW TO BUY AND SELL SHARES ................................................ 21
How to Buy Shares ......................................................... 22
How to Sell Shares ........................................................ 24
Telephone Transactions .................................................... 25
Brokerage Account Requirements ............................................ 26
Statements to Shareholders ................................................ 26
MANAGEMENT ................................................................ 26
SHAREHOLDER INFORMATION ................................................... 28
Pricing Your Shares ....................................................... 28
Dividends and Distributions ............................................... 29
Taxes ..................................................................... 29
A Word about the Indexes .................................................. 30
FOR MORE INFORMATION Back cover
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INVESTMENT OBJECTIVES, PRINCIPAL STRATEGIES AND PRINCIPAL RISKS
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FUND OVERVIEW
Each TD Waterhouse fund (each a "Fund" and, collectively, the "Funds") is a
separate portfolio of TD Waterhouse Trust (the "Trust"), an open-end management
investment company, with its own investment objective that it pursues through
distinct investment strategies. Differences in objectives and strategies among
the Funds affect the degree of risk and potential return of each Fund.
Several of the Funds -- the TD Waterhouse Bond Index Fund, the TD Waterhouse 500
Index Fund, the TD Waterhouse Extended Market Index Fund, the TD Waterhouse
Asian Index Fund and the TD Waterhouse European Index Fund (the "Index Funds")
-- use a "passively" managed investment approach through which they attempt to
match the return of a target index. The TD Waterhouse Technology Fund and the TD
Waterhouse Tax Managed Growth Fund (the "Actively Managed Funds") are actively
managed by their investment sub-adviser.
The following summarizes each Fund's investment objective, principal strategies
and risks. The Funds' principal strategies and risks are further described in
INVESTMENT STRATEGIES and INVESTMENT RISKS.
There can be no assurance that a Fund will achieve its investment objective.
An investment in a Fund is not a deposit of any bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
INDEX FUNDS
TD WATERHOUSE BOND INDEX FUND
OBJECTIVE
To seek to track closely the total return of a broad, market-weighted bond
index, before the deduction of Fund expenses.
PRINCIPAL STRATEGY
The Fund invests in a mix of investment-grade bonds consistent with those
included in the LEHMAN BROTHERS AGGREGATE BOND INDEX (the "Lehman Index") in
attempting to match the performance of that index.
The Lehman Index is a broad representation of the investment-grade fixed
income market in the U.S. It includes U.S. government and corporate debt
securities, mortgage- and asset-backed securities, and international U.S.
dollar-denominated bonds. All securities contained in the Lehman Index have a
minimum term to maturity of one year.
WHAT IS AN INDEX FUND?
AN INDEX IS AN UNMANAGED GROUP OF SECURITIES WHOSE OVERALL PERFORMANCE IS USED
AS A STANDARD TO MEASURE INVESTMENT PERFORMANCE. AN INDEX FUND SEEKS TO MATCH,
AS CLOSELY AS POSSIBLE, THE PERFORMANCE OF AN ESTABLISHED TARGET INDEX. THE
FUND DOES THIS BY HOLDING ALL, OR A REPRESENTATIVE SAMPLE, OF THE SECURITIES
THAT COMPRISE THE INDEX, AS WELL AS OTHER INSTRUMENTS THAT ARE DESIGNED TO
REPLICATE, OR THAT CORRELATE WITH, ALL OR A PORTION OF THE INDEX, INCLUDING
DERIVATIVES.
FOR INFORMATION ABOUT PARTICULAR INDEXING TECHNIQUES, SEE INVESTMENT
STRATEGIES.
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Initially, the Fund will be overweighted in U.S. government securities, which
are included in the Lehman Index and are consistent with the investment and risk
characteristics of the index. The Fund intends to pursue this strategy until it
reaches an asset level of approximately $25 million. During this period, the
Fund is not expected to track the index with the same degree of accuracy as if
it were invested more broadly in bonds contained in the index.
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of bonds. Normally, the values of bonds vary inversely with changes
in prevailing interest rates.
An issuer of securities held by the Fund may not be able to repay its
obligations, including its obligations to the Fund.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's performance may not match the index.
In attempting to match the index, the Fund will bear the full risk of loss of
those securities in the index without any attempt to limit losses.
Although most of the Fund's risks are those associated with its bond
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
TD WATERHOUSE 500 INDEX FUND
OBJECTIVE
To seek to track closely the total return of a benchmark index that measures the
investment return of large-capitalization stocks, before the deduction of Fund
expenses.
PRINCIPAL STRATEGY
The Fund invests primarily in the stocks included in the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), in attempting to match the
performance of that index.
The S&P 500 Index is a market-weighted index composed of 500 common stocks
issued by large-capitalization companies representing the top industries in
the U.S. The stocks included in the S&P 500 Index collectively represent a
substantial portion of all common stocks publicly traded in the U.S.
WHAT IS MARKET CAPITALIZATION?
Stocks of publicly traded companies can be classified by the companies' total
market value, or capitalization. Generally, large-capitalization (large-cap)
companies are defined as those holding stocks of companies whose outstanding
shares have a total market value exceeding $10 billion. Mid-capitalization
(mid-cap) companies generally have a total market value between $1 billion and
$10 billion. Small-capitalization (small-cap) companies generally have a total
market value of less than $1 billion.
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PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
Large-cap stocks may perform differently than the overall stock market.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's performance may not match the index.
In attempting to match the index, the Fund will bear the full risk of loss of
those securities in the index without any attempt to limit losses.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
TD WATERHOUSE EXTENDED MARKET INDEX FUND
OBJECTIVE
To seek to track closely the total return of a benchmark index that measures the
investment return of mid- and small-capitalization stocks, before the deduction
of Fund expenses.
PRINCIPAL STRATEGY
The Fund invests primarily in stocks included in the Wilshire 4500 Equity Index
(the "Wilshire 4500 Index"), in attempting to match the performance of that
index.
The Wilshire 4500 Index is a broadly diversified index of stocks of
medium-sized and small U.S. companies. The Wilshire 4500 Index contains most
of the U.S. common stocks regularly traded on the New York and American Stock
Exchanges and the Nasdaq over-the-counter market, except those stocks
included in the S&P 500 Index.
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
Small- and mid-cap stocks are more volatile in price than large-cap stocks, and
may perform differently than the overall stock market.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's performance may not match the index.
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In attempting to match the index, the Fund will bear the full risk of loss of
those securities in the index without any attempt to limit losses.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
TD WATERHOUSE ASIAN INDEX FUND
OBJECTIVE
To seek to track closely the total return of a benchmark index that measures the
investment return of stocks of Pacific Basin companies, before the deduction of
Fund expenses.
PRINCIPAL STRATEGY
The Fund invests primarily in stocks that comprise the MSCI Pacific Free Index
in attempting to match the performance of that index.
The MSCI Pacific Free Index contains approximately 400 common stocks of
Pacific Basin companies. The index is dominated by the Japanese stock market,
which represented 80% of the market capitalization of the index as of July
31, 2000. The other four countries represented in the MSCI Pacific Free Index
are Australia, Hong Kong, New Zealand, and Singapore. The designation "Free"
in the name of the MSCI Pacific Free Index refers to the securities that the
index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a U.S. mutual fund
are tracked.
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
In general, foreign investing involves higher risks than investing in U.S.
markets. Foreign markets tend to be more volatile than those of the U.S., and
changes in currency exchange rates could affect Fund performance.
Because of its emphasis on the Asian markets, the Fund may involve a higher
degree of foreign risk than that of more geographically diversified
international funds.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's performance may not match the index.
In attempting to match the index, the Fund will bear the full risk of loss of
those securities in the index without any attempt to limit losses.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market
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exposure, may not correlate with the performance of the related securities or
otherwise achieve their intended purpose.
TD WATERHOUSE EUROPEAN INDEX FUND
OBJECTIVE
To seek to track closely the total return of a benchmark index that measures the
investment return of stocks of European companies, before the deduction of Fund
expenses.
PRINCIPAL STRATEGY
The Fund invests primarily in the stocks that comprise the MSCI Europe Index in
attempting to match the performance of that index.
The MSCI Europe Index consists of common stocks of more than 550 companies
located in 15 European countries. Four countries -- the United Kingdom,
Germany, Switzerland and France -- dominate the index, with 30.5%, 12.5%,
8.7%, and 16.5%, respectively, as of August 22, 2000. The other 11 countries,
which include Austria, Belgium, Denmark, Finland, Ireland, Italy, the
Netherlands, Norway, Portugal, Spain, and Sweden, are much less significant
to the MSCI Europe Index and, consequently, the European Index Fund.
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
In general, foreign investing involves higher risks than investing in U.S.
markets. Foreign markets tend to be more volatile than those of the U.S., and
changes in currency exchange rates could affect Fund performance.
Because of its emphasis on the European markets, the Fund may involve a higher
degree of foreign risk than that of more geographically diversified
international funds.
The Fund is also subject to risks associated with the European Economic and
Monetary Union and the transition to the "euro" as a common European currency,
which may cause increased volatility and present stock valuation problems.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's performance may not match the index.
In attempting to match the index, the Fund will bear the full risk of loss of
those securities in the index without any attempt to limit losses.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
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ACTIVELY MANAGED FUNDS
WHAT IS AN ACTIVELY MANAGED FUND?
An actively managed fund is managed by an investment adviser that buys and
sells securities based on research and analysis in an attempt to achieve a
particular objective.
TD WATERHOUSE TECHNOLOGY FUND
OBJECTIVE
To seek enhanced performance over a benchmark index that measures the investment
return of technology stocks, before the deduction of Fund expenses.
PRINCIPAL STRATEGY
The Fund invests primarily in stocks representing a broad range of technology
companies in attempting to outperform the Goldman Sachs Technology Index (the
"GSTI Composite Index"). Technology companies are those expected to benefit from
the development, advancement, and use of science and technology, such as those
in the computer, telecommunications, and electronics industries.
As part of its strategy, the Fund invests at least 65% of its total assets in
stocks in the GSTI Composite Index. As a technology fund, the Fund concentrates
its investments (in other words, invests 25% or more of its total assets) in the
stocks of technology companies. Up to 35% of the Fund's total assets may be
invested in the stocks of technology and other related companies that are not
included in the GSTI Composite Index.
The GSTI Composite Index includes approximately 160 companies representing
several different sectors of the technology marketplace selected by Goldman
Sachs & Co. (including hardware, internet, multi-media networking,
semiconductors, services and software).
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
Because the Fund concentrates its investments in a single group of industries,
the Fund is exposed to the risks of those industries. Stocks of technology
companies are likely to be more volatile than, and may underperform, the stock
market as a whole. In addition, the Fund's "non-diversified" status allows it to
invest a greater percentage of its assets in the stock of a single company than
a diversified fund. To the extent the Fund invests a greater percentage of its
assets in a single company, the Fund has greater exposure to the performance and
risks of that company.
Small and mid-cap stocks, in which the Fund may invest, are more volatile in
price than large-cap stocks, and may perform differently than the overall stock
market.
To the extent the Fund invests in foreign stocks, it is exposed to the risks of
those markets. Foreign markets tend to be more volatile than those of the U.S.,
and changes in currency exchange rates could affect Fund performance.
The investment sub-adviser's judgment about the attractiveness, value or
potential appreciation of a particular company's stock may prove to be
incorrect.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
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TD WATERHOUSE TAX MANAGED GROWTH FUND
OBJECTIVE
To seek long-term capital appreciation while minimizing taxable distributions to
shareholders.
WHAT IS A TAX MANAGED FUND?
Mutual funds often seek to maximize pre-tax total returns, without regard to
the personal tax consequences for investors. Yet many investors stand to lose
a substantial portion of their investment returns to federal, state, and local
taxes. Fund dividend and short-term capital gain distributions are now taxed
at federal income tax rates as high as 39.6%; for long-term capital gains, the
rates reach up to 20%. A tax managed fund aims to minimize the impact of taxes
on investors' total returns by minimizing capital gain and other taxable
distributions.
PRINCIPAL STRATEGY
The Fund invests primarily in stocks believed by its investment sub-adviser to
have superior growth potential using methods designed to reduce, but not
eliminate, taxable distributions.
PRINCIPAL RISKS
You could lose money on your investment in the Fund, or the Fund could
underperform other investments. Many factors can adversely affect the
performance of stocks, including both general financial market conditions and
factors related to a specific company or industry.
The Fund's "non-diversified" status allows it to invest a greater percentage of
its assets in the stock of a single company than a diversified fund. To the
extent the Fund invests a greater percentage of its assets in a single company,
the Fund has greater exposure to the performance and risks of that company.
The Fund's strategy of investing in "growth" stocks could fall out of favor with
the investing public.
Small- and mid-cap stocks, in which the Fund may invest, are more volatile in
price than large-cap stocks, and may perform differently than the overall stock
market.
To the extent the Fund invests in foreign stocks, it is exposed to the risks of
those markets. Foreign markets tend to be more volatile than those of the U.S.,
and changes in currency exchange rates could affect Fund performance.
The investment sub-adviser's judgment about the attractiveness, value or
potential appreciation of a particular company's stock -- or the sub-adviser's
strategies designed to minimize taxable distributions -- may prove to be
incorrect.
Although most of the Fund's risks are those associated with its stock
investments, other investment strategies also may involve risks. For example,
futures contracts, which the Fund uses to gain market exposure, may not
correlate with the performance of the related securities or otherwise achieve
their intended purpose.
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WHO MAY WANT TO INVEST
THE BOND INDEX FUND may be an appropriate investment if you:
o are looking for an investment that provides income
o are willing to accept a lower potential for capital appreciation
o are willing to accept the risk that the value of your investment may
decline
The 500 INDEX FUND, the EXTENDED MARKET INDEX FUND, the ASIAN INDEX FUND, the
EUROPEAN INDEX FUND, the TECHNOLOGY FUND, and the TAX MANAGED GROWTH FUND may be
appropriate investments if you:
o are investing with long-term goals, such as retirement or funding a
child's education
o are willing to accept the risk that the value of your investment may
decline
o are not seeking a substantial amount of current income
In addition--
The 500 INDEX FUNd may be appropriate if you want to invest in large U.S.
companies.
The EXTENDED MARKET INDEX FUND may be appropriate if you want to invest in
small- to mid-cap U.S. companies and can accept the additional risk and
volatility associated with stocks of these companies.
The ASIAN INDEX FUND may be appropriate if you are looking for exposure to
the major Pacific Basin markets and can accept the additional risk and
volatility associated with foreign investing as compared to a fund
investing exclusively in U.S. companies.
The EUROPEAN INDEX FUND may be appropriate if you are looking for exposure
to the European markets and can accept the additional risk and volatility
associated with foreign investing as compared to a fund investing
exclusively in U.S. companies.
The TECHNOLOGY FUND may be appropriate if you want exposure to the
technology sector and can accept the heightened risk and volatility
associated with stocks of technology companies as compared to a fund
investing across multiple sectors and industries.
The TAX MANAGED GROWTH FUND may be appropriate if you are a relatively
high-income investor seeking tax-advantaged total returns.
PAST FUND PERFORMANCE
As new funds, the Funds do not have performance history as of the date of this
prospectus.
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FEES AND EXPENSES OF THE FUNDS
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This information is designed to help you understand the fees and expenses that
you may pay if you buy and hold shares of the Funds.
SHAREHOLDER TRANSACTION FEES (fees paid directly from your investment)*
<TABLE>
<CAPTION>
EXTENDED MARKET
BOND INDEX FUND INDEX FUND, TECHNOLOGY FUND
AND EUROPEAN ASIAN INDEX FUND AND TAX MANAGED
AND 500 INDEX FUND INDEX FUND GROWTH FUND
------------------ ---------- -----------
<S> <C> <C> <C>
Maximum Sales Charge (Load)
Imposed On Purchases None None None
Redemption Fee None 0.75%** 1.00%**
</TABLE>
* Broker-dealers that are not affiliates of the Portfolios' investment manager
may impose service fees in connection with the sale of Fund shares.
** You may be assessed a redemption fee of up to the amount specified
(expressed as a percentage of the amount you are redeeming) if you redeem
Fund shares within 180 days after investing in the Fund.
ANNUAL OPERATING EXPENSES (Expenses Deducted From Fund Assets)/1/
<TABLE>
<CAPTION>
EXTENDED EURO- TAX
BOND 500 MARKET ASIAN PEAN MANAGED
INDEX INDEX INDEX INDEX INDEX TECHNOLOGY GROWTH
FUND FUND FUND FUND FUND FUND FUND
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Management Fees 0.30% 0.30% 0.30% 0.40% 0.40% 0.70% 0.65%
Distribution (12b-1) Fees None None None None None None None
Shareholder
Servicing Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses 0.46% 0.33% 0.46% 0.80% 0.87% 0.44% 0.89%
------ ------- ------ ------ ----- ------ ------
Total Operating Expenses 1.01% 0.88% 1.01% 1.45% 1.52% 1.39% 1.79%
Fee Waiver and
Expense Reimbursement/2/ 0.66% 0.53% 0.61% 0.87% 0.94% 0.14% 0.69%
------ ------- ------ ------ ----- ------ ------
Net Expenses/2/ 0.35% 0.35% 0.40% 0.58% 0.58% 1.25% 1.10%
</TABLE>
1 The table shows the Fund's estimated expenses for the Fund's current fiscal
year ending January 31, 2001.
2 Reflects an agreement by the investment manager to reduce expenses. The
investment manager agreed to reduce Fund expenses (by paying certain
expenses and/or waiving fees) so that each Fund's net expenses for the
period from September 1, 2000 through August 31, 2001 will not exceed the
amount stated in the table. Thereafter, for two years, each Fund is
required to reimburse the investment manager for these expenses, provided
that the Fund's assets have grown or expenses have declined sufficiently to
allow reimbursement without causing its net expenses to exceed the stated
amount.
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EXAMPLE
This Example is intended to help you compare the cost of investing in a Fund
with the cost of investing in other mutual funds. The Example assumes that you
invest $10,000 in a Fund for the time periods indicated and then redeem all of
your shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the operating expenses of the
relevant Fund remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS
------ -------
Bond Index Fund $ 36 $257
500 Index Fund $ 36 $229
Extended Market Index Fund $ 41 $262
Asian Index Fund $ 59 $376
European Index Fund $ 59 $391
Technology Fund $127 $427
Tax Managed Growth Fund $112 $499
INVESTMENT STRATEGIES
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The Funds' investment strategies are further described below. Each Fund's
investment objective is not considered fundamental, meaning that it may be
changed without shareholder approval. Unless otherwise noted, each Fund's
investment policies may also be changed without shareholder approval. Percentage
limitations on investments are applied at the time of investment. A later change
in percentage, due to other circumstances, will not require the sale of an
investment if it was proper at the time it was made.
INDEX FUNDS
Generally, the Index Funds attempt to be fully invested at all times in the
securities or other financial instruments that make up, or are correlated with,
securities in their respective target indexes. A Fund may change its target
index if Fund management believes a different index would better enable the Fund
to match the performance of the market segment represented by the current index.
BOND INDEX FUND
In seeking to track the Lehman Index, the Bond Index Fund uses a strategy known
as "sampling." This strategy involves dividing the Lehman Index into components
and sub-components and then selecting representative bonds whose characteristics
closely match those of bonds contained in the index. Some examples of these
sub-components are term-to-maturity and sector weightings. As there are almost
7,500 securities in the Lehman Index, and given the homogeneous nature of the
bond market (which means that some bonds have very similar characteristics),
sampling offers an effective approach to index management. The Fund's investment
sub-adviser regularly monitors the Fund's correlation to the Lehman Index and
adjusts the portfolio to the extent necessary.
In sampling the Lehman Index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. Under
normal market conditions, the Fund invests at least 90% of its assets in the
securities or other investments that make up, or are correlated with, the Lehman
Index. Until
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the Fund reaches an asset level of approximately $25 million, it is expected
that the Fund initially will overweight U.S. government securities. U.S.
government securities are included in the Lehman Index and are consistent with
the investment and risk characteristics of the index. During this period, the
Fund is not expected to track the index with the same degree of accuracy as if
it were invested more broadly in bonds contained in the index.
Investments that may be correlated with an index include futures and options
based on the index, as well as other investment funds with a similar composition
to that of the index. The Fund uses these investments to maintain full exposure
to the Lehman Index. Similarly, the Fund may enter into interest rate swap
agreements or invest in structured notes to better mirror the Lehman Index or
its characteristics.
500 INDEX FUND, EXTENDED MARKET INDEX FUND, ASIAN INDEX FUND AND EUROPEAN INDEX
FUND
Each of these Funds uses a strategy called "sampling," through which the Fund
invests in a representative sampling of the stocks found in its target index.
Sampling allows each Fund to select stocks whose industry weightings, market
capitalizations and risk characteristics, in the aggregate, closely match those
of the index. In using sampling, the Fund first buys stocks that make up the
larger portions of the index's value in roughly the same proportion as the
index. Next, smaller stocks are analyzed and selected. In selecting smaller
stocks, the Fund's investment sub-adviser seeks to match the industry and risk
characteristics of all the smaller companies of the index without buying all of
those stocks. The Fund's investment sub-adviser regularly monitors the Fund's
correlation to its target index and adjusts the portfolio to the extent
necessary. At times, the Fund's portfolio composition may be altered (or
"rebalanced") to reflect changes in the characteristics of the index.
Sampling will be used to balance the benefit of closely tracking the index with
the cost of trading securities in the Fund's portfolio. Each Fund reserves the
right to invest in all the securities in the target index to the extent the
investment sub-adviser believes this approach to be practical under the
circumstances.
Under normal market conditions, each Fund invests at least 90% of its assets in
the securities or other investments that make up, or are correlated with, the
applicable index. Investments that may be correlated with an index include
futures and options based on the index, as well as other investment funds with a
similar composition to that of the index. A Fund uses these investments to
maintain full exposure to its target index.
From time to time, the stock of a Fund's investment manager, investment
sub-adviser or one of their affiliates may be included in the Fund's target
index. For example, TD Waterhouse Investor Services, Inc., the investment
manager's parent, may be included in the Wilshire 4500 Index. The Fund may
invest in such a stock only in proportion to its representation in the index.
ACTIVELY MANAGED FUNDS
TECHNOLOGY FUND
The Fund uses the GSTI Composite Index, an index of technology companies, both
as a performance benchmark and as a source for holdings and market sectors to be
included in the Fund's portfolio. In its effort to outperform the GSTI Composite
Index, the Fund invests at least 65% of its total assets in stocks included in
the GSTI Composite Index (the Fund's "core holdings"). Generally, the Fund will
be "sector
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neutral" relative to the GSTI Composite Index (in other words, the market
sectors of the Fund's holdings will be weighted approximately the same as the
sectors represented in the GSTI Composite Index). The investment sub-adviser
relies on its own investment approach, described below, to weight individual
stocks within each sector. The Fund's holdings can range from small companies
developing new technologies to large, "blue chip" companies with established
track records.
Technology companies include those companies expected to benefit from the
development, advancement, and use of science and technology. Some of the market
sectors likely to be included in the portfolio are:
o computers, including products, software, and electronic components;
o telecommunications;
o media and information services;
o environmental services;
o chemicals and synthetic materials;
o defense and aerospace; and
o internet products and services.
In making investment decisions, the investment sub-adviser uses an investment
approach that combines both "fundamental" and "quantitative" research
techniques. The investment sub-adviser first relies on proprietary research to
assess whether a company's fundamentals -- financial condition, management, and
position in its industry -- indicate strong prospects for earnings growth.
Secondarily, the investment sub-adviser considers such quantitative measures as
recent earnings or stock price trends, as well as a variety of valuation
measures, to determine whether a company's stock price already reflects any
positive fundamentals identified by the sub-adviser. The investment sub-adviser
also will use quantitative methods to compare the Fund's overall portfolio
characteristics - such as its risk, valuation, and performance -- against those
of the GSTI Composite Index. The investment sub-adviser seeks to outperform the
index without significant added risk.
The Fund's weightings of the core holdings will be adjusted to reflect the
investment sub-adviser's views on the particular companies in the GSTI Composite
Index. For example, the investment sub-adviser may overweight the Fund's core
holdings in stocks that it believes offer above-average earnings growth or that
stand to benefit from technological advances. On the other hand, the investment
sub-adviser may underweight, or exclude entirely, the stocks that are in the
GSTI Composite Index that it believes are fully valued based upon price/earnings
ratios relative to the market sector or the company's own growth rate, or other
indications of value. The Fund also may exclude stocks that are in the GSTI
Composite Index when the investment sub-adviser believes that a market sector is
more appropriately represented by the Fund's other holdings in that sector.
The Fund may hold up to 35% of its total assets in the stocks of technology and
other related companies that are not part of the GSTI Composite Index. This
portion of the Fund's portfolio will be actively managed by the investment
sub-adviser using the same fundamental and quantitative techniques described
above. These holdings may include small or mid-sized companies developing new
technologies or that stand to benefit from technological advances even if they
are not directly involved in research and development. In addition, these
holdings may not be included in the GSTI Composite Index because they are
foreign companies or have limited operating histories.
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While most assets will be invested in U.S. common stocks, the Fund also may
purchase other instruments, including foreign stock and futures and options, in
keeping with the Technology Fund's investment objectives. Because the Fund
"concentrates" (in other words, invests 25% or more of its total assets) in the
securities of technology companies, it is more susceptible to market risk than a
broader-based fund.
The Fund may sell securities for a variety of reasons, such as to secure gains,
limit losses, or redeploy assets into more promising opportunities.
For defensive purposes, the Fund may temporarily hold all or a portion of its
assets in cash or money market instruments. Such action may help the Fund
minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
TAX MANAGED GROWTH FUND
The Fund invests primarily in large-capitalization stocks selected mainly from
the 1,000 largest U.S. companies. Stock selection is based on a fundamental,
"bottom-up" approach that seeks to identify companies with superior long-term
appreciation prospects (as opposed to a "top-down" approach, which targets
particular market sectors before considering individual companies). Generally,
the investment sub-adviser uses a growth approach to stock selection, looking
for companies with a demonstrated ability to increase revenues, earnings, and
cash flow consistently; capable management; attractive business niches; and a
sustainable competitive advantage. Valuation measures, such as a company's
price/earnings ratio relative to the market and its own growth rate, and its
dividend yield relative to the market, also are considered.
Generally, the Fund will limit exposure to high-yielding stocks in its effort to
minimize Fund distributions. However, the payment of dividends -- even
higher-than-average dividends -- does not disqualify a stock from consideration
for the Fund's portfolio.
To accomplish the Fund's goal of minimizing taxable distributions, the
investment sub-adviser will strive to avoid realizing capital gains. However,
gains may be realized when it is believed that the risk of holding a security
outweighs tax considerations. When the Fund does sell securities that have
appreciated in value, the investment sub-adviser will attempt to limit realized
capital gains by selling the highest cost shares first (that is, the shares on
which the Fund has the smallest gain). When gains are taken, the investment
sub-adviser will attempt to offset them with losses from other securities. This
may be accomplished by selling certain securities at a loss and investing the
proceeds in similar securities.
While most assets will be invested in U.S. common stocks, other instruments also
may be purchased, including foreign stock and futures and options, in keeping
with the Fund's investment objective.
For defensive purposes, the Fund may temporarily hold all or a portion of its
assets in cash or money market instruments. Such action may help the Fund
minimize or avoid losses during adverse market, economic or political
conditions. During such a period, the Fund may not achieve its investment
objective. For example, should the market advance during this period, the Fund
may not participate as much as it would have if it had been more fully invested.
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GENERAL
FUTURES, OPTIONS AND OTHER DERIVATIVES
Consistent with their investment objectives, the Funds may invest in futures and
options. Futures contracts are agreements whereby one party agrees to accept,
and the other party agrees to deliver, a dollar amount based on the value of
another asset (such as a security, currency or index of securities) on a
specified future date. Similarly, options are rights to sell or buy a particular
asset on a specified future date at a specified price. These investments allow
participation in the performance of the security in a manner generally more
convenient and less costly than purchasing the underlying asset. This benefit
can serve to magnify downward changes in an index or market, however.
The Index Funds may, but are not required to, engage in futures and options
transactions to help minimize the gap in performance that naturally exists
between any index fund and its benchmark index. This gap will occur mainly
because, unlike an index, the Index Funds incur expenses and must keep a portion
of their assets in cash for paying expenses and processing shareholders' orders.
By using futures, the Index Funds potentially can offset a portion of the gap
attributable to their cash holdings. However, because some of the effect of
expenses remains, each Index Fund's performance normally will be below that of
its target index. The use of futures could cause an Index Fund to track the
index less closely if the futures contracts do not perform as expected.
The Technology Fund and the Tax Managed Growth Fund may buy and sell futures and
options contracts on securities, financial indexes, and foreign currencies.
These Funds may invest in futures and options for any number of reasons,
including: managing their exposure to changes in securities prices and foreign
currencies; as an efficient means of adjusting their overall exposure to certain
markets; attempting to enhance income; as a cash management tool; and protecting
the value of portfolio securities.
Losses involving futures and options can sometimes be substantial -- in part
because a relatively small price movement in these investments may result in an
immediate and substantial loss for a Fund. To the extent a Fund uses futures and
options, it is exposed to the risks of additional volatility and losses caused
by factors such as, but not limited to, the investment sub-adviser's incorrect
judgment as to certain market movements, the default by a counterparty to the
transaction, the forced sale or purchase of securities at inopportune times or
prices, or the inability to close out a transaction due to a lack of liquidity
or a market. For this reason, the Index Funds do not use futures or options for
speculative purposes or as leveraged investments. With respect to each Fund's
investments in futures, initial margin deposits and premiums on futures used for
non-hedging purposes will not exceed 5% of the Fund's net asset value.
The Tax Managed Growth Fund also may invest in hybrid instruments, a type of
potentially high-risk derivative that can combine the characteristics of
securities, futures and options. For example, the principal amount, redemption
or conversion terms of a security could be related to the market price of some
commodity, currency, or securities index. Such securities may bear interest or
pay dividends at below market or even relatively nominal rates. Under certain
conditions, the redemption value of such an investment could be zero.
FOREIGN SECURITIES AND CURRENCIES
The European Index Fund and Asian Index Fund invest substantially all of their
assets in foreign securities.
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The other Funds may invest in foreign securities consistent with their
investment objectives. Each Index Fund tracking a domestic index may invest in
foreign securities to the extent necessary to carry out its investment strategy
of holding a representative sample of the stocks that comprise the index. It is
not expected that any of the Index Funds other than European Index Fund and
Asian Index Fund will invest more than 5% of its assets in foreign securities.
Up to 25% of the Technology Fund's and the Tax Managed Growth Fund's total
assets (excluding short-term investments) may be invested in foreign securities.
These include non U.S. dollar-denominated securities traded outside of the U.S.
and dollar-denominated securities of foreign issuers traded in the U.S. (such as
American Depository Receipts (ADRs)).
The Funds that invest in foreign securities denominated in a foreign currency
may, but are not required to, engage in foreign currency futures contracts and
related options transactions in order to hedge against the possibility that a
particular foreign currency may suffer a decline against the U.S. dollar. A
foreign currency futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of a foreign currency at a
specified price and time. An option on a foreign currency futures contract gives
the holder the right, in return for the premium paid, to assume a long position
(call) or short position (put) in a futures contract at a specified exercise
price at any time during the period of the option. These Funds also may enter
into forward foreign currency contracts in order to maintain a desired level of
currency exposure. A forward foreign currency contract is an agreement to buy or
sell a country's currency at a specific price on a specific date, usually 30,
60, or 90 days in the future. In other words, the contract guarantees an
exchange rate on a given date. The Funds may use these contracts for reasons
such as gaining currency exposure when investing in stock index futures or
settling trades in a foreign currency.
INVESTMENT RISKS
--------------------------------------------------------------------------------
All investments involve some type and level of risk. Risk is the possibility
that you will lose money or not make any additional money by investing in the
Funds.
The principal risks of investing in the Funds are identified in INVESTMENT
OBJECTIVES, PRINCIPAL STRATEGIES AND PRINCIPAL RISKS and further described
below. Each Fund's exposure to these risks depends upon its specific investment
objective and strategies. Please note that there are many other circumstances
that could adversely affect your investment or prevent a Fund from achieving its
objective, and that are not described here.
RISKS OF ALL FUNDS
MARKET RISK. Market risk is the risk that the market value of a Fund's
investments will fluctuate as the stock and bond markets fluctuate. Market risk
may affect a single issuer, industry or section of the economy or it may affect
the market as a whole. The market value of equity securities (stocks) is based
largely upon the market's perception of the issuing company's value. Normally,
the values of fixed income securities (bonds) vary inversely with changes in
prevailing interest rates.
The total return of those Funds that invest in stocks will fluctuate within a
wide range, like stock prices generally, so you could lose money over short or
even long periods. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices. These Funds also are subject to market
segment
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risk, which is the risk that returns from stocks comprising the Fund's
portfolio will trail returns from other asset classes or the overall stock
market. For example, large capitalization stocks, such as those in which the 500
Index Fund and the Tax Managed Growth Fund invest, tend to go through cycles of
performing better -- or worse -- than the stock market in general. These periods
have, in the past, lasted for as long as several years. In addition, small- and
mid-cap stocks, in which the Extended Market Index Fund invests, historically
have been more volatile in price than the large-cap stocks that dominate the S&P
500 Index, and perform differently than the overall stock market.
NON-DIVERSIFICATION RISK. Each of the Funds is non-diversified, which means it
can invest a greater portion of its assets in the securities of a single issuer
than a diversified fund. Non-diversification risk is the risk that a
non-diversified fund will be more volatile than a diversified fund because it
invests a greater percentage of its assets in one or more issuers and/or it
invests its assets in a smaller number of issues. The gains or losses on a
single security or issuer will, therefore, have a greater impact on the
non-diversified fund's net asset value.
DERIVATIVE RISK. Futures, options and similar investments often are referred to
as "derivatives," because their performance is derived, at least in part, from
the performance of a particular security, market or asset. To the extent a Fund
invests in derivatives, it is exposed to the risks of additional volatility and
losses caused by factors such as, but not limited to, the investment
sub-adviser's incorrect judgment as to certain market movements, the default by
a counterparty to the transaction, the forced sale or purchase of securities at
inopportune times or prices, or the inability to close out a transaction due to
a lack of liquidity or a market. In addition, because these securities tend to
magnify changes in an index or market, downward price changes in a security may
result in a loss greater than a Fund's investment in the security.
RISKS OF FUNDS THAT INVEST IN SMALLER COMPANIES
These risks apply to the Extended Market Index Fund, the Technology Fund and the
Tax Managed Growth Fund.
Investments in smaller companies may be more volatile than investments in larger
companies, as smaller companies generally experience higher growth and failure
rates. Small companies also tend to have limited product lines, markets or
financial resources. The trading volume of smaller company securities is
normally lower than that of larger companies. Changes in the demand for the
securities of smaller companies generally has a disproportionate effect on their
market price, tending to make prices rise more in response to buying demand and
fall more in response to selling pressure.
RISKS OF FUNDS THAT INVEST IN FOREIGN SECURITIES
These risks apply to the Funds that may invest in foreign securities,
particularly the Asian Index Fund and the European Index Fund.
Investments in foreign securities involve special risks, including the
possibility of substantial volatility, limited liquidity and significant changes
in value due to exchange rate fluctuations. These risks are heightened in Asian
markets. Foreign companies may not be subject to the same accounting, auditing
and financial reporting standards and practices as U.S. companies. In addition,
some foreign stock exchanges, brokers and companies have less government
supervision and regulation than their U.S. counterparts.
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Investments in foreign securities involve COUNTRY RISK, which is the risk that
the economy of a country (or region) will be damaged by political instability,
financial problems or natural disasters. To the extent any investments are in
developing countries, these risks may be heightened. Because Japanese stocks
comprise such a large portion of the MSCI Pacific Free Index and will represent
a correspondingly large component of the Asian Index Fund's portfolio, this Fund
may involve a higher degree of country risk than that of more geographically
diversified international funds. A similar risk applies to the European Index
Fund: because four countries comprise a majority of the MSCI Europe Index,
stocks from the remaining 11 countries with less weighting have correspondingly
less impact on its total return.
Finally, Funds investing in foreign securities are subject to CURRENCY RISK,
which is the risk that returns will be hurt by a rise in the value of the U.S.
dollar versus foreign currencies. Generally, when the U.S. dollar rises in value
against another country's currency, a Fund's investment in that country loses
value because its currency is worth fewer U.S. dollars.
RISKS OF FUNDS THAT INVEST IN BONDS
These risks apply to the Bond Index Fund, as well as to the other Funds, which
all may invest in fixed income securities.
INTEREST RATE RISK. Interest rate risk is the risk that bond prices overall will
decline over short or even long periods due to rising interest rates. Interest
rate risk is generally higher for long-term bonds, and lower for shorter-term
bonds.
CREDIT RISK. Credit risk is the risk that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
PREPAYMENT RISK. Prepayment risk is the risk that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding bond
before its maturity date. Forced to invest the unanticipated proceeds at lower
rates, the Fund would experience a decline in income and lose the opportunity
for additional price appreciation associated with falling rates.
RISKS OF THE INDEX FUNDS
Because the Index Funds are managed to match the performance of target indexes,
they generally will not keep a substantial portion of their assets in cash or
use other techniques, such as currency or index rate hedging or temporary
defensive investments, designed to reduce the risk of loss. Thus, the Index
Funds' portfolios may decrease in value more than an actively managed fund in
the event of a general market decline. An Index Fund's investments, which may
not fully replicate the target index, may perform differently from the
securities in the index. In addition, because each Index Fund is subject to fees
and expenses, the Fund will tend to underperform the performance of the index,
which is not subject to fees and expenses.
RISKS OF THE ACTIVELY MANAGED FUNDS
Each of the Technology Fund and the Tax Managed Growth Fund is subject to the
risk that its investment sub-adviser's decisions will not produce the desired
result, possibly resulting in losses or poor performance even in a rising
market.
Similarly, the Tax Managed Growth Fund's attempts to manage its portfolio in a
tax-efficient manner may not be successful. In addition, the Fund's effort to
maximize after-tax returns may require trade-offs that reduce pre-tax returns.
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RISKS OF THE EUROPEAN INDEX FUND
The European Index Fund is subject to additional risk associated with the
transition to a common European currency -- the "euro" -- which was introduced
on January 1, 1999 by the European Economic and Monetary Union ("EMU") and is
expected to replace the existing national currencies of all initial EMU
participants by July 1, 2002. Certain securities (beginning with government and
corporate bonds) have been redenominated in the euro. These securities trade and
make dividend and other payments only in euros. Like other funds and business
organizations, including the companies in which the Fund invests, the Fund could
be adversely affected if the transition to the euro, or EMU as a whole, does not
proceed as planned or if a participating country withdraws from EMU.
RISKS OF THE TECHNOLOGY FUND
The Technology Fund is subject to additional risk because it concentrates its
investments in technology companies. The Fund thus will be more susceptible to
factors adversely affecting companies in technology-related industries (as
opposed to investments in a broader range of industries).
Greater risk and increased volatility are associated with investments in the
technology segment of the stock market. The performance and volatility of the
Fund will likely reflect that of the GSTI Composite Index during down markets as
well as during up markets. The Fund's returns will be directly affected by the
substantial volatility of the stocks making up the GSTI Composite Index, which
includes small companies.
The technology industry can be affected by specific risks including: aggressive
product pricing due to competition pressure from numerous market entrants, short
product cycles and product obsolescence, among others. Companies in the rapidly
changing fields of science and technology often face high price volatility.
Products and services that at first appear promising may not prove commercially
successful or may become obsolete quickly. This level of risk will be increased
to the extent the Fund has significant exposure to smaller or unseasoned
companies, which may not have established products or more experienced
management.
RISKS OF THE TAX MANAGED GROWTH FUND
The Tax Managed Growth Fund is subject to additional risk with respect to its
investment approach in that its strategy of investing in "growth" stocks could
fall out of favor with the investing public, resulting in lagging performance
versus other types of stock funds. In addition, growth stocks can be volatile
for several reasons. Because they usually reinvest a high proportion of their
earnings in their own businesses, they may lack the dividend income of other
types of stocks that could cushion their decline in a falling market. Also,
because investors buy growth stocks because of their expected superior earnings
growth, earnings disappointments often result in sharp price declines.
HOW TO BUY AND SELL SHARES
--------------------------------------------------------------------------------
Investors may purchase shares of a Fund through an account maintained with TD
Waterhouse Investor Services, Inc. ("TD Waterhouse"), or certain other
broker-dealers.
If you would like to purchase shares of a Fund through TD Waterhouse and you are
not already a customer, you need to open a TD Waterhouse account by completing
and signing a TD Waterhouse New Account
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Application. To request an application, please call 1-800-934-4448 or visit us
online at www.tdwaterhouse.com. Mail it, together with your check in the amount
you wish to purchase, in the self-addressed stamped envelope provided with the
TD Waterhouse New Account Application.
Existing TD Waterhouse customers must have money available in their TD
Waterhouse brokerage accounts to buy shares of a Fund.
ACCOUNT PROTECTION. Within your TD Waterhouse brokerage account, you have access
to other investments available at TD Waterhouse such as stocks, bonds, options,
and other mutual funds. The securities in your TD Waterhouse brokerage account,
including shares of a Fund, are fully protected for loss of securities (not
including loss due to market fluctuations of securities or market conditions).
The first $500,000 of coverage is provided by Securities Investor Protection
Corporation (known as "SIPC") of which up to $100,000 covers cash. The remaining
coverage, which covers securities only, is provided by a private insurance
carrier.
INVESTMENT MINIMUMS. There is a $1,000 minimum for initial purchases and a $100
minimum for subsequent purchases of shares of a Fund. The Trust may waive the
investment minimums for existing customers of TD Waterhouse and otherwise may
waive these minimums in its discretion. Initial investment minimums do not apply
to investments made through a periodic investment program for investors who make
a monthly investment of $100 or more or a quarterly investment of $300 or more
or to TD Waterhouse IRA accounts.
HOW TO BUY SHARES
Shares are purchased at the next net asset value per share calculated after an
order and payment are received by the Fund. See SHAREHOLDER INFORMATION --
PRICING YOUR SHARES.
CUSTOMERS OF TD WATERHOUSE
TD Waterhouse brokerage customers may purchase shares of a Fund by mail or by
placing an order directly with a TD Waterhouse Account Officer by telephone at
1-800-934-4448. TD Waterhouse also allows the purchase of Fund shares by
electronic means for customers at www.tdwaterhouse.com.
Whether by mail, telephone or electronically, please indicate your wish to buy
shares of a particular Fund and provide the following information:
o your TD Waterhouse account number
o the Fund in which you wish to invest
o the dollar amount you wish to invest or share amount you wish to
purchase
o the dividend and distribution option you have selected, either:
(a) reinvest dividends and any capital gain distributions; or
(b) pay both dividends and any capital gain distributions in cash; or
(c) reinvest dividends and pay any capital gain distributions in
cash; or
(d) reinvest any capital gain distributions and pay dividends in
cash.
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BY MAIL. You may buy shares of a Fund by mailing a letter of instruction with
the information requested above, signed by one of the registered account holders
in the exact form specified on the account to TD Waterhouse Investor Services,
Inc., Northeast Operations Center, P.O. Box 1085, New York, NY 10268-1085.
Current TD Waterhouse customers should include their account number so that the
account can be debited. New customers should include a check made payable to "TD
Waterhouse Investor Services, Inc." Once you mail your letter, you may not
modify or cancel your instructions.
BY TELEPHONE. You may purchase shares of a Fund by calling your TD Waterhouse
Account Officer at 1-800-934-4448.
ELECTRONICALLY. Please refer to product and services information regarding TD
Waterhouse webBroker and TradeDirect(R) (touch tone trading). The World Wide Web
address for TD Waterhouse is http://www.tdwaterhouse.com.
THROUGH PERIODIC INVESTMENT. You may authorize monthly or quarterly amounts to
be withdrawn automatically from your TD Waterhouse brokerage account and
invested in a Fund (monthly minimum: $100; quarterly minimum: $300). You may
sign up for this service when you open your account at TD Waterhouse or at
another time by calling your TD Waterhouse Account Officer at 1-800-934-4448.
PURCHASE ORDERS
The Funds will not accept electronic (internet or touch-tone) orders to purchase
shares after 2:00 p.m. (Eastern time) or telephonic orders to purchase shares
after 2:20 p.m. (Eastern time). Thus, if you plan to purchase shares of a Fund
electronically or by telephone, you must complete your internet or touch-tone
transmission or place your telephone order by 2:00 or 2:20 p.m. (Eastern time),
as the case may be, to effect a same day purchase. Orders placed after 4:00 p.m.
(Eastern time) will be priced as of the close of regular trading on the New York
Stock Exchange (the "NYSE") on the next business day.
CUSTOMERS OF SELECTED BROKER-DEALERS
Shares may be purchased and redeemed through certain authorized broker-dealers
other than TD Waterhouse that have entered into a selling agreement with the
Funds' distributor ("Selected Brokers"). Affiliates of TD Waterhouse, including
National Investors Services Corp., may be Selected Brokers. Selected Brokers may
receive payments as a processing agent from the Transfer Agent. In addition,
Selected Brokers may charge their customers a fee for their services, no part of
which is received by any Fund or TD Waterhouse.
Investors who purchase shares through a Selected Broker will be subject to the
procedures of their Selected Broker, which may include charges, limitations,
investment minimums, cutoff times and restrictions in addition to, or different
from, those generally applicable to TD Waterhouse customers. Any such charges
would reduce the return on an investment in a Fund. Investors should acquaint
themselves with their Selected Broker's procedures and should read this
prospectus in conjunction with any material and information provided by their
Selected Broker. Investors who purchase a Fund's shares though a Selected Broker
may or may not be the shareholder of record. Selected Brokers are responsible
for promptly transmitting purchase, redemption and other requests to a Fund.
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Certain shareholder services, such as periodic investment programs, may not be
available to customers of Selected Brokers or may differ in scope from programs
available to TD Waterhouse customers. Shareholders should contact their Selected
Broker for further information. Each Fund may confirm purchases and redemptions
of a Selected Broker's customers directly to the Selected Broker, which in turn
will provide its customers with confirmation and periodic statements. The Funds
are not responsible for the failure of any Selected Broker to carry out its
obligations to its customer.
EXCHANGE PRIVILEGE
Shareholders of a Fund are entitled to exchange some or all of their shares of
the Fund for shares of another Fund of the TD Waterhouse mutual funds, subject
to any applicable redemption fee. Shares that are exchanged will be valued at
their respective net asset values computed as of the close of regular trading on
the NYSE on the day the exchange is requested.
An exchange of shares pursuant to the exchange privilege may result in a
shareholder realizing a taxable gain or loss for income tax purposes. The
exchange privilege is available to shareholders residing in any state in which
the shares of the Fund being acquired may legally be sold. There is no charge
for the exchange privilege. Any exchange, however, must meet the applicable
minimum investment amount for the Fund into which the exchange is being made.
COSTS OF MARKET-TIMING
Some investors try to profit from a strategy called market-timing -- switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a Fund incurs
expenses for buying and selling securities. These costs are borne by all Fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Funds have adopted the following policies, among others, designed
to discourage short-term trading:
o Each Fund reserves the right to suspend the offering of shares for a
period of time and to reject any purchase request -- including
exchanges from other Funds in the Trust -- that it regards as
disruptive to the efficient management of the Fund. A purchase request
could be rejected because of the timing of the investment or because
of a history of excessive trading by the investor.
o The number of times you can exchange into and out of a Fund may be
limited. Each Fund reserves the right to revise or terminate the
exchange privilege, limit the amount of an exchange, or reject any
exchange at any time.
o For certain Funds, you will be assessed a redemption fee if you redeem
shares of a Fund within 180 days after investing in the Fund (See FEES
AND EXPENSES OF THE FUNDS for applicable fee amounts and the Statement
of Additional Information for further information regarding the
redemption fee).
HOW TO SELL SHARES
To sell (redeem) shares of a Fund, you may use any of the methods outlined
below. Shareholders who have invested through a Selected Broker should redeem
their shares through the Selected Broker. Shares of the Fund are redeemed at the
next net asset value per share calculated after receipt by the Fund of a
redemption request in proper form. See SHAREHOLDER INFORMATION -- PRICING YOUR
SHARES.
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BY MAIL. You may sell shares by sending a letter of instruction with the
information below, signed by one of the registered account holders in the exact
form specified on the account to TD Waterhouse Investor Services, Inc.,
Northeast Operations Center, P.O. Box 1085, New York, NY 10268-1085. Once you
mail your letter, you may not modify or cancel your instructions.
BY TELEPHONE. You may sell shares of a Fund by calling your TD Waterhouse
Account Officer at 1-800-934-4448.
ELECTRONICALLY. Please refer to product and services information regarding TD
Waterhouse webBroker and TradeDirect(R) (touch tone trading). The World Wide Web
address for TD Waterhouse is http://www.tdwaterhouse.com.
GENERAL
With every request to sell shares, you will need to include the following
information:
o your TD Waterhouse account number
o the Fund whose shares you wish to sell
o the dollar or share amount you wish to sell
PAYMENT. The proceeds of the redemption of shares you own of a Fund ordinarily
will be credited to your brokerage account the following business day after
receipt by the Fund of a redemption request in proper form, but not later than
seven calendar days after an order to sell shares is received. If you purchased
shares by check, proceeds may be held in your brokerage account to allow for
clearance of the check (which may take up to ten calendar days from the date of
purchase). Each Fund reserves the right to make redemption payments in whole or
in part in securities or other property, valued for this purpose as they are
valued in computing the relevant Fund's net asset value per share.
SALE ORDERS. The Funds will not accept electronic (internet or touch-tone)
orders to sell its shares after 2:00 p.m. (Eastern time) or telephonic orders to
sell its shares after 2:20 p.m. (Eastern time). Thus, if you plan to sell shares
of a Fund electronically or by telephone, you must complete your internet or
touch-tone transmission or place your telephone order by 2:00 or 2:20 p.m.
(Eastern time), as the case may be, to effect a same day sale. Orders placed
after 4:00 p.m. (Eastern time) will be priced as of the close of regular trading
on the NYSE on the next business day.
TELEPHONE TRANSACTIONS
Customers of TD Waterhouse automatically have the privilege of purchasing or
redeeming shares of a Fund by telephone. TD Waterhouse and the Funds will employ
reasonable procedures to verify the genuineness of telephone redemption
requests. These procedures involve requiring certain personal identification
information. If such procedures are not followed, TD Waterhouse and the Funds
may be liable for any losses due to unauthorized or fraudulent instructions.
Neither TD Waterhouse nor any Fund will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. You should
verify the accuracy of your account statements immediately after you receive
them and contact a TD Waterhouse Account Officer if you question any activity in
the account.
Each Fund reserves the right to refuse to honor requests made by telephone if
that Fund believes them not to be genuine. Each Fund also may limit the amount
involved or the number of such requests. During
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periods of drastic economic or market change, telephone redemption privileges
may be difficult to implement. Each Fund reserves the right to terminate or
modify this privilege at any time.
BROKERAGE ACCOUNT REQUIREMENTS
Currently, only customers of TD Waterhouse and Selected Brokers are eligible to
purchase and hold shares of the Funds. If a customer closes the brokerage
account in which Fund shares are held, the account closing will result in the
redemption of such shares, which could result in adverse tax consequences for
the shareholder. Of course, a shareholder may leave his or her brokerage account
open so long as he or she desires to hold Fund shares.
STATEMENTS TO SHAREHOLDERS
The Funds do not issue share certificates but record your holdings in
noncertificated form. Your Fund activity is reflected in your TD Waterhouse
brokerage account statement. The Funds provide you with a new copy of their
prospectus, at least annually, and annual audited and semi-annual unaudited
financial statements. Unless you request otherwise, only one copy of each of the
annual and semi-annual financial statements and prospectus of the Funds will be
sent to a single household without regard to the number of shareholders residing
at such household.
MANAGEMENT
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INVESTMENT MANAGER
TD Waterhouse Asset Management, Inc., 100 Wall Street, New York, NY 10005, is
each Fund's investment manager. The investment manager provides investment
supervisory and business management services to the Funds, including monitoring
the investment programs for the Funds, and selecting and supervising the
investment sub-advisers for the Funds. The investment sub-advisers are
responsible for providing day-to-day investment management for the Funds.
The investment manager is a wholly owned subsidiary of The Toronto-Dominion Bank
("TD Bank"). TD Bank is part of a worldwide group of banks and financial service
companies (referred to as the "TD Bank Financial Group"). As of July 31, 2000,
the TD Bank Financial Group had over $60 billion under management including
pension, endowment, foundation, segregated, corporate and private accounts, and
mutual and pooled funds.
In addition to the Fund, the investment manager currently serves as investment
manager to TD Waterhouse Bank, N.A. (of which it is an affiliate) and to other
proprietary mutual funds, and as of July 31, 2000, had total assets under
management in excess of $11 billion.
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The investment management fees that each Fund pays are based on the Fund's
average net assets at the following annual rates:
Bond Index Fund 0.30%
500 Index Fund 0.30%
Extended Market Index Fund 0.30%
Asian Index Fund 0.40%
European Index Fund 0.40%
Technology Fund 0.70%
Tax Managed Growth Fund 0.65%
As described in FEES AND EXPENSES OF THE FUNDS, from time to time the investment
manager and its affiliates may reduce a Fund's expenses (by paying certain
expenses and/or waiving fees). A Fund may be required to reimburse the
investment manager for these expenses at a later time, provided that the Fund's
assets have grown or expenses have declined sufficiently to allow reimbursement
without causing its total operating expenses to exceed a stated amount. Unless
specified otherwise, any expense reductions are voluntary and may be reduced or
eliminated at any time upon notifying investors.
The investment manager, not the Funds, is responsible for compensating the
investment sub-advisers.
INVESTMENT SUB-ADVISERS
TD INVESTMENT MANAGEMENT INC. TD Investment Management Inc., P.O. Box 100,
Toronto-Dominion Centre, 26th Floor, Toronto Dominion Tower, 55 King Street
West, Toronto, Ontario, Canada M5K 1A2 ("TDIM"), serves as investment
sub-adviser to each of the Index Funds. TDIM oversees the investment program for
each of the Index Funds, places orders for the Index Funds' purchases and sales
of portfolio securities, and maintains records relating to such purchases and
sales. TDIM is a wholly-owned subsidiary of TD Bank and part of the TD Bank
Financial Group.
Each Index Fund is managed by a team of investment professionals. TDIM believes
its team approach benefits Fund investors by bringing together many disciplines
and leveraging its extensive resources.
T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("T. Rowe Price"),
100 East Pratt Street, Baltimore, MD 21202, serves as investment sub-adviser to
the Technology Fund and the Tax Managed Growth Fund. T. Rowe Price oversees the
investment program for each of these Funds, places orders for the Funds'
purchases and sales of portfolio securities, and maintains records relating to
such purchases and sales. Founded in 1937, T. Rowe Price and its affiliates
managed over $179 billion for more than eight million individual and
institutional investor accounts as of June 30, 2000.
In selecting investments for each of the Technology Fund's and the Tax Managed
Growth Fund's portfolio, T. Rowe Price uses an Investment Advisory Committee.
The committee chairman has day-to-day responsibility for managing the respective
Fund and works with the committee in developing and executing the Fund's
investment program. As a member of the advisory committees for a number of
funds, Raymond A. Mills, the committee chairman for the Technology Fund, has
been managing investments since 1998.
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Before joining T. Rowe Price, Mr. Mills was a Principal Systems Engineer with
The Analytic Sciences Corporation. Donald J. Peters, the committee chairman for
the Tax Managed Growth Fund, has been a portfolio manager and quantitative
investment analyst for T. Rowe Price since joining the firm in 1993.
ADMINISTRATOR
As administrator, TD Waterhouse, an affiliate of the investment manager,
provides certain administrative and management services to the Funds. For its
services as administrator, TD Waterhouse receives an annual fee of 0.10% of each
Fund's average net assets. TD Waterhouse has entered into an agreement with
Funds Distributor, Inc. ("FDI") whereby FDI performs certain administrative
services for the Funds. TD Waterhouse pays FDI's fees for providing these
services.
DISTRIBUTOR
FDI acts as distributor of the Funds' shares for no compensation.
SHAREHOLDER SERVICING
The Funds' Shareholder Servicing Plan permits each Fund to pay banks,
broker-dealers or other financial institutions (including TD Waterhouse and its
affiliates) for shareholder support services they provide to their clients who
are shareholders of the Fund, at a rate of 0.25% of the average daily net assets
of the Fund. These services may include, among other services, providing general
shareholder liaison services (including responding to shareholder inquiries),
providing information on shareholder investments, and establishing and
maintaining shareholder accounts and records. At present, TD Waterhouse is the
only financial institution that may be paid for its services under the
Shareholder Servicing Plan.
SHAREHOLDER INFORMATION
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PRICING YOUR SHARES
The price at which shares of each Fund are purchased or redeemed is equal to the
net asset value per share of a Fund as determined on the effective date of a
purchase or redemption. The net asset value per share is computed by dividing
the total current value of the assets of a Fund, less its liabilities, by the
total number of shares outstanding at the time of such computation. Each Fund's
net asset value per share is computed as of the close of regular trading on the
NYSE (normally 4:00 p.m. Eastern time) on each day during which the NYSE is open
for regular trading. Currently, the NYSE is closed on weekends and certain
holidays.
Securities owned by the Funds for which market quotations are readily available
are valued at current market value or, in their absence, at fair value as
determined pursuant to procedures approved by the Board. Most of the securities
in which the Asian Index Fund and the European Index Fund invest are traded in
markets that close before the close of regular trading on the NYSE. For
securities primarily traded in the Far East, the most recent closing prices may
be as much as 15 hours old as of the close of regular trading on the NYSE.
Normally, developments that could affect the values of portfolio securities that
occur between the close of a foreign market and the close of regular trading on
the NYSE will not be reflected in the Asian Index Fund's or the European Index
Fund's net asset value. The Asian Index Fund and the European Index Fund may,
however, adjust the previous closing prices to reflect fair value or use the
next available opening market prices to value their portfolio securities.
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Because certain of the Funds may invest in securities that are listed on foreign
exchanges that may trade on weekends or other days when those Funds do not price
their shares, those Funds' share value may change on days when shareholders will
not be able to purchase or redeem those Funds' shares.
Each Fund's shares are sold or redeemed, respectively, at the next net asset
value per share (subject to any applicable redemption fee, in the case of
certain redemptions) calculated after an order and payment are accepted or a
redemption request is received by that Fund in the manner described under HOW TO
BUY AND SELL SHARES.
DIVIDENDS AND DISTRIBUTIONS
It is currently contemplated that dividends of the Bond Index Fund's net
investment income will be declared daily and paid monthly and that dividends of
each other Fund's net investment income, if any, will be declared and paid
annually. In the event that the Trust's Board of Trustees changes the dividend
policy, shareholders will be notified. Net capital gain, if any, realized by a
Fund will be distributed at least annually. Unless a shareholder elects payment
in cash, all dividend and capital gain distributions of the Funds are
automatically reinvested in additional full and fractional shares of the
relevant Fund at the net asset value per share as of the payment date of the
distribution.
If you purchase shares shortly before a distribution, you will be taxed on the
distribution, even though it represents a return of your investment. To avoid
this result, check a Fund's distribution schedule before you invest.
TAXES
Dividends paid out of a Fund's net investment income (including dividends and
taxable interest) and net short-term capital gains will be taxable to you as
ordinary income. If a portion of a Fund's income consists of dividends paid by
U.S. corporations, a portion of the dividends paid by that Fund may be eligible
for the dividends-received deduction for corporate shareholders. Distributions
of net long-term capital gains earned by a Fund are taxable to you as long-term
capital gains, regardless of how long you have held your Fund shares. Fund
distributions are taxable to you in the same manner whether received in cash or
reinvested in additional Fund shares.
A distribution will be treated as paid to you on December 31 of the current
calendar year if it is declared by a Fund in October, November or December with
a record date in such a month and paid by a Fund during January of the following
calendar year.
In certain years, you may be able to claim a credit or deduction on your income
tax return for your share of foreign taxes paid by the Asian Index Fund or the
European Index Fund.
Each year each Fund in which you have invested will notify you of the tax status
of dividends and other distributions.
Upon the sale or other disposition of your Fund shares, you may realize a
capital gain or loss that will be characterized as long-term or short-term,
generally depending upon how long you held your shares.
The Funds may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to you if you fail to provide the Funds in
which you invest with your correct taxpayer identification
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number or to make required certifications, or if you have been notified by the
IRS that you are subject to backup withholding. Backup withholding is not an
additional tax. Any amounts withheld may be credited against your U.S. federal
income tax liability.
Fund distributions also may be subject to state, local and foreign taxes. In
many states, Fund distributions that are derived from interest on certain U.S.
government obligations are exempt from taxation. You should consult your own tax
adviser regarding the particular tax consequences of an investment in the Funds.
A WORD ABOUT THE INDEXES
Investors should be aware of the following information.
S&P 500 INDEX (500 INDEX FUND). "STANDARD & POOR'S(R)", "S&P(R)", "S&P 500(R)",
"STANDARD & POOR'S 500", "SPDRs(R)", "STANDARD & POOR'S DEPOSITARY RECEIPTS(R)",
and "500" are trademarks of The McGraw-Hill Companies, Inc. and have been
licensed for use by TD Waterhouse Asset Management, Inc. (the "Licensee").
The 500 Index Fund (the "Product") is not sponsored, endorsed, sold or promoted
by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. ("S&P"). S&P
makes no representation or warranty, express or implied, to the owners of the
Product or any member of the public regarding the advisability of investing in
securities generally or in the Product particularly or the ability of the S&P
500 Index to track general stock market performance. S&P's only relationship to
the Licensee is the licensing of certain trademarks and trade names of S&P and
of the S&P 500 Index which is determined, composed and calculated by S&P without
regard to the Licensee or the Product. S&P has no obligation to take the needs
of the Licensee or the owners of the Product into consideration in determining,
composing or calculating the S&P 500 Index. S&P is not responsible for and has
not participated in the determination of the prices and amount of the Product or
the timing of the issuance or sale of the Product or in the determination or
calculation of the equation by which the Product is to be converted into cash.
S&P has no obligation or liability in connection with the administration,
marketing or trading of the Product.
S&P DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE S&P 500 INDEX
OR ANY DATA INCLUDED THEREIN AND S&P SHALL HAVE NO LIABILITY FOR ANY ERRORS,
OMISSIONS, OR INTERRUPTIONS THEREIN. S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED,
AS TO RESULTS TO BE OBTAINED BY THE LICENSEE, OWNERS OF THE PRODUCT, OR ANY
OTHER PERSON OR ENTITY FROM THE USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED
THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY
OF THE FOREGOING, IN NO EVENT SHALL S&P HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
WILSHIRE 4500 INDEX (EXTENDED MARKET INDEX FUND). "Wilshire 4500" is a trademark
and "Wilshire" is a service mark of Wilshire Associates Incorporated
("Wilshire") and they have been licensed for use by TD Waterhouse Asset
Management, Inc. (the "Licensee").
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The Extended Market Index Fund (the "Product") is not sponsored, endorsed, sold
or promoted by Wilshire. Wilshire makes no representation or warranty, express
or implied, to the owners of the Product or any member of the public regarding
the advisability of investing in securities generally or in the Product
particularly or the ability of the Wilshire 4500 Index to track general stock
market performance. Wilshire's only relationship to the Licensee is the
licensing of certain trademarks and trade names of Wilshire. The Wilshire 4500
Index is composed and calculated without regard to the Licensee or the Product.
Wilshire has no obligation to take the needs of the Licensee or the owners of
the Product into consideration in determining, composing or calculating the
Wilshire 4500 Index. Wilshire does not guarantee the accuracy or the
completeness of the Wilshire 4500 Index or any data included therein and
Wilshire shall have no liability for any errors, omissions, or interruptions
therein. Wilshire makes no warranty, express or implied, as to results to be
obtained by Licensee, owners of the Product, or any other person or entity from
the use of the Wilshire 4500 Index or any data included therein. Wilshire makes
no express or implied warranties, and expressly disclaims all warranties of
merchantability or fitness for a particular purpose or use with respect to the
Wilshire 4500 Index or any data included therein. Without limiting any of the
foregoing, in no event shall Wilshire have any liability for any special,
punitive, indirect, or consequential damages (including lost profits), even if
notified of the possibility of such damages.
MSCI PACIFIC FREE INDEX (ASIAN INDEX FUND) AND MSCI EUROPE INDEX (EUROPEAN INDEX
FUND) (THE "FUNDS"). Each of the MSCI Pacific Free Index and the MSCI Europe
Index is the exclusive property of MSCI. Morgan Stanley Capital International is
a service mark of MSCI and has been licensed for use by TD Waterhouse Asset
Management, Inc. (the "Licensee").
Each of the Asian Index Fund and the European Index Fund is not sponsored,
endorsed, sold or promoted by MSCI or any affiliate of MSCI. Neither MSCI nor
any other party makes any representation or warranty, express or implied, to the
owners of the Funds or any member of the public regarding the advisability of
investing in funds generally or in the Funds particularly or the ability of
either the MSCI Pacific Free Index or the MSCI Europe Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service
marks and trade names of MSCI and of each of the MSCI Pacific Free Index and the
MSCI Europe Index, which are determined, composed and calculated by MSCI without
regard to the issuer of the Funds or the Funds. MSCI has no obligation to take
the needs of the issuer of the Funds or the owners of the Funds into
consideration in determining, composing or calculating the MSCI Pacific Free
Index and MSCI Europe Index. MSCI is not responsible for and has not
participated in the determination of the timing of prices at, or quantities of
the Funds to be issued or in the determination or calculation of the equation by
which the Funds are redeemable for cash. Neither MSCI nor any other party has
any obligation or liability to owners of the Funds in connection with the
administration, marketing or trading of the Funds.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE FUNDS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY
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DATA INCLUDED THEREIN IN CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR
ANY OTHER USE. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED
WARRANTIES, AND MSCI HEREBY EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES
OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL MSCI OR ANY OTHER PARTY HAVE ANY LIABLITY FOR ANY DIRECT, INDIRECT,
SPECIAL, PUNITIVE, CONSEQUENTIAL OR ANY OTHER DAMAGES (INCLUDING LOST PROFITS)
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
GSTI COMPOSITE INDEX (TECHNOLOGY FUND). "GSTI(R)", "GSTI Composite Index" and
"Goldman Sachs Technology Index" are trademarks of Goldman, Sachs & Co. The
Technology Fund (the "Fund") is not sponsored, endorsed, sold, or promoted by
Goldman, Sachs & Co. or any of its affiliates and neither Goldman, Sachs & Co.
nor any of its affiliates make any representation regarding the advisability of
investing in the Fund.
The Fund is not sponsored, endorsed, sold or promoted by Goldman, Sachs & Co.
Goldman, Sachs & Co. makes no representation or warranty, express or implied, to
the owners of the Fund or any member of the public regarding the advisability of
investing in securities generally or in the Fund particularly or the ability of
the GSTI Composite Index to track the technology stock market performance.
Goldman, Sachs & Co.'s only relationship to TD Waterhouse Asset Management,
Inc., its Affiliates, or the Fund is the licensing of certain trademarks and
trade names of Goldman, Sachs & Co. and of the GSTI Composite Index which is
determined, composed and calculated by Goldman, Sachs & Co. without regard to TD
Waterhouse Asset Management, Inc., its Affiliates, or the Fund. Goldman, Sachs &
Co. has no obligation to take the needs of TD Waterhouse Asset Management, Inc.,
its Affiliates, the Fund or the shareholders into consideration in determining,
composing or calculating the GSTI Composite Index. Goldman, Sachs & Co. is not
responsible for and has not participated in the determination of the prices and
the amount of the Fund or the timing of the issuance or sale of shares of the
Fund or in the determination or calculation of the redemption price per share.
Goldman, Sachs & Co. has no obligation or liability in connection with the
administration, marketing or trading of the Fund.
GOLDMAN, SACHS & CO. DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE GSTI COMPOSITE INDEX OR ANY DATA INCLUDED THEREIN AND GOLDMAN, SACHS & CO.
HEREBY EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY FOR ANY ERRORS, OMISSIONS, OR
INTERRUPTIONS THEREIN. GOLDMAN, SACHS & CO. MAKES NO WARRANTY, EXPRESS OR
IMPLIED, AS TO THE RESULTS TO BE OBTAINED BY THE TECHNOLOGY FUND, THE
SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY FROM USE OF THE GSTI COMPOSITE INDEX
OR ANY DATA INCLUDED THEREIN. GOLDMAN, SACHS & CO. MAKES NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OR MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE GSTI COMPOSITE INDEX OR ANY
DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, GOLDMAN, SACHS &
CO. HEREBY EXPRESSLY DISCLAIMS ANY AND ALL LIABILITY FOR ANY SPECIAL, PUNITIVE,
INDIRECT,
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OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES.
LEHMAN BROTHERS AGGREGATE BOND INDEX (BOND INDEX FUND). Lehman Brothers
("Lehman") does not sponsor the Bond Index Fund (the "Fund"), nor is it
affiliated in any way with the Fund or its Investment Manager or Investment
SUB-ADVISER. "LEHMAN BROTHERS AGGREGATE BOND INDEX(R)" is a trademark of Lehman.
The Fund is not sponsored, endorsed, sold, or promoted by Lehman, and neither
Lehman nor the Lehman Index makes any representation or warranty, express or
implied, regarding the advisability of investing in the Fund.
LEHMAN MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. LEHMAN, ITS PARENT,
OFFICERS, DIRECTORS, AFFILIATES, EMPLOYEES AND AGENTS, SHALL HAVE NO LIABILITY,
CONTINGENT OR OTHERWISE, TO THE COMPANY OR TO THIRD PARTIES, FOR THE QUALITY,
ACCURACY, COMPLETENESS OR CURRENCY OF THE INDEX OR FOR DELAYS OR OMISSIONS
THEREIN, OR FOR INTERRUPTIONS IN THE DELIVERY OF THE INDEX. IN NO EVENT WILL
LEHMAN BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENTIAL DAMAGES,
EVEN IF LEHMAN HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
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TD WATERHOUSE TRUST
FOR MORE INFORMATION
--------------------------------------------------------------------------------
More information on the Funds is available upon request, including the
following:
SHAREHOLDER REPORTS. Additional information about each Fund's investments is
available in the Fund's annual and semi-annual reports to shareholders. In each
Fund's annual report, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund's performance during
its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI). The SAI includes more information
about the Fund and its policies. The SAI is on file with the Securities and
Exchange Commission (SEC) and is incorporated by reference into (is legally
considered a part of) this prospectus.
You may request free copies of these materials, along with other information
about the Funds and make shareholder inquiries by contacting:
TD Waterhouse Investor Services, Inc.
Mutual Fund Services
100 Wall Street
New York, New York 10005
TELEPHONE: 1-800-934-4448
HEARING IMPAIRED: TTY 1-800-933-0555
INTERNET SITE: http://www.tdwaterhouse.com
Text-only versions of the Funds' prospectus can be viewed online or downloaded
from TD Waterhouse (http:// www.tdwaterhouse.com). The Funds' prospectus and
other documents pertaining to the Funds also can be viewed online or downloaded
from the SEC (http://www.sec.gov).
You also can review and copy information about the Funds, including the SAI, at
the SEC's public reference room in Washington, DC. For a duplicating fee, you
may obtain copies of this information by writing to the SEC's Public Reference
Section, Washington, DC 20549-0102 or by electronic request at
[email protected]. For more information about these services, call the SEC at
1-202-942-8090.
The Funds' investment company registration number is 811-9519.
TD WATERHOUSE TRUST
Seven portfolios to choose from:
o TD WATERHOUSE BOND INDEX FUND
o TD WATERHOUSE 500 INDEX FUND
o TD WATERHOUSE EXTENDED MARKET INDEX FUND
o TD WATERHOUSE ASIAN INDEX FUND
o TD WATERHOUSE EUROPEAN INDEX FUND
o TD WATERHOUSE TECHNOLOGY FUND
o TD WATERHOUSE TAX MANAGED GROWTH FUND
PROSPECTUS
August 23, 2000
[LOGO]
<PAGE>
TD WATERHOUSE TRUST
100 WALL STREET, NEW YORK, NEW YORK 10005
TD WATERHOUSE, CUSTOMER SERVICE - 1-800-934-4448
STATEMENT OF ADDITIONAL INFORMATION
August 23, 2000
TD Waterhouse Bond Index Fund
TD Waterhouse 500 Index Fund
TD Waterhouse Extended Market Index Fund
TD Waterhouse Asian Index Fund
TD Waterhouse European Index Fund
TD Waterhouse Technology Fund
TD Waterhouse Tax Managed Growth Fund
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated August 23, 2000 (the
"Prospectus") for TD Waterhouse Bond Index Fund (the "Bond Index Fund"), TD
Waterhouse 500 Index Fund (the "500 Index Fund"), TD Waterhouse Extended Market
Index Fund (the "Extended Market Index Fund"), TD Waterhouse Asian Index Fund
(the "Asian Index Fund"), TD Waterhouse European Index Fund (the "European Index
Fund"), TD Waterhouse Technology Fund (the "Technology Fund"), and TD Waterhouse
Tax Managed Growth Fund (the "Tax Managed Growth Fund"), each of which is a
separate portfolio of TD Waterhouse Trust.
To obtain a free copy of the Prospectus, please write to TD Waterhouse Investor
Services, Inc., Customer Service, at 100 Wall Street, New York, New York 10005,
or call 1-800-934-4448.
<PAGE>
TABLE OF CONTENTS
Page
GENERAL INFORMATION..........................................................3
GLOSSARY............................................................3
INTRODUCTION........................................................3
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS.............................4
INDEX FUND MATTERS..................................................4
EQUITY SECURITIES...................................................5
DEBT SECURITIES.....................................................7
FOREIGN SECURITIES.................................................17
OPTIONS ...........................................................22
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS.................26
OTHER SECURITIES AND TECHNIQUES....................................31
ADDITIONAL INFORMATION CONCERNING THE INDICES......................37
FUND POLICIES......................................................41
MANAGEMENT OF THE TRUST.....................................................43
TRUSTEES AND EXECUTIVE OFFICERS....................................43
INVESTMENT MANAGEMENT AND OTHER SERVICES....................................45
INVESTMENT MANAGER.................................................45
CODES OF ETHICS....................................................46
INVESTMENT SUB-ADVISERS............................................46
ADMINISTRATOR......................................................47
DISTRIBUTOR........................................................48
SHAREHOLDER SERVICING..............................................48
TRANSFER AGENT AND CUSTODIAN.......................................49
EXPENSES...........................................................50
BROKERAGE ALLOCATION........................................................50
COMPUTATION OF NET ASSET VALUE..............................................52
DIVIDENDS AND TAX STATUS....................................................53
DIVIDENDS..........................................................53
CAPITAL GAIN DISTRIBUTIONS.........................................53
TAX STATUS OF THE TRUST............................................53
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS............................58
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................58
PERFORMANCE.................................................................59
TOTAL RETURN CALCULATIONS..........................................60
SEC YIELD CALCULATIONS.............................................61
OTHER ADVERTISEMENT MATTERS........................................61
SHAREHOLDER INFORMATION............................................63
APPENDIX-- RATINGS OF FIXED INCOME SECURITIES...............................65
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TD WATERHOUSE TRUST
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GENERAL INFORMATION
GLOSSARY
As used in this SAI, the following terms shall have the meanings listed:
"CFTC" means the U.S. Commodity Futures Trading Commission.
"CODE" means the Internal Revenue Code of 1986, as amended.
"FUND" means each of the seven separate portfolios of the Trust to which this
SAI relates as identified on the cover page.
"INVESTMENT ADVISERS ACT" means the Investment Advisers Act of 1940, as amended.
"INVESTMENT COMPANY ACT" means the Investment Company Act of 1940, as amended.
"INVESTMENT MANAGER" means TD Waterhouse Asset Management, Inc.
"INVESTMENT SUB-ADVISER" means each of TD Investment Management Inc. and T. Rowe
Price Associates, Inc.
"INDEX FUND" means each of the Bond Index Fund, the 500 Index Fund, the Extended
Market Index Fund, the Asian Index Fund and the European Index Fund.
"MOODY'S" means Moody's Investors Service.
"SEC" means the U.S. Securities and Exchange Commission.
"S&P" means Standard & Poor's.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"TD WATERHOUSE" means TD Waterhouse Investor Services, Inc., the Trust's
Administrator and a broker-dealer affiliate of the Investment Manager.
"TRUST" means TD Waterhouse Trust.
INTRODUCTION
The Trust is registered under the Investment Company Act as an open-end
management investment company. The Trust was formed under Delaware law on August
6, 1999 as a Delaware business trust. Because the Trust offers multiple
portfolios, it is known as a "series company." Each Fund is a separate portfolio
of assets and has its own investment objective which it pursues through separate
investment policies, as described below and in the Prospectus.
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The Trust's investment manager is TD Waterhouse Asset Management, Inc., an
investment adviser registered under the Investment Advisers Act.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following supplements the discussion in the Prospectus of the Funds'
investment objectives and their principal and additional investment strategies,
policies and risks. These investment strategies and policies may be changed
without shareholder approval unless otherwise noted. Capitalized terms not
otherwise defined in this SAI have the same meanings as in the Prospectus.
Whenever an investment policy or restriction of any Fund described in the
Prospectus or in this SAI states a maximum percentage of assets that may be
invested in a security or other asset, or describes a policy regarding quality
standards, that percentage limitation or standard will, unless otherwise
indicated, apply to that Fund only at the time a transaction takes place. Thus,
if a percentage limitation is adhered to at the time of investment, a later
increase or decrease in the percentage that results from circumstances not
involving any affirmative action by a Fund will not be considered a violation.
Descriptions in this SAI of a particular investment practice or technique in
which any Fund may engage or a financial instrument which any Fund may purchase
are meant to describe the spectrum of investments that an Investment
Sub-Adviser, in its discretion, might, but is not required to, use in managing
each Fund's portfolio assets. An Investment Sub-Adviser may, in its discretion,
at any time employ such practice, technique or instrument for one or more Funds
but not for all Funds advised by it. Furthermore, it is possible that certain
types of financial instruments or investment techniques described herein may
not, in the judgment of the Investment Sub-Adviser, be available, permissible,
economically feasible or effective for their intended purposes in some or all
markets, in which case a Fund would not use them. Certain practices, techniques
or instruments may not be principal activities of a Fund but, to the extent
employed, could from time to time have a material impact on that Fund's
performance.
INDEX FUND MATTERS
The Index Funds are not managed according to traditional methods of "active"
investment management, which involve the buying and selling of securities based
upon economic, financial and market analyses and investment judgment. Instead,
each Fund, utilizing essentially a "passive" or "indexing" investment approach,
seeks to replicate, before each Fund's expenses (which can be expected to reduce
the total return of the Fund), the total return of its target index.
INDEXING AND MANAGING THE INDEX FUNDS. Each Index Fund will be substantially
invested in securities in the applicable index, and will invest at least 90% of
its assets in securities or other financial instruments which are contained in
or correlated with securities in that index (fixed-income securities in the case
of the Bond Index Fund and equity securities in the case of all the other
Funds).
An Index Fund may acquire certain financial instruments based upon individual
securities or based upon or consisting of one or more baskets of securities,
which basket may be based upon a target index. Certain of these instruments may
represent an indirect ownership interest in such
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securities or baskets. Others may provide for the payment to a Fund or by a Fund
of amounts based upon the performance (positive, negative or both) of a
particular security or basket. The Investment Sub-Adviser will select such
instruments when it believes that the use of the instrument will correlate
substantially with the expected total return of a target security or index. In
connection with the use of such instruments, the Investment Sub-Adviser may, but
is not required to, enter into short sales in an effort to adjust the weightings
of particular securities represented in the basket to more accurately reflect
such securities' weightings in the target index.
Each Fund's ability to replicate the total return of its respective index may be
affected by, among other things, transaction costs, administration and other
operating costs and expenses incurred by the Fund (e.g., transfer agency,
audit), taxes (including foreign withholding taxes, where applicable), changes
in either the composition of the target index or the assets of a Fund, and the
timing and amount of investor contributions and withdrawals, if any.
CASH FLOWS; EXPENSES. The ability of each Index Fund to satisfy its investment
objective depends to some extent on the Investment Sub-Adviser's ability to
manage cash flow (primarily from purchases and redemptions and distributions
from the Fund's investments). The Investment Sub-Adviser will make investment
changes to a Fund's portfolio to accommodate cash flow while continuing to seek
to replicate the total return of the target index. Investors should also be
aware that the investment performance of each index is a hypothetical number
which does not take into account brokerage commissions and other transaction
costs, custody and other costs of investing, and any operating costs (e.g.,
transfer agency, audit) that will be borne by the Funds.
SECURITIES-RELATED BUSINESSES. The Investment Company Act limits the ability of
each Fund to invest in securities issued by companies deriving more than 15% of
their gross revenues from securities related activities ("financial companies").
If an index provides a higher concentration in one or more financial companies,
an Index Fund may experience difficulty in its efforts to track its target index
due to the limitations on investments in such companies.
INVESTMENT IN CERTAIN AFFILIATES. The Investment Company Act limits the ability
of each Fund to invest in securities issued by the Fund's Investment Manager,
Investment Sub-Adviser, or their affiliates. From time to time, the stock of a
Fund's Investment Manager, Investment Sub-Adviser or one of its affiliates may
be included in the Fund's target index. In that case, the Fund may invest in
such stock only in proportion to its representation in the index.
EQUITY SECURITIES
COMMON STOCK AND PREFERRED STOCK. Shares of common stock represent a
proportionate ownership interest in a company. As a result, the value of common
stock rises and falls with a company's success or failure. The market value of
common stock can fluctuate significantly. Preferred stock is a class of stock
having a preference over common stock as to dividends and, generally, as to the
recovery of investment.
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INVESTMENT COMPANY SECURITIES. Each Fund may invest in securities issued by
other open-end management investment companies which principally invest in
securities of the type in which such Fund invests. Under the Investment Company
Act, a Fund's investment in such securities currently is normally limited,
subject to certain exceptions, to (i) 3% of the total voting stock of any one
investment company, (ii) 5% of the Fund's total assets with respect to any one
investment company and (iii) 10% of the Fund's total assets in the aggregate.
Investments in the securities of other investment companies generally will
involve duplication of advisory fees and certain other expenses. Each Fund may
also purchase shares of exchange-listed closed-end funds.
The Technology Fund and the Tax Managed Growth Fund each may invest its cash
reserves in either the Reserve Investment Fund ("RIF") or Government Reserve
Investment Fund ("GRF"), each a series of Reserve Investment Funds, Inc., money
market funds established for the exclusive use of the family of mutual funds
affiliated with its Investment Sub-Adviser and its other clients. RIF and GRF
operate under an exemptive order issued by the SEC (SEC Release No. IC-22770
(July 29, 1997)). Among other conditions imposed by the order, each Fund's
aggregate investment in RIF or GRF at the time the investment is made cannot
exceed 25% of the Fund's total net assets.
RIF and GRF must comply with the requirements of Rule 2a-7 under the Investment
Company Act governing money market funds. RIF invests at least 95% of its total
assets in prime money market instruments receiving the highest credit rating.
GRF invests primarily in a portfolio of U.S. Government-backed securities,
primarily U.S. Treasuries and repurchase agreements thereon. RIF and GRF are not
insured or guaranteed by the U.S. Government, and there is no assurance that
they will maintain a stable net asset value of $1.00 per share. While RIF and
GRF do not pay an advisory fee to their investment sub-adviser, they will incur
other expenses. RIF and GRF are expected, however, to operate at low expense
ratios. Each Fund will invest in RIF or GRF only to the extent it is consistent
with its investment objective and policies.
EXCHANGE-TRADED INDEX SECURITIES. Subject to the limitations on investment in
investment company securities set forth above, the Funds may invest in
exchange-traded index securities such as SPDRs, WEBS and various country index
funds. SPDRs(R) (Standard & Poor's Depositary Receipts(R)), for example,
typically trade like a share of common stock and provide investment results that
generally correspond to the price and yield performance of the component common
stocks of the S&P 500 Index. There can be no assurance that this can be
accomplished as it may not be possible for the issuer of SPDRs to replicate and
maintain exactly the composition and relative weightings of the S&P 500 Index
securities. SPDRs are subject to the risks of an investment in a broadly based
portfolio of common stocks, including the risk that the general level of stock
prices may decline, thereby adversely affecting the value of such investment.
SPDRs are also subject to risks other than those associated with an investment
in a broadly based portfolio of common stocks in that the selection of the
stocks represented by SPDRs may affect trading in SPDRs, as compared with
trading in a broadly based portfolio of common stocks.
WEBS (World Equity Benchmark Shares) are shares of exchange-traded index funds
based on particular countries or geographic regions. WEBS are subject to the
same risks that are inherent in investing directly in foreign securities.
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OPALS. The European Index Fund and the Asian Index Fund may each invest in
OPALS. OPALS (Optimized Portfolios As Listed Securities) represent an interest
in a basket of securities of companies primarily located in a specific country
generally designed to track an index for that country. Investments in OPALS are
subject to the same risks that are inherent in investing directly in foreign
securities. In addition, because the OPALS are not registered under the
securities laws, they may only be sold to certain classes of investors, and it
may be more difficult for the Fund to sell OPALS than other types of securities.
However, the OPALS may generally be exchanged with the issuer for the underlying
securities, which may be more readily tradable.
WARRANTS. To the extent that such investments are consistent with its investment
objective, each Index Fund may invest up to 5% of its net assets, and the
Technology Fund and Tax Managed Growth Fund each may invest up to 10% of its net
assets, in warrants. The holder of a warrant has the right, until the warrant
expires, to purchase a given number of shares of a particular issuer at a
specified price. Such investments can provide a greater potential for profit or
loss than an equivalent investment in the underlying security. However, prices
of warrants do not necessarily move in tandem with the prices of the underlying
securities, and are, therefore, considered speculative investments. Warrants pay
no dividends and confer no rights other than a purchase option. Thus, if a
warrant held by any Fund were not exercised by the date of its expiration, the
Fund would lose the entire purchase price of the warrant. The Funds may only
purchase warrants on securities in which the Fund may invest directly.
DEBT SECURITIES
IN GENERAL. A Fund investing in fixed-income securities will be subject to the
general risks inherent in such securities, primarily interest rate risk, credit
risk and prepayment risk. Interest rate risk is the potential for fluctuations
in bond prices due to changing interest rates. In general, bond prices vary
inversely with interest rates. If interest rates rise, bond prices generally
decline; if interest rates fall, bond prices generally rise. In addition, for a
given change in interest rates, longer-maturity bonds generally fluctuate more
in price than shorter-maturity bonds. To compensate investors for these larger
fluctuations, longer-maturity bonds usually offer higher yields than
shorter-maturity bonds, other factors, including credit quality, being equal.
Credit risk is the possibility that an issuer of securities held by a Fund will
be unable to make payments of either interest or principal or will be perceived
to have a diminished capacity to make such payments in the future. The credit
risk of the Fund is a function of the diversification and credit quality of its
underlying securities.
A Fund may also be exposed to event risk, which includes the possibility that
fixed-income securities held by the Fund may suffer a substantial decline in
credit quality and market value due to issuer restructurings. Certain
restructurings such as mergers, leveraged buyouts, takeovers or similar events,
are often financed by a significant expansion of corporate debt. As a result of
the added debt burden, the credit quality and market value of a firm's existing
debt securities may decline significantly. Other types of restructurings (such
as corporate spinoffs or privatizations of governmental or agency borrowers or
the termination of express or implied governmental credit support) may also
result in decreased credit quality of a particular issuer.
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Prepayment risk is the possibility that the principal of the mortgage loans
underlying mortgage-backed securities may be prepaid at any time. As a general
rule, prepayments increase during a period of falling interest rates and
decrease during a period of rising interest rates. As a result of prepayments,
in periods of declining interest rates a Fund may be required to reinvest its
assets in securities with lower interest rates. In periods of increasing
interest rates, prepayments generally may decline, with the effect that the
mortgage-backed securities held by the Fund may exhibit price characteristics of
longer-term debt securities. The corporate substitution strategy used by a Fund
may increase or decrease the Fund's exposure to the foregoing risks relative to
those of its target index.
INVESTMENT-GRADE DEBT SECURITIES. Bonds rated Aaa by Moody's and AAA by S&P are
judged to be of the best quality (i.e., capacity to pay interest and repay
principal is extremely strong). Bonds rated Aa/AA are considered to be of high
quality (i.e., capacity to pay interest and repay principal is very strong and
differs from the highest rated issues only to a small degree). Bonds rated A are
viewed as having many favorable investment attributes, but elements may be
present that suggest a susceptibility to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
Bonds rated Baa/BBB (considered by Moody's to be "medium grade" obligations) are
considered to have an adequate capacity to pay interest and repay principal, but
certain protective elements may be lacking (i.e., such bonds lack outstanding
investment characteristics and have some speculative characteristics). Each Fund
may invest in debt securities that are given an investment-grade rating by
Moody's or S&P, and may also invest in unrated debt securities that are
considered by the Investment Sub-Adviser to be of comparable quality.
LOW-RATED DEBT SECURITIES. Securities rated lower than Baa by Moody's or BBB by
S&P, and comparable unrated securities (commonly referred to as "high yield" or
"junk" bonds), are considered to be predominantly speculative with respect to
the issuer's continuing ability to meet principal and interest payments. The
lower the ratings of corporate debt securities, the more their risks render them
like equity securities. Such securities carry a high degree of risk (including
the possibility of default or bankruptcy of the issuers of such securities), and
generally involve greater volatility of price and risk of principal and income
(and may be less liquid) than securities in the higher rating categories. (See
the Appendix for a more complete description of the ratings assigned by Moody's
and S&P and their respective characteristics.)
CONVERTIBLE SECURITIES. The convertible securities in which the Bond Index Fund
may invest include debt securities (such as corporate bonds, notes and
debentures) and other securities (preferred stock) that may be converted or
exchanged at a stated or determinable exchange ratio into underlying shares of
common stock. Investments in convertible securities can provide income through
interest and dividend payments as well as an opportunity for capital
appreciation by virtue of their conversion or exchange features. Because
convertible securities can be converted into equity securities, their values
will normally vary in some proportion with those of the underlying equity
securities. Convertible securities usually provide a higher yield than the
underlying equity security, however, so that the price decline of a convertible
security may sometimes be less substantial than that of the underlying equity
security. The exchange ratio for any particular convertible security may be
adjusted from time to time due to stock splits,
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dividends, spin-offs, other corporate distributions or scheduled changes in the
exchange ratio. Convertible debt securities and convertible preferred stocks,
until converted, have general characteristics similar to both debt and equity
securities. Although to a lesser extent than with debt securities generally, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion or exchange feature, the market value of
convertible securities typically changes as the market value of the underlying
common stock changes, and, therefore, also tends to follow movements in the
general market for equity securities. When the market price of the underlying
common stock increases, the price of a convertible security tends to rise as a
reflection of the value of the underlying common stock, although typically not
as much as the price of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed income securities, convertible securities may provide a stream of
income. Like all debt securities, there can be no assurance of income or
principal payments because the issuers of the convertible securities may default
on their obligations. Convertible securities generally offer lower yields than
non-convertible securities of similar quality because of their conversion or
exchange features.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, are senior in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. However, convertible bonds and convertible preferred stock
typically have lower coupon rates than similar non-convertible securities.
Convertible securities may be issued as fixed income obligations that pay
current income.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations of, or
guaranteed by, the U.S. Government, its agencies or instrumentalities.
Securities guaranteed by the U.S. Government include: (1) direct obligations of
the U.S. Treasury (such as Treasury bills, notes, and bonds) and (2) Federal
agency obligations guaranteed as to principal and interest by the U.S. Treasury
(such as GNMA certificates, which are mortgage-backed securities). When such
securities are held to maturity, the payment of principal and interest is
unconditionally guaranteed by the U.S. Government, and thus they are of the
highest possible credit quality. U.S. Government securities that are not held to
maturity are subject to variations in market value due to fluctuations in
interest rates.
Securities issued by U.S. Government instrumentalities and certain Federal
agencies are neither direct obligations of nor guaranteed by the U.S. Treasury;
however, they involve Federal sponsorship in one way or another. Some are backed
by specific types of collateral, some are supported by the issuer's right to
borrow from the Treasury, some are supported by the discretionary authority of
the Treasury to purchase certain obligations of the issuer, others are supported
only by the credit of the issuing government agency or instrumentality. These
agencies and instrumentalities include, but are not limited to, Federal Land
Banks, Farmers Home Administration, Central Bank for Cooperatives, Federal
Intermediate Credit Banks,
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Federal Home Loan Banks, Federal National Mortgage Association, Federal Home
Loan Mortgage Association, and Student Loan Marketing Association.
MUNICIPAL NOTES. The Tax Managed Growth Fund may invest in municipal notes.
Municipal notes generally are used to provide short-term operating or capital
needs and generally have maturities of one year or less. Municipal notes
include:
o TAX ANTICIPATION NOTES. Tax anticipation notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenue, such as income, property,
use and business taxes, and are payable from these specific future
taxes.
o REVENUE ANTICIPATION NOTES. Revenue anticipation notes are issued in
expectation of receipt of other types of revenue, such as federal or
state revenues available under the revenue sharing or grant programs.
o BOND ANTICIPATION NOTES. Bond anticipation notes are issued to provide
interim financing until long-term financing can be arranged. In most
cases, the long-term bonds then provide the money for the repayment of
the notes.
o TAX-EXEMPT COMMERCIAL PAPER. Tax-exempt commercial paper is a
short-term obligation with a stated maturity of 270 days or less. It is
issued by state and local governments or their agencies to finance
seasonal working capital need or as short-term financing in
anticipation of longer-term financing.
MORTGAGE-BACKED SECURITIES. Mortgage-backed securities may be classified as
private, governmental or government related, depending on the issuer or
guarantor. Private mortgage-backed securities represent pass-through pools
consisting principally of conventional residential mortgage loans created by
non-governmental issuers, such as commercial banks, savings and loan
associations and private mortgage insurance companies. Governmental
mortgage-backed securities are backed by the full faith and credit of the United
States. Government National Mortgage Association (GNMA), the principal U.S.
guarantor of such securities, is a wholly owned corporate instrumentality of the
United States within the Department of Housing and Urban Development.
Pass-through securities issued by the Federal National Mortgage Association
(FNMA) are guaranteed as to timely payment of principal and interest by FNMA,
which guarantee is not backed by the full faith and credit of the U.S.
Government. The Federal Home Loan Mortgage Corporation (FHLMC) is a corporate
instrumentality of the United States, the stock of which is owned by the Federal
Home Loan Banks. Participation certificates representing interests in mortgages
from FHLMC's national portfolio are guaranteed as to the timely payment of
interest and ultimate, but generally not timely, collection of principal by
FHLMC. The obligations of the FHLMC under its guarantee are obligations solely
of FHLMC and are not backed by the full faith and credit of the U.S. Government.
It is anticipated that private and governmental entities may create mortgage
loan pools offering pass-through investments in addition to those described
above. The mortgages underlying these securities may be alternative mortgage
instruments, that is, mortgage instruments whose
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principal or interest payments may vary or whose terms to maturity may be
shorter than previously customary. As new types of mortgage-backed securities
are developed and offered to investors, a Fund, consistent with its investment
objective and policies, may make investments in those new types of securities.
The average maturity of pass-through pools of mortgage-backed securities varies
with the maturities of the underlying mortgage instruments. In addition, a
pool's stated maturity may be shortened by unscheduled payments on the
underlying mortgages. Factors affecting mortgage prepayments include the level
of interest rates, general economic and social conditions, the location of the
mortgaged property and age of the mortgage. Because prepayment rates of
individual pools vary widely, it is not possible to predict accurately the
average life of a particular pool. Common practice is to assume that prepayments
will result in an average life ranging from two to ten years for pools of fixed
rate 30-year mortgages. Pools of mortgages with other maturities or different
characteristics will have varying average life assumptions.
Because prepayments of principal generally occur when interest rates are
declining, it is likely that a Fund will have to reinvest the proceeds of
prepayments at lower interest rates than those at which the assets were
previously invested. If this occurs, the Fund's yield will correspondingly
decline. Thus, mortgage-backed securities may have less potential for capital
appreciation in periods of falling interest rates than other fixed income
securities of comparable maturity, although these securities may have a
comparable risk of decline in market value in periods of rising interest rates.
To the extent that the Fund purchases mortgage-backed securities at a premium,
unscheduled prepayments, which are made at par, will result in a loss equal to
any unamortized premium.
COLLATERALIZED MORTGAGE OBLIGATIONS. Collateralized Mortgage Obligations
("CMOs") 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 Fannie Mae, 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. The prices of certain CMOs,
depending on their structure and the rate of prepayments, can be volatile. Some
CMOs may also not be as liquid as other securities.
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
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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 Bond 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.
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. Consistent with the Bond Index Fund's investment objectives and
policies, the 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.
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.
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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 respecting 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 Bond Index 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, the characteristics
of the underlying assets, the coupon rates on the securities, prevailing
interest rates, the amount of administrative expenses and the actual prepayment
experience on the underlying assets. Asset-backed security residuals not
registered under the Securities Act, 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 then existing holdings of such securities.
ZERO COUPON BONDS. Zero coupon bonds are debt obligations issued without any
requirement for the periodic payment of interest. Zero coupon bonds are issued
at a significant discount from face value. The discount approximates the total
amount of interest the bonds would accrue and compound over the period until
maturity at a rate of interest reflecting the market rate at the time of
issuance. If the Bond Index Fund holds zero coupon bonds in its portfolio, it
would recognize income currently for Federal income tax purposes in the amount
of the unpaid, accrued interest and generally would be required to make
distributions representing such income to shareholders currently, even though
funds representing such income would not have been received by the Fund. Cash to
pay distributions representing unpaid, accrued interest may be obtained from,
for example, proceeds from sales of portfolio securities, payments received for
Fund shares and from loan proceeds. The potential sale of portfolio securities
to pay cash distributions from income earned on zero coupon bonds may result in
the Fund being forced to sell portfolio securities at a time when it might
otherwise choose not to sell these securities and when the Fund might incur a
capital loss on such sales. Because interest on zero coupon obligations is not
distributed to the Fund on a current basis, but is in effect compounded, the
value of the securities of this type is subject to greater fluctuations in
response to changing interest rates than the value of debt obligations which
distribute income regularly.
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SHORT-TERM INSTRUMENTS AND TEMPORARY INVESTMENTS. Each Fund may invest in
certain money market instruments on an ongoing basis to provide liquidity or for
temporary purposes when there is an unexpected level of shareholder purchases or
redemptions. The Tax Managed Growth Fund, however, also may invest in tax-exempt
money market instruments. The instruments in which a Fund may invest include:
(i) short-term obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities (including government-sponsored enterprises); (ii)
negotiable certificates of deposit ("CDs"), bankers' acceptances, fixed time
deposits and other obligations of domestic banks (including foreign branches)
that have more than $1 billion in total assets at the time of investment and
that are members of the Federal Reserve System or are examined by the
Comptroller of the Currency or whose deposits are insured by the Federal Deposit
Insurance Corporation (the "FDIC"); (iii) commercial paper rated at the date of
purchase "Prime-1" by Moody's or "A-1+" or "A-1" by S&P, or, if unrated, of
comparable quality as determined by the Fund's Investment Sub-Adviser; (iv)
non-convertible corporate debt securities (e.g., bonds and debentures) with
remaining maturities at the date of purchase of not more than one year that are
rated at least "A" by Moody's or S&P; (v) repurchase agreements; and (vi)
short-term, U.S. dollar-denominated obligations of foreign banks (including U.S.
branches) that, at the time of investment have more than $10 billion, or the
equivalent in other currencies, in total assets and in the opinion of the Fund's
Investment Sub-Adviser are of comparable quality to obligations of U.S. banks
which may be purchased by the Fund. The Funds also may invest in money market
mutual funds that invest in the above-described instruments. The Technology Fund
and the Tax Managed Growth Fund can invest in money market funds affiliated with
their Investment Sub-Adviser. See "Equity Securities - Investment Company
Securities."
BANK OBLIGATIONS. The Funds may invest in bank obligations, including time
deposits, certificates of deposit, bankers' acceptances and other short-term
obligations of domestic banks, foreign subsidiaries of domestic banks, foreign
branches of domestic banks, and domestic and foreign branches of foreign banks,
domestic savings and loan associations and other banking institutions.
Time deposits are non-negotiable deposits with a banking institution that earn a
specified interest rate over a given period. A certificate of deposit is an
interest-bearing negotiable certificate issued by a bank against funds deposited
in the bank. A bankers' acceptance is a short-term draft drawn on a commercial
bank by a borrower, usually in connection with an international commercial
transaction. Although the borrower is liable for payment of the draft, the bank
unconditionally guarantees to pay the draft at its face value on the maturity
date. Certificates of deposit and fixed time deposits, which are payable at the
stated maturity date and bear a fixed rate of interest, generally may be
withdrawn on demand by a Fund but may be subject to early withdrawal penalties
which vary depending upon market conditions and the remaining maturity of the
obligation and could reduce the Fund's yield. Although fixed-time deposits do
not in all cases have a secondary market, there are no contractual restrictions
on a Fund's right to transfer a beneficial interest in the deposits to third
parties. Deposits subject to early withdrawal penalties or that mature in more
than seven days are treated as illiquid securities if there is no readily
available market for the securities. A Fund's investments in the obligations of
foreign banks and their branches, agencies or subsidiaries may be obligations of
the parent, of the issuing branch, agency or subsidiary, or both.
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Obligations of U.S. branches and agencies of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal and state
regulation, as well as by governmental action in the country in which the
foreign bank has its head office. Investments in foreign bank obligations are
limited to banks and branches located in countries that the Investment
Sub-Adviser believes do not present undue risk.
Investment in foreign bank obligations are subject to the additional risks
associated with foreign securities.
COMMERCIAL PAPER AND SHORT-TERM CORPORATE DEBT INSTRUMENTS. Each Fund may invest
in commercial paper (including variable amount master demand notes), which
consists of short-term, unsecured promissory notes issued by corporations to
finance short-term credit needs. Commercial paper is usually sold on a discount
basis. Variable amount master demand notes are demand obligations that permit
the investment of fluctuating amounts at varying market rates of interest
pursuant to arrangements between the issuer and a commercial bank acting as
agent for the payee of such notes whereby both parties have the right to vary
the amount of the outstanding indebtedness on the notes. The Investment
Sub-Adviser monitors on an ongoing basis the ability of an issuer of a demand
instrument to pay principal and interest on demand.
A Fund also may invest in non-convertible corporate debt securities (e.g., bonds
and debentures) with not more than one year remaining to maturity at the date of
settlement. The Fund will invest only in such corporate bonds and debentures
that are rated at the time of purchase at least "A" by Moody's or S&P.
Subsequent to its purchase by the Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum rating required for
purchase by the Fund. The Investment Sub-Adviser will consider such an event in
determining whether the Fund should continue to hold the obligation. To the
extent the Fund continues to hold such obligations, it may be subject to
additional risk of default.
To the extent the ratings given by Moody's or S&P may change as a result of
changes in such organizations or their rating systems, a Fund will attempt to
use comparable ratings as standards for investments in accordance with the
investment policies contained in its Prospectus and in this SAI. The ratings of
Moody's and S&P and other nationally recognized statistical rating organizations
are more fully described in the attached Appendix.
REPURCHASE AGREEMENTS. Each Fund may enter into a repurchase agreement wherein
the seller of a security to the Fund agrees to repurchase that security from the
Fund at a mutually-agreed upon time and price. The period of maturity is usually
quite short, often overnight or a few days, although it may extend over a number
of months. A Fund may enter into repurchase agreements only with respect to
securities that could otherwise be purchased by the Fund, including government
securities and mortgage-related securities, regardless of their remaining
maturities, and pursuant to an agreement requires that additional securities be
deposited with the custodian if the value of the securities purchased should
decrease below the repurchase price.
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A Fund may incur a loss on a repurchase transaction if the seller defaults and
the value of the underlying collateral declines or is otherwise limited or if
receipt of the security or collateral is delayed. The Fund's custodian (or a
sub-custodian) has custody of, and holds in a segregated account, securities
acquired as collateral by the Fund under a repurchase agreement. All repurchase
transactions must be collateralized.
In an attempt to reduce the risk of incurring a loss on a repurchase agreement,
a Fund limits investments in repurchase agreements to selected creditworthy
securities dealers or domestic banks or other recognized financial institutions.
The Investment Sub-Adviser monitors on an ongoing basis the value of the
collateral to assure that it always equals or exceeds the repurchase price.
FLOATING- AND VARIABLE-RATE OBLIGATIONS. Each Fund may purchase debt instruments
with interest rates that are periodically adjusted at specified intervals or
whenever a benchmark rate or index changes. These adjustments generally limit
changes (increases or decreases) in the amount of interest received on the debt
instruments.
A Fund may purchase floating- and variable-rate demand notes and bonds, which
are obligations ordinarily having stated maturities in excess of thirteen
months, but which permit the holder to demand payment of principal at any time,
or at specified intervals not exceeding thirteen months. Variable rate demand
notes include master demand notes that are obligations that permit the Fund to
invest fluctuating amounts, which may change daily without penalty, pursuant to
direct arrangements between the Fund, as lender, and the borrower. The interest
rates on these notes fluctuate from time to time. The issuer of such obligations
ordinarily has a corresponding right, after a given period, to prepay in its
discretion the outstanding principal amount of the obligations plus accrued
interest upon a specified number of days' notice to the holders of such
obligations. The interest rate on a floating-rate demand obligation is based on
a known lending rate, such as a bank's prime rate, and is adjusted automatically
each time such rate is adjusted. The interest rate on a variable-rate demand
obligation is adjusted automatically at specified intervals. Frequently, such
obligations are secured by letters of credit or other credit support
arrangements provided by banks.
Because floating- and variable-rate demand obligations are direct lending
arrangements between the lender and borrower, these obligations generally are
not traded, and there generally is no established secondary market for them,
although they are redeemable at face value. Accordingly, where these obligations
are not secured by letters of credit or other credit support arrangements, the
Fund's right to redeem is dependent on the ability of the borrower to pay
principal and interest on demand. Such obligations frequently are not rated by
credit rating agencies. The Fund may invest in obligations that are not so rated
if the Investment Sub-Adviser determines that at the time of investment the
obligations are of comparable quality to the other obligations in which the Fund
may invest. The Investment Sub-Adviser considers on an ongoing basis the
creditworthiness of the issuers of the floating- and variable-rate demand
obligations in the Fund's portfolio. To the extent a demand obligation does not
have a 7 day or shorter demand feature and there is no readily available market
for the obligation, it is treated as an illiquid security.
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LETTERS OF CREDIT. Certain of the debt obligations (including municipal
securities, certificates of participation, commercial paper and other short-term
obligations) which each Fund may purchase may be backed by an unconditional and
irrevocable letter of credit of a bank, savings and loan association or
insurance company which assumes the obligation for payment of principal and
interest in the event of default by the issuer. Only banks, savings and loan
associations and insurance companies which, in the opinion of the Investment
Sub-Adviser, are of comparable quality to issuers of other permitted investments
of a Fund may be used for letter of credit-backed investments.
FOREIGN SECURITIES
The securities of foreign issuers in which the Funds may invest include non-U.S.
dollar-denominated securities, Eurodollar securities, sponsored and unsponsored
American Depository Receipts ("ADRs"), Global Depository Receipts ("GDRs") and
related depository instruments, American Depository Shares ("ADSs"), Global
Depository Shares ("GDSs"), and debt securities issued, assumed or guaranteed by
foreign governments or political subdivisions or instrumentalities thereof.
Shareholders should consider carefully the substantial risks involved in
investing in securities issued by companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments.
DEPOSITORY RECEIPTS. ADRs, GDRs, ADSs, GDSs and related securities are
depository instruments, the issuance of which is typically administered by a
U.S. or foreign bank or trust company. These instruments evidence ownership of
underlying securities issued by a U.S. or foreign corporation. ADRs are publicly
traded on exchanges or over-the-counter ("OTC") in the United States.
Unsponsored programs are organized independently and without the cooperation of
the issuer of the underlying securities. As a result, information concerning the
issuer may not be as current or as readily available as in the case of sponsored
depository instruments, and their prices may be more volatile than if they were
sponsored by the issuers of the underlying securities.
OBLIGATIONS OF FOREIGN GOVERNMENTS AND CORPORATIONS. The Funds may invest in
U.S. dollar-denominated short-term obligations issued or guaranteed by one or
more foreign governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Investment Sub-Adviser to be of
comparable quality to the other obligations in which the Fund may invest.
To the extent that such investments are consistent with its investment
objective, a Fund may also invest in debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank. The percentage of a
Fund's assets invested in obligations of foreign governments and supranational
entities will vary depending on the relative yields of such securities, the
economic and financial markets of the countries in which the investments are
made and the interest rate climate of such countries.
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FOREIGN MARKET RISK. Foreign security investment involves special risks not
present in U.S. investments that can increase the chances that the Funds will
lose money. These risks are heightened for investments in developing countries.
In particular, the Funds are subject to the risk that because there are
generally fewer investors on foreign exchanges and a smaller number of shares
traded each day, it may be difficult for the Funds to buy and sell securities on
those exchanges. In addition, prices of foreign securities may fluctuate more
than prices of securities traded in the United States.
FOREIGN ECONOMY RISK. The economies of certain foreign markets often do not
compare favorably with that of the United States with respect to such issues as
growth of gross national product, reinvestment of capital, resources and balance
of payments position. Certain of those economies may rely heavily on particular
industries or foreign capital and are more vulnerable to diplomatic
developments, the imposition of economic sanctions against a particular country
or countries, changes in international trading patterns, trade barriers and
other protectionist or retaliatory measures. Investments in foreign markets may
also be adversely affected by governmental actions such as the imposition of
capital controls, nationalization of companies or industries, expropriation of
assets or the imposition of punitive taxes. In addition, the governments of
certain countries may prohibit or impose substantial restrictions on foreign
investing in their capital markets or in certain industries. Any of these
actions could severely affect security prices, impair a Fund's ability to
purchase or sell foreign securities or transfer a Fund's assets or income back
into the United States or otherwise adversely affect a Fund's operations. Other
foreign market risks include foreign exchange controls, difficulties in pricing
securities, defaults on foreign government securities, difficulties in enforcing
favorable legal judgments in foreign courts, and political and social
instability. Legal remedies available to investors in certain foreign countries
may be less extensive than those available to investors in the United States or
other foreign countries.
GOVERNMENTAL SUPERVISION AND REGULATION/ACCOUNTING STANDARDS. Many foreign
governments supervise and regulate stock exchanges, brokers and the sale of
securities less than the United States does. Other countries may not have laws
to protect investors the way that the United States' securities laws do. For
example, some foreign countries may have no laws or rules against insider
trading (this is when a person buys or sells a company's securities based on
"inside" non-public information about that company). Also, brokerage commissions
and other costs of buying or selling securities often are higher in foreign
countries than they are in the United States. This reduces the amount a Fund can
earn on its investments.
CERTAIN RISKS OF HOLDING FUND ASSETS OUTSIDE THE UNITED STATES. The Funds
generally hold the foreign securities and cash in which they invest outside the
United States in foreign banks and securities depositories. Certain of such
foreign banks and securities depositories may be recently organized or new to
the foreign custody business and/or may have operations subject to limited or no
regulatory oversight. Also, the laws of certain countries may put limits on a
Fund's ability to recover its assets if a foreign bank or depository or issuer
of a security or any or their agents goes bankrupt. In addition, it can be
expected that it will be more expensive for a Fund to buy, sell, and hold
securities in certain foreign markets than in the U.S. market due to higher
brokerage, transaction, custody and/or other costs.
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The increased expense to invest in foreign markets reduces the amount a Fund can
earn on its investments and typically results in a higher operating expense
ratio for the Fund than investment companies invested only in the U.S.
Settlement and clearance procedures in certain foreign markets differ
significantly from those in the United States. Foreign settlement procedures and
trade regulations also may involve certain risks (such as delays in payment for
or delivery of securities) not typically generated by the settlement of U.S.
investments. Communications between the United States and emerging market
countries may be unreliable, increasing the risk of delayed settlements or
losses of security certificates. Settlements in certain foreign countries at
times have not kept pace with the number of securities transactions; these
problems may make it difficult for a Fund to carry out transactions. If a Fund
cannot settle or is delayed in settling a purchase of securities, it may miss
attractive investment opportunities and certain of its assets may be uninvested
with no return earned thereon for some period. If a Fund cannot settle or is
delayed in settling a sale of securities, it may lose money if the value of the
security then declines or, if it has contracted to sell the security to another
party, the Fund could be liable to that party for any losses incurred. Dividends
or interest on, or proceeds from the sale of, foreign securities may be subject
to foreign withholding taxes, and special U.S. tax considerations may apply.
Foreign bond markets have different clearance and settlement procedures and in
certain markets there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct
such transactions. Delays in settlement could result in temporary periods when
assets of a Fund are uninvested and no return is earned thereon. The inability
of a Fund to make intended security purchases due to settlement problems could
cause the Fund to miss attractive investment opportunities. Further, the
inability to dispose of portfolio securities due to settlement problems could
result either in losses to a Fund because of subsequent declines in the value of
the portfolio security or, if the Fund has entered into a contract to sell the
security, in possible liability to the purchaser. It may be more difficult for
each Fund's agents to keep currently informed about corporate actions such as
stock dividends or other matters that may affect the prices of portfolio
securities. Communications between the United States and foreign countries may
be less reliable than within the United States, thus increasing the risk of
delayed settlements of portfolio transactions or loss of certificates for
portfolio securities. Moreover, individual foreign economies may differ
favorably or unfavorably from the United States economy in such respects as
growth of gross national product, rate of inflation, capital reinvestment,
resource self-sufficiency and balance of payments position.
EUROPEAN ECONOMIC AND MONETARY UNION. For a number of years, certain European
countries have been seeking economic unification that would, among other things,
reduce barriers between countries, increase competition among companies, reduce
government subsidies in certain industries, and reduce or eliminate currency
fluctuations among these European countries. The Treaty on European Union (the
"Maastricht Treaty") set out a framework for a European Economic and Monetary
Union ("EMU") among the countries that comprise the European Union ("EU"). EMU
established a single common European currency (the "euro") that was introduced
on January 1, 1999 and is expected to replace the existing national currencies
of all EMU participants by July 1, 2002. Certain securities issued in
participating EU countries (beginning
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with government and corporate bonds) have been redenominated in the euro and are
listed, traded and make dividend and other payments only in euros.
No assurance can be given that EMU will take full effect, that all of the
changes planned for the EU can be successfully implemented, or that these
changes will result in the economic and monetary unity and stability intended.
There is a possibility that EMU will not be completed, or will be completed but
then partially or completely unwound. Because any participating country may opt
out of EMU within the first three years, it is also possible that a significant
participant could choose to abandon EMU, which could diminish its credibility
and influence. Any of these occurrences could have adverse effects on the
markets of both participating and non-participating countries, including sharp
appreciation or depreciation of participants' national currencies and a
significant increase in exchange rate volatility, a resurgence in economic
protectionism, an undermining of confidence in the European markets, an
undermining of European economic stability, the collapse or slowdown of the
drive toward European economic unity, and/or reversion of the attempts to lower
government debt and inflation rates that were introduced in anticipation of EMU.
Also, withdrawal from EMU by an initial participant could cause disruption of
the financial markets as securities redenominated in euros are transferred back
into that country's national currency, particularly if the withdrawing country
is a major economic power. Such developments could have an adverse impact on a
Fund's investments in Europe generally or in specific countries participating in
EMU. Gains or losses resulting from euro conversions may be taxable to a Fund's
shareholders under foreign or, in certain limited circumstances, U.S. tax laws.
FOREIGN CURRENCIES. Investment in foreign securities usually will involve
currencies of foreign countries. Moreover, the Funds may temporarily hold funds
in bank deposits in foreign currencies during the completion of investment
programs and may purchase forward foreign currency contracts. Because of these
factors, the value of the assets of each Fund as measured in U.S. dollars may be
affected favorably or unfavorably by changes in foreign currency exchange rates
and exchange control regulations, and each Fund may incur costs in connection
with conversions between various currencies. Although each Fund's custodian
values the Fund's assets daily in terms of U.S. dollars, each Fund does not
intend to convert its holdings of foreign currencies into U.S. dollars on a
daily basis. Each Fund will do so from time to time, however, and investors
should be aware of the costs of currency conversion. Although foreign exchange
dealers do not charge a fee for conversion, they do realize a profit based on
the difference (the "spread") between the prices at which they are buying and
selling various currencies. Thus, a dealer may offer to sell a foreign currency
to a Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer. Each Fund will conduct its foreign
currency exchange transactions either on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market, or through entering
into forward contracts to purchase or sell foreign currencies.
Because certain Funds normally will be invested in both U.S. and foreign
securities markets, changes in those Funds' share prices may have low
correlations with movements in U.S. markets. Each Fund's share price will
reflect the movements of the different stock and bond markets in which it is
invested (both U.S. and foreign), and of the currencies in which the
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investments are denominated. Thus, the strength or weakness of the U.S. dollar
against foreign currencies may account for part of a Fund's investment
performance. U.S. and foreign securities markets do not always move in step with
each other, and the total returns from different markets may vary significantly.
Foreign currencies in which each Fund's assets are denominated may be devalued
against the U.S. dollar, resulting in a loss to each Fund.
FOREIGN CURRENCY EXCHANGE TRANSACTIONS. The Funds may enter into forward foreign
currency contracts in order to protect against uncertainty in the level of
future foreign exchange rates in the purchase and sale of securities. A forward
contract is an obligation to purchase or sell a specific currency for an agreed
price at a future date (usually less than a year), and typically is individually
negotiated and privately traded by currency traders and their customers. A
forward contract generally has no deposit requirement, and no commissions are
charged at any stage for trades. Although foreign exchange dealers do not charge
a fee for commissions, they do realize a profit based on the difference between
the price at which they are buying and selling various currencies. Although
these contracts are intended to minimize currency risk - the risk of loss due to
a decline in the value of the hedged currencies - at the same time, they tend to
limit any potential gain which might result should the value of such currencies
increase. The Index Funds generally will not enter into forward foreign currency
contracts in an attempt to reduce currency risk.
While each Fund may enter into forward contracts to reduce currency exchange
risks, changes in currency exchange rates may result in poorer overall
performance for the Fund than if it had not engaged in such transactions.
Moreover, there may be an imperfect correlation between a Fund's portfolio
holdings of securities denominated in a particular currency and forward
contracts entered into by that Fund. An imperfect correlation of this type may
prevent a particular hedging strategy from achieving its objective or expose the
Fund to the risk of currency exchange loss.
Each Fund may purchase currency forwards and combine such purchases with
sufficient cash or short-term securities to create unleveraged substitutes for
investments in foreign markets when deemed advantageous. Each Fund may also
combine the foregoing with bond futures or interest rate futures contracts to
create the economic equivalent of an unhedged foreign bond position.
Each Fund also may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which that Fund has or in which the Fund expects
to have portfolio exposure.
Currency transactions are subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be negatively affected by
government exchange controls, blockages and manipulations or exchange
restrictions imposed by governments. These can result in losses to a Fund if it
is unable to deliver or receive currency or funds in settlement of obligations
and could also cause hedges it has entered into to be rendered useless,
resulting in full currency exposure as well as incurring transactions costs.
Buyers and sellers of currency futures are subject to the same risks that apply
to the use of futures generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency
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futures is relatively new, and the ability to establish and close out positions
on such options is subject to the maintenance of a liquid market which may not
always be available. Currency exchange rates may fluctuate based on factors
extrinsic to that country's economy.
OPTIONS
IN GENERAL. A call option is a short-term contract (having a duration of less
than one year) pursuant to which the purchaser, in return for the premium paid,
has the right to buy the security underlying the option at the specified
exercise price at any time during the term of the option. The writer of the call
option, who receives the premium, has the obligation, upon exercise of the
option, to deliver the underlying security against payment of the exercise
price. A put option is a similar contract pursuant to which the purchaser, in
return for the premium paid, has the right to sell the security underlying the
option at the specified exercise price at any time during the term of the
option. The writer of the put option, who receives the premium, has the
obligation, upon exercise of the option, to buy the underlying security at the
exercise price. The premium paid by the purchaser of an option will reflect,
among other things, the relationship of the exercise price to the market price
and volatility of the underlying security, the time remaining to expiration of
the option, supply and demand, and interest rates.
If the writer of a U.S. exchange-traded option wishes to terminate the
obligation, the writer may effect a "closing purchase transaction." This is
accomplished by buying an option of the same series as the option previously
written. The effect of the purchase is that the writer's position will be
canceled by the Options Clearing Corporation. However, a writer may not effect a
closing purchase transaction after it has been notified of the exercise of an
option. Likewise, an investor who is the holder of an option may liquidate his
or her position by effecting a "closing sale transaction." This is accomplished
by selling an option of the same series as the option previously purchased.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected at any particular time or at any acceptable price.
If any call or put option is not exercised or sold, it will become worthless on
its expiration date. Closing purchase transactions are not available for OTC
transactions. In order to terminate an obligations in an OTC transaction, Fund
would need to negotiate directly with the counterparty.
A Fund will realize a gain (or a loss) on a closing purchase transaction with
respect to a call or a put previously written by that Fund if the premium, plus
commission costs, paid by the Fund to purchase the call or the put is less (or
greater) than the premium, less commission costs, received by the Fund on the
sale of the call or the put. A gain also will be realized if a call or a put
that a Fund has written lapses unexercised, because the Fund would retain the
premium. Any such gains (or losses) are considered short-term capital gains (or
losses) for Federal income tax purposes. Net short-term capital gains, when
distributed by each Fund, are taxable as ordinary income. See "Dividends and Tax
Status."
A Fund will realize a gain (or a loss) on a closing sale transaction with
respect to a call or a put previously purchased by that Fund if the premium,
less commission costs, received by the Fund on the sale of the call or the put
is greater (or less) than the premium, plus commission costs, paid by the Fund
to purchase the call or the put. If a put or a call expires unexercised, it will
become worthless on the expiration date, and the Fund will realize a loss in the
amount of the
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premium paid, plus commission costs. Any such gain or loss will be long-term or
short-term gain or loss, depending upon the Fund's holding period for the
option.
Exchange-traded options generally have standardized terms and are issued by a
regulated clearing organization (such as the Options Clearing Corporation),
which, in effect, guarantees the completion of every exchange-traded option
transaction. In contrast, the terms of OTC options are negotiated by each Fund
and its counterparty (usually a securities dealer or a financial institution)
with no clearing organization guarantee. When a Fund purchases an OTC option, it
relies on the party from whom it has purchased the option (the "counterparty")
to make delivery of the instrument underlying the option. If the counterparty
fails to do so, the Fund will lose any premium paid for the option, as well as
any expected benefit of the transaction. Accordingly, the Investment Sub-Adviser
will assess the creditworthiness of each counterparty to determine the
likelihood that the terms of the OTC option will be satisfied.
PURCHASING OPTIONS. Each of the Technology Fund and the Tax Managed Growth Fund
is authorized to purchase put options on securities held in its portfolio or
securities indices the performance of which is substantially correlated with
securities held in its portfolio. When a Fund purchases a put option, in
consideration for an upfront payment (the "option premium") the Fund acquires a
right to sell to another party specified securities owned by the Fund at a
specified price (the "exercise price") on or before a specified date (the
"expiration date"), in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
declines below a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a put option limits the
Fund's risk of loss in the event of a decline in the market value of the
portfolio holdings underlying the put option prior to the option's expiration
date. If the market value of the portfolio holdings associated with the put
option increases rather than decreases, however, the Fund will lose the option
premium and will consequently realize a lower return on the portfolio holdings
than would have been realized without the purchase of the put.
Each Fund is also authorized to purchase call options on securities it intends
to purchase or securities indices. When a Fund purchases a call option, in
consideration for the option premium the Fund acquires the right to purchase
from another party specified securities at the exercise price on or before the
expiration date, in the case of an option on securities, or to receive from
another party a payment based on the amount a specified securities index
increases beyond a specified level on or before the expiration date, in the case
of an option on a securities index. The purchase of a call option may protect
the Fund from having to pay more for a security as a consequence of increases in
the market value for the security during a period when the Fund is contemplating
its purchase, in the case of an option on a security, or attempting to maintain
exposure to an index prior to purchasing the underlying securities, in the case
of an option on an index (an "anticipatory hedge"). In the event a Fund
determines not to purchase a security underlying a call option, however, the
Fund may lose the entire option premium.
Each Fund is also authorized to purchase put or call options in connection with
closing out put or call options it has previously sold.
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WRITING OPTIONS. The Technology Fund and the Tax Managed Growth Fund are
authorized to write (i.e., sell) call options on securities held in its
portfolio or securities indices, the performance of which is substantially
correlated to securities held in its portfolio. When a Fund writes a call
option, in return for an option premium the Fund gives another party the right
to buy specified securities owned by the Fund at the exercise price on or before
the expiration date, in the case of an option on securities, or agrees to pay to
another party an amount based on any gain in a specified securities index beyond
a specified level on or before the expiration date, in the case of an option on
a securities index. In the event the party to which a Fund has written an option
fails to exercise its rights under the option because the value of the
underlying securities is less than the exercise price, the Fund will partially
offset any decline in the value of the underlying securities through the receipt
of the option premium. By writing a call option, however, a Fund limits its
ability to sell the underlying securities, and gives up the opportunity to
profit from any increase in the value of the underlying securities beyond the
exercise price, while the option remains outstanding.
The Technology Fund and the Tax Managed Growth Fund also may write put options
on securities or securities indices. When a Fund writes a put option, in return
for an option premium the Fund gives another party the right to sell to the Fund
a specified security at the exercise price on or before the expiration date, in
the case of an option on a security, or agrees to pay to another party an amount
based on any decline in a specified securities index below a specified level on
or before the expiration date, in the case of an option on a securities index.
In the event the party to which the Fund has written an option fails to exercise
its rights under the option because the value of the underlying securities is
greater than the exercise price, the Fund will profit by the amount of the
option premium. By writing a put option, however, a Fund will be obligated to
purchase the underlying security at a price that may be higher than the market
value of the security at the time of exercise as long as the put option is
outstanding, in the case of an option on a security, or make a cash payment
reflecting any decline in the index, in the case of an option on an index.
Accordingly, when the Fund writes a put option it is exposed to a risk of loss
in the event the value of the underlying securities falls below the exercise
price, which loss potentially may substantially exceed the amount of option
premium received by the Fund for writing the put option. A Fund will write a put
option on a security or a securities index only if the Fund would be willing to
purchase the security at the exercise price for investment purposes (in the case
of an option on a security) or is writing the put in connection with trading
strategies involving combinations of options--for example, the sale and purchase
of options on the same security or index but different expiration dates or
exercise prices (a technique called a "spread").
Each Fund is authorized to sell call or put options in connection with closing
out call or put options it has previously purchased.
Other than with respect to closing transactions, a Fund will only write call or
put options that are "covered." A put option will be considered covered if a
Fund has segregated assets with respect to such option in the manner described
below. A call option will be considered covered if a Fund owns the securities it
would be required to deliver upon exercise of the option (or, in the case of an
option on a securities index, securities which substantially replicate the
performance of such index) or owns a call option, warrant or convertible
instrument which is immediately exercisable for, or convertible into, such
security.
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RISKS OF OPTIONS TRANSACTIONS. The purchase and writing of options involves
certain risks. During the option period, the covered call writer has, in return
for the premium on the option, given up the opportunity to profit from a price
increase in the underlying securities above the exercise price, but, as long as
its obligation as a writer continues, has retained the risk of loss should the
price of the underlying security decline. The writer of a U.S. option has no
control over the time when it may be required to fulfill its obligation as a
writer of the option. Once an option writer has received an exercise notice, it
cannot effect a closing purchase transaction in order to terminate its
obligation under the option and must deliver the underlying securities (or cash
in the case of an index option) at the exercise price. If a put or call option
purchased by a Fund is not sold when it has remaining value, and if the market
price of the underlying security (or index), in the case of a put, remains equal
to or greater than the exercise price or, in the case of a call, remains less
than or equal to the exercise price, the Fund will lose its entire investment in
the option. Also, where a put or call option on a particular security (or index)
is purchased to hedge against price movements in a related security (or
securities), the price of the put or call option may move more or less than the
price of the related security (or securities). In this regard, there are
differences between the securities and options markets that could result in an
imperfect correlation between these markets, causing a given transaction not to
achieve its objective.
There can be no assurance that a liquid market will exist when a Fund seeks to
close out an option position. Furthermore, if trading restrictions or
suspensions are imposed on the options markets, a Fund may be unable to close
out a position. Finally, trading could be interrupted, for example, because of
supply and demand imbalances arising from a lack of either buyers or sellers, or
the options exchange could suspend trading after the price has risen or fallen
more than the maximum amount specified by the exchange. Closing transactions can
be made for OTC options only by negotiating directly with the counterparty or by
a transaction in the secondary market, if any such market exists. Transfer of an
OTC option is usually prohibited absent the consent of the original
counterparty. There is no assurance that a Fund will be able to close out an OTC
option position at a favorable price prior to its expiration. An OTC
counterparty may fail to deliver or to pay, as the case may be. In the event of
insolvency of the counterparty, a Fund might be unable to close out an OTC
option position at any time prior to its expiration. Although a Fund may be able
to offset to some extent any adverse effects of being unable to liquidate an
option position, a Fund may experience losses in some cases as a result of such
inability.
When conducted outside the U.S., options transactions may not be regulated as
rigorously as in the U.S., may not involve a clearing mechanism and related
guarantees, and are subject to the risk of governmental actions affecting
trading in, or the prices of, foreign securities, currencies and other
instruments. The value of such positions also could be adversely affected by:
(i) other complex foreign political, legal and economic factors, (ii) lesser
availability than in the U.S. of data on which to make trading decisions, (iii)
delays in each Fund's ability to act upon economic events occurring in foreign
markets during non-business hours in the U.S., (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
U.S., and (v) lower trading volume and liquidity.
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Each Fund's options activities also may have an impact upon the level of its
portfolio turnover and brokerage commissions.
Each Fund's success in using options techniques depends, among other things, on
the Investment Sub-Adviser's ability to predict accurately the direction and
volatility of price movements in the options and securities markets, and to
select the proper type, timing of use and duration of options.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
IN GENERAL. Each Fund may enter into futures contracts and options on futures
contracts for any number of reasons, including managing their exposure to
changes in securities prices and foreign currencies; as an efficient means of
adjusting their overall exposure to certain markets; attempting to enhance
income; as a cash management tool; and protecting the value of portfolio
securities. A futures contract provides for the future sale by one party and
purchase by another party of a specified quantity of a commodity at a specified
price and time. When a purchase or sale of a futures contract is made by a Fund,
that Fund is required to deposit with its custodian (or broker, if legally
permitted) a specified amount of cash or liquid securities ("initial margin").
The margin required for a futures contract is set by the exchange on which the
contract is traded and may be modified during the term of the contract. The
initial margin is in the nature of a performance bond or good faith deposit on
the futures contract which is returned to the Fund upon termination of the
contract, assuming all contractual obligations have been satisfied. A futures
contract held by a Fund is valued daily at the official settlement price of the
exchange on which it is traded. Each day the Fund pays or receives cash, called
"variation margin," equal to the daily change in value of the futures contract.
This process is known as "marking to market." Variation margin does not
represent a borrowing or loan by a Fund but is instead a settlement between the
Fund and the broker of the amount one would owe the other if the futures
contract expired. In computing daily net asset value, each Fund will
mark-to-market its open futures position.
Each Fund is also required to deposit and maintain margin with respect to put
and call options on futures contracts written by it. Such margin deposits will
vary depending on the nature of the underlying futures contract (and the related
initial margin requirements), the current market value of the option, and other
futures positions held by the Fund.
Although some futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery of offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, each Fund generally
realizes a capital gain, or if it is more, the Fund generally realizes a capital
loss. Conversely, if an offsetting sale price is more than the original purchase
price, each Fund generally realizes a capital gain, or if it is less, the Fund
generally realizes a capital loss. The transaction costs must also be included
in these calculations.
When purchasing a futures contract, each Fund will segregate (and mark-to-market
on a daily basis) cash or liquid securities that, when added to the amounts
deposited with a futures
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commission merchant ("FCM") as margin, are equal to the market value of the
futures contract. Alternatively, each Fund may "cover" its position by
purchasing a put option on the same futures contract with a strike price as high
as or higher than the price of the contract held by the Fund, or, if lower, may
cover the difference with cash or short-term securities.
When selling a futures contract, each Fund will segregate (and mark-to-market on
a daily basis) cash or liquid securities that, when added to the amounts
deposited with an FCM as margin, are equal to the market value of the
instruments underlying the contract. Alternatively, each Fund may "cover" its
position by owning the instruments underlying the contract (or, in the case of
an index futures contract, a portfolio with a volatility substantially similar
to that of the index on which the futures contract is based), or by holding a
call option permitting the Fund to purchase the same futures contract at a price
no higher than the price of the contract written by the Fund (or at a higher
price if the difference is maintained in liquid assets with the Fund's
custodian).
When selling a call option on a futures contract, each Fund will segregate (and
mark-to-market on a daily basis) cash or liquid securities that, when added to
the amounts deposited with an FCM as margin, equal the total market value of the
futures contract underlying the call option. Alternatively, a Fund may cover its
position by entering into a long position in the same futures contract at a
price no higher than the strike price of the call option, by owning the
instruments underlying the futures contract, or by holding a separate call
option permitting the Fund to purchase the same futures contract at a price not
higher than the strike price of the call option sold by the Fund, or covering
the difference if the price is higher.
When selling a put option on a futures contract, each Fund will segregate (and
mark-to-market on a daily basis) cash or liquid securities that equal the
purchase price of the futures contract less any margin on deposit.
Alternatively, a Fund may cover the position either by entering into a short
position in the same futures contract, or by owning a separate put option
permitting it to sell the same futures contract so long as the strike price of
the purchased put option is the same or higher than the strike price of the put
option sold by the Fund, or, if lower, the Fund may hold securities to cover the
difference.
FOREIGN CURRENCY FUTURES CONTRACTS AND RELATED OPTIONS. The Funds (except for
the Bond Index Fund) may engage in foreign currency futures contracts and
related options transactions for any number of reasons, including managing their
exposure to changes in securities prices and foreign currencies; as an efficient
means of adjusting their overall exposure to certain markets; attempting to
enhance income; as a cash management tool; and protecting the value of portfolio
securities. A foreign currency futures contract provides for the future sale by
one party and purchase by another party of a specified quantity of a foreign
currency at a specified price and time.
An option on a foreign currency futures contract gives the holder the right, in
return for the premium paid, to assume a long position (call) or short position
(put) in a futures contract at a specified exercise price at any time during the
period of the option. Upon the exercise of a call option, the holder acquires a
long position in the futures contract and the writer is assigned the opposite
short position. In the case of a put option, the opposite is true.
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The Funds may purchase call and put options on foreign currencies as a hedge
against changes in the value of the U.S. dollar (or another currency) in
relation to a foreign currency in which portfolio securities of the Funds may be
denominated. A call option on a foreign currency gives the buyer the right to
buy, and a put option the right to sell, a certain amount of foreign currency at
a specified price during a fixed period of time. The Funds may invest in options
on foreign currency which are either listed on a domestic securities exchange or
traded on a recognized foreign exchange.
In those situations where foreign currency options may not be readily purchased
(or where such options may be deemed illiquid) in the currency in which the
hedge is desired, the hedge may be obtained by purchasing an option on a
"surrogate" currency, i.e., a currency where there is tangible evidence of a
direct correlation in the trading value of the two currencies. A surrogate
currency's exchange rate movements parallel that of the primary currency.
Surrogate currencies are used to hedge an illiquid currency risk, when no liquid
hedge instruments exist in world currency markets for the primary currency.
Each Fund will only enter into futures contracts and futures options which are
standardized and traded on a U.S. or foreign exchange, board of trade, or
similar entity or quoted on an automated quotation system. A Fund will not enter
into a futures contract or purchase an option thereon for other than bona fide
hedging purposes if, immediately thereafter, the aggregate initial margin
deposits for futures contracts held by the Fund plus premiums paid by it for
open futures option positions, less the amount by which any such positions are
"in-the-money," would exceed 5% of the liquidation value of the Fund's portfolio
(or the Fund's net asset value), after taking into account unrealized profits
and unrealized losses on any such contracts the Fund has entered into. A call
option is "in-the-money" if the value of the futures contract that is the
subject of the option exceeds the exercise price. A put option is "in-the-money"
if the exercise price exceeds the value of the futures contract that is the
subject of the option.
INTEREST-RATE FUTURES CONTRACTS AND OPTIONS ON INTEREST-RATE FUTURES CONTRACTS.
The Bond Index Fund may invest in interest-rate futures contracts and options on
interest-rate futures contracts as a substitute for a comparable market position
in the underlying securities. The Fund may also sell options on interest-rate
futures contracts as part of closing purchase transactions to terminate its
options positions. No assurance can be given that such closing transactions can
be effected or the degree of correlation between price movements in the options
on interest rate futures or price movements in the Fund's securities which are
the subject of the transactions.
RISKS ASSOCIATED WITH FUTURES AND RELATED OPTIONS. There can be no guarantee
that there will be a correlation between price movements in the futures contract
or option and in the securities to which these instruments relate, which may
result in a strategy employing these instruments not to achieve its objective.
The degree of imperfection of correlation depends on circumstances such as
variations in speculative market demand for futures and futures options on
securities, including technical influences in futures trading and futures
options, and differences between the financial instruments being hedged and the
instruments underlying the standard contracts available for trading in such
respects as interest rate levels, maturities and creditworthiness of issuers. A
decision as to whether, when and how to hedge involves the
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exercise of skill and judgment, and even a well-conceived hedging strategy may
be unsuccessful to some degree because of market behavior or unexpected interest
rate trends.
Future exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price at the end of the current trading
session. Once the daily limit has been reached in a futures contract subject to
the limit, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may work to prevent
the liquidation of unfavorable positions. For example, futures prices have
occasionally moved to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of positions and
subjecting some holders of futures contracts to substantial losses.
There can be no assurance that a liquid market will exist at a time when a Fund
seeks to close out a futures or a futures option position, and the Fund would
remain obligated to meet margin requirements until the position is closed. In
addition, there can be no assurance that an active secondary market will
continue to exist.
Currency futures contracts and options thereon may be traded on foreign
exchanges. Such transactions may not be regulated as effectively as similar
transactions in the United States; may not involve a clearing mechanism and
related guarantees; and are subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities. The value of such
position also could be adversely affected by (i) other complex foreign
political, legal and economic factors, (ii) lesser availability than in the
United States of data on which to make trading decisions, (iii) delays in a
Fund's ability to act upon economic events occurring in foreign markets during
non business hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
SECURITIES INDEX FUTURES CONTRACTS. Each Fund may also enter into securities
index futures contracts as an efficient means of gaining exposure to the equity
and bond markets. A Fund will not engage in transactions in futures contracts
for speculation. An Index Fund may enter into index futures contracts for
several reasons: to simulate full investment in its target index while retaining
a cash balance for fund management purposes, to facilitate trading, to reduce
transactions costs, or to seek higher investment returns when a futures contract
is priced more attractively than securities in the index.
An index futures contract is a contract to buy or sell units of an index at a
specified future date at a price agreed upon when the contract is made. Entering
into a contract to buy units of an index is commonly referred to as purchasing a
contract or holding a long position in the index. Entering into a contract to
sell units of an index is commonly referred to as selling a contract or holding
a short position. The value of a unit is the current value of the stock index.
For example, the S&P 500 Index is composed of 500 selected common stocks, most
of which are listed on the New York Stock Exchange. The S&P 500 Index assigns
relative weightings to the 500 common stocks included in the index, and the
index fluctuates with changes in the market
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values of the shares of those common stocks. In the case of the S&P 500 Index,
contracts are to buy or sell 500 units. Thus, if the value of the S&P 500 Index
were $150, one contract would be worth $75,000 (500 units x $150). The index
futures contract specifies that no delivery of the actual securities making up
the index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract. For example, if a Fund enters into a futures contract to buy 500
units of the S&P 500 Index at a specified future date at a contract price of
$150 and the S&P 500 Index is at $154 on that future date, the Fund will gain
$2,000 (500 units x gain of $4). If a Fund enters into a futures contract to
sell 500 units of the stock index at a specified future date at a contract price
of $150 and the S&P 500 Index is at $154 on that future date, the Fund will lose
$2,000 (500 units x loss of $4).
RISKS OF SECURITIES INDEX FUTURES. Each Fund's success in using futures and
options for hedging depends, among other things, on the Investment Sub-Adviser's
ability to predict correctly the direction and volatility of price movements in
the futures and options markets as well as in the securities markets and to
select the proper type, time and duration of the hedging instrument. The skills
necessary for successful use of hedging instruments are different from those
used in the selection of individual stocks.
Each Fund's ability to hedge effectively all or a portion of its securities
through transactions in index futures (and therefore the extent of its gain or
loss on such transactions) depends on the degree to which price movements in the
underlying index correlate with price movements in the Fund's securities.
Inasmuch as such securities will not duplicate the components of an index, the
correlation probably will not be perfect. Consequently, each Fund will bear the
risk that the prices of the securities being hedged will not move in the same
amount as the hedging instrument. This risk will increase as the composition of
the Fund's portfolio diverges from the composition of the hedging instrument.
Although each Fund intends to establish positions in futures only when there
appears to be an active market, there is no assurance that a liquid market will
exist at a time when a Fund seeks to close a particular option or futures
position. Trading could be interrupted, for example, because of supply and
demand imbalances arising from a lack of either buyers or sellers. In addition,
the futures exchanges may suspend trading after the price has risen or fallen
more than the maximum amount specified by the exchange. In some cases, a Fund
may experience losses as a result of its inability to close out a position, and
it may have to liquidate other investments to meet its cash needs.
Although some index futures contracts call for making or taking delivery of the
underlying securities, generally these obligations are closed out prior to
delivery by offsetting purchases or sales of matching futures contracts (same
exchange, underlying security or index, and delivery month). If an offsetting
purchase price is less than the original sale price, a Fund generally realizes a
capital gain, or if it is more, the Fund generally realizes a capital loss.
Conversely, if an offsetting sale price is more than the original purchase
price, a Fund generally realizes a capital gain, or if it is less, the Fund
generally realizes a capital loss. The transaction costs must also be included
in these calculations.
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Each Fund will only enter into index futures contracts or futures options that
are standardized and traded on a U.S. or foreign exchange or board of trade, or
similar entity, or quoted on an automated quotation system. Certain futures
strategies employed by a Fund may not be deemed to be for "bona fide hedging"
purposes, as such term is defined in applicable regulations of the CFTC. A Fund
may enter into these futures contracts only if the aggregate of initial margin
deposits for open futures contract positions does not exceed 5% of the Fund's
total assets.
OTHER SECURITIES AND TECHNIQUES
SHORT SALES. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the 500 Index Fund, the
Extended Market Index Fund, the Asian Index Fund and the European Index Fund.
may engage in short sales (i.e., sell a security the Fund does not own, or in an
amount greater than the Fund owns). Such transactions will be used only in an
effort to adjust the weightings of particular securities represented in the
basket to reflect such securities' weightings in the target index. The
Investment Sub-Adviser will not employ short sales in reflection of the
Investment Sub-Adviser's outlook for the securities markets or for the
performance of the securities sold short. Generally, to complete a short sale
transaction, a Fund will borrow the security to make delivery to the buyer. The
Fund is then obligated to replace the security borrowed. The price at the time
of replacement may be more or less than the price at which the security was sold
by the Fund. Until the security is replaced, the Fund is required to pay to the
lender any interest that accrues during the period of the loan. To borrow the
security, the Fund may be required to pay a premium which would increase the
cost of the security sold. The proceeds of the short sale will be retained by
the broker to the extent necessary to meet margin requirements until the short
position is closed out. Until the Fund replaces the borrowed security, it will
(a) segregate cash or liquid securities at such a level that the segregated
amount plus the amount deposited with the broker as collateral will equal the
current market value of the security sold short or (b) otherwise cover its short
position.
FORWARD COMMITMENTS, WHEN-ISSUED PURCHASES AND DELAYED-DELIVERY TRANSACTIONS.
Each 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. 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, or the value of the
security to be sold increases, before the settlement date. Although a Fund will
generally purchase securities with the intention of acquiring them, the Fund may
dispose of securities purchased on a when-issued, delayed-delivery or a forward
commitment basis before settlement when deemed appropriate.
Certain of the securities in which a Fund may invest will be purchased on a
when-issued basis, in which case delivery and payment normally take place within
45 days after the date of the commitment to purchase. The Fund will make
commitments to purchase securities on a when-issued basis only with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. When-issued securities are subject to
market fluctuation, and no income accrues to the purchaser during the period
prior to issuance. The purchase price and the interest rate that will be
received on debt securities are fixed at the time the purchaser enters into the
commitment.
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Purchasing a security on a when-issued basis can involve a risk that the market
price at the time of delivery may be lower than the agreed-upon purchase price,
in which case there could be an unrealized loss at the time of delivery. Each
Fund, other than the Bond Index Fund, currently does not intend on investing
more than 5% of its assets in when-issued securities. Each Fund will segregate
cash or liquid securities in an amount at least equal in value to the Fund's
commitments to purchase when-issued securities. If the value of these assets
declines, the Fund will segregate additional liquid assets on a daily basis so
that the value of the segregated assets is equal to the amount of such
commitments.
SWAPS. The Bond Index Fund may enter into interest-rate swaps, and each Index
Fund may enter into index and total return swaps in pursuit of its investment
objective. Interest-rate swaps involve the exchange by a Fund with another party
of their respective commitments to pay or receive interest (for example, an
exchange of floating-rate payments for fixed-rate payments). Index swaps involve
the exchange by a Fund with another party of cash flows based upon the
performance of an index of securities or a portion of an index of securities
that usually include dividends or income. In each case, the exchange commitments
can involve payments to be made in the same currency or in different currencies.
Each Fund will usually enter into swaps on a net basis. In so doing, the two
payment streams are netted out, with the Fund receiving or paying, as the case
may be, only the net amount of the two payments. If a Fund enters into a swap on
a net basis, it will segregate cash or other liquid securities at least equal to
the net amount (i.e., the excess of the Fund's obligations over its entitlements
with respect to each swap) accrued on a daily basis. The Fund will segregate
cash or other liquid securities with respect to its total obligations under any
interest rate swaps that are not entered into on a net basis. If there is a
default by the other party to an interest rate swap transaction, the Fund will
have contractual remedies pursuant to the agreements related to the transaction.
The use of interest-rate and index swaps is a highly specialized activity which
involves investment techniques and risks different from those associated with
ordinary portfolio security transactions. These transactions generally do not
involve the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to swaps generally is limited to the
net amount of payments that the Fund is contractually obligated to make. There
is also a risk of a default by the other party to a swap, in which case the Fund
may not receive the net amount of payments that the Fund contractually is
entitled to receive.
REVERSE REPURCHASE AGREEMENTS. Although the Funds have no current intention of
engaging in reverse repurchase agreements, each Fund reserves the right to do
so. Reverse repurchase agreements are ordinary repurchase agreements in which a
Fund is the seller of, rather than the investor in, securities, and agrees to
repurchase them at an agreed upon time and price. Use of a reverse repurchase
agreement may be preferable to a regular sale and later repurchase of the
securities because it avoids certain market risks and transaction costs. A
reverse repurchase agreement may be viewed as a type of borrowing subject to
each Fund's fundamental investment restriction concerning borrowing.
DOLLAR ROLLS. The Bond Index Fund may enter into dollar rolls in which the Fund
will sell securities for delivery in the current month and simultaneously
contract to repurchase
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substantially similar (the same type and coupon) securities on a specified
future date from the same party. During the roll period, the Fund forgoes
principal and interest paid on the securities sold. The Fund is compensated by
the difference between the current sales price and the forward price for the
future purchase (often referred to as the "drop") as well as by the interest
earned on the cash proceeds of the initial sale.
Dollar rolls involve the risk that the market value of the securities subject to
the Fund's forward purchase commitment may decline below the price of the
securities the Fund has sold. In the event the buyer of the securities files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the current
sale portion of the transaction may be restricted pending a determination by the
other party, or its trustee or receiver, whether to enforce the Fund's
obligation to purchase the similar securities in the forward transaction. Dollar
rolls are speculative techniques which can be deemed to involve leverage. The
Fund will segregate liquid securities in an aggregate amount equal to the amount
of the forward commitment. The Fund will engage in dollar roll transactions to
enhance return and not for the purpose of borrowing. Each dollar roll
transaction is accounted for as a sale of a portfolio security and a subsequent
purchase of a substantially similar security in the forward market.
INDEX PARTICIPATIONS AND INDEX PARTICIPATION CONTRACTS. Index participations and
index participation contracts provide the equivalent of a position in the
securities comprising an index, with each security's representation equaling its
index weighting. Moreover, their holders are entitled to payments equal to the
dividends paid by the underlying index securities. Generally, the value of an
index participation or index participation contract will rise and fall along
with the value of the related index. A Fund will invest in index participation
contracts only if a liquid market for them appears to exist.
HYBRID INSTRUMENTS. Hybrid instruments (a type of potentially high-risk
derivative) have been developed and combine the elements of futures contracts or
options with those of debt, preferred equity or a depository instrument ("Hybrid
Instruments"). Generally, a Hybrid Instrument will be a debt security, preferred
stock, depository share, trust certificate, certificate of deposit, or other
evidence of indebtedness on which a portion of or all interest payments, and/or
the principal or stated amount payable at maturity, redemption, or retirement,
is determined by reference to prices, changes in prices, or differences between
prices, of securities, currencies, intangibles, goods, articles or commodities
(collectively, "Underlying Assets") or by another objective index, economic
factor, or other measure, such as interest rates, currency exchange rates,
commodity indices and securities indices (collectively, "Benchmarks"). Thus,
Hybrid Instruments may take a variety of forms, including, but not limited to,
debt instruments with interest or principal payments or redemption terms
determined by reference to the value of a currency or commodity or securities
index at a future point in time, preferred stock with dividend rates determined
by reference to the value of a currency, or convertible securities with the
conversion terms related to a particular commodity.
The risks of investing in Hybrid Instruments reflect a combination of the risks
of investing in securities, options, futures and currencies. Thus, an investment
in a Hybrid Instrument may entail significant risks that are not associated with
a similar investment in a traditional debt instrument that has a fixed principal
amount, is denominated in U.S. dollars or bears interest
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either at a fixed rate or a floating rate determined by reference to a common,
nationally published benchmark. The risks of a particular Hybrid Instrument
will, of course, depend upon the terms of the instrument, but may include,
without limitation, the possibility of significant changes in the Benchmarks or
the prices of Underlying Assets to which the instrument is linked. Such risks
generally depend upon factors which are unrelated to the operations or credit
quality of the issuer of the Hybrid Instrument and which may not be readily
foreseen by the purchaser, such as economic and political events, the supply and
demand for the Underlying Assets, and interest rate movements. In recent years,
various Benchmarks and prices for Underlying Assets have been highly volatile,
and such volatility may be expected in the future. Reference is also made to the
discussion of futures, options, and forward contracts herein for a discussion of
the risks associated with such investments.
Hybrid Instruments are potentially more volatile and carry greater market risks
than traditional debt instruments. Depending on the structure of the particular
Hybrid Instrument, changes in a Benchmark may be magnified by the terms of the
Hybrid Instrument and have an even more dramatic and substantial effect upon the
value of the Hybrid Instrument. Also, the prices of the Hybrid Instrument and
the Benchmark or Underlying Asset may not move in the same direction or at the
same time.
Hybrid Instruments may bear interest or pay preferred dividends at below market
(or even relatively nominal) rates. Alternatively, Hybrid Instruments may bear
interest at above market rates but bear an increased risk of principal loss (or
gain). The latter scenario may result if "leverage" is used to structure the
Hybrid Instrument. Leverage risk occurs when the Hybrid Instrument is structured
so that a given change in a Benchmark or Underlying Asset is multiplied to
produce a greater value change in the Hybrid Instrument, thereby magnifying the
risk of loss as well as the potential for gain.
Hybrid Instruments may also carry liquidity risk since the instruments are often
"customized" to meet the portfolio needs of a particular investor, and
therefore, the number of investors that are willing and able to buy such
instruments in the secondary market may be smaller than that for more
traditional debt securities. In addition, because the purchase and sale of
Hybrid Instruments could take place in an over-the-counter market without the
guarantee of a central clearing organization or in a transaction between the
fund and the issuer of the Hybrid Instrument, the creditworthiness of the
counterparty of the Hybrid Instrument would be an additional risk factor which
the Fund would have to consider and monitor. Hybrid Instruments also may not be
subject to regulation of the CFTC, which generally regulates the trading of
commodity futures by U.S. persons, the SEC, which regulates the offer and sale
of securities by and to U.S. persons, or any other governmental regulatory
authority.
The various risks discussed above, particularly the market risk of such
instruments, may in turn cause significant fluctuations in the net asset value
of the fund. Accordingly, each Fund will limit its investments in Hybrid
Instruments to 10% of total assets. However, because of their volatility, it is
possible that a Fund's investment in Hybrid Instruments will account for more
than 10% of the Fund's return (positive or negative).
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COMBINED TRANSACTIONS. Each Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions and multiple
currency transactions (including forward currency contracts) and some
combination of futures, options, and currency transactions ("component"
transactions), instead of a single transaction, as part of a single or combined
strategy when, in the opinion of the Investment Sub-Adviser, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions are normally entered into based on the Investment
Sub-Adviser's judgment that the combined strategies will reduce risk or
otherwise more effectively achieve the desired portfolio management goal, it is
possible that the combination will instead increase such risks or hinder
achievement of the management objective.
FUTURE DEVELOPMENTS. A Fund may take advantage of opportunities in the area of
options and futures contracts and options on futures contracts and any other
derivative investments which are not presently contemplated for use by the Fund
or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Fund's investment objective and
legally permissible for the Fund.
ILLIQUID SECURITIES. Each Fund may purchase securities other than in the open
market. While such purchases may often offer attractive opportunities for
investment not otherwise available on the open market, the securities so
purchased are often "restricted securities" or "not readily marketable" (i.e.,
they cannot be sold to the public without registration under the Securities Act,
or the availability of an exemption from registration (such as Rule 144A) or
because they are subject to other legal or contractual delays in or restrictions
on resale). This investment practice, therefore, could have the effect of
increasing the level of illiquidity of each Fund. It is each Fund's policy that
illiquid securities (including repurchase agreements of more than seven days
duration, certain restricted securities, and other securities which are not
readily marketable) may not constitute, at the time of purchase, more than 15%
of the value of the Fund's net assets. The Trust's Board of Trustees has
approved guidelines for use in determining whether a security is illiquid.
Generally speaking, restricted securities may be sold (i) only to qualified
institutional buyers; (ii) in a privately negotiated transaction to a limited
number of purchasers; (iii) in limited quantities after they have been held for
a specified period of time and other conditions are met pursuant to an exemption
from registration; or (iv) in a public offering for which a registration
statement is in effect under the Securities Act. Issuers of restricted
securities may not be subject to the disclosure and other investor protection
requirements that would be applicable if their securities were publicly traded.
If adverse market conditions were to develop during the period between a Fund's
decision to sell a restricted or illiquid security and the point at which the
Fund is permitted or able to sell such security, the Fund might obtain a price
less favorable than the price that prevailed when it decided to sell. Where a
registration statement is required for the resale of restricted securities, a
Fund may be required to bear all or part of the registration expenses. Each Fund
may be deemed to be an "underwriter" for purposes of the Securities Act when
selling restricted securities to the public and, in such event, the Fund may be
liable to purchasers of such securities if the registration statement prepared
by the issuer is materially inaccurate or misleading.
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Since it is not possible to predict with assurance that the market for
securities eligible for resale under Rule 144A will continue to be liquid, the
Investment Sub-Adviser will monitor such restricted securities. Among the
factors the Investment Sub-Adviser may consider in reaching liquidity decisions
relating to Rule 144A securities are: (1) the frequency of trades and quotes for
the security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security; and (4) the nature of the security and the nature of the
market for the security (i.e., the time needed to dispose of the security, the
method of soliciting offers, and the mechanics of the transfer).
LOANS OF PORTFOLIO SECURITIES. Each Fund may lend securities from its portfolios
to brokers, dealers and financial institutions (but not individuals) in order to
increase the return on its portfolio. The value of the loaned securities may not
exceed one-third of a Fund's total assets and loans of portfolio securities must
be fully collateralized based on values that are marked-to-market daily. The
Fund will not enter into any portfolio security lending arrangement having a
duration of longer than one year. In determining whether to lend a security to a
particular broker, dealer or financial institution, the Investment Sub-Adviser
considers all relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer or financial institution.
The principal risk of portfolio lending is potential default or insolvency of
the borrower. In either of these cases, the Fund could experience delays in
recovering securities or collateral or could lose all or part of the value of
the loaned securities. The Fund may pay reasonable administrative and custodial
fees in connection with loans of portfolio securities and may pay a portion of
the interest or fee earned thereon to the borrower or a placing broker.
Any securities that the Fund may receive as collateral will not become part of
the Fund's investment portfolio at the time of the loan and, in the event of a
default by the borrower, the Fund will, if permitted by law, dispose of such
collateral except for such part thereof that is a security in which the Fund is
permitted to invest. During the time securities are on loan, the borrower will
pay the Fund any accrued income on those securities, and the Fund may invest the
cash collateral and earn income or receive an agreed upon fee from a borrower
that has delivered cash-equivalent collateral.
BORROWING. Borrowing may exaggerate the effect on each Fund's net asset value of
any increase or decrease in the value of the Fund's portfolio securities. Money
borrowed will be subject to interest costs (which may include commitment fees
and/or the cost of maintaining minimum average balances). Although the principal
of each Fund's borrowings will be fixed, each Fund's assets may change in value
during the time a borrowing is outstanding, thus increasing exposure to capital
risk. As a fundamental policy, a Fund's borrowings may not exceed 33 1/3% of its
total assets. Each Fund may borrow up to an additional 5% of its total assets
(not including the amount borrowed) from a bank for temporary or emergency
purposes (but not for leverage or the purchase of investments). If a Fund's
borrowings were to exceed 33 1/3%, the Fund may be required to sell securities
in order to reduce its borrowings. Each Fund may not make additional purchases
when borrowings exceed 5%.
NON-DIVERSIFICATION. Each Fund is classified as "non-diversified" for purposes
of the Investment Company Act, which means that it is not limited by the
Investment Company Act
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with regard to the portion of its assets that may be invested in the securities
of a single issuer. To the extent the Fund makes investments in excess of 5% of
its assets in the securities of a particular issuer, its exposure to the risks
associated with that issuer is increased. Because the Fund invests in a limited
number of issuers, the performance of particular securities may adversely affect
the performance of the Fund or subject the Fund to greater price volatility than
that experienced by diversified investment companies.
CONCENTRATION. Generally, each Fund except the Technology Fund may not
"concentrate" its assets in securities related to a particular industry,
although it may invest its assets in any industry in which the Fund's benchmark
Index is concentrated to approximately the same degree during the same period.
Concentration, as the term is used in the Investment Company Act, means that at
least 25% of the Fund's assets would be invested in the securities of issuers
within the same industry. The Technology Fund will concentrate its assets in the
securities of technology companies: those expected to benefit from the
development, advancement, and use of science and technology, such as those in
the computer, telecommunications, and electronics industries. To the extent that
a Fund's investments are concentrated in any one industry at any given time, the
Fund may be subject to greater market fluctuation than a fund which has
securities representing a broader range of investment alternatives.
PORTFOLIO TURNOVER. A change in securities held by a Fund is known as "portfolio
turnover." A high turnover rate may increase transaction costs and result in
additional taxable gains. Each Fund's portfolio turnover rate is calculated by
dividing the lesser of purchases or sales of portfolio securities for the most
recently completed fiscal year by the monthly average of the value of the
portfolio securities owned by the Fund during that year. For purposes of
determining each Fund's portfolio turnover rate, all securities whose maturities
at the time of acquisition were one year or less are excluded.
The portfolio turnover rate for each Index Fund generally is not expected to
exceed 25%. The portfolio turnover rate for the Technology Fund generally is not
expected to exceed 100%. This portfolio turnover rate will not be a limiting
factor when the Investment Sub-Adviser deems portfolio changes appropriate.
The Tax Managed Growth Fund will not generally trade in securities for
short-term profits, but, when circumstances warrant, securities may be purchased
and sold without regard to the length of time held. The Fund's portfolio
turnover rate is not expected to exceed 100%.
ADDITIONAL INFORMATION CONCERNING THE INDICES
LEHMAN INDEX. Lehman Brothers ("Lehman") does not sponsor the Bond Index Fund,
nor is it affiliated in any way with the Fund or its Investment Manager or
Investment Sub-Adviser. "Lehman Brothers Aggregate Bond Index(R)" is a trademark
of Lehman. The Bond Index Fund is not sponsored, endorsed, sold, or promoted by
Lehman, and neither Lehman nor the Lehman Index makes any representation or
warranty, express or implied, regarding the advisability of investing in the
Fund.
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LEHMAN MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS
ALL WARRANTIES OF MERCHANTABILITY OF FITNESS FOR A PARTICULAR PURPOSE OR USE
WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. LEHMAN, ITS PARENT,
OFFICERS, DIRECTORS, AFFILIATES, EMPLOYEES, AND AGENTS, SHALL HAVE NO LIABILITY,
CONTINGENT OR OTHERWISE, TO THE COMPANY OR TO THIRD PARTIES, FOR THE QUALITY,
ACCURACY, COMPLETENESS OR CURRENCY OF THE INDEX OR FOR DELAYS OR OMISSIONS
THEREIN, OR FOR INTERUPTIONS IN THE DELIVERY OF THE INDEX. IN NO EVENT WILL
LEHMAN BE LIABLE FOR ANY SPECIAL, INDIRECT, INCIDENTAL OR CONSEQUENCIAL DAMAGES,
EVEN IF LEHMAN HAS BEEN ADVISED OF THE POSSIBILTY OF SUCH DAMAGES.
S&P 500 INDEX. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard &
Poor's 500", "SPDRs(R)", "Standard & Poor's Depositary Receipts(R)", and "500"
are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use
by TD Waterhouse Asset Management, Inc. (the "Licensee").
The 500 Index Fund is not sponsored, endorsed, sold or promoted by Standard &
Poor's, a division of the McGraw Hill Companies, Inc. Standard & Poor's makes no
representation regarding the advisability of investing in the Fund. Standard &
Poor's makes no representation or warranty, express or implied, to the owners of
shares of the 500 Index Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the S&P 500 to track general stock market performance. Standard &
Poor's only relationship to the 500 Index Fund is the licensing of certain
trademarks and trade names of Standard & Poor's and of the S&P 500 which is
determined, composed and calculated by Standard & Poor's without regard to the
Fund. Standard & Poor's has no obligation to take the needs of the 500 Index
Fund or the owners of shares of the Fund into consideration in determining,
composing or calculating the S&P 500. Standard & Poor's is not responsible for
and has not participated in the determination of the prices and amount of the
500 Index Fund or the timing of the issuance of sale of shares of the Fund or in
the determination or calculation of the equation by which the Fund is to be
converted into cash. Standard & Poor's has no obligation or liability in
connection with the administration, marketing or trading of the Fund.
STANDARD & POOR'S DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN, AND STANDARD & POOR'S SHALL HAVE NO
LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. STANDARD & POOR'S
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE 500
INDEX FUND, OWNERS OF SHARES OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. STANDARD & POOR'S MAKES
NO EXPRESS OR IMPLIED WARRANTIES AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
S&P 500 INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE
FOREGOING, IN NO EVENT SHALL STANDARD & POOR'S HAVE ANY LIABILITY FOR ANY
SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS),
EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
WILSHIRE 4500 INDEX. The Extended Market Index Fund is not sponsored, endorsed,
sold or promoted by Wilshire Associates Incorporated ("Wilshire"). Wilshire
makes no representation or warranty, express or implied, to the owners of the
Extended Market Index Fund or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the Wilshire 4500 Equity Index to track general stock market
performance. Wilshire's only relationship to the Investment Manager, the
Investment Sub-Adviser or the Extended Market Index Fund is the licensing of
certain trademarks and trade names of Wilshire and of the Wilshire 4500 Equity
Index which is determined, composed and calculated by Wilshire without regard to
the Investment Manager, the Investment Sub-Adviser or the Fund. Wilshire has no
obligation to take the needs of the Investment Manager, Investment Sub-Adviser,
the Extended Market Index Fund, or the Fund's shareholders into consideration in
determining, composing or calculating the Wilshire 4500 Equity Index.
Wilshire does not guarantee the accuracy or the completeness of the Wilshire
4500 Equity Index or any data included therein and Wilshire shall have no
liability for any errors, omissions, or
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interruptions therein. Wilshire makes no warranty, express or implied, as to
results to be obtained by the Extended Market Index Fund, the shareholders, or
any other person or entity from the use of the Wilshire 4500 Equity Index or any
data included therein. Wilshire makes no express or implied warranties, and
expressly disclaims all warranties of merchantability or fitness for a
particular purpose or use with respect to the Wilshire 4500 Equity Index or any
data included therein. Without limiting any of the foregoing, in no event shall
Wilshire have any liability for any special, punitive, indirect, or
consequential damages (including lost profits), even if notified of the
possibility of such damages.
GSTI COMPOSITE INDEX. The Technology Fund is not sponsored, endorsed sold or
promoted by Goldman Sachs & Co. Goldman Sachs & Co. makes no representation or
warranty, express or implied, to the owners of the Technology Fund or any member
of the public regarding the advisability of investing in securities generally or
in the Fund particularly or the ability of the GSTI Composite Index to track the
technology stock market performance. Goldman Sachs & Co.'s only relationship to
the Technology Fund, the Investment Sub-Adviser or the Investment Manager and
its affiliates is the licensing of certain trademarks and trade names of Goldman
Sachs & Co. and of the GSTI Composite Index which is determined, composed and
calculated by Goldman Sachs & Co. without regard to the Technology Fund, the
Investment Sub-Adviser or the Investment Manager and its affiliates. Goldman
Sachs & Co. has no obligation to take the needs of the Technology Fund or the
Fund's shareholders, the Investment Sub-Adviser, or the Investment Manager or
its affiliates into consideration in determining, composing or calculating the
GSTI Composite Index. Goldman Sachs & Co. is not responsible for and has not
participated in the determination of the prices and amount of the Technology
Fund or the timing of the issuance or sale of shares of the Fund or in the
determination or calculation of the equation by which the Fund is to be
converted into cash. Goldman Sachs & Co. has no obligation or liability in
connection with the administration, marketing or trading of the Technology Fund.
GOLDMAN SACHS & CO. DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF
THE GSTI COMPOSITE INDEX OR ANY DATA INCLUDED THEREIN AND GOLDMAN SACHS & CO.
SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
GOLDMAN SACHS & CO. MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE
OBTAINED BY THE TECHNOLOGY FUND THE SHAREHOLDERS, OR ANY OTHER PERSON OR ENTITY
FROM THE USE OF THE GSTI COMPOSITE INDEX OR ANY DATA INCLUDED THEREIN. GOLDMAN
SACHS & CO. MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH
RESPECT TO THE GSTI COMPOSITE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT
LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL GOLDMAN SACHS & CO. HAVE ANY
LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES
(INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
MSCI PACIFIC FREE INDEX (ASIAN INDEX FUND) AND MSCI EUROPE INDEX (EUROPEAN INDEX
FUND) (the "FUNDS"). Each of the MSCI Pacific Free Index and the MSCI Europe
Index is the exclusive property of MSCI. Morgan Stanley Capital International is
a service mark of MSCI and has been licensed for use by TD Waterhouse Asset
Management, Inc. (the "Licensee").
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Each of the Asian Index Fund and the European Index Fund is not sponsored,
endorsed, sold or promoted by MSCI or any affiliate of MSCI. Neither MSCI nor
any other party makes any representation or warranty, express or implied, to the
owners of the Funds or any member of the public regarding the advisability of
investing in funds generally or in the Fund particularly or the ability of
either the MSCI Pacific Free Index or the MSCI Europe Index to track general
stock market performance. MSCI is the licensor of certain trademarks, service
marks and trade names of MSCI and each of the MSCI Pacific Free Index and the
MSCI Europe Index which is determined, composed and calculated by MSCI without
regard to the issuer of the Funds or the Funds. MSCI has no obligation to take
the needs of the issuer of the Funds or the owners of the Funds into
consideration in determining, composing or calculating the MSCI Pacific Free
Index and MSCI Europe Index. MSCI is not responsible for and has not
participated in the determination of the timing of prices at, or quantities of
the Funds to be issued or in the determination or calculation of the equation by
which the Funds are redeemable for cash. Neither MSCI nor any other party has
any obligation or liability to owners of the Funds in connection with the
administration, marketing or trading of the Funds.
ALTHOUGH MSCI SHALL OBTAIN INFORMATION FOR INCLUSION IN OR FOR USE IN THE
CALCULATION OF THE INDEXES FROM SOURCES WHICH MSCI CONSIDERS RELIABLE, NEITHER
MSCI NOR ANY OTHER PARTY GUARANTEES THE ACCURACY AND/OR THE COMPLETENESS OF THE
INDEXES OR ANY DATA INCLUDED THEREIN. NEITHER MSCI NOR ANY OTHER PARTY MAKES ANY
WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE,
LICENSEE'S CUSTOMERS AND COUNTERPARTIES, OWNERS OF THE FUNDS, OR ANY OTHER
PERSON OR ENTITY FROM THE USE OF THE INDEXES OR ANY DATA INCLUDED THERIEN IN
CONNECTION WITH THE RIGHTS LICENSED HEREUNDER OR FOR ANY OTHER USE. NEITHER MSCI
NOR ANY OTHER PARTY MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND MSCI HEREBY
EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE WITH RESPECT TO THE INDEXES OR ANY DATA INCLUDED THEREIN.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL MSCI OR ANY OTHER PARTY
HAVE ANY LIABLITY FOR ANY DIRECT, INDIRECT, SPECIAL, PUNITIVE, CONSEQUENTIAL OR
ANY OTHER DAMAGES (INCLUDING LOST PROFITS) EVEN IF NOTIFIED OF THE POSSIBILITY
OF SUCH DAMAGES.
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FUND POLICIES
FUNDAMENTAL INVESTMENT RESTRICTIONS. The following are each Fund's fundamental
investment restrictions, which cannot be changed without shareholder approval by
a vote of a majority of the outstanding shares of the Fund, as set forth in the
Investment Company Act. Unless noted otherwise, if a percentage restriction is
adhered to at the time of investment, a later increase or decrease in percentage
resulting from a change in the Fund's assets (i.e., due to cash inflows or
redemptions) or in market value of the investment or the Fund's assets will not
constitute a violation of that restriction.
Each Fund:
1. may not issue senior securities, except as permitted under the Investment
Company Act;
2. may (i) borrow money from banks and (ii) make other investments or engage in
other transactions permissible under the Investment Company Act which may
involve a borrowing, provided that the combination of (i) and (ii) shall not
exceed 33 1/3% of the value of the Fund's total assets (including the amount
borrowed), less the Fund's liabilities (other than borrowings), except that the
Fund may borrow up to an additional 5% of its total assets (not including the
amount borrowed) from a bank for temporary or emergency purposes (but not for
leverage or the purchase of investments). For these same purposes, the Funds may
borrow money from persons other than banks to the extent permitted by applicable
law. For purposes of this investment restriction, the Fund's entry into short
sales, reverse repurchase agreements, dollar rolls, options, forward contracts,
futures contracts, including those relating to indexes, options on futures
contracts or indexes and other similar transactions that may be described in the
Fund's Prospectus or SAI shall not constitute borrowing to the extent they are
covered;
3. may not act as an underwriter of another issuer's securities, except to the
extent that the Fund may be deemed to be an underwriter within the meaning of
the Securities Act in connection with the disposition of portfolio securities;
4. may not invest 25% or more of its total assets (taken at market value at the
time of such investment) in the securities of issuers in any particular industry
except that there shall be no limitation with respect to investments in (i)
obligations of the U.S. Government, its agencies or instrumentalities (or
repurchase agreements thereto); or (ii) any industry in which the Index Fund's
benchmark index is concentrated to approximately the same degree during the same
period; and except that the Technology Fund will invest 25% or more of its total
assets in the securities of technology companies.
5. may not purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by companies
which invest in real estate, or interests therein;
6. may not purchase or sell physical commodities or commodities contracts. This
restriction shall not prohibit the Fund, subject to restrictions described in
the Prospectus and elsewhere in
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this SAI, from purchasing, selling or entering into futures contracts, options
on futures contracts and other derivative instruments; and
7. may not lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations, even
though the purchase of such obligations may be deemed to be the making of loans,
(b) enter into repurchase agreements, and (c) lend its portfolio securities in
an amount not to exceed 33 1/3% of the Fund's total assets.
NON-FUNDAMENTAL OPERATING RESTRICTIONS. The following are each Fund's
non-fundamental operating restrictions, which may be changed by the Trust's
Board of Trustees without shareholder approval.
Unless indicated otherwise below, each Fund may not:
1. pledge, mortgage or hypothecate its assets, except to the extent necessary to
secure permitted borrowings and to the extent related to the purchase of
securities on a when-issued or forward commitment basis and the deposit of
assets in escrow in connection with writing covered put and call options and
collateral and initial or variation margin arrangements with respect to options,
forward contracts, futures contracts, including those relating to indexes, and
options on futures contracts or indexes and other similar financial
transactions;
2. purchase securities of other investment companies, except to the extent
permitted under the Investment Company Act or exemptive relief therefrom.
3. invest in illiquid securities if, as a result of such investment, more than
15% of its net assets would be invested in illiquid securities, or such other
amounts as may be permitted under the Investment Company Act; and
4. purchase, sell or write puts, calls or combinations thereof, except as may be
described in the Fund's offering documents.
Each Fund may, notwithstanding any other fundamental or non-fundamental
investment policy or restriction, invest all of its assets in the securities of
a single open-end management investment company with substantially the same
fundamental investment objective, policies, and restrictions as the Fund.
MANAGEMENT OF THE TRUST
TRUSTEES AND EXECUTIVE OFFICERS
Responsibility for overall management of the Fund rests with the Board of
Trustees of the Trust in accordance with Delaware law.
The trustees and executive officers of the Trust, along with their principal
occupations over the past five years and their affiliations, if any, with the
Investment Manager, the Investment Sub-Advisers and Funds Distributor, Inc.
("FDI"), the Fund's distributor, are listed below.
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RICHARD W. DALRYMPLE, Trustee. Mr. Dalrymple has served as a Trustee of the
Trust since its inception. Mr. Dalrymple has served as a Director of each of TD
Waterhouse Family of Funds, Inc. ("TD WFF") and National Investors Cash
Management Fund, Inc. ("NICM") since December 12, 1995 and February 26, 1998,
respectively. Mr. Dalrymple has been the President of Teamwork Management, Inc.
since January 1997. Mr. Dalrymple has served as a Director of Dime Bancorp, Inc.
since 1990. Mr. Dalrymple has been a Trustee of The Shannon McCormack Foundation
since 1988, the Kevin Scott Dalrymple Foundation since 1993 and a Director of
National Center for Disability Services since 1983. From 1990 through 1995, Mr.
Dalrymple served as President and Chief Operating Officer of Anchor Bank. From
1985 through 1990, Mr. Dalrymple worked for the Bank of Boston. During this
time, Mr. Dalrymple served as the President of Massachusetts Banking and the
Southern New England Region, and as Department Executive of Banking Services. He
is 56 years old. Mr. Dalrymple's address is 70 West Red Oak Lane, White Plains,
NY 10604.
CAROLYN B. LEWIS, Trustee. Ms. Lewis has served as a Trustee of the Trust since
its inception. Ms. Lewis has served as a Director of each of TD WFF and NICM
since February 26, 1998. Since March 1997, Ms. Lewis has served as President of
The CBL Group providing professional services to clients in the securities and
healthcare industries. Ms. Lewis spent over 30 years at the United States
Securities and Exchange Commission (SEC) in various positions including Senior
Financial Analyst, Branch Chief and Assistant Director. In September 1997, Ms.
Lewis was appointed a member of the Board of Governors of the Philadelphia Stock
Exchange. Presently, Ms. Lewis is a member of the Board of Directors of the
Metropolitan Washington Airports Authority and a director on various healthcare
and hospital Boards, including Chairman of the Board of Trustees of the American
Hospital Association. She is 63 years old. Ms. Lewis' address is 2920 W Street
Southeast, Washington, DC 20020.
GEORGE F. STAUDTER*, Trustee. Mr. Staudter has served as Chairman of the Board
of Trustees of the Trust since its inception. Mr. Staudter has served as
Chairman of the Board of Directors of TD WFF since December 12, 1995. Mr.
Staudter is a Director of Koger Equity, Inc. Mr. Staudter served as a Director
of Waterhouse Investor Services, Inc. from 1987 to 1996. Since 1989, Mr.
Staudter has served as a Managerial and Financial Consultant, rendering
investment management, tax and estate planning services to individual clients,
and strategic planning advice to corporate clients. From 1993 through 1994, Mr.
Staudter was the Chief Executive Officer and served on the Board of Directors
for Family Steak Houses of Florida, Inc. He is 68 years old. Mr. Staudter's
address is 9637 Preston Trail West, Ponte Vedra, FL 32082.
LAWRENCE J. TOAL, Trustee. Mr. Toal has served as a Trustee of the Trust since
its inception. Mr. Toal has served as a Director of TD WFF since December 12,
1995. Mr. Toal is President and Chief Executive Officer of Dime Bancorp, Inc.
and its subsidiary, The Dime Savings Bank of New York, FSB (the "Dime"). He
joined the Dime in 1991 as President and Chief Operating Officer. Prior to
joining the Dime, Mr. Toal had been President of PSFS, a $10 billion
Philadelphia thrift from 1988 to 1991. Mr. Toal spent 26 years at The Chase
Manhattan Bank, N.A., in various senior management positions in consumer,
corporate and international banking areas in the United States, Europe and Asia.
He is 63 years old. Mr. Toal's address is 589 Fifth Avenue, 3rd Floor, New York,
NY 10017.
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GEORGE A. RIO**, President, Treasurer and Chief Financial Officer. Mr. Rio is
Executive Vice President and Director of Client Services of FDI since April
1998. From June 1995 to March 1998, Mr. Rio was Senior Vice President and Senior
Key Account Manager for Putnam Mutual Funds. From May 1994 to June 1995, Mr. Rio
was Director of Business Development for First Data Corporation. He is 44 years
old.
CHRISTOPHER J. KELLEY**, Vice President and Secretary. Mr. Kelley is Senior Vice
President and Deputy General Counsel of FDI, and an officer of certain
investment companies distributed by FDI or its affiliates. From April 1994 to
July 1996, Mr. Kelley was Assistant Counsel at Forum Financial Group. He is 35
years old.
* THIS TRUSTEE IS AN "INTERESTED PERSON" OF THE TRUST.
** ADDRESS: 60 STATE STREET, SUITE 1300, BOSTON, MA 02109
On April 30, 2000, the officers and trustees of the Trust, as a group, owned
less than 1% of the outstanding shares of the Fund.
Officers and trustees who are interested persons of the Investment Manager or
FDI receive no compensation from the Fund. Each trustee who is not an interested
person serving on the board of a company in the "Fund Complex" (which also
includes TD WFF and NICM, other investment companies advised by the Investment
Manager) receives a (i) complex-wide annual retainer of $12,000, (ii) a
supplemental annual retainer of $5,000 if serving on the board of more than one
fund in the Fund Complex (the Trust and TD WFF are treated as one fund for
purposes of calculating this fee), and (iii) a meeting fee of $2,000 for each
meeting attended. Trustees who are not interested persons also will be
reimbursed for their expenses by the Trust. Trustees who are interested persons
of the Trust may be compensated by the Investment Manager or its affiliates for
their services to the Trust.
The amounts of compensation that the Fund Complex paid to each trustee (or
director, as the case may be) for the fiscal year ended October 31, 1999, is
contained in the table below. Amounts for the Trust are based on amounts paid by
TD WFF for the period that were attributable to the Waterhouse Dow 30 Fund (the
Trust's initial series) as a series of TD WFF.
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<TABLE>
<CAPTION>
Pension or
Aggregate Retirement Estimated
Compensation Benefits Accrued Annual Total Compensation
Name of Board from as Part of Fund's Benefits Upon from Fund Complex (1)
Member Trust (3) Expenses Retirement Paid to Board Members (3)
------ --------- -------- ---------- -------------------------
<S> <C> <C> <C> <C>
Richard W. Dalrymple $3,125 $0 $0 $25,000
Carolyn B. Lewis $3,125 $0 $0 $25,000
George F. Staudter (2) $0 $0 $0 $0
Lawrence J. Toal $5,000 $0 $0 $20,000
---------------------------------
(1) "Fund Complex" includes the Trust, TD WFF and NICM, investment companies also advised by the Investment
Manager.
(2) Interested trustee of the Trust.
(3) Amounts do not include reimbursed expenses for attending Board meetings
or compensation from the Investment Manager or its affiliates.
</TABLE>
INVESTMENT MANAGEMENT AND OTHER SERVICES
INVESTMENT MANAGER
TD Waterhouse Asset Management, Inc., a Delaware corporation, is the Investment
Manager of the Fund (as previously defined, the "Investment Manager"). Pursuant
to the Investment Management Agreement with the Trust on behalf of the Funds,
the Investment Manager supervises the management of each Fund's investments in
accordance with its stated policies and restrictions, subject to oversight by
the Trust's Board of Trustees.
The Investment Manager is a wholly owned subsidiary of The Toronto-Dominion Bank
("TD Bank"). TD Bank, a Canadian chartered bank, is subject to the provisions of
the Bank Act of Canada. TD Bank is a part of worldwide group of banks and
financial service companies (referred to as the "TD Bank Financial Group"). As
of July 31, 2000, the TD Bank Financial Group had over $60 billion under
management including pension, endowment, foundation, segregated, corporate and
private accounts, and mutual and pooled funds.
The Investment Manager also currently serves as investment manager to other
mutual funds and to TD Waterhouse Bank, N.A. and as of July 31, 2000 had total
assets under management in excess of $11 billion.
The Investment Management Agreement will continue in effect for an initial
two-year term, and thereafter from year to year so long as continuation is
specifically approved at least annually by a vote of the Trust's Board of
Trustees or by vote of the shareholders of the Trust, and in either case by a
majority of Disinterested Trustees who have no direct or indirect financial
interest in the Agreement. The agreement may be terminated as to a Fund at any
time upon 60 days' prior written notice, without penalty, by either party, or by
a majority vote of the outstanding shares of that Fund, and will terminate
automatically upon assignment.
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<PAGE>
The Investment Management Agreement provides that the Investment Manager will
not be liable for any error of judgment or of law, or for any loss suffered by a
Fund in connection with the matters to which such agreement relates, except a
loss resulting from willful misfeasance, bad faith or gross negligence on the
Investment Manager's part in the performance of its obligations and duties, or
by reason of its reckless disregard of its obligations and duties under such
agreement. The services of the Investment Manager to the Funds under the
Investment Management Agreement are not exclusive and it is free to render
similar services to others.
For the investment management services furnished to the Funds, each Fund pays
the Investment Manager an annual investment management fee, accrued daily and
payable monthly, at the annual rate set forth in the Prospectus. The Investment
Manager compensates each Investment Sub-Adviser out of the fees that it receives
from the Funds.
The Investment Manager voluntarily agreed to reduce Fund expenses (by paying
certain expenses and/or waiving fees) so that each Fund's total expense ratio
(total expenses to average daily net assets) for the period from September 1,
2000 through August 31, 2001 will not exceed the following amounts,
respectively: Bond Index Fund, 0.35%; 500 Index Fund, 0.35%; Extended Market
Index Fund, 0.40%; Asian Index Fund, 0.58%; European Index Fund, 0.58%;
Technology Fund, 1.25%; and Tax Managed Growth Fund, 1.10%. Thereafter, for two
years, each Fund is required to reimburse the Investment Manager for expenses it
has borne, provided that the Fund's assets have grown or expenses have declined
sufficiently to allow reimbursement without causing its total expense ratio to
exceed the specified amount.
The Investment Manager and its affiliates may, from time to time, reduce a
Fund's operating expenses (by paying certain expenses and/or waiving fees).
Expense reductions by the Investment Manager or its affiliates will increase a
Fund's total return. Unless stated as contractual, expense reductions are
voluntary and may be reduced or eliminated at any time upon notifying investors.
CODES OF ETHICS
The Trust and its Investment Manager, Investment Sub-Advisers and Distributor
have adopted codes of ethics pursuant to Rule 17j-1 under the Investment Company
Act with respect to their personnel with access to information about the
purchase or sale of securities by the Funds. These codes are designed to protect
the interests of fund shareholders. While these codes contain provisions
reasonably necessary to prevent personnel subject to the codes from engaging in
unlawful conduct and require compliance review of securities transactions, they
do not prohibit such personnel from investing in securities, including
securities that may be purchased or held by the Funds so long as such
investments are made pursuant to the code's requirements.
INVESTMENT SUB-ADVISERS
TD INVESTMENT MANAGEMENT INC. TD Investment Management Inc., c/o TD Asset
Management Inc., P.O. Box 100, Toronto-Dominion Centre, 26th Floor, Toronto
Dominion Tower, 55 King Street West, Toronto, Ontario, Canada M5K 1A2 ("TDIM"),
serves as investment sub-adviser to each of the Index Funds. TDIM oversees the
investment program for each of the Index Funds, places orders for the Funds'
purchases and sales of portfolio securities,
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<PAGE>
and maintains records relating to such purchases and sales. TDIM is a
wholly-owned subsidiary of TD Bank and an affiliate of the Investment Manager,
and is part of the TD Bank Financial Group.
With respect to each of the Bond Index Fund, the 500 Index Fund and the Extended
Market Index Fund, TDIM receives from the Investment Manager a fee at the annual
rate of 0.10% of each Fund's average daily net assets. With respect to each of
the Asian Index Fund and the European Index Fund, TDIM receives from the
Investment Manager a fee at the annual rate of 0.20% of each Fund's average
daily net assets.
T. ROWE PRICE ASSOCIATES, INC. T. Rowe Price Associates, Inc. ("T. Rowe Price"),
100 East Pratt Street, Baltimore, MD 21202, serves as investment sub-adviser to
the Technology Fund and the Tax Managed Growth Fund. T. Rowe Price oversees the
investment program for each of these Funds, places orders for the Funds'
purchases and sales of portfolio securities, and maintains records relating to
such purchases and sales. Founded in 1937, T. Rowe Price and its affiliates
managed over $179 billion for more than eight million individual and
institutional investor accounts as of June 30, 2000.
For the services that it provides to the Technology Fund, T. Rowe Price receives
from the Investment Manager an annual fee on a graduated basis equal to 0.50% of
the first $500 million of average daily net assets of the Fund and 0.45% of
average daily net assets of the Fund over $500 million. For the services that it
provides to the Tax Managed Growth Fund, T. Rowe Price receives from the
Investment Manager an annual fee on a graduated basis equal to 0.45% of the
first $100 million of average daily net assets of the Fund, 0.40% of the next
$150 million, and 0.35% of average daily net assets of the Fund over $250
million.
ADMINISTRATOR
Pursuant to an Administration Agreement with the Trust, TD Waterhouse, an
affiliate of the Investment Manager, as Administrator, provides administrative
services to the Funds. Administrative services furnished by TD Waterhouse
include, among other services, maintaining and preserving the records of the
Funds, including financial and corporate records, computing net asset value,
dividends, performance data and financial information regarding the Funds,
preparing reports, overseeing the preparation and filing with the SEC and state
securities regulators of registration statements, notices, reports and other
material required to be filed under applicable laws, developing and implementing
procedures for monitoring compliance with regulatory requirements, providing
routine accounting services, providing office facilities and clerical support as
well as providing general oversight of other service providers. For these
services, TD Waterhouse receives an annual fee, payable monthly, of 0.10% of
each Fund's average daily net assets.
TD Waterhouse has entered into a Subadministration Agreement with FDI pursuant
to which FDI performs certain of the foregoing administrative services for the
Funds. TD Waterhouse pays FDI's fees for providing the services under the
Agreement. In addition, TD Waterhouse may enter into subadministration
agreements with other persons to perform such services from time to time.
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<PAGE>
The Administration Agreement will continue in effect for an initial two-year
term, and thereafter from year to year so long as such continuation is
specifically approved at least annually by a vote of the Board of Trustees,
including a majority of Disinterested Trustees who have no direct or indirect
financial interest in the Administration Agreement. A Fund or TD Waterhouse may
terminate the Administration Agreement on 60 days' prior written notice without
penalty. Termination by a Fund may be by vote of the Board of Trustees, or a
majority of the Disinterested Trustees who have no direct or indirect financial
interest in the Administration Agreement, or by a majority of the outstanding
voting securities of the Fund. The Administration Agreement terminates
automatically in the event of its "assignment" as defined in the Investment
Company Act.
The Administration Agreement provides that TD Waterhouse will not be liable for
any error of judgment or of law, or for any loss suffered by the Fund in
connection with the matters to which such agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on TD
Waterhouse's part in the performance of its obligations and duties, or by reason
of its reckless disregard of its obligations and duties under such agreement.
DISTRIBUTOR
The distributor of the Trust is FDI, 60 State Street, Suite 1300, Boston,
Massachusetts 02109. Pursuant to a Distribution Agreement between the Trust and
FDI, FDI has the exclusive right to distribute shares of the Funds. FDI may
enter into dealer or agency agreements with affiliates of the Investment Manager
and other firms for the sale of Fund shares. FDI has entered into such an agency
agreement with TD Waterhouse. FDI receives no fee from the Trust under the
Distribution Agreement for acting as distributor to the Trust. FDI also acts as
a subadministrator for the Trust. From time to time and out of its own
resources, the Investment Manager or its affiliates may pay fees to
broker-dealers or other persons for distribution or other services related to
the Funds.
The Distribution Agreement will continue in effect for an initial two-year term,
and thereafter from year to year so long as continuation is specifically
approved at least annually by a vote of the Trust's Board of Trustees, including
a majority of Disinterested Trustees who have no direct or indirect financial
interest in the Distribution Agreement. The Distribution Agreement was approved
by the Board of Trustees, including a majority of Disinterested Trustees who
have no direct or indirect financial interest in the Distribution Agreement. The
Fund may terminate the Distribution Agreement on 60 days' prior written notice
without penalty. Termination by the Fund may be by vote of a majority of the
Board of Trustees, or a majority of the Disinterested Trustees, or by a majority
of the outstanding voting securities of the Fund. The Distribution Agreement
terminates automatically in the event of its "assignment" as defined in the
Investment Company Act.
SHAREHOLDER SERVICING
The Trust's Board of Trustees has approved a Shareholder Servicing Plan
("Servicing Plan") pursuant to which each Fund may pay banks, broker-dealers or
other financial institutions that have entered into a shareholder services
agreement with the Trust ("Servicing Agents") in connection with shareholder
support services that they provide. Payments under the Servicing Plan will be
calculated daily and paid monthly at an annual rate of 0.25% of the average
daily net
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<PAGE>
assets of the applicable Fund. The shareholder services provided by the
Servicing Agents pursuant to the Servicing Plan may include, among other
services, providing general shareholder liaison services (including responding
to shareholder inquiries), providing information on shareholder investments,
establishing and maintaining shareholder accounts and records, and providing
such other similar services as may be reasonably requested.
The Servicing Plan was approved by the Trust's Board of Trustees, including a
majority of the Disinterested Trustees who have no direct or indirect financial
interest in the Plan or the Shareholder Services Agreement (described below).
The Servicing Plan continues in effect as long as such continuance is
specifically so approved at least annually. The Servicing Plan may be terminated
by the Trust with respect to a Fund by a vote of a majority of the Disinterested
Trustees who have no direct or indirect financial interest in the Plan or any
agreements relating thereto.
Pursuant to a Shareholder Services Agreement between the Trust and TD
Waterhouse, TD Waterhouse has agreed to provide shareholder services to each
Fund pursuant to the Shareholder Servicing Plan. The Trust may enter into
similar agreements with other service organizations, including broker-dealers
and banks whose clients are shareholders of the Trust, to act as Servicing
Agents and to perform shareholder support services with respect to such clients.
The Shareholder Services Agreement with TD Waterhouse will continue in effect
only if such continuance is specifically approved at least annually by a vote of
the Trust's Board of Trustees, including a majority of the Disinterested
Trustees who have no direct or indirect financial interest in the Agreement. The
Agreement was approved by the Trust's Board of Trustees, including a majority of
the Disinterested Trustees who have no direct or indirect financial interest in
the Agreement. A Fund may terminate the Shareholder Services Agreement on 60
days' prior written notice without penalty. Termination by a Fund may be by vote
of the Trust's Board of Trustees, or a majority of the Disinterested Trustees
who have no direct or indirect financial interest in the Agreement. The
Agreement terminates automatically in the event of its "assignment" as defined
in the Investment Company Act.
Conflict of interest restrictions may apply to the receipt by Servicing Agents
of compensation from the Trust in connection with the investment of fiduciary
assets in Fund shares. Servicing Agents, including banks regulated by the
Comptroller of the Currency, the Federal Reserve Board or the FDIC, and
investment sub-advisers and other money managers are urged to consult their
legal advisers before investing such assets in Fund shares.
TRANSFER AGENT AND CUSTODIAN
National Investor Services Corp. (the "Transfer Agent"), 55 Water Street, New
York, an affiliate of the Investment Manager, serves as transfer and dividend
disbursing agent for the Funds. For the services provided under the Transfer
Agency and Dividend Disbursing Agency Agreement, which include furnishing
periodic and year-end shareholder statements and confirmations of purchases and
sales, reporting share ownership, aggregating, processing and recording
purchases and redemptions of shares, processing dividend and distribution
payments, forwarding shareholder communications such as proxies, shareholder
reports, dividend notices and prospectuses to beneficial owners, receiving,
tabulating and transmitting proxies executed by
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beneficial owners and sending year-end tax reporting to shareholders and the
Internal Revenue Service, the Transfer Agent receives an annual fee, payable
monthly, of 0.05% of each Fund's average daily net assets. The Transfer Agent is
permitted to subcontract any or all of its functions with respect to all or any
portion of the Funds' shareholders to one or more qualified sub-transfer agents
or processing agents, which may be affiliates of the Transfer Agent, the
Distributor, or broker-dealers authorized to sell shares of the Funds pursuant
to a selling agreement with the Distributor. The Transfer Agent is permitted to
compensate those agents for their services; however, that compensation may not
increase the aggregate amount of payments by the Funds to the Transfer Agent.
Pursuant to a Custodian Agreement, The Bank of New York (the "Custodian"), 100
Church Street, New York, NY 10286, acts as the custodian of the Funds' assets.
The Custodian, among other things, maintains a custody account or accounts in
the name of each Fund, receives and delivers all assets for each Fund upon
purchase and upon sale or maturity, collects all income and other payments and
distributions with respect to the assets of each Fund, and pays expenses of each
Fund.
EXPENSES
Each Fund pays the expenses of its operations, including the costs of
shareholder and board meetings; the fees and expenses of blue sky and pricing
services, independent auditors, counsel, the Custodian and the Transfer Agent;
reports and notices to shareholders; the costs of calculating net asset value;
brokerage commissions or transaction costs; taxes; interest; insurance premiums;
Investment Company Institute dues; and the fees and expenses of qualifying that
Fund and its shares for distribution under federal and state securities laws. In
addition, each Fund pays for typesetting, printing and mailing proxy material,
prospectuses, statements of additional information, notices and reports to
existing shareholders, and the fees of the Disinterested Trustees. Each Fund is
also liable for such nonrecurring expenses as may arise, including costs of any
litigation to which the Trust may be a party, and any obligation it may have to
indemnify the Trust's officers and Trustees with respect to any litigation. The
Trust's expenses generally are allocated among the Funds on the basis of
relative net assets at the time of allocation, except that expenses directly
attributable to a particular Fund are charged to that Fund.
BROKERAGE ALLOCATION
The Investment Sub-Advisers place orders for the purchase and sale of assets
with brokers and dealers selected by and in its discretion. In placing orders
for the Funds' portfolio transactions, the Investment Sub-Advisers seek "best
execution" (i.e., prompt and efficient execution at the most favorable prices).
Consistent with the policy of "best execution," orders for portfolio
transactions are placed with broker-dealer firms giving consideration to the
quality, quantity and nature of the firms' professional services which include
execution, clearance procedures, reliability and other factors. In selecting
among the firms believed to meet the criteria for handling a particular
transaction, an Investment Sub-Adviser may give consideration to those firms
that provide market, statistical and other research information to the Trust and
the Investment Manager or Investment Sub-
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Adviser. In addition, a Fund may pay higher than the lowest available commission
rates when the Investment Sub-Adviser believes it is reasonable to do so in
light of the value of the brokerage and research services provided by the broker
effecting the transaction, viewed in terms of either the particular transaction
or the Investment Sub-Adviser's overall responsibilities with respect to
accounts as to which it exercises investment discretion. Any research benefits
derived are available for all clients. Because statistical and other research
information is only supplementary to the Investment Sub-Adviser's research
efforts and still must be analyzed and reviewed by its staff, the receipt of
research information is not expected to significantly reduce its expenses. In no
event will a broker-dealer that is affiliated with the Investment Manager or
Investment Sub-Adviser, as applicable, receive brokerage commissions in
recognition of research services provided to the Investment Manager or
Investment Sub-Adviser.
The Investment Sub-Advisers may employ broker-dealers that are affiliated with
them or the Investment Manager (collectively "Affiliated Brokers") to effect
portfolio transactions for the Funds, provided certain conditions are satisfied.
Payment of brokerage commissions to Affiliated Brokers is subject to Section
17(e) of the Investment Company Act and Rule 17e-1 thereunder, which require,
among other things, that commissions for transactions on securities exchanges
paid by a registered investment company to a broker which is an affiliated
person of such investment company, or an affiliated person of another person so
affiliated, not exceed the usual and customary brokers' commissions for such
transactions. The Trust's Board of Trustees, including a majority of
Disinterested Trustees, has adopted procedures to ensure that commissions paid
to Affiliated Brokers by the Funds satisfy the standards of Section 17(e) and
Rule 17e-1. Certain transactions may be effected for a Fund by an Affiliated
Broker at no net cost to that Fund; however, the broker-dealer may be
compensated by another broker-dealer in connection with such transaction for the
order flow to the second broker-dealer. Receipt of such compensation will be
subject to the Funds' procedures pursuant to Section 17(e) and Rule 17e-1.
The investment decisions for each Fund will be reached independently from those
for other accounts, if any, managed by the Investment Sub-Adviser. On occasions
when the Investment Sub-Adviser deems the purchase or sale of securities to be
in the best interest of one or more clients of the Investment Sub-Adviser, the
Investment Sub-Adviser, to the extent permitted by applicable laws and
regulations, may, but shall be under no obligation to, aggregate the securities
to be so sold or purchased in order to obtain the most favorable price or lower
brokerage commissions and efficient execution. In such event, allocation of the
securities so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Investment Sub-Adviser in accordance with its
policy for aggregation of orders, as in effect from time to time. In some cases
this procedure may affect the size or price of the position obtainable for a
Fund.
Purchases and sales of equity securities on exchanges are generally effected
through brokers who charge commissions. In transactions on stock exchanges in
the United States, these commissions generally are negotiated. In all cases, a
Fund will attempt to negotiate best execution.
Purchases and sales of fixed income portfolio securities are generally effected
as principal transactions. These securities are normally purchased directly from
the issuer or from an underwriter or market maker for the securities. There
usually are no brokerage commissions paid for such purchases. Purchases from
underwriters of portfolio securities include a
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commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers include the spread between the bid and ask
prices. In the case of securities traded in the over-the-counter markets, there
is generally no stated commission, but the price usually includes an undisclosed
commission or markup.
COMPUTATION OF NET ASSET VALUE
The price of a Fund's shares on any given day is its net asset value ("NAV") per
share. NAV is calculated by the Trust for each Fund on each day that the New
York Stock Exchange (the "NYSE") is open for trading. Currently, the NYSE is
closed on weekends and New Year's Day, Dr. Martin Luther King, Jr. Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
Securities owned by a Fund for which market quotations are readily available are
valued at current market value. Each Fund values its securities as follows. A
security listed or traded on an exchange is valued at its last sale price (prior
to the time as of which assets are valued) on the exchange where it is
principally traded. Lacking any such sales on the day of valuation, the security
is valued at the mean of the last bid and asked prices. All other securities for
which over-the-counter market quotations are readily available generally are
valued at the mean of the current bid and asked prices. When market quotations
are not readily available, securities are valued at fair value as determined in
good faith by the Board. Debt securities may be valued on the basis of
valuations furnished by pricing services that utilize electronic data processing
techniques to determine valuations for normal institutional-size trading units
of debt securities, without regard to sale or bid prices, when such valuations
are believed to more accurately reflect the fair market value of such
securities. Debt obligations with remaining maturities of 60 days or less
generally are valued at amortized cost. The amortized cost method involves
valuing a security at its cost and amortizing any discount or premium over the
period until maturity, regardless of the impact of fluctuating interest rates on
the market value of the security.
Most of the securities in which the Asian Index Fund and the European Index Fund
invest are traded in markets that close before the close of trading on the NYSE.
For securities primarily traded in the Far East, the most recent closing prices
may be as much as 15 hours old as of the close of trading of the NYSE. Normally,
developments that could affect the values of portfolio securities that occur
between the close of the foreign market and the close of trading on the NYSE
will not be reflected in the Asian Index Fund's net asset value. The Asian Index
Fund and the European Index Fund may adjust the previous closing prices to
reflect fair value or use the next available opening market prices to value its
portfolio securities.
Because certain of the Funds may invest in securities that are listed on foreign
exchanges that may trade on weekends or other days when those Funds do not price
their shares, those Funds' share value may change on days when shareholders will
not be able to purchase or redeem those Funds' shares.
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<PAGE>
DIVIDENDS AND TAX STATUS
DIVIDENDS
It is currently contemplated that dividends of the Bond Index Fund's net
investment income, if any, will be declared daily and paid monthly and that each
other Fund's net investment income, if any, will be declared and paid annually.
Any dividends declared will be net of that Fund's expenses accrued to date. In
the event that the Trust's Board of Trustees changes the dividend policy,
shareholders will be notified.
CAPITAL GAIN DISTRIBUTIONS
If a Fund realizes any net capital gain, such gain will be distributed at least
once during the year as determined by the Trust's Board of Trustees. Short-term
capital gain distributions by a Fund are taxable to shareholders as ordinary
income, not as capital gain. Any realized capital loss to the extent not offset
by realized capital gain will be carried forward.
TAX STATUS OF THE TRUST
Each Fund intends to qualify annually and to elect to be treated as a regulated
investment company under the Code. To qualify as a regulated investment company,
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
securities loans and gains from the sale or other disposition of stock,
securities or foreign currencies or other income derived with respect to its
business of investing in such stock, securities or currencies; (b) diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the market value of the Fund's assets is represented by cash and cash
items (including receivables), U.S. Government securities, the securities of
other regulated investment companies and other securities, with such other
securities of any one issuer limited for the purposes of this calculation to an
amount not greater than 5% of the value of the Fund's total assets and not
greater than 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 or the securities of
other regulated investment companies); and (c) distribute at least 90% of its
investment company taxable income (which includes, among other items, dividends,
interest and the excess of net short-term capital gains over net long-term
capital losses) and its net tax-exempt interest income each taxable year, if
any.
As a regulated investment company, each Fund generally will not be subject to
U.S. federal income tax on its investment company taxable income and net capital
gains (the excess of net long-term capital gains over net short-term capital
losses), if any, that it distributes to shareholders. Each Fund intends to
distribute to its shareholders, at least annually, substantially all of its
investment company taxable income and net capital gains. Amounts not distributed
on a timely basis in accordance with a calendar year distribution requirement
are subject to a nondeductible 4% excise tax. To prevent imposition of the
excise tax, 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, as prescribed by the Code) for the one-year period ending on October 31
of the calendar year, and (3) any ordinary income and capital gains for previous
years that was not distributed during those years.
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<PAGE>
A distribution will be treated as paid on December 31 of the current calendar
year if it is declared by a Fund in October, November or December with a record
date in such a month and paid by the Fund during January of the following
calendar year. Such distributions will be taxable to shareholders in the
calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To prevent application of the
excise tax, each Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
Dividends paid out of a Fund's investment company taxable income will be taxable
to a U.S. shareholder as ordinary income. If a portion of a Fund's income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the Fund may be eligible for the corporate dividends-received deduction.
Distributions of net capital gains, if any, designated as capital gain dividends
are taxable as long-term capital gains, regardless of how long the shareholder
has held the Fund's shares, and are not eligible for the dividends-received
deduction. Shareholders receiving distributions in the form of additional
shares, rather than cash, generally will have a cost basis in each such share
equal to the net asset value of a share of the Fund on the reinvestment date.
Shareholders will be notified annually as to the U.S. federal tax status of
distributions, and shareholders receiving distributions in the form of
additional shares will receive a report as to the net asset value of those
shares.
Investments by a Fund in zero coupon securities will result in income to the
Fund equal to a portion of the excess of the face value of the securities over
their issue price (the "original issue discount") each year that the securities
are held, even though the Fund receives no cash interest payments. This income
is included in determining the amount of income which the Fund must distribute
to maintain its status as a regulated investment company and to avoid the
payment of federal income tax and the 4% excise tax. In addition, if a Fund
invests in certain high yield original issue discount obligations issued by
corporations, a portion of the original issue discount accruing on the
obligation may be eligible for the deduction for dividends received by
corporations. In such event, dividends of investment company taxable income, to
the extent attributable to such portion of accrued original issue discount, may
be eligible for this deduction for dividends received by corporations if so
designated by the Fund in a written notice to shareholders.
Gain derived by a Fund from the disposition of any market discount bonds (i.e.,
bonds purchased other than at original issue, where the face value of the bonds
exceeds their purchase price) held by the Fund will be taxed as ordinary income
to the extent of the accrued market discount on the bonds, unless the Fund
elects to include the market discount in income as it accrues.
The taxation of equity options and over-the-counter options on debt securities
is governed by Code section 1234. Pursuant to Code section 1234, the premium
received by a Fund for selling a put or call option is not included in income at
the time of receipt. If the option expires, the premium is short-term capital
gain to the Fund. If the Fund enters into a closing transaction, the difference
between the amount paid to close out its position and the premium received is
short-term capital gain or loss. If a call option written by a Fund is
exercised, thereby requiring the Fund to sell the underlying security, the
premium will increase the amount realized upon the sale of such security and any
resulting gain or loss will be a capital gain or loss, and will be long-term or
short-term depending upon the holding period of the security. With respect to a
put or call
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<PAGE>
option that is purchased by a Fund, if the option is sold, any resulting gain or
loss will be a capital gain or loss, and will be long-term or short-term,
depending upon the holding period of the option. If the option expires, the
resulting loss is a capital loss and is long-term or short-term, depending upon
the holding period of the option. If the option is exercised, the cost of the
option, in the case of a call option, is added to the basis of the purchased
security and, in the case of a put option, reduces the amount realized on the
underlying security in determining gain or loss.
Certain options and futures contracts in which a Fund may invest are "section
1256 contracts." Gains or losses on section 1256 contracts generally are
considered 60% long-term and 40% short-term capital gains or losses; however,
foreign currency gains or losses (as discussed below) arising from certain
section 1256 contracts may be treated as ordinary income or loss. Also, section
1256 contracts held by a Portfolio at the end of each taxable year (and,
generally, for purposes of the 4% excise tax, on October 31 of each year) are
"marked-to-market" (that is, treated as sold at fair market value), resulting in
unrealized gains or losses being treated as though they were realized.
Generally, the hedging transactions undertaken by a Fund may result in
"straddles" for U.S. federal income tax purposes. The straddle rules may affect
the character of gains (or losses) realized by a Fund. In addition, losses
realized by a Fund on positions that are part of a straddle may be deferred
under the straddle rules, rather than being taken into account in calculating
the taxable income for the taxable year in which the losses are realized.
Because only a few regulations implementing the straddle rules have been
promulgated, the tax consequences to the Funds of engaging in hedging
transactions are not entirely clear. Hedging transactions may increase the
amount of short-term capital gain realized by the Funds which is taxed as
ordinary income when distributed to shareholders.
Each Fund may make one or more of the elections available under the Code which
are applicable to straddles. If a Fund makes any of the elections, the amount,
character and timing of the recognition of gains or losses from the affected
straddle positions will be determined under rules that vary according to the
election(s) made. The rules applicable under certain of the elections may
operate to accelerate the recognition of gains or losses from the affected
straddle positions.
Because 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 may be distributed to shareholders, and
which will be taxed to them as ordinary income or long-term capital gain, may be
increased or decreased as compared to a fund that did not engage in such hedging
transactions.
Notwithstanding any of the foregoing, a Fund may recognize gain (but not loss)
from a constructive sale of certain "appreciated financial positions" if the
Fund enters into a short sale, offsetting notional principal contract or forward
contract transaction with respect to the appreciated position or substantially
identical property. Appreciated financial positions subject to this constructive
sale treatment are interests (including options and forward contracts and short
sales) in stock, partnership interests, certain actively traded trust
instruments and certain debt instruments. Constructive sale treatment does not
apply to certain transactions closed in the 90-
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<PAGE>
day period ending with the 30th day after the close of the taxable year, if
certain conditions are met.
Unless certain constructive sale rules (discussed more fully above) apply, a
Fund will not realize gain or loss on a short sale of a security until it closes
the transaction by delivering the borrowed security to the lender. Pursuant to
Code Section 1233, all or a portion of any gain arising from a short sale may be
treated as short-term capital gain, regardless of the period for which the Fund
held the security used to close the short sale. In addition, the Fund's holding
period of any security which is substantially identical to that which is sold
short may be reduced or eliminated as a result of the short sale. Recent
legislation, however, alters this treatment by treating certain short sales
against the box and other transactions as a constructive sale of the underlying
security held by the Fund, thereby requiring current recognition of gain, as
described more fully above. Similarly, if a Fund enters into a short sale of
property that becomes substantially worthless, the Fund will recognize gain at
that time as though it had closed the short sale. Future Treasury regulations
may apply similar treatment to other transactions with respect to property that
becomes substantially worthless.
Under the Code, gains or losses attributable to fluctuations in exchange rates
which occur between the time a Fund accrues receivables or liabilities
denominated in a foreign currency, and the time the Fund actually collects such
receivables or pays such liabilities, generally are treated as ordinary income
or ordinary loss. Similarly, on disposition of debt securities denominated in a
foreign currency and on disposition of certain options and futures contracts,
gains or losses attributable to fluctuations in the value of foreign currency
between the date of acquisition of the security or contract and the date of
disposition also are treated as ordinary gain or loss. These gains or losses,
referred to under the Code as "section 988" gains or losses, may increase or
decrease the amount of a Fund's investment company taxable income to be
distributed to its shareholders as ordinary income.
Upon the sale or other disposition of shares of a Fund, a shareholder may
realize a capital gain or loss which will be long-term or short-term, generally
depending upon the shareholder's holding period for the shares. Any loss
realized on a sale or exchange will be disallowed to the extent the shares
disposed of are replaced (including shares acquired pursuant to a dividend
reinvestment plan) within a period of 61 days beginning 30 days before and
ending 30 days after disposition of the shares. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss. Any loss
realized by a shareholder on a disposition of Fund shares held by the
shareholder for six months or less will be treated as a long-term capital loss
to the extent of any distributions of net capital gains received by the
shareholder with respect to such shares.
If a Fund invests in stock of certain foreign investment companies, the Fund may
be subject to U.S. federal income taxation on a portion of any "excess
distribution" with respect to, or gain from the disposition of, such stock. The
tax would be determined by allocating such distribution or gain ratably to each
day of the Fund's holding period for the stock. The distribution or gain so
allocated to any taxable year of the Fund, other than the taxable year of the
excess distribution or disposition, would be taxed to the Fund at the highest
ordinary income tax rate in effect for such year, and the tax would be further
increased by an interest charge to reflect the value of the tax deferral deemed
to have resulted from the ownership of the foreign company's stock. Any
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<PAGE>
amount of distribution or gain allocated to the taxable year of the distribution
or disposition would be included in the Fund's investment company taxable income
and, accordingly, would not be taxable to the Fund to the extent distributed by
the Fund as a dividend to its shareholders.
Alternatively, a Fund may elect to mark-to-market its foreign investment company
stock, resulting in the stock being treated as sold at fair market value on the
last business day of each taxable year. Any resulting gain would be reported as
ordinary income; any resulting loss and any loss from an actual disposition of
the stock would be reported as ordinary loss to the extent of any net
mark-to-market gains previously included in income. Each Fund also may elect, in
lieu of being taxable in the manner described above, to include annually in
income its pro rata share of the ordinary earnings and net capital gain of the
foreign investment company.
Income received by a Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. If more than 50% of
the value of a Fund's total assets at the close of its taxable year consists of
securities of foreign corporations (which may be true of the European Index Fund
and the Asian Index Fund in certain years), the Fund will be eligible and may
elect to "pass-through" to the Fund's shareholders the amount of foreign income
and similar taxes paid by the Fund. Pursuant to this election, a shareholder
will be required to include in gross income (in addition to taxable dividends
actually received) his or her pro rata share of the foreign income and similar
taxes paid by the Fund, and will be entitled either to deduct his or her pro
rata share of foreign income and similar taxes in computing his or her taxable
income or to use it as a foreign tax credit against his or her U.S. Federal
income taxes, subject to limitations. No deduction for foreign taxes may be
claimed by a shareholder who does not itemize deductions. Foreign taxes
generally may not be deducted by a shareholder that is an individual in
computing the alternative minimum tax. Each shareholder will be notified within
60 days after the close of the Fund's taxable year whether the foreign taxes
paid by the Fund will "pass-through" for that year and, if so, such notification
will designate (1) the shareholder's portion of the foreign taxes paid to each
such country and (2) the portion of the dividend which represents income derived
from sources within each such country.
Generally, a credit for foreign taxes is subject to the limitation that it may
not exceed the shareholder's U.S. tax attributable to his or her total foreign
source taxable income. For this purpose, if a Fund makes the election described
in the preceding paragraph, the source of the Fund's income flows through to its
shareholders. With respect to a Fund, gains from the sale of securities
generally will be treated as derived from U.S. sources and section 988 gains
will be treated as ordinary income derived from U.S. sources. The limitation on
the foreign tax credit is applied separately to foreign source passive income,
including foreign source passive income received from a Fund. The foreign tax
credit limitation rules do not apply to certain electing individual taxpayers
who have limited creditable foreign taxes and no foreign source income other
than passive investment-type income. The foreign tax credit is eliminated with
respect to foreign taxes withheld on dividends if the dividend paying shares are
held by a Fund for less than 16 days (46 days in the case of preferred shares)
during the 30-day period (90-day period for preferred shares) beginning 15 days
(45 days for preferred shares) before the shares become ex-dividend. In
addition, if a Fund fails to satisfy these holding period requirements, it
cannot elect to pass through to shareholders the ability to claim a deduction
for the related foreign taxes. The foreign tax credit may offset only 90% of the
revised alternative minimum tax imposed on corporations and individuals.
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The foregoing is only a general description of the foreign tax credit under
current law. Because application of the credit depends on the particular
circumstances of each shareholder, shareholders are advised to consult their own
tax advisers.
Each Fund may be required to withhold U.S. federal income tax at the rate of 31%
of all taxable distributions payable to shareholders who fail to provide the
Fund with their correct taxpayer identification number or to make required
certifications, or who have been notified by the IRS that they are subject to
backup withholding. Corporate shareholders and certain other shareholders
specified in the Code generally are exempt from such backup withholding. Backup
withholding is not an additional tax. Any amounts withheld may be credited
against the shareholder's U.S. federal income tax liability.
Fund shareholders may be subject to state, local and foreign taxes on their Fund
distributions. In many states, Fund distributions which are derived from
interest on certain U.S. Government obligations are exempt from taxation. The
tax consequences to a foreign shareholder of an investment in a Fund may be
different from those described herein. Foreign shareholders are advised to
consult their own tax advisers with respect to the particular tax consequences
to them of an investment in a Fund. Shareholders are advised to consult their
own tax advisers with respect to the particular tax consequences to them of an
investment in a Fund.
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS
The Trust's independent auditors, Ernst & Young LLP, 787 Seventh Avenue, New
York, New York 10019, audit and report on the Trust's annual financial
statements, review certain regulatory reports and the Trust's federal income tax
returns, and perform other professional accounting, auditing, tax and advisory
services when engaged to do so by the Trust. Shareholders will receive annual
audited financial statements and semi-annual unaudited financial statements.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Shares of the Funds are sold on a continuous basis by the Distributor.
In general, shares of a Fund may be redeemed at net asset value. However, shares
of a Fund held for 180 days or less are redeemable at a price equal to a
specified percentage of the then current net asset value per share (the
"discount") according to the table below. This discount, referred to in the
Prospectus and this Statement of Additional Information as a redemption fee,
directly affects the amount a shareholder who is subject to the discount
receives upon redemption. It is intended to encourage long-term investment in
the applicable Fund, to avoid transaction and other expenses caused by early
redemptions and to facilitate portfolio management. The fee which is paid to the
Fund, is not a deferred sales charge, is not a commission paid to the Adviser or
its subsidiaries, and does not benefit the Adviser in any way. The Funds reserve
the right to modify the terms of or terminate this fee at any time.
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Extended Market
Index Fund,
Asian Index Fund, Technology Fund
and European and Tax Managed
Index Fund Growth Fund
Discount 99.25% 99%
If the Trust's Board of Trustees determines that existing conditions make cash
payments undesirable, redemption payments may be made in whole or in part in
securities or other property, valued for this purpose as they are valued in
computing the relevant Fund's NAV per share. Shareholders receiving securities
or other property on redemption may realize a gain or loss for tax purposes, and
will incur any costs of sale, as well as the associated inconveniences. An
in-kind distribution of portfolio securities will be less liquid than cash. The
shareholder may have difficulty in finding a buyer for portfolio securities
received in payment for redeemed shares. Portfolio securities may decline in
value between the time of receipt by the shareholder and conversion to cash. A
redemption in-kind of a Fund's portfolio securities could result in a less
diversified portfolio of investments for that Fund and could affect adversely
the liquidity of that Fund's portfolio.
The Trust may suspend redemption rights and postpone payments at times when
trading on the NYSE is restricted, the NYSE is closed for any reason other than
its customary weekend or holiday closings, emergency circumstances as determined
by the SEC exist, or for such other circumstances as the SEC may permit.
PERFORMANCE
The historical performance calculation for each Fund may be shown in the form of
"total return" or "yield." These various measures of performance are described
below.
Quotations of performance may from time to time be used in advertisements, sales
literature, shareholder reports or other communications to shareholders or
prospective investors. All performance information supplied by a Fund is
historical and is not intended to indicate future returns. Each Fund's total
return and yield fluctuate in response to market conditions and other factors.
The value of a Fund's shares when redeemed may be more or less than their
original cost.
In performance advertising, each Fund may compare its performance information
with data published by independent evaluators such as Morningstar, Inc., Lipper
Analytical Services, Inc., or other companies that track the investment
performance of investment companies ("Fund Tracking Companies"). Each Fund may
also compare any of its performance information with the performance of
recognized stock, bond and other indexes. Each Fund may refer to general market
performances over past time periods such as those published by Ibbotson
Associates (for instance, its "Stocks, Bonds, Bills and Inflation Yearbook"). In
addition, each Fund may refer in such materials to mutual fund performance
rankings and other data published by Fund Tracking Companies. Performance
advertising may also refer to discussions of a Fund and comparative
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<PAGE>
mutual fund data and ratings reported in independent periodicals, such as
newspapers and financial magazines.
TOTAL RETURN CALCULATIONS
Standardized total returns quoted in advertising and sales literature reflect
all aspects of a Fund's return, including the effect of reinvesting dividends
and capital gain distributions, and any change in a Fund's net asset value per
share over the period. Average annual returns are calculated by determining the
growth or decline in value of a hypothetical historical investment in a Fund
over a stated period, and then calculating the annually compounded percentage
rate that would have produced the same result if the rate of growth or decline
in value had been constant over the period. For example, a cumulative return of
100% over ten years would produce an average annual return of 7.18%, which is
the steady annual rate that would equal 100% growth on a compounded basis in ten
years. While average annual returns are a convenient means of comparing
investment alternatives, investors should realize that the performance is not
constant over time but changes from year to year, and that average annual
returns represent averaged figures as opposed to the actual year-to-year
performance of a Fund.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment, over such periods
according to the following formula:
P(1+T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 payment made at the
beginning of the applicable period.
In addition to average annual returns, a Fund may quote unaveraged or cumulative
total returns reflecting the simple change in value of an investment over a
stated period. Total returns may be broken down into their components of income
and capital (including capital gain and changes in share price) in order to
illustrate the relationship of these factors and their contributions to total
return. Total returns, yields, and other performance information may be quoted
numerically or in a table, graph, or similar illustration. Period total return
is calculated according to the following formula:
PT = (ERV/P) -1
Where:
PT = period total return.
The other definitions are the same as in average annual total return
above.
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SEC YIELD CALCULATIONS
Although published yield information is useful to investors in reviewing a
Fund's performance, investors should be aware that each Fund's yield fluctuates
from day to day and that a Fund's yield for any given period is not an
indication or representation by a Fund of future yields or rates of return on
that Fund's shares. The yields of a Fund are not fixed or guaranteed, and an
investment in a Fund is not insured or guaranteed. Accordingly, yield
information may not necessarily be used to compare shares of a Fund with
investment alternatives which, like money market instruments or bank accounts,
may provide a fixed rate of interest. Also, it may not be appropriate to compare
a Fund's yield information directly to similar information regarding investment
alternatives which are insured or guaranteed.
Standardized yields for each Fund used in advertising are computed by dividing
that Fund's dividend and interest income (in accordance with specific
standardized rules) for a given 30 days or one month period, net of expenses, by
the average number of shares entitled to receive distributions during the
period, dividing this figure by that Fund's NAV per share at the end of the
period, and annualizing the result (assuming compounding of income in accordance
with specific standardized rules) in order to arrive at an annual percentage
rate. Capital gain and loss generally are excluded from these calculations.
Income calculated for the purpose of determining a Fund's standardized yield
differs from income as determined for other accounting purposes. Because of the
different accounting methods used, and because of the compounding assumed in
yield calculations, the yield quoted for a Fund may differ from the rate of
distribution that Fund paid over the same period or the rate of income reported
in that Fund's financial statements.
OTHER ADVERTISEMENT MATTERS
The Fund may advertise other forms of performance. For example, the Fund may
quote unaveraged or cumulative total returns reflecting the change in the value
of an investment over a stated period. Average annual and cumulative total
returns may be quoted as a percentage or as a dollar amount, and may be
calculated for a single investment, a series of investments, and/or a series of
redemptions over any time period.
The Fund may also include various information in its advertisements. Information
included in the Fund's advertisements may include, but is not limited to (i)
portfolio holdings and portfolio allocation as of certain dates, such as
portfolio diversification by instrument type, by instrument, by location of
issuer, industry or by maturity, (ii) statements or illustrations relating to
the appropriateness of types of securities and/or mutual funds that may be
employed by an investor to meet specific financial goals, such as funding
retirement, paying for children's education and financially supporting aging
parents, (iii) information regarding the effects of automatic investment plans,
including the principle of dollar cost averaging, (iv) descriptions of the
Fund's portfolio manager(s) and the portfolio management staff of the Investment
Manager or summaries of the views of the portfolio managers with respect to the
financial markets, (v) the results of a hypothetical investment in the Fund or
the DJIA over a given number of years, including the amount that the investment
would be at the end of the period, (vi) the effects of investing in a
tax-deferred account, such as an individual retirement account or Section 401(k)
pension plan and (vii) the net asset value, net assets or number of shareholders
of the Fund as of one or more dates.
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In connection with its advertisements, the Fund may provide information about
its Investment Manager, TD Waterhouse or any of the Fund's other service
providers, including information relating to policies, business practices or
services. For instance, the Fund may provide information about TD Waterhouse in
its advertisements, including the difference between commissions paid on stock
trades executed by TD Waterhouse compared to full-price and discount brokers (as
illustrated below) and a description of services available through TD
Waterhouse. This example is for illustrative purposes only; investors should
contact the Customer Service Department at TD Waterhouse at 1-800-934-4448 for
information about services and commissions.
<TABLE>
<CAPTION>
Compare 1,000 shares @ $10 2,000 shares @ $14 3,000 shares @ $12
Our Price
MERRILL LYNCH/
ML DIRECT
<S> <C> <C> <C>
On-Line $29.95 $59.95 $89.95
Touch-Tone No Touch-Tone Trading No Touch-Tone Trading No Touch-Tone Trading
Live Broker $180.00 $210.00 $240.00
SCHWAB
On-Line $29.95 $60.00 $90.00
Touch-Tone $99.00 $145.44 $161.28
Live Broker $110.00 $161.60 $179.20
FIDELITY
On-Line $25.00 $45.00 $65.00
Touch-Tone $107.25 $136.50 $130.00
Live Broker $165.00 $210.10 $200.00
TD WATERHOUSE
ON-LINE $12.00 $12.00 $12.00
TOUCH-TONE $35.00 $35.00 $35.00
ACCOUNT OFFICER $45.00 $45.00 $45.00
<FN>
Survey date 8/23/99. Commission rates surveyed are for market orders on stocks and may vary for
other products. Services vary by firm.
Minimum commissions: on-line - $12.00, touch-tone - $35.00, Account Officer - $45.00.
Trades over 5,000 shares will incur a 1 cent per share charge for the entire trade.
</FN>
</TABLE>
The Fund may advertise information regarding the effects of periodic investment,
including the principle of dollar cost averaging. In a dollar cost averaging
program, an investor invests a fixed dollar amount in the Fund at period
intervals, thereby purchasing fewer shares when prices are high and more shares
when prices are low. While such a strategy does not ensure a profit or guard
against a loss in a declining market, the investor's average cost per share can
be lower than if fixed numbers of shares had been purchased at those intervals.
In evaluating such a plan, investors should consider their ability to continue
purchasing shares through periods of low price levels. For example, if an
investor invests $100 a month for a period of six months in the Fund the
following will be the relationship between average cost per share ($14.35 in the
example given) and average price per share:
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Systematic Share Shares
Period Investment Price Purchased
------ ---------- ----- ---------
1 $100 $10 10.000
2 $100 $12 8.333
3 $100 $15 6.666
4 $100 $20 5.000
5 $100 $18 5.555
6 $100 $16 6.250
---- --- -----
Total Invested $600 Avg. Price $15.17 Total Shares 41.804
SHAREHOLDER INFORMATION
The Trust has an unlimited number of authorized shares of beneficial interest.
The Board of Trustees may divide the authorized shares into an unlimited number
of separate portfolios or series and may divide portfolios or series into
classes of shares without shareholder approval. Currently, the Trust has eight
series: the Funds and TD Waterhouse Dow 30 Fund. Shares are fully paid and
nonassessable when issued, are transferable without restriction, and have no
preemptive or conversion rights. Shares of the Trust have equal rights with
respect to voting, except that the holders of shares of one investment portfolio
will have the exclusive right to vote on matters affecting only the rights of
the holders of the investment portfolio. For example, holders of a particular
investment portfolio will have the exclusive right to vote on any investment
management agreement or investment restriction that relates only to such
investment portfolio. Shareholders of the investment portfolios do not have
cumulative voting rights, and therefore the holders of more than 50% of the
outstanding shares of the Trust voting together for the election of trustees may
elect all of the members of the Board of Trustees. In such event, the remaining
holders cannot elect any members of the Board of Trustees.
The Trust will not normally hold annual shareholders' meetings. Under Delaware
law and the Trust's By-laws, an annual meeting is not required to be held in any
year in which the election of trustees is not required to be acted upon under
the Investment Company Act. The Trust's By-Laws provide that special meetings of
shareholders, unless otherwise provided by law or by the Agreement and
Declaration of Trust, may be called for any purpose or purposes by a majority of
the Board of Trustees, the Chairman of the Board, the President, or the written
request of the holders of at least 10% of the outstanding shares of the Trust
entitled to be voted at such meeting to the extent permitted by Delaware law and
the By-Laws of the Trust.
Currently, shareholders' voting rights are based on the number of shares that
they own. Under the Declaration of Trust, the Board of Trustees has the
authority to change the voting rights to a dollar-based voting system. Under a
dollar-based voting system, each dollar of net asset value (number of shares of
a series of the Trust (or class thereof) owned times the net asset value per
share of such series or class, as applicable) is entitled to one vote on any
matter on which those shares are entitled to vote and each fractional dollar
amount is entitled to a proportionate fractional vote.
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Each trustee serves until the next election of trustees and until the election
and qualification of his or her successor or until such trustee sooner dies,
resigns, retires or is removed by the affirmative vote of a majority of the
outstanding voting securities of the Trust. In accordance with the Investment
Company Act (i) the Trust will hold a shareholder meeting for the election of
trustees at such time as less than a majority of the trustees have been elected
by shareholders, and (ii) if, as a result of a vacancy in the Board of Trustees,
less than two-thirds of the trustees have been elected by the shareholders, that
vacancy will be filled only by a vote of the shareholders.
Delaware law provides that shareholders shall be entitled to the same limitation
of personal liability extended to stockholders of private corporations for
profit. The securities regulators of some states, however, have indicated that
they and the courts in their states may decline to apply Delaware law on this
point. To guard against this risk, the Trust's Agreement and Declaration of
Trust contains an express disclaimer of shareholder liability for acts or
obligations of the Trust and provides for indemnification out of Trust property
of any shareholder held personally liable for obligations of the Trust. Thus,
the risk of a shareholder incurring financial loss on account of shareholder
liability is limited to circumstances in which Delaware law does not apply (or
no contractual limitation of liability was in effect) and the portfolio is
unable to meet its obligation. In light of Delaware law and the nature of the
Trust's business, the Investment Manager believes that the risk of personal
liability to shareholders is extremely remote.
As permitted under Delaware law, the debts, liabilities, obligations and
expenses incurred, contracted for or otherwise existing with respect to a
particular series of the Trust (such as one of the Funds) is enforceable against
the assets of that series only and not against the assets of the Trust generally
or another series of the Trust.
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APPENDIX
RATINGS OF FIXED INCOME SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ("MOODY'S") CORPORATE RATINGS
Aaa Bonds that are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred
to as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds
because margins of protection may not be as large as in Aaa securities
or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in Aaa securities.
A Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment
sometime in the future.
Baa Bonds that are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest
payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such bonds lack outstanding
investment characteristics and in fact have speculative characteristics
as well.
Ba Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate, and therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of time
may be small.
Caa Bonds that are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
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C Bonds that are rated C are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B in its corporate bond rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS
The term "commercial paper" as used by Moody's means promissory
obligations not having an original maturity in excess of nine months. Moody's
makes no representations as to whether such commercial paper is by any other
definition "commercial paper" or is exempt from registration under the
Securities Act of 1933, as amended.
Moody's commercial paper ratings are opinions of the ability of issuers
to repay punctually promissory obligations not having an original maturity in
excess of nine months. Moody's makes no representation that such obligations are
exempt from registration under the Securities Act of 1933, nor does it represent
that any specific note is a valid obligation of a rated issuer or issued in
conformity with any applicable law. Moody's employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally be evidenced by the following characteristics:
-- Leading market positions in well established industries
-- High rates of return on funds employed
-- Conservative capitalization structures with moderate reliance on debt and
ample asset protection
-- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
-- Well established access to a range of financial markets and assured sources
of alternate liquidity
Issuers rated Prime-2 (or related supporting institutions) have a
strong capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization characteristics, while
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still appropriate, may be more affected by external conditions. Ample alternate
liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
level of debt protection measurements and the requirement for relatively high
financial leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
If an issuer represents to Moody's that its commercial paper
obligations are supported by the credit of another entity or entities, then the
name or names of such supporting entity or entities are listed within
parentheses beneath the name of the issuer, or there is a footnote referring the
reader to another page for the name or names of the supporting entity or
entities. In assigning ratings to such issuers, Moody's evaluates the financial
strength of the indicated affiliated corporations, commercial banks, insurance
companies, foreign governments or other entities, but only as one factor in the
total rating assessment. Moody's makes no representation and gives no opinion on
the legal validity or enforceability of any support arrangement. You are
cautioned to review with your counsel any questions regarding particular support
arrangements.
DESCRIPTION OF MOODY'S PREFERRED STOCK RATINGS
Because of the fundamental differences between preferred stocks and
bonds, a variation of the bond rating symbols is being used in the quality
ranking of preferred stocks. The symbols, presented below, are designed to avoid
comparison with bond quality in absolute terms. It should always be borne in
mind that preferred stocks occupy a junior position to bonds within a particular
capital structure and that these securities are rated within the universe of
preferred stocks.
Preferred stock rating symbols and their definitions are as follows:
aaa An issue that is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the
least risk of dividend impairment within the universe of preferred
stocks.
aa An issue that is rated "aa" is considered a high-grade preferred stock.
This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the
foreseeable future.
a An issue that is rated "a" is considered to be an upper-medium grade
preferred stock. While risks are judged to be somewhat greater than in
the "aaa" and "aa" classifications, earnings and asset protection are,
nevertheless, expected to be maintained at adequate levels.
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baa An issue that is rated "baa" is considered to be medium grade, neither
highly protected nor poorly secured. Earnings and asset protection
appear adequate at present but may be questionable over any great
length of time.
ba An issue that is rated "ba" is considered to have speculative elements
and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse
periods. Uncertainty of position characterizes preferred stocks in this
class.
b An issue that is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of
other terms of the issue over any long period of time may be small.
caa An issue that is rated "caa" is likely to be in arrears on dividend
payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue that is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual
payment.
c This is the lowest rated class of preferred or preference stock. Issues
so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's may apply numerical modifiers 1, 2 and 3 in each rating
classification from "aa" through "b" in its preferred stock rating system. The
modifier 1 indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates that the issue ranks in the lower end of its generic rating
category.
DESCRIPTION OF STANDARD & POOR'S ("STANDARD & POOR'S") CORPORATE DEBT RATINGS
A Standard & Poor's corporate or municipal rating is a current
assessment of the creditworthiness of an obligor with respect to a specific
obligation. This assessment may take into consideration obligors such as
guarantors, insurers, or lessees.
The debt rating is 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 Standard & Poor's from other sources it considers reliable. Standard
& Poor's does not perform an audit in connection with any rating 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 reasons.
The ratings are based, in varying degrees, on the following
considerations: (1) likelihood of default-capacity and willingness of the
obligor as to the timely payment of interest and
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repayment of principal in accordance with the terms of the obligation; (2)
nature of and provisions of the obligation; and (3) 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
creditors' rights.
AAA Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest-rated issues only in small
degree.
A Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher-
rated categories.
BBB Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than for debt in
higher-rated categories.
Debt rated BB, B, CCC, CC and C are regarded as having predominantly
speculative characteristics with respect to capacity to pay interest
and repay principal. BB indicates the least degree of speculation and C
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB Debt rated BB has less near-term vulnerability to default than other
speculative grade debt. However, it faces major ongoing uncertainties
or exposure to adverse business, financial or economic conditions which
could lead to inadequate capacity to meet timely interest and principal
payment. The BB rating category is also used for debt subordinated to
senior debt that is assigned an actual or implied BBB or BBB- rating.
B Debt rated B has a greater vulnerability to default but presently has
the capacity to meet interest payments and principal repayments.
Adverse business, financial or economic conditions would likely impair
capacity or willingness to pay interest and repay principal. The B
rating category is also used for debt subordinated to senior debt that
is assigned an actual or implied BB or BB- rating.
CCC Debt rated CCC has a current identifiable vulnerability to default, and
is dependent upon favorable business, financial and economic conditions
to meet timely payments of interest and repayments of principal. In the
event of adverse business, financial or economic conditions, it is not
likely to have the capacity to pay interest and repay principal. The
CCC rating category is also used for debt subordinated to senior debt
that is assigned an actual or implied B or B- rating.
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CC The rating CC is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC rating.
C The rating C is typically applied to debt subordinated to senior debt
which is assigned an actual or implied CCC- debt rating. The C rating
may be used to cover a situation where a bankruptcy petition has been
filed but debt service payments are continued.
CI The rating CI is reserved for income bonds on which no interest is
being paid.
D Debt rated D is in default. The D rating is assigned on the day an
interest or principal payment is missed. The D rating also will be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or minus (-): The ratings from AA to CCC may be modified by
the addition of a plus or minus sign to show relative standing within the major
ratings categories.
Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt 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, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood or risk of default upon failure of such completion. The investor
should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit
collateral is insured by the Federal Savings & Loan Insurance Corp. or
the Federal Deposit Insurance Corp. and interest is adequately
collateralized.
* Continuance of the rating is contingent upon Standard & Poor's receipt
of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flows.
NR Indicates that no rating has been requested, that there is insufficient
information on which to base a rating or that Standard & Poor's does
not rate a particular type of obligation as a matter of policy.
Debt obligations of issuers outside the United States and its
territories are rated on the same basis as domestic corporate and municipal
issues. The ratings measure the creditworthiness of the obligor but do not take
into account currency exchange and related uncertainties.
Bond Investment Quality Standards: 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. In addition,
the laws of various states governing legal investments impose
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certain rating or other standards for obligations eligible for investment by
savings banks, trust companies, insurance companies and fiduciaries generally.
DESCRIPTION OF STANDARD & POOR'S COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into four categories, ranging from "A" for the
highest quality obligations to "D" for the lowest. The four categories are as
follows:
A Issues assigned this highest rating are regarded as having the greatest
capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1 This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined
to possess overwhelming safety characteristics are denoted with a plus
(+) sign designation.
A-2 Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues
designated "A-l."
A-3 Issues carrying this designation have a satisfactory capacity for
timely payment. They are however, somewhat more vulnerable to the
adverse effects of changes in circumstances than obligations carrying
the higher designations.
B Issues rated "B" are regarded as having only adequate capacity for
timely payment. However, such capacity may be damaged by changing
conditions or short-term adversities.
C This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D This rating indicates that the issue is either in default or is
expected to be in default upon maturity.
The commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished to Standard &
Poor's by the issuer or obtained from other sources it considers reliable. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information.
DESCRIPTION OF STANDARD & POOR'S PREFERRED STOCK RATINGS
A Standard & Poor's preferred stock rating is an assessment of the
capacity and willingness of an issuer to pay preferred stock dividends and any
applicable sinking fund obligations. A preferred stock rating differs from a
bond rating inasmuch as it is assigned to an equity issue, which issue is
intrinsically different from, and subordinated to, a debt issue.
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Therefore, to reflect this difference, the preferred stock rating symbol will
normally not be higher than the bond rating symbol assigned to, or that would be
assigned to, the senior debt of the same issuer.
The preferred stock ratings are based on the following considerations:
I. Likelihood of payment -- capacity and willingness of the issuer to meet
the timely payment of preferred stock dividends and any applicable
sinking fund requirements in accordance with the terms of the
obligation.
II. Nature of, and provisions of, the issue.
III. Relative position of the issue in the event of bankruptcy,
reorganization, or other arrangements affecting creditors' rights.
AAA This is the highest rating that may be assigned by Standard & Poor's to
a preferred stock issue and indicates an extremely strong capacity to
pay the preferred stock obligations.
AA A preferred stock issue rated "AA" also qualifies as a high-quality
fixed income security. The capacity to pay preferred stock obligations
is very strong, although not as overwhelming as for issues rated "AAA."
A An issue rated "A" is backed by a sound capacity to pay the preferred
stock obligations, although it is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions.
BBB An issue rated "BBB" is regarded as backed by an adequate capacity to
pay the preferred stock obligations. Whereas it normally exhibits
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to make
payments for a preferred stock in this category than for issues in the
"A" category.
BB, Preferred stock rated "BB," "B," and "CCC" are regarded, on balance,
as predominantly
B, speculative with respect to the issuer's capacity to pay preferred
stock obligations. "BB"
CCC indicates the lowest degree of speculation and "CCC" the highest
degree of speculation. While such issues will likely have some quality
and protection characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
CC The rating "CC" is reserved for a preferred stock issue in arrears on
dividends or sinking fund payments but that is currently paying.
C A preferred stock rated "C" is a non-paying issue.
D A preferred stock rated "D" is a non-paying issue with the issuer in
default on debt instruments.
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NR indicates that no rating has been requested, that there is
insufficient information on which to base a rating, or that S&P does not rate a
particular type of obligation as a matter of policy.
Plus (+) or minus (-): To provide more detailed indications of
preferred stock quality, the ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
The preferred stock ratings are not a recommendation to purchase or
sell a security, inasmuch as market price is not considered in arriving at the
rating. Preferred stock ratings are wholly unrelated to Standard Poor's earnings
and dividend rankings for common stocks.
The ratings are based on current information furnished to Standard &
Poor's by the issuer, and obtained by Standard & Poor's from other sources it
considers reliable. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information.
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