As filed with the Securities and Exchange Commission on August 13, 1999
(File Nos. 33-[ ] and 811-9543).
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
and
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
TD WATERHOUSE FAMILY OF FUNDS
(Exact Name of Registrant as Specified in Charter)
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
(Address of Principal Executive Offices)
Registrant's Telephone Number: (416) 982-6039
Hilari D'Aguiar, Trustee
TD Waterhouse Family of Funds
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
(Name and Address of Agent for Service)
Copies to:
Joseph R. Fleming, Esq.
Dechert Price & Rhoads
Ten Post Office Square, South - Suite 1230
Boston, MA 02109
Approximate date of proposed public offering: As soon as practicable after the
effective date of this Registration Statement.
Registrant hereby amends this Registration Statement on such date or dates as
may be necessary to delay its effective date until Registrant files a further
amendment that specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a) of the Securities
Act of 1933, or until this Registration Statement becomes effective on such date
as the Commission, acting pursuant to Section 8(a) of the Securities Act of
1933, may determine.
<PAGE>
TD WATERHOUSE FAMILY OF FUNDS
CROSS REFERENCE SHEET
This Registration Statement contains the Prospectus and Statement of
Additional Information to be used with the seven series that comprise TD
Waterhouse Family of Funds (the "Registrant").
ITEMS REQUIRED BY FORM N-1A:
PART A:
ITEM 1 FRONT AND BACK COVER PAGES: Front and back cover pages
ITEM 2 RISK/RETURN SUMMARY: INVESTMENTS, RISKS AND PERFORMANCES: The
Funds' Investment Objectives; Principal Investment
Strategies of the Funds; Principal Risks of Investing in
the Funds; Why Invest in the Funds?; Who May Want to Invest
ITEM 3 RISK/RETURN SUMMARY: FEE TABLE: Fees and Expenses of the Funds
ITEM 4 INVESTMENT OBJECTIVES, PRINCIPAL INVESTMENT STRATEGIES, AND
RELATED RISKS: The Funds' Investment Objectives; Principal
Investment Strategies of the Funds; Principal Risks of
Investing in the Funds; Additional Information About the
Funds' Investment Strategies
ITEM 5 MANAGEMENT'S DISCUSSION OF FUND PERFORMANCE: Not applicable
ITEM 6 MANAGEMENT, ORGANIZATION AND CAPITAL STRUCTURE: Management of
the Trust
ITEM 7 SHAREHOLDER INFORMATION: How to Buy and Sell Shares;
Shareholder Information
ITEM 8 DISTRIBUTION ARRANGEMENTS: How to Buy and Sell Shares;
Management of the Trust
ITEM 9 FINANCIAL HIGHLIGHTS INFORMATION: Not applicable
PART B:
ITEM 10 COVER PAGE AND TABLE OF CONTENTS: Cover Page; Table of Contents
ITEM 11 FUND HISTORY: Organization of the Funds
ITEM 12 DESCRIPTION OF THE FUND AND ITS INVESTMENTS AND RISKS: Investment
Objectives, Policies and Restrictions
ITEM 13 MANAGEMENT OF THE FUND: Management of the Trust
ITEM 14 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES: Not Applicable
ITEM 15 INVESTMENT ADVISORY AND OTHER SERVICES: Investment Adviser and Other
Services; Independent Auditors and Reports to Shareholders
ITEM 16 BROKERAGE ALLOCATION AND OTHER PRACTICES: Brokerage Allocation
ITEM 17 CAPITAL STOCK AND OTHER SECURITIES: Organization of the Funds
ITEM 18 PURCHASE, REDEMPTION AND PRICING OF SHARES: Computation of Net Asset
Value; Additional Purchase and Redemption Information
ITEM 19 TAXATION OF THE FUND: Dividends and Tax Status
ITEM 20 UNDERWRITERS: Investment Adviser and Other Services
ITEM 21 CALCULATION OF PERFORMANCE DATA: Performance
ITEM 22 FINANCIAL STATEMENTS: Not Applicable
<PAGE>
TD WATERHOUSE FAMILY OF FUNDS
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 Systematic Technology Fund(TM)
TD Waterhouse Tax Managed Growth Fund
PROSPECTUS
[prospectus date]
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.
<PAGE>
TABLE OF CONTENTS
AN INTRODUCTION TO THE FUNDS.................................................3
OVERVIEW OF THE FUNDS........................................................3
THE FUNDS' INVESTMENT OBJECTIVES.............................................3
PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS.................................5
PRINCIPAL RISKS OF INVESTING IN THE FUNDS....................................8
WHY INVEST IN THE FUNDS?....................................................11
WHO MAY WANT TO INVEST......................................................12
FEES AND EXPENSES OF THE FUNDS..............................................15
Example............................................................17
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENT STRATEGIES...............17
HOW TO BUY AND SELL SHARES..................................................20
How to Buy Shares..................................................20
How to Sell Shares.................................................24
Telephone Transactions.............................................24
Brokerage Account Requirements.....................................25
Pricing Your Shares................................................25
MANAGEMENT OF THE TRUST.....................................................25
Investment Adviser.................................................25
Sub-Adviser........................................................26
Year 2000 Information..............................................26
Administrator......................................................27
Distributor........................................................27
Shareholder Servicing..............................................27
SHAREHOLDER INFORMATION.....................................................28
Dividends and Distributions........................................28
Taxes ..........................................................28
Where to go for Additional Information about the Funds.....Back Cover
Obtaining Information from the Securities
and Exchange Commission...................................Back Cover
<PAGE>
AN INTRODUCTION TO THE FUNDS
Index Funds. 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.
Index funds are not actively managed by investment advisers who buy and sell
securities based on research and analysis in an attempt to outperform a
particular benchmark. Rather, index funds attempt to mirror the performance of
the target index.
Actively Managed Funds. Actively managed funds are managed by investment
advisers who buy and sell securities based on research and analysis in an
attempt to outperform a particular benchmark.
Tax Managed Funds. Most mutual funds seek to maximize pretax total returns,
without regard to the personal tax consequences for investors. Yet most
investors stand to lose a substantial portion of their investment returns to
federal, state, and local taxes. Fund dividends and short-term capital gains are
now taxed at federal income tax rates as high as 39.6%; and 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 taxable
distributions and capital gains.
OVERVIEW OF THE FUNDS
Each TD Waterhouse fund (each a "Fund" and, collectively, the "Funds") is a
separate portfolio of the TD Waterhouse Family of Funds (the "Trust"), an
open-end management investment company, and has its own investment objectives
which it pursues through separate investment policies. The difference in
objectives and policies among the Funds affects the degree of risk and potential
return of each Fund.
THE FUNDS' INVESTMENT OBJECTIVES
The Index Funds
TD Waterhouse Bond Index Fund
The TD Waterhouse Bond Index Fund (the "Bond Index Fund") seeks to track closely
the performance of a broad, market-weighted bond index, before the deduction of
Fund expenses. The Bond Index Fund will hold a mix of bonds through which it
seeks to match the performance of the Lehman Brothers Aggregate Bond Index (the
"Lehman 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.
TD Waterhouse 500 Index Fund
The TD Waterhouse 500 Index Fund (the "500 Index Fund") seeks to track closely
the performance of a benchmark index that measures the investment return of
large-capitalization stocks, before the deduction of Fund expenses. The 500
Index Fund primarily invests in the stocks that comprise the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"). The S&P 500 Index is a
market-weighted index composed of 500 common stocks issued by
large-capitalization U.S. companies in a wide range of businesses. The stocks
included in the S&P 500 Index collectively represent a substantial portion of
all common stocks publicly traded in the U.S.
TD Waterhouse Extended Market Index Fund
The TD Waterhouse Extended Market Index Fund (the "Extended Market Index Fund")
seeks to track closely the performance of a benchmark index that measures the
investment return of mid- and small-capitalization stocks, before the deduction
of Fund expenses. The Extended Market Index Fund primarily invests in stocks
that comprise the Wilshire 4500 Equity Index (the "Wilshire 4500 Index"). The
Wilshire 4500 Index, a broadly diversified index of stocks of medium-size and
small U.S. companies, 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.
TD Waterhouse Asian Index Fund
The TD Waterhouse Asian Index Fund (the "Asian Index Fund") seeks to track
closely the performance of a benchmark index that measures the investment return
of stocks of Pacific Basin companies, before the deduction of Fund expenses. The
Asian Index Fund primarily invests in stocks that comprise the Morgan Stanley
Capital International Pacific Free Index* (the "MSCI Pacific Free Index"). The
MSCI Pacific Free Index, which contains approximately 400 common stocks of
Pacific Basin companies, is dominated by the Japanese stock market, which
represented [ ]% of the market capitalization of the index as of September 30,
1999. 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 fund are
tracked.
TD Waterhouse European Index Fund
The TD Waterhouse European Index Fund (the "European Index Fund") seeks to track
closely the performance of a benchmark index that measures the investment return
of stocks of European companies, before the deduction of Fund expenses. The
European Index Fund primarily invests in the stocks that comprise the Morgan
Stanley Capital International Europe Index (the "MSCI Europe 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 [ ]%, [ ]%, [ ]%, and [ ]%, respectively, as of
September 30, 1999. 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.
Actively Managed Funds
TD Waterhouse Systematic Technology Fund(TM)
The TD Waterhouse Systematic Technology Fund(TM) (the "Systematic Technology
Fund(TM)") seeks enhanced performance over a benchmark index that measures the
investment return of technology stocks, before the deduction of Fund expenses.
The Systematic Technology Fund(TM)'s core holdings will be invested primarily in
stocks that comprise the Goldman Sachs Technology Index (the "GSTI Composite
Index"). The GSTI Composite Index includes approximately 159 companies
representing several different sectors of the technology marketplace selected by
Goldman Sachs & Co. (including hardware, internet, multi-media networking,
semiconductors, services and software). The Systematic Technology Fund(TM) will
be managed such that its sector weightings will closely match those of the GSTI
Composite Index; however, drawing on proprietary research, the Fund's weightings
of specific stocks in the GSTI Composite Index will be adjusted based on the
outlook for particular companies. Up to 20% of the Systematic Technology
Fund(TM)'s total assets may be invested in stocks that are not included in the
GSTI Composite Index.
TD Waterhouse Tax Managed Growth Fund
The TD Waterhouse Tax Managed Growth Fund (the Tax Managed Growth Fund") seeks
long-term capital appreciation while minimizing taxable distributions to
shareholders.
Market Capitalization. Stocks of publicly traded companies -- and mutual funds
that hold these stocks -- can be classified by the companies' market value, or
capitalization. Generally, large-capitalization (large-cap) funds are defined as
those holding stocks of companies whose outstanding shares have a market value
exceeding $10 billion. Mid-capitalization (mid-cap) funds hold stocks of
companies with a market value between $1 billion and $10 billion.
Small-capitalization (small-cap) funds typically hold stocks of companies with a
market value of less than $1 billion.
PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS
TD Investment Management Inc. serves as investment adviser (the "Investment
Adviser") to each Fund. T. Rowe Price Associates, Inc. has been retained to
serve as sub-adviser (the Sub-Adviser") to the Systematic Technology Fund(TM)
and the Tax Managed Growth Fund.
All Index Funds (except the Bond Index Fund)
Each Index Fund employs a process called optimization, through which the Fund
invests in a statistically selected sample of the stocks found in its target
index. Optimization allows an Index Fund to select stocks whose industry
weightings, market capitalizations and risk characteristics, in the aggregate,
closely match those of the index. In using optimization, the Index 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 Index Fund's Investment 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 Adviser regularly
monitors the Fund's correlation to its target index and adjusts the portfolio to
the extent necessary. At times, the Index Fund's portfolio composition may be
altered (or "rebalanced") to reflect changes in the characteristics of the
index. Optimization will be used to balance the benefit of closely tracking the
index with the cost of trading securities in the Index Fund's portfolio. Under
normal market conditions, each Fund invests at least 90% of its assets in the
securities or other financial instruments that make up, or are correlated with,
the applicable index.
The 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 (some bonds have very similar characteristics), sampling offers an
effective approach to index management.
In sampling the Lehman Index, the Bond Index 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 financial instruments that make up, or are
correlated with, the Lehman Index.
Until the Bond Index Fund reaches an asset level sufficient to permit it to
invest in accordance with its investment objective, it is expected that the Fund
will initially invest primarily in U.S. Treasury securities.
The Systematic Technology Fund(TM)
The Systematic Technology Fund(TM) seeks enhanced performance over that of the
GSTI Composite Index by using a systematic approach. While the Fund's core
holdings will be invested primarily in stocks which comprise the GSTI Composite
Index, the Sub-Adviser will use its proprietary research to assess the
fundamental prospects of the Fund's core holdings. The Systematic Technology
Fund(TM)'s weightings to these core holdings will be adjusted to reflect the
Sub-Adviser's views on the particular companies in the GSTI Composite Index. For
example, the Sub-Adviser may overweight the Fund's core holdings in stocks that
it believes offer above-average earnings growth or which stand to benefit from
technological advances. On the other hand, the Sub-Adviser may underweight the
Fund's core holdings in stocks that it believes are fully valued based upon
price/earnings ratios relative to the market sector or the company's own growth
rate. If the Sub-Adviser does not have a view on a particular company in the
GSTI Composite Index, its weighting in the Fund will equal that of the index.
The Systematic Technology Fund(TM) may not at times hold all of the stocks in
the GSTI Composite Index. The sector weightings of the Fund's core holdings,
however, are expected to closely approximate that of the GSTI Composite Index.
The Systematic Technology Fund(TM) expects to concentrate (in other words,
invest 25% or more of its total assets) in the securities of technology-related
companies.
The Systematic Technology Fund(TM) may also hold up to 20% of its total assets
in stocks that are not part of the GSTI Composite Index. This portion of the
Fund's portfolio will be actively managed by the Sub-Adviser based upon
fundamental, bottom-up analysis that seeks to identify technology companies with
strong growth prospects. These holdings may include small or mid-size 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 comprise companies that are not included in the GSTI
Composite Index because they have recently conducted an initial public offering
and have limited operating histories, or they may be foreign companies.
While most assets will be invested in U.S. common stocks, other securities may
also be purchased, including foreign stocks, futures and options, in keeping
with the Systematic Technology Fund(TM)'s investment objectives.
The Tax Managed Growth Fund
Unlike the Index Funds, the Tax Managed Growth Fund is actively managed by the
Sub-Adviser. The Fund will invest primarily in large-capitalization stocks
selected mainly from the 1,000 largest U.S. companies.
Stock selection is based on fundamental, bottom-up analysis that seeks to
identify companies with superior long-term appreciation prospects. Generally the
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, are also considered.
Generally, the Tax Managed Growth Fund will limit exposure to high-yielding
stocks. 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 Tax Managed Growth Fund's goal of minimizing taxable
distributions, the 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 Tax Managed Growth Fund does
sell securities that have appreciated in value, the 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
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 securities may
also be purchased, including foreign stocks, futures and options, in keeping
with the Tax Managed Growth Fund's investment objectives.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
Risks That Apply to All Funds
o There can be no assurance that a Fund will achieve its investment
objective. You could lose money on your investment in a Fund, or the Fund
could underperform its benchmark or other investments.
o The Funds are also subject to selection risk, which, in the case of the
Index Funds, is the risk that a Fund's investments, which may not fully
replicate the target Index, may perform differently from the securities in
the Index. With respect to the Systematic Technology Fund(TM) and the Tax
Managed Growth Fund, the Sub-Adviser's assessment of companies held in each
Fund's portfolio may prove incorrect, resulting in losses or poor
performance even in a rising market.
o To the extent a Fund uses derivatives such as futures and options, it is
exposed to the risks of additional volatility and losses.
o An investment in the 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.
o The Funds are subject to Y2K Risk, which is the risk that the inability of
some computers to properly process and calculate date-related information
and data on and after January 1, 2000 could disrupt a company's operations,
including those of the Funds. Because Y2K risk affects virtually all
organizations, the companies in whose securities the Funds invest also
could be adversely impacted and the Funds' returns could be reduced. The
Y2K problem may have a disproportionate impact on the technology sector,
with its emphasis on computing and, therefore, on the performance of the
Systematic Technology Fund(TM).
Index Fund Risks
o Unlike other funds that do not attempt to track an index, the Index Funds
may not use certain techniques to reduce the risk of loss. For example, the
Index Funds generally will not keep a substantial portion of their assets
in cash. As a result, the Index Funds may decrease in value more than an
actively managed fund which holds a cash position in the event of a general
market decline.
o Because each Index Fund is subject to fees and expenses, the Index Fund
will tend to underperform the results of the index, which is not subject to
fees and expenses.
Funds Investing in Stocks
o Each Fund's total return, like stock prices generally, will fluctuate
within a wide range, 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.
o Each Fund is also subject to investment style 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.
Funds Investing in Foreign Securities
o All Funds may invest, to varying degrees, in foreign securities, although
the European Index Fund and Asian Index Fund will invest substantially all
of their assets in such securities. 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. 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. These
factors, as well as the following, could affect your investment in these
Funds.
o The Funds are subject to country risk, which is the risk that a country's
economy will be damaged by political instability, financial problems or
natural disasters. 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. The same risk applies to the European Index Fund,
because four countries comprise a majority of the MSCI Europe Index; stocks
from the remaining 11 countries have much less substantial market
capitalization weightings in the index and thus much less impact on its
total return.
o Another form of country risk applicable to the European Index Fund is the
transition to a common European currency -- the "euro" -- which began on
January 1, 1999. The euro conversion could cause uncertainty in the
European financial markets. If there are difficulties with the euro
conversion, the European Index Fund's European holdings could be adversely
affected.
o The Funds are subject to regional risk, which is the risk that an entire
region (Europe, for instance, in the case of the European Index Fund) will
be hurt by political instability, financial problems or natural disasters.
o The Funds 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.
The Systematic Technology Fund(TM)
o The Systematic Technology Fund(TM)'s investments are limited to industry
segments of the U.S. stock market that are generally associated with
technology. Greater risk and increased volatility is associated with
investments in the technology segment of the stock market (as opposed to
investments in a broader range of industries).
o The Systematic Technology Fund(TM) seeks to track the GSTI Composite Index
during down markets as well as during up markets. The Fund's returns will
be directly affected by the volatility of the stocks making up the GSTI
Composite Index, which includes small companies and foreign securities.
o 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 Systematic
Technology Fund(TM) has significant exposure to smaller or unseasoned
companies, which may not have established products or more experienced
management.
o The Systematic Technology Fund(TM) is "non-diversified," which allows it to
invest more than 5% of its assets in the stock of a single company. To the
extent the Systematic Technology Fund(TM) invests a greater percentage of
its assets in a single company, the Fund has greater exposure to
the performance and risks of the stock of that company.
o By concentrating its investments in the securities of technology-related
companies, the Systematic Technology Fund(TM) may be subject to greater
market fluctuation than a fund invested in a broader range of securities.
The Bond Index Fund
o The Bond Index Fund is subject to interest rate risk, which 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.
o The Bond Index Fund is subject to income risk, which is the risk that
falling interest rates will cause the Fund's income to decline. Income risk
is generally higher for short-term bonds, and lower for long-term bonds.
o The Bond Index Fund is subject to credit risk, which is the risk that a
bond issuer will fail to pay interest and principal in a timely manner,
reducing the Fund's return.
o The Bond Index Fund is subject to prepayment risk, which 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 Bond Index Fund would
experience a decline in income and lose the opportunity for additional
price appreciation associated with falling rates.
o The Bond Index Fund is subject to extension risk, which is the risk that
during periods of rising interest rates, issuers may pay off certain types
of mortgage-backed securities more slowly than originally anticipated,
which causes the value of these securities to fall.
o The Bond Index Fund is subject to event risk, which is the risk that
corporate issuers may undergo restructurings, such as mergers, leveraged
buyouts, takeovers, or similar events, which may be financed by increased
debt. As a result of the added debt, the credit quality and market value of
a company's bonds may decline significantly.
The Tax Managed Growth Fund
o The Tax Managed Growth Fund's investment approach could fall out of favor
with the investing public, resulting in lagging performance versus other
types of stock funds.
o 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 dividends often associated with value 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.
o Investing in stocks that appear undervalued carries the risk that the
market will not recognize a security's intrinsic value for a long time, or
that a stock judged to be undervalued may actually be appropriately priced.
There is no guarantee that the Tax Managed Growth Fund's attempts to manage
its portfolio in a tax-efficient manner will be successful.
WHY INVEST IN THE FUNDS?
The Index Funds. The Index Funds may appeal to many investors for a number of
reasons. The Index Funds generally invest in a diversified mix of companies and
industries, and typically match the performance of relevant market benchmarks
more closely than comparable actively managed funds. The Index Funds do not have
many of the expenses of an actively managed fund -- such as research -- and keep
trading activity, and thus brokerage commissions, to a minimum. Because an index
fund typically sells securities only to respond to redemption requests or to
adjust the number of shares it holds to reflect a change in its target index,
the Fund's turnover rate -- and thus its realization of taxable capital gains --
is usually very low.
The Systematic Technology Fund(TM). The Systematic Technology Fund(TM) seeks to
combine the benefits of the Index Funds with the possibility of returns higher
than the GSTI Composite Index by emphasizing stocks in the index that are
expected to generate the highest returns.
The Tax Managed Growth Fund. For those who are not investing in tax-deferred or
tax-free accounts, such as IRAs or retirement accounts, there are relatively few
vehicles focused on maximizing after-tax returns. Investors in higher tax
brackets, in particular, could be giving up a substantial portion of their
overall investment returns due to taxation. To address this problem, the Tax
Managed Growth Fund attempts to capture the growth potential of equities while
minimizing the need to distribute net capital gains and keeping taxable income
low. (Investors in taxable accounts, however, could potentially incur capital
gains when they sell Fund shares.)
For those investing in tax-deferred accounts or tax-free accounts, the use of
tax-minimizing strategies should not necessarily limit long-term returns. Buying
and holding quality growth stocks and minimizing portfolio turnover are
strategies that can achieve attractive long-term investment growth,
notwithstanding tax considerations.
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.
The 500 Index Fund may be an appropriate investment if you:
o Want to invest in large U.S. companies.
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.
The Extended Market Index Fund may be an appropriate investment if you:
o 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 as
compared to a fund investing exclusively in U.S. large-cap companies.
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 looking for a substantial amount of current income.
The Asian Index Fund may be an appropriate investment if you:
o Are looking for exposure to the Asian markets and can accept the additional
risk and volatility associated with foreign investing as compared to a fund
investing exclusively in U.S. companies.
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 looking for a substantial amount of current income.
The European Index Fund may be an appropriate investment if you:
o 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.
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 looking for a substantial amount of current income.
The Systematic Technology Fund(TM) may be an appropriate investment if you:
o Want exposure to the technology sector and can accept the additional risk
and volatility associated with stocks of technology companies as compared
to a fund investing across multiple sectors and industries.
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 looking for a substantial amount of current income.
The Tax Managed Growth Fund may be an appropriate investment if you:
o Are looking for long-term capital appreciation on an after-tax basis.
o Are a relatively high-income investor seeking tax-advantaged total returns
who can accept the possibility of share price declines.
o Are not looking for a substantial amount of current income.
<PAGE>
FEES AND EXPENSES OF THE FUNDS
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.
All Funds
Shareholder Transaction Fees (fees paid
directly from your investment)
Maximum Sales
Charge (Load)
Imposed on
Purchases None
Redemption Fee
(if redeemed within
90 days after
purchase,
as a percentage
of amount
redeemed)* 2%
Annual Account
Maintenance Fee** $10
* You may be assessed a redemption fee of up to 2% of the amount you are
redeeming if you redeem Fund shares within 90 days after investing in a Fund.
** An annual account maintenance fee of up to $10 may be charged by a Fund to
your account, including an account maintained with TD Waterhouse. If charged,
sufficient shares will be redeemed from your account to cover the fee. However,
recognizing that there are administrative cost savings on larger accounts, the
fee will be waived if you continuously maintain an investment of $10,000 or more
in a Fund.
<PAGE>
Extended Euro- Tax
Bond 500 Market Asian pean Systematic Managed
Index Index Index Index Index Technology Growth
Fund Fund Fund Fund Fund Fund(TM) Fund
Annual Operating
Expenses (expenses
deducted from Fund
assets)
Management
Fees [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Distribution
(12b-1) Fees None None None None None None None
Service Fees 0.25% 0.25% 0.25% 0.25% 0.25% 0.25% 0.25%
Other Expenses* [ ] [ ] [ ] [ ] [ ] [ ] [ ]
Total Operating
Expenses [ ] [ ] [ ] [ ] [ ] [ ] [ ]
- ---------------------
* "Other Expenses" are based on estimated amounts for the current fiscal year.
<PAGE>
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
500 Index Fund
Extended Market Index Fund
Asian Index Fund
European Index Fund
Systematic Technology Fund(TM)
Tax Managed Growth Fund
ADDITIONAL INFORMATION ABOUT THE FUNDS' INVESTMENT STRATEGIES
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. The Funds
adhere to applicable investment restrictions and policies at the time they make
an investment. A later change in circumstances will not require the sale of an
investment if it was proper at the time it was made.
The 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.
The Index Funds also may invest up to 10% of their total assets in certain money
market instruments to provide liquidity for paying redemptions and fees, among
other reasons. These instruments may include obligations of the U.S. Government,
its agencies or instrumentalities, investment grade bonds or comparable unrated
bonds (i.e., those rated A or higher by Moody's Investors Service, Inc. or
Standard & Poor's Corporation or, if unrated, of comparable quality in the
opinion of the Fund's Investment Adviser), commercial paper, bank obligations
and repurchase agreements. To the extent an Index Fund invests in short-term
money market instruments, it will generally also invest in options, futures or
other derivatives in order to maintain full exposure to its target index.
The Index Funds may, but are not required to, engage in futures and options
transactions and other derivative securities transactions, such as warrants,
convertible securities and swap agreements, to hedge against changes in market
conditions or 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.
Losses involving futures can sometimes be substantial -- in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss for an Index Fund. Similar risks exist for warrants
(securities that permit their owners to purchase a specific number of stock
shares at a predetermined price), convertible securities (securities that may be
exchanged for another asset) and swap agreements (contracts in which each party
agrees to make payments to the other based on the return of a specified index or
asset). For this reason, the Index Funds will not use futures, options,
warrants, convertible securities, or swap agreements for speculative purposes or
as leveraged investments.
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 these Index Funds will invest more than 5% of its assets in foreign
securities.
Each Index Fund that invests in foreign securities denominated in a foreign
currency may, but is not required to, engage in foreign currency futures
contracts and related options transactions for hedging purposes. 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 may also enter
into forward foreign currency contracts in order to maintain the same currency
exposure as its respective index. 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 Index Funds will use these
contracts for reasons such as gaining currency exposure when investing in stock
index futures or settling trades in a foreign currency.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Index Funds generally are managed without regard to tax
ramifications.
The Systematic Technology Fund(TM). The Systematic Technology Fund(TM)'s core
holdings generally will be invested primarily in stocks which comprise the GSTI
Composite Index, and the Fund's exposure to these core holdings will be adjusted
by the Sub-Adviser based upon proprietary research. While the Systematic
Technology Fund(TM) may not hold all of the stocks in the GSTI Composite Index
at any one time, the sector weightings of the Fund's core holdings are expected
to closely approximate that of the index. Up to 20% of the Systematic Technology
Fund(TM)'s total assets may be invested in technology company stocks that are
not part of the GSTI Composite Index. These will be selected by the Sub-Adviser
based upon fundamental, bottom-up analysis.
The Tax Managed Growth Fund. In seeking to meet its investment objectives, the
Tax Managed Growth Fund may invest in any type of security or instrument
(including certain potentially high-risk derivatives) whose investment
characteristics are consistent with the Fund's investment program. The Tax
Managed Growth Fund invests primarily in common stocks and may, to a lesser
degree, purchase other types of securities described below.
The Tax Managed Growth Fund may invest in debt or preferred equity securities
convertible into, or exchangeable for, equity securities, and warrants.
The Tax Managed Growth Fund may invest in hybrid instruments, a type of
potentially high-risk derivative which 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.
The Systematic Technology Fund(TM) and Tax Managed Growth Fund. The Systematic
Technology Fund(TM) and the Tax Managed Growth Fund each will hold a portion of
its assets in short-term (tax-exempt, in the case of the Tax Managed Growth
Fund) money market securities maturing in one year or less . This reserve
position provides flexibility in meeting redemptions, expenses, and the timing
of new investments; can help in structuring each Fund's weighted average
maturity; and serves as a short-term defense during periods of unusual market
volatility. The Systematic Technology Fund(TM)'s and the Tax Managed Growth
Fund's reserve position can consist of shares of one or more money market funds,
including certain money market funds affiliated with the Sub-Adviser, as well as
short-term, investment-grade securities, including (tax-exempt, in the case of
the Tax Managed Growth Fund) commercial paper, municipal notes, and short-term
maturity bonds. Some of these securities may have adjustable, variable, or
floating rates. For temporary, defensive purposes, the Systematic Technology
Fund(TM) and the Tax Managed Growth Fund each may invest without limitation in
money market reserves. The effect of taking such a position is that the
Systematic Technology Fund(TM) or the Tax Managed Growth Fund may not achieve
its investment objectives.
Up to 25% of the Systematic Technology Fund(TM)'s and the Tax Managed Growth
Fund's total assets (excluding reserves) 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 Systematic Technology Fund(TM) and the Tax Managed Growth Fund each may buy
and sell futures and options contracts for any number of reasons, including:
managing its exposure to changes in securities prices and foreign currencies; as
an efficient means of adjusting its overall exposure to certain markets;
attempting to enhance income; as a cash management tool; and protecting the
value of portfolio securities. The Systematic Technology Fund(TM) and the Tax
Managed Growth Fund each may purchase, sell or write call and put options on
securities, financial indexes, and foreign currencies.
All Funds. Each Fund may invest in private placements, which are securities sold
directly to a small number of investors, usually institutions. Unlike public
offerings, such securities are not registered with the SEC. Although certain of
these securities may be readily sold, for example, under Rule 144A, others may
be illiquid, and their sale may involve substantial delays and additional costs.
Up to 15% of the Fund's net assets may be invested in illiquid securities,
including repurchase agreements providing for settlement in more than seven
days.
As a fundamental policy, each Fund may borrow money from banks as a temporary
measure for emergency purposes, to facilitate redemption requests, or for other
purposes consistent with the Fund's investment objective and program. Borrowings
may not exceed 33 1/3% of a Fund's 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).
The total market value of securities against which each Fund writes call or put
options may not exceed 25% of its total assets. A Fund will not commit more than
5% of its total assets to premiums when purchasing call or put options. 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 value of all futures contracts in which each Fund
acquires an interest cannot exceed 10% of that Fund's total assets.
HOW TO BUY AND SELL SHARES
How to Buy Shares.
Investors may purchase shares of the Fund through an account maintained with TD
Waterhouse ("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 Application. To request an application,
please call 800-934-4410. 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 funds in their TD Waterhouse account
to buy shares of the Fund.
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 the Fund, are protected up to $75 million for loss of securities (not
including loss due to market fluctuations of securities or economic conditions).
The first $500,000 is provided by Securities Investor Protection Corporation
(known as "SIPC") of which $100,000 covers cash. The remaining $74.5 million,
which covers securities only, is provided by a private insurance carrier.
TD Waterhouse brokerage customers may purchase shares of the Fund by mail or by
placing an order directly with a TD Waterhouse Mutual Fund Specialist by
telephone at 800-943-4443. TD Waterhouse also allows the purchase of Fund shares
by electronic means for customers with TD Waterhouse webBroker(TM) or Personal
Access(TM) for Windows Accounts.
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 or share amount you wish to invest
o the dividend and distribution option you have selected, either:
(a) reinvest dividends and any capital gain distributions;
(b) pay both dividends and any capital gain distributions in cash;
(c) reinvest dividends and pay any capital gain distributions in
cash; or
(d) reinvest any capital gain distributions and pay dividends in
cash.
<PAGE>
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 with a check to TD Waterhouse,
Processing Center, 525 Washington Boulevard, P.O. Box 2021, Jersey City, NJ
07303-2021. Checks should be made payable to "TD Waterhouse" and you should
write your TD Waterhouse account number on the check. 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 Mutual Fund
Specialist at 800-934-4443.
Electronically
Please refer to product and services information regarding Waterhouse webBroker,
Personal Access for Windows and TradeDirect (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 of $100 or more to be withdrawn
automatically from your TD Waterhouse brokerage account and invested in a Fund.
You may sign up for this service when you open your account at TD Waterhouse or
at another time by calling your TD Waterhouse Mutual Fund Specialist at
800-934-4443.
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.
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.
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.
Costs and 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 TD Waterhouse Funds -- 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 is limited.
o You may be assessed a redemption fee of up to 2% of the amount you are
redeeming if you redeem shares of a Fund within 90 days after investing
in the Fund.
Exchange Privilege.
Shareholders who have held shares of a given Fund for at least 90 days are
entitled to exchange some or all of their shares of that Fund for shares of any
other Fund of the Trust, subject to any applicable redemption fee. Such shares
exchanged will be valued at their respective net asset values computed as of the
close of trading on the New York Stock Exchange (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.
How to Sell Shares.
To sell (redeem) shares of a Fund, you may use any of the methods outlined above
under "How to Buy Shares." 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 "Pricing Your Shares."
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). 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.
Telephone Transactions.
Customers of TD Waterhouse automatically have the privilege of purchasing or
redeeming shares of a Fund by telephone. TD Waterhouse 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 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 Mutual Fund Specialist 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 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 shares of the Funds. Fund shares may be redeemed automatically should
the brokerage account in which they are held be closed.
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 day 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 trading on the NYSE on
each day during which the NYSE is open for trading. 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 by the Trust's
Board of Trustees 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 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 a foreign market and the close of 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 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.
Each Fund's shares are sold at the next net asset value per share calculated
after an order and payment are accepted by that Fund in the manner described
under "How to Buy and Sell Shares."
MANAGEMENT OF THE TRUST
Investment Adviser.
The Trust's portfolios are managed by 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,
an investment adviser to be registered under the Investment Advisers Act of
1940, as amended. The Investment Adviser oversees the investment programs for
the Funds, places orders for the Funds' purchases and sales of portfolio
securities, maintains records relating to such purchases and sales and selects
and supervises the sub-advisers for certain Funds.
The Investment Adviser is a wholly owned subsidiary of Toronto Dominion Bank
("TD Bank"). TD Bank is a part of the TD Bank Financial Group, one of North
America's leading financial services providers. As of June 30, 1999, TD Bank and
its affiliates had over $30 billion under management including pension,
endowment, foundation, segregated, corporate and private accounts, and mutual
and pooled funds.
Each Index Fund is managed by a team of investment professionals. Team members
are supported by a large staff of economists, research analysts, traders and
other investment specialists within the TD Bank Financial Group. The Investment
Adviser believes its team approach benefits Fund investors by bringing together
many disciplines and leveraging its extensive resources.
For its services, the Investment Adviser receives an annual fee of [ ]% of each
Fund's average daily net assets.
Sub-Adviser.
T. Rowe Price Associates, Inc., 100 East Pratt Street, Baltimore, MD 21202,
serves as sub-adviser to the Systematic Technology Fund(TM) and the Tax Managed
Growth Fund. Founded in 1937, the Sub-Adviser and its affiliates managed over
$159 billion for more than seven million individual and institutional investor
accounts as of June 30, 1999.
In selecting investments for the Systematic Technology Fund(TM) and the Tax
Managed Growth Fund's portfolio, the Sub-Adviser uses an Investment Advisory
Committee. The committee chairman has day-to-day responsibility for managing the
Fund and works with the committee in developing and executing the Fund's
investment program.
Year 2000 Information.
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment companies and
financial and business organizations, the Funds could be adversely affected if
the computer systems used by the Investment Adviser or other service providers
to the Funds do not properly address this problem prior to January 1, 2000. The
Investment Adviser and its affiliates have established a dedicated group to
analyze these issues and to implement any systems modifications necessary to
prepare for the Year 2000. Currently, the Investment Adviser does not anticipate
that the transition to the new year will have any material impact on its ability
to continue to service the Funds at current levels. In addition, the Investment
Adviser has sought assurances from the Funds' other service providers that they
are taking all necessary steps to ensure that their computer systems will
accurately reflect the Year 2000, and the Investment Adviser will continue to
monitor the situation. At this time, however, no assurance can be given that the
Funds or their service providers have anticipated every step necessary to avoid
any adverse effect on the Funds attributable to the Year 2000 Problem or that
interaction with other non-complying computer systems will not impact their
services.
The Year 2000 Problem is expected to impact corporations, which may include
issuers of portfolio securities held by the Funds, to varying degrees based upon
various factors, including, but not limited to, the corporation's industry
sector and degree of technological sophistication. The Funds are unable to
predict what impact, if any, the Year 2000 Problem will have on the issuers of
securities held in the Funds' portfolios. To the extent the Year 2000 Problem
has a negative effect on such an issuer, a Fund's returns could be reduced.
Administrator.
As administrator, [ ] (the "Administrator") , an affiliate of the Investment
Adviser, provides certain administrative and management services to the Funds.
The Investment Adviser, and not the Funds, compensates the Administrator for
providing these services. The Administrator has entered into an agreement with [
] (the "Distributor") whereby the Distributor performs certain administrative
services for the Funds. The Administrator pays the Distributor's fees for
providing these services.
Distributor.
The Distributor acts as distributor of the Funds' shares.
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, at a rate of up to
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.
SHAREHOLDER INFORMATION
Dividends and Distributions.
It is currently contemplated that dividends of the Bond Index Fund's net
investment income will be declared and paid quarterly 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. Net capital gain, if any, realized by a Fund will be distributed at
least annually. Unless a shareholder elects payment in cash, all dividends and
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 dividend or distribution.
Taxes.
Distributions of tax-exempt interest income earned by any Fund are expected to
be exempt from federal income taxation, except for the possible application of
the alternative minimum tax. 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 a 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 which will be 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 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 which 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.
<PAGE>
"LEHMAN BROTHERS AGGREGATE BOND INDEX(R)" IS A TRADEMARK OF LEHMAN
BROTHERS. "STANDARD & POOR'S(R)," "S&P(R)," "S&P 500(R)," "STANDARD & POOR'S
500(R)" AND "500(R)" ARE TRADEMARKS OF THE MCGRAW-HILL COMPANIES, INC. "WILSHIRE
4500 INDEX(R)" IS A TRADEMARK OF WILSHIRE ASSOCIATES INCORPORATED. "GSTI
COMPOSITE INDEX(R)" IS A TRADEMARK OF GOLDMAN SACHS & CO. "MSCI EUROPE INDEX(R)"
AND "MSCI PACIFIC FREE INDEX(R)" ARE TRADEMARKS OF MORGAN STANLEY GROUP INC.
NO FUND IS SPONSORED, ENDORSED, SOLD OR PROMOTED BY ANY OF LEHMAN BROTHERS, THE
MCGRAW-HILL COMPANIES, WILSHIRE ASSOCIATES INCORPORATED, GOLDMAN SACHS & CO., OR
MORGAN STANLEY GROUP INC., AND NONE OF THESE COMPANIES MAKES ANY REPRESENTATION
REGARDING THE ADVISABILITY OF INVESTING IN ANY FUND. MORE COMPLETE INFORMATION
MAY BE FOUND IN THE STATEMENT OF ADDITIONAL INFORMATION (SEE BACK COVER).
<PAGE>
[back cover]
Where to go for Additional Information about the Funds.
If you would like additional information about any Fund, the following
information documents are available to you:
Statement of Additional Information -- Additional information about each Fund's
structure and operations can be found in the Statement of Additional
Information. The information presented in the Statement of Additional
Information is incorporated by reference into this Prospectus and is legally
considered to be 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
Customer Service
100 Wall Street
New York, New York 10005
Telephone: 1-800-934-4410
Hearing impaired: TTY 1-800-933-0555
Email: http://www.tdwaterhouse.com
Obtaining Information from the Securities and Exchange Commission.
Reports and other information about each Fund (including the Funds' Statement of
Additional Information) may also be obtained from the Securities and Exchange
Commission:
1. By going to the Commission's Public Reference Room in
Washington, D.C., where you can review and copy the
information. Information on the operation of the Public
Reference Room may be obtained by calling the Commission at
(800) SEC-0880.
2. By accessing the Commission's Internet site at
http://www.sec.gov where you can view, download, and print the
information.
3. By writing to the Public Reference Section of the Securities
and Exchange Commission, Washington, D.C. 20549-6009, where,
upon payment of a duplicating fee, copies of the information
will be sent to you.
SEC File Number 811-[ ]
<PAGE>
TD WATERHOUSE FAMILY OF FUNDS
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 Systematic Technology Fund(TM)
TD Waterhouse Tax Managed Growth Fund
STATEMENT OF ADDITIONAL INFORMATION
[date]
This Statement of Additional Information (the "SAI") is not a prospectus. It
should be read in conjunction with the prospectus dated [date] (the
"Prospectus") for 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 Systematic Technology Fund(TM),
and TD Waterhouse Tax Managed Growth Fund (each a "Fund" and, collectively, the
"Funds"), each of which is a separate portfolio of the TD Waterhouse Family of
Funds (the "Trust").
To obtain a free copy of the Prospectus, please write to TD Waterhouse, Customer
Service, at 100 Wall Street, New York, New York 10005, or call 1-800-934-4410.
<PAGE>
TABLE OF CONTENTS
ORGANIZATION OF THE FUNDS....................................................3
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS.............................4
Additional Information Concerning The Indices......................40
Fund Policies......................................................43
MANAGEMENT OF THE TRUST.....................................................45
INVESTMENT ADVISER AND OTHER SERVICES.......................................46
Investment Adviser.................................................46
Sub-Adviser........................................................47
Administrator......................................................47
Distributor........................................................48
Shareholder Servicing..............................................49
Transfer Agent and Custodian.......................................50
Other Expenses.....................................................50
BROKERAGE ALLOCATION........................................................51
COMPUTATION OF NET ASSET VALUE..............................................52
DIVIDENDS AND TAX STATUS....................................................53
Dividends..........................................................53
Capital Gain Distributions.........................................53
Tax Status of the Trust............................................54
INDEPENDENT AUDITORS AND REPORTS TO SHAREHOLDERS............................58
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION..............................58
PERFORMANCE.................................................................59
Total Return Calculations..........................................59
SEC Yield Calculations.............................................60
Other Advertisement Matters........................................61
APPENDIX ...................................................................63
RATINGS OF FIXED INCOME SECURITIES.................................63
<PAGE>
ORGANIZATION OF THE FUNDS
The Trust is registered under the Investment Company Act of 1940, as amended
(the "Investment Company Act"), as an open-end management investment company.
The Trust was formed under Delaware law on August 11, 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. The Trust's investment adviser is TD
Investment Management Inc. (the "Investment Adviser"), an investment adviser to
be registered under the Investment Advisers Act of 1940, as amended.
Each Fund issues shares of beneficial interest in the Trust. The Board of
Trustees of the Trust may increase the number of authorized shares or create
additional series or classes of Trust or portfolio shares without shareholder
approval. 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 each Fund will have the exclusive right to vote on matters affecting
only the rights of the holders of that Fund. For example, holders of a Fund will
have the exclusive right to vote on any investment management agreement or
investment restriction that relates only to that Fund. Shareholders of the Funds
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 Trust's Board of Trustees. In such
event, the remaining holders cannot elect any members of the Board of Trustees.
The Trust's Board of Trustees may authorize the issuance of additional shares,
and may, from time to time, classify or reclassify issued or any unissued shares
to create one or more new classes or series in addition to those already
authorized by setting or changing in any one or more respects the designations,
preferences, conversion or other rights, voting powers, restrictions,
limitations as to dividends, qualifications, or terms or conditions of
redemption, of such shares; provided, however, that any such classification or
reclassification shall not substantially adversely affect the rights of holders
of issued shares. Any such classification or reclassification will comply with
the provisions of the Investment Company Act. The Trustees also have the
authority to terminate a series or class thereof by written notice to
shareholders without shareholder approval.
The Trust's Agreement and Declaration of Trust (the "Declaration of Trust")
permits the Trustees to issue an unlimited number of full and fractional shares,
par value $.001, of the Funds. Each Fund share is entitled to participate pro
rata in the dividends and distributions of that Fund.
The Trust will not normally hold annual shareholders' meetings. Under Delaware
law and the Trust's Bylaws, 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 Bylaws provide that special meetings of
shareholders, unless otherwise provided by law or by the 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 beneficial interests of
the Trust entitled to be voted at such meeting to the extent permitted by
Delaware law.
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.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
The following supplements the discussion in the Prospectus of the Funds'
investment objectives, 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 the Investment Adviser or
Sub-Adviser (as defined below), in its discretion, might, but is not required
to, use in managing each Fund's portfolio assets. The Investment Adviser or
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 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.
About Indexing and Management of the Index Funds. 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).
The Investment Adviser 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 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 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 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
expenses incurred by the Fund, taxes (including foreign withholding taxes, where
applicable), changes in either the composition of the Index or the assets of a
Fund, and the timing and amount of investor contributions and withdrawals, if
any. In addition, each Fund's total return will be affected by incremental
operating costs (e.g., transfer agency, accounting) that will be borne by the
Fund.
Cash Flows; Expenses. The ability of each Index Fund to satisfy its investment
objective depends to some extent on the Investment Adviser's ability to manage
cash flow (primarily from purchases and redemptions and distributions from the
Fund's investments). The Investment 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 incremental operating costs (e.g., transfer
agency, accounting) that will be borne by the Funds.
Actively Managed Funds. Actively managed funds are managed by investment
advisers who buy and sell securities based on research and analysis in an
attempt to outperform a particular benchmark.
About Tax-Efficient Investing. To accomplish the Tax Managed Growth Fund's goal
of minimizing taxable distributions, the 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 gains are
taken, the 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. There is no guarantee that the
Fund's attempts to manage its portfolio in a tax-efficient manner will be
successful.
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 is limited, however, to investing in
tax-exempt money market instruments (therefore, certain of the money market
instruments explained below may be unavailable for investment by the Tax Managed
Growth Fund). 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 Investors Service, Inc. ("Moody's") or "A-1+" or "A-1" by Standard &
Poor's Corporation ("S&P"), or, if unrated, of comparable quality as determined
by the Fund's Investment Adviser or 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 Adviser
or Sub-Adviser are of comparable quality to obligations of U.S. banks which may
be purchased by the Fund. The Systematic Technology Fund(TM)'s and the Tax
Managed Growth Fund's reserve position may consist of shares of one or more
money market funds, including certain money market funds affiliated with the
Sub-Adviser. (See "Investment Company Securities" below.)
Bank Obligations. The Funds may invest in bank obligations, including CDs, time
deposits, 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.
CDs are negotiable certificates evidencing the obligation of a bank to repay
funds deposited with it for a specified period of time. Time deposits are
non-negotiable deposits maintained in a banking institution for a specified
period of time at a stated interest rate. Time deposits which may be held by a
Fund will not benefit from insurance from the Bank Insurance Fund or the Savings
Association Insurance Fund administered by the FDIC. Bankers' acceptances are
credit instruments evidencing the obligation of a bank to pay a draft drawn on
it by a customer. These instruments reflect the obligation both of the bank and
of the drawer to pay the face amount of the instrument upon maturity. The other
short-term obligations may include uninsured, direct obligations, bearing fixed,
floating- or variable-interest rates.
Domestic commercial banks organized under Federal law are supervised and
examined by the Comptroller of the Currency and are required to be members of
the Federal Reserve System and to have their deposits insured by the FDIC.
Domestic banks organized under state law are supervised and examined by state
banking authorities but are members of the Federal Reserve System only if they
elect to join. In addition, state banks whose CDs may be purchased by a Fund are
insured by the FDIC (although such insurance may not be of material benefit to
the Fund, depending on the principal amount of the CDs of each bank held by the
Fund) and are subject to Federal examination and to a substantial body of
Federal law and regulation. As a result of Federal or state laws and
regulations, domestic branches of domestic banks whose CDs may be purchased by
the Fund generally are required, among other things, to maintain specified
levels of reserves, are limited in the amounts which they can loan to a single
borrower and are subject to other regulation designed to promote financial
soundness. However, not all of such laws and regulations apply to the foreign
branches of domestic banks.
Obligations of foreign branches of domestic banks, foreign subsidiaries of
domestic banks and domestic and foreign branches of foreign banks, such as CDs
and time deposits, may be general obligations of the parent banks in addition to
the issuing branch, or may be limited by the terms of a specific obligation and
governmental regulation. Such obligations are subject to different risks than
are those of domestic banks. These risks include foreign economic and political
developments, foreign governmental restrictions that may adversely affect
payment of principal and interest on the obligations, foreign exchange controls
and foreign withholding and other taxes on interest income. These foreign
branches and subsidiaries are not necessarily subject to the same or similar
regulatory requirements that apply to domestic banks, such as mandatory reserve
requirements, loan limitations, and accounting, auditing and financial record
keeping requirements. In addition, less information may be publicly available
about a foreign branch of a domestic bank or about a foreign bank than about a
domestic bank.
Obligations of United States branches 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 or by Federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, Federal branches licensed by the Comptroller of the Currency and
branches licensed by certain states ("State Branches") may be required to: (1)
pledge to the regulator, by depositing assets with a designated bank within the
state, a certain percentage of their assets as fixed from time to time by the
appropriate regulatory authority; and (2) maintain assets within the state in an
amount equal to a specified percentage of the aggregate amount of liabilities of
the foreign bank payable at or through all of its agencies or branches within
the state. The deposits of Federal and State Branches generally must be insured
by the FDIC if such branches take deposits of less than $100,000.
In view of the foregoing factors associated with the purchase of CDs and time
deposits issued by foreign branches of domestic banks, by foreign subsidiaries
of domestic banks, by foreign branches of foreign banks or by domestic branches
of foreign banks, the Investment Adviser or Sub-Adviser carefully evaluates such
investments on a case-by-case basis.
A Fund may purchase CDs issued by banks, savings and loan associations and
similar thrift institutions with less than $1 billion in assets, which are
members of the FDIC, provided the Fund purchases any such CD in a principal
amount of not more than $100,000, which amount would be fully insured by the
Bank Insurance Fund or the Savings Association Insurance Fund administered by
the FDIC. Interest payments on such a CD are not insured by the FDIC. No Fund
will own more than one such CD per such issuer.
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 Adviser
or 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 Adviser or 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 requires that additional securities be deposited with the
custodian if the value of the securities purchased should decrease below the
repurchase price.
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 has
custody of, and holds in a segregated account, securities acquired as collateral
by the Fund under a repurchase agreement. Repurchase agreements are considered
loans by the Fund. 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 Adviser or Sub-Adviser monitors on an ongoing basis the value of
the collateral to assure that it always equals or exceeds the repurchase price.
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.
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 the Investment
Adviser or Sub-Adviser, are of comparable quality to issuers of other permitted
investments of a Fund may be used for letter of credit-backed investments.
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
the increase or decrease 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 these obligations are direct lending
arrangements between the lender and borrower, it is not contemplated that such
instruments generally will be traded, and there generally is no established
secondary market for these obligations, 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 and the Fund may
invest in obligations which are not so rated only if the Fund's Investment
Adviser or 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 Adviser or 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. The Fund will not invest more than 10% of
the value of its total net assets in floating- or variable-rate demand
obligations whose demand feature is not exercisable within seven days. Such
obligations may be treated as liquid, provided that an active secondary market
exists.
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.
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 are
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. 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.
In determining whether to lend a security to a particular broker, dealer or
financial institution, the Investment Adviser or Sub-Adviser, as applicable,
considers all relevant facts and circumstances, including the size,
creditworthiness and reputation of the broker, dealer or financial institution.
Any loans of portfolio securities are fully collateralized and marked to market
daily. A Fund will not enter into any portfolio security lending arrangement
having a duration of longer than one year. 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.
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,
a Fund's investment in such securities currently is limited, subject to certain
exceptions, to (i) 3% of the total voting stock of any one investment company,
(ii) 5% of the Fund's net assets with respect to any one investment company and
(iii) 10% of the Fund's net 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 Systematic Technology Fund(TM) 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 the Sub-Adviser and its other clients. RIF and
GRF operate under an exemptive order issued by the Securities and Exchange
Commission (the "SEC") (SEC Release No. IC-22770 (July 29, 1997)).
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 manager, they will incur
other expenses. RIF and GRF are expected, however, to operate at low expense
ratios. Each Fund will only invest in RIF or GRF to the extent it is consistent
with its investment objective and policies.
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 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 establish a segregated account with its custodian in which it will
maintain 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.
Short Sales. In connection with the use of certain instruments based upon or
consisting of one or more baskets of securities, the Investment Adviser may sell
a security an Index Fund does not own, or in an amount greater than the Fund
owns (i.e., make short sales). 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 Adviser
will not employ short sales in reflection of the Investment 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 which 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) maintain in a
segregated account with its custodian cash or liquid securities at such a level
that the amount deposited in the account 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.
Common Stocks. Common stock can be issued by companies to raise cash; all common
stock shares 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.
Convertible Securities. The convertible securities in which each Fund may invest
include corporate bonds, notes, debentures, preferred stock and other securities
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, 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 debt securities, convertible securities are investments that provide for 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.
Small Companies. Investing in smaller company stocks involves certain special
considerations and risks that are not usually associated with investing in
larger, more established companies. For example, the securities of small or new
companies may be subject to more abrupt or erratic market movements because they
tend to be thinly traded and are subject to a greater degree to changes in the
issuer's earnings and prospects. Small companies also tend to have limited
product lines, markets or financial resources. Transaction costs in smaller
company stocks also may be higher than those of larger companies.
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. As a rule 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.
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 Adviser or 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.)
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, Federal Home Loan Banks, Federal National Mortgage
Association, Federal Home Loan Mortgage Association, and Student Loan Marketing
Association.
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 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,
each Fund, consistent with its investment objective and policies, will consider
making 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 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.
Other Asset-Backed Securities. The securitization techniques used to develop
mortgage-backed securities are now being applied to a broad range of assets.
Through the use of trusts and special purpose corporations, various types of
assets, including automobile loans, computer leases and credit card receivables,
are being securitized in pass-through structures similar to the mortgage
pass-through structures described above or in a structure similar to the CMO
structure. 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. 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 of 1933, as amended (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.
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 only will make
commitments to purchase securities on a when-issued basis 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.
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 during the coming year. The
Fund will establish a segregated account in which it will maintain 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 place additional liquid assets in the account on a daily basis so that
the value of the assets in the account is equal to the amount of such
commitments.
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.
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 Adviser or Sub-Adviser will monitor such restricted securities
subject to the supervision of the Trust's Board of Trustees. Among the factors
the Investment Adviser or 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).
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 Adviser or 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.
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. 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. The increased expense to
invest in foreign market 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 ("EMU"). 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") seeks to set out a framework for the
European Economic and Monetary Union ("EMU") among the countries that comprise
the European Union ("EU"). Among other things, EMU establishes 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. EMU took effect for the initial EMU participants as of January 1,
1999, and was implemented over the weekend January 1, 1999 through January 3,
1999 ("conversion weekend"). Upon implementation of EMU, certain securities
issued in participating EU countries (beginning with government and corporate
bonds) were redenominated in the euro, and thereafter, were listed, traded, and
made dividend and other payments only in euros. 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 would 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 the 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 that have been 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 the euro
conversion may be taxable to Fund 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 investments
are denominated. Thus, the strength or weakness of the U.S. dollar against
foreign currencies may account for part of each 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 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.
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 Fund from achieving the intended hedge 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 may also cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to decline in value
relative to other currencies to which 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 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.
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 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
counter party of issuer 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 Commodities Futures Trading
Commission ("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).
Exchange-Traded Index Securities. The Funds may invest in exchange-traded index
securities such as WEBS, SPDRs, and various country index funds. SPDRs (Standard
& Poor's Depositary Receipts), 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 trust 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 included in the trust may affect
trading in SPDRs, as compared with trading in a broadly based portfolio of
common stocks.
OPALS. The European and Asian Index Funds may each invest in OPALS. OPALS
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 inherent in directly
investing 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.
Options Transactions.
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 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 Adviser or
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 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.
Writing Options. Each Fund is 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.
Each Fund may also 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 also 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
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.
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.
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 Adviser's or 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 hedging purposes. 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 maintain with its custodian
(and mark-to-market on a daily basis) cash or liquid securities that, when added
to the amounts deposited with a futures 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 maintain with its custodian in a
segregated account (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 maintain with
its custodian in a segregated account (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 maintain with
its custodian (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 may engage in
foreign currency futures contracts and related options transactions for hedging
purposes. 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.
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. For additional information about margin deposits required
with respect to futures contracts and options thereon, see "Futures Contracts
and Options on Futures Contracts."
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.
Interest-Rate and Index Swaps. The Bond Index Fund may enter into interest-rate
swaps, and each Fund may enter into index swaps in pursuit of its investment
objectives. Interest-rate swaps involve the exchange by the Bond Index Fund with
another party of their respective commitments to pay or receive interest (for
example, an exchange of floating-rate payments or 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,
it will maintain a segregated account on a gross basis, unless the contract
provides for a segregated account on a net basis. If there is a default by the
other party to such a 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.
Risks Associated With Futures and Related Options. There can be no guarantee
that there will be a correlation between price movements in the hedging vehicle
and in a Fund's portfolio securities being hedged. In addition, there are
significant differences between the securities and futures markets that could
result in an imperfect correlation between the markets, causing a given hedge
not to achieve its objectives. 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 exercise of skill and judgment, and even a well-conceived hedge 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 enter into securities index
futures contracts as an efficient means of regulating the Fund's exposure to the
equity markets. Each Fund will not engage in transactions in futures contracts
for speculation, but only as a hedge against changes resulting from market
conditions in the values of securities held in the Fund's portfolio or which it
intends to purchase. 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 "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 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 hedging
techniques depends, among other things, on the Investment Adviser's or
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 hedges. The skills
necessary for successful use of hedges 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 these instruments 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.
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. Each Fund will use
futures contracts and related options only for "bona fide hedging" purposes, as
such term is defined in applicable regulations of the CFTC.
When purchasing an index futures contract, each Fund will maintain with its
custodian (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 futures contract. Alternatively, a 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.
When selling an index futures contract, each Fund will maintain with its
custodian (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, a 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 cash or liquid
assets in a segregated account with the Fund's custodian).
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.
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 Adviser or 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
Adviser's or 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. Before entering into such transactions or
making any such investment, the Fund will provide any appropriate additional
disclosure.
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.
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
Systematic Technology Fund(TM) 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 a 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.
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 increased tracking error due to the limitations on
investments in such companies.
Diversification. The Systematic Technology Fund(TM) is classified as
"non-diversified" for purposes of the Investment Company Act, which means that
the Fund is not limited by the Investment Company Act 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 Systematic Technology Fund(TM)
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 Systematic Technology Fund(TM) intends to
concentrate its assets in the securities of technology-related companies. 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 Systematic Technology Fund(TM)
generally is not expected to exceed 100%. This portfolio turnover rate will not
be a limiting factor when the Investment Adviser or Sub-Adviser, as applicable,
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 for its initial period of operations is not expected to exceed
150%.
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 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.
S&P 500 Index. "Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard &
Poor's 500", and "500" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by the Corporation and the Trust. 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"). 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 and the Series 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 or 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 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 Adviser or
the Fund. Wilshire has no obligation to take the needs of the Investment
Adviser, the Extended Market Index Fund, or the 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 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 Systematic Technology Fund(TM) 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 Systematic
Technology Fund(TM) 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 Investment Adviser or the
Systematic Technology Fund(TM) 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
Investment Adviser or the Systematic Technology Fund(TM). Goldman Sachs & Co.
has no obligation to take the needs of the Investment Adviser, the Systematic
Technology Fund(TM) 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
amount of the Systematic Technology Fund(TM) 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 Systematic Technology Fund(TM).
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 Systematic Technology Fund(TM) 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 Europe and Pacific Free Indexes. The MSCI Europe Index and the MSCI Pacific
Free Index are the exclusive property of Morgan Stanley & Co. Incorporated
("Morgan Stanley"). The MSCI Europe Index and the MSCI Pacific Free Index are
service marks of Morgan Stanley Group Inc. and has been licensed for use by the
Investment Adviser and its affiliates. The European and Asian Index Funds are
not sponsored, endorsed, sold or promoted by Morgan Stanley. Morgan Stanley
makes no representation or warranty, express or implied, to the owners of shares
of the European or Asian Index Funds or any member of the public regarding the
advisability of investing in securities generally or in the European or Asian
Index Funds particularly or the ability of the MSCI Europe Index or the MSCI
Pacific Free Index to track general stock market performance. Morgan Stanley is
the licensor of certain trademarks, service marks and trade names of Morgan
Stanley and of the MSCI Europe Index and the MSCI Pacific Free Index. Morgan
Stanley has no obligation to take the needs of the European and Asian Index
Funds or the owners of shares of the European and Asian Index Funds into
consideration in determining, composing or calculating the MSCI Europe Index and
the MSCI Pacific Free Index. Morgan Stanley is not responsible for and has not
participated in the determination of the timing of, prices at, or quantities of
shares of the European and Asian Index Funds to be issued or in the
determination or calculation of the equation by which the shares of the European
and Asian Index Funds is redeemable for cash. Morgan Stanley has no obligation
or liability to owners of shares of the European and Asian Index Funds in
connection with the administration, marketing or trading of the European and
Asian Index Funds.
Although Morgan Stanley shall obtain information for inclusion in or for use in
the calculation of the MSCI Europe Index and the MSCI Pacific Free Index from
sources which Morgan Stanley considers reliable, Morgan Stanley does not
guarantee the accuracy and/or the completeness of the MSCI Europe Index and the
MSCI Pacific Free Index or any data included therein. Morgan Stanley makes no
warranty, express or implied, as to results to be obtained by licensee,
licensee's customers and counterparties, owners of shares of the European and
Asian Index Funds, or any other person or entity from the use of the MSCI Europe
Index and the MSCI Pacific Free Index or any data included therein in connection
with the rights licensed hereunder or for any other use. Morgan Stanley makes no
express or implied warranties, and hereby expressly disclaims all warranties of
merchantability or fitness for a particular purpose with respect to the MSCI
Europe Index and the MSCI Pacific Free Index or any data included therein.
Without limiting any of the foregoing, in no event shall Morgan Stanley have any
liability for any direct, indirect, special, punitive, consequential or any
other damages (including lost profits) even if notified of the possibility of
such damages.
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 except the Systematic Technology Fund(TM):
1. may not purchase securities of any one issuer (except securities issued or
guaranteed by the U.S. Government or its agencies or instrumentalities) if as a
result more than 5% of the Fund's total assets would be invested in such issuer
or the Fund would own or hold more than 10% of the outstanding voting securities
of that issuer; provided, however, that up to 25% of the value of the Fund's
total assets may be invested without regard to the foregoing limitations.
In addition, unless otherwise indicated below, each Fund:
2. may not issue senior securities, except as permitted under the Investment
Company Act;
3. 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). The Fund may also borrow money from
other persons to the extent permitted by applicable law. For purposes of this
investment restriction, the Fund's entry into short sales, reverse repurchase
agreements, options, forward contracts, futures contracts, including those
relating to indexes, and options on futures contracts or indexes shall not
constitute borrowing to the extent certain segregated accounts are established
and maintained by the Fund;
4. 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;
5. 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 Systematic Technology Fund(TM) will invest more than
25% of its total assets in the securities of technology-related companies.
6. 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;
7. may not purchase or sell physical commodities or commodities contracts or
oil, gas or mineral programs. This restriction shall not prohibit the Fund,
subject to restrictions described in the Prospectus and elsewhere in this SAI,
from purchasing, selling or entering into futures contracts, options on futures
contracts and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities laws; and
8. may not lend any funds or other assets, except that the Fund may, consistent
with its investment objective and policies: (a) invest in certain short-term or
temporary 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, provided such loans are made in accordance with applicable
guidelines established by the SEC and/or the Trustees of the Fund.
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;
2. purchase securities of other investment companies, except (i) to the extent
permitted under the Investment Company Act; and (ii) that the Systematic
Technology Fund(TM) and the Tax Managed Growth Fund may purchase shares of money
market funds affiliated with the Sub-Adviser, which operate under an exemptive
order issued by the SEC, to the extent permitted by such order or any
interpretation or modification thereof.
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
The business of the Trust is managed by its Board of Trustees which elects
officers responsible for the day to day operations of the Funds and for the
execution of the policies formulated by the Board of Trustees.
The following table sets forth the principal occupation or employment of the
members of the Board of Trustees and principal officers of the Trust.
Position Held Principal Occupation
Name (age) and Address with the Trust During Past Five Years
Hilari D'Aguiar, President, Secretary, 1990-1995 Vice President -
MBA, CFA, CPA*(55) Treasurer and Trustee Financial Analysis, TD
Group Finance, TD Bank
26th Floor, TD Tower 1995-present Vice President,
55 King Street West Products and Advice - TD
Toronto, Ontario, Asset Management Inc.
Canada M5K 1A2
- ------------------
*An "interested person" of the Trust as defined in the Investment Company Act.
The Trust makes no payments to any of its officers for services. However, each
of the Trust's Trustees who are not "interested persons" (the "Disinterested
Trustees") are paid by the Trust an annual fee of $[ ] and a fees of $[ ] for
each meeting they attend (other than those held by telephone conference call).
Each Trustee is reimbursed by the Trust for any expenses incurred by reason of
attending such meetings or in connection with services performed for the Trust.
The following table sets forth information regarding compensation of Trustees by
the Trust and by the fund complex of which the Trust is a part. In the column
headed "Total Compensation from Trust and Fund Complex Paid to Trustees," the
number in parentheses indicates the total number of boards in the fund complex
on which the Trustee served as of [date].
Compensation Table
Total
Compen-
sation
Pension or From
Retirement Estimated Trust
Aggregate Benefits Annual and Fund
Compensation Accrued Benefits Complex
from as Part of upon Paid to
Name of Person, Position from Trust* Fund Expenses* Retirement* Trustees*
Hilari D'Aguiar, Trustee N/A N/A N/A N/A
- -------------------
*Based on estimated amounts for the current fiscal year.
While the Trust is a Delaware business trust, certain of its Trustees and
officers are non-residents of the United States and may have all, or a
substantial part, of their assets located outside the United States. Under
Delaware law each Trustee is deemed to have consented to the appointment of the
Trust's registered agent by virtue of serving as a trustee of a Delaware
business trust. However, none of the officers of the Trust has authorized an
agent for service of process in the United States. Thus, it may be difficult for
U.S. investors to effect service of process upon non-U.S. officers within the
United States or effectively to enforce judgments of courts of the United States
predicated upon civil liabilities of non-U.S. officers or Trustees under federal
securities laws of the United States.
INVESTMENT ADVISER AND OTHER SERVICES
Investment Adviser.
TD Investment Management Inc., a Canadian federally chartered company, is the
investment adviser of the Funds (as previously defined, the "Investment
Adviser"). Pursuant to the Investment Management Agreement with the Trust on
behalf of the Funds, the Investment Adviser manages each Fund's investments in
accordance with its stated policies and restrictions, subject to oversight by
the Trust's Board of Trustees.
The Investment Adviser is a wholly owned subsidiary of Toronto Dominion Bank
("TD Bank"). TD Bank is a part of the TD Bank Financial Group, one of North
America's leading financial services providers. As of June 30, 1999, TD Bank and
its affiliates had over $30 billion under management including pension,
endowment, foundation, segregated, corporate and private accounts, and mutual
and pooled funds. Personnel of the Investment Adviser may invest in securities
for their own account pursuant to a code of ethics that sets forth all
employees' fiduciary responsibilities regarding the Trust, establishes
procedures for personal investing, and restricts certain transactions.
The Investment Management Agreement, which is dated [ ], 1999, 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.
The Investment Management Agreement provides that the Investment Adviser 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 Adviser'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 Adviser 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 Adviser an annual investment management fee, accrued daily and
payable monthly, of [ ]% of that Fund's average daily net assets.
The Investment Adviser and its affiliates may, from time to time, voluntarily
waive or reimburse all or a part of a Fund's operating expenses. Expense
reimbursements by the Investment Adviser or its affiliates will increase a
Fund's total return. [Description of any such waiver/reimbursement to be added
by amendment.]
Sub-Adviser.
T. Rowe Price Associates, Inc. (the "Sub-Adviser") serves as sub-adviser to the
Systematic Technology Fund(TM) and the Tax Managed Growth Fund. Founded in 1937,
the Sub-Adviser and its affiliates managed over $159 billion for more than seven
million individual and institutional investor accounts as of June 30, 1999.
[Description of sub-advisory agreement and compensation structure to be added by
amendment.]
Administrator.
Pursuant to an Administration Agreement with the Trust and the Investment
Adviser, [ ] (the "Administrator") provides administrative services to the
Funds. Administrative services furnished by the Administrator include, among
others, maintaining and preserving the records of the Trust, including financial
and corporate records, computing net asset value, dividends, performance data
and financial information regarding the Trust, 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. [Description of compensation of
Administrator to be added by amendment.]
The Administration Agreement, which is dated [date], 1999, 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
Trust's Board of Trustees, including a majority of Disinterested Trustees who
have no direct or indirect financial interest in the Agreement. The Trust or the
Administrator may terminate the Administration Agreement on 60 days' prior
written notice without penalty. Termination by the Trust 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, or by a majority of
the outstanding voting securities of the Funds.
The Administration Agreement provides that the Administrator 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
Administrator'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 Glass-Steagall Act and other applicable laws generally prohibit federally
chartered or supervised banks from engaging in the business of underwriting,
selling or distributing securities. While the matter is not free from doubt, the
Administrator and the Investment Adviser believe that such laws should not
preclude them from acting as administrator and investment adviser, respectively,
of the Trust. Accordingly, the Administrator under the Administration Agreement
and the Investment Adviser under the Investment Advisory Agreement will perform
only administrative and investment management servicing functions, respectively.
However, judicial and administrative decisions or interpretations of such laws
as well as changes in either state statutes or regulations relating to
permissible activities of banks or their subsidiaries or affiliates could
prevent the Administrator or the Investment Adviser from continuing to perform
all or a part of their administration or investment management activities,
respectively. If the Administrator or the Investment Adviser were prohibited
from so acting, alternative means of continuing such services would be sought by
the Trust's Board of Trustees.
Distributor.
The distributor of the Trust is [ ], [address] (the "Distributor"). Pursuant to
a Distribution Agreement between the Trust and the Distributor, the Distributor
has the exclusive right to distribute shares of the Trust. The Distributor may
enter into dealer or agency agreements with affiliates of the Investment Adviser
and other firms for the sale of Trust shares. [Description of fees, if any, paid
to the Distributor to be added by amendment.] From time to time and out of its
own resources, the Investment Adviser or its affiliates may pay fees to
broker-dealers or other persons for distribution or other services related to
the Funds.
The Distribution Agreement with the Distributor 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. The Funds may terminate the Distribution 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.
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 that may not exceed 0.25% of
the average daily net 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 advisers and other money managers are urged to consult their legal
advisers before investing such assets in Fund shares.
Transfer Agent and Custodian.
[ ] (the "Transfer Agent"), [address], 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 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 [ ]% 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 "Custodian"), [address], 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.
Other 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 Adviser places orders for the purchase and sale of assets with
brokers and dealers selected by and in the discretion of the Investment Adviser.
In placing orders for the Funds' portfolio transactions, the Investment Adviser
seeks "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, the Investment Adviser or Sub-Adviser, as applicable, may give
consideration to those firms that provide market, statistical and other research
information to the Trust and the Investment Adviser or Sub-Adviser. In addition,
the Funds may pay higher than the lowest available commission rates when the
Investment Adviser or Sub-Adviser, as applicable, 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 Adviser's or 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 Adviser's or 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 Adviser or Sub-Adviser, as applicable,
receive brokerage commissions in recognition of research services provided to
the Investment Adviser or Sub-Adviser.
The Investment Adviser intends to employ broker-dealer affiliates of the
Investment Adviser (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 affiliates of the
Investment Adviser by the Funds satisfy the standards of Section 17(e) and Rule
17e-1. Certain transactions may be effected for a Funds by a broker-dealer
affiliate of the Investment Adviser 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 Adviser or Sub-Adviser, as
applicable. On occasions when the Investment Adviser or Sub-Adviser, as
applicable, deems the purchase or sale of securities to be in the best interest
of one or more clients of the Investment Adviser or Sub-Adviser, the Investment
Adviser or 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 Adviser or Sub-Adviser, as
applicable, 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 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.
DIVIDENDS AND TAX STATUS
Dividends.
It is currently contemplated that dividends of the Bond Index Fund's net
investment income will be declared and paid quarterly 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 Internal Revenue Code of 1986, as amended (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. 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.
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 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-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 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.
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, [ ], [address], 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.
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, including but not limited to [relevant
indices]. 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 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 $10,000 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.
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 Funds may advertise other forms of performance. For example, a 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.
A Fund may also include various information in its advertisements. Information
included in a 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 and
systematic withdrawal plans, including the principle of dollar cost averaging,
(iv) descriptions of a Fund's portfolio manager(s) and the portfolio management
staff of the Investment Adviser or summaries of the views of the portfolio
managers with respect to the financial markets, (v) the results of a
hypothetical investment in a Fund or its relevant benchmark index 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 a Fund as of one or more
dates.
In connection with its advertisements, the Funds may provide information about
the Investment Adviser or any of the Funds' other service providers, including
information relating to policies, business practices or services. For instance,
a 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 1-800-934-4410 for information about services and
commissions.
[Chart comparing commission rates.]
The Funds 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 a 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 a Fund, the
following will be the relationship between average cost per share ($14.35 in the
example given) and average price per share:
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 Avg. Total
Invested $600 Price $15.17 Shares 41.804
<PAGE>
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.
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 I 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 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.
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 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-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.
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 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. 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
B, predominantly B, speculative with respect to the issuer's capacity to
CCC pay preferred stock obligations. "BB" 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.
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.
<PAGE>
PART C. OTHER INFORMATION
ITEM 23: EXHIBITS
(a) DECLARATION OF TRUST:
(1) Agreement and Declaration of Trust dated August 10, 1999 is filed herewith.
(b) BY-LAWS: To be filed by amendment.
(c) INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS: To be filed by amendment.
(d) INVESTMENT ADVISORY CONTRACTS: To be filed by amendment.
(e) UNDERWRITING CONTRACTS: To be filed by amendment.
(f) BONUS OR PROFIT SHARING CONTRACTS: Not applicable.
(g) CUSTODIAN AGREEMENTS: To be filed by amendment.
(h) OTHER MATERIAL CONTRACTS: To be filed by amendment.
(i) LEGAL OPINION: To be filed by amendment.
(j) OTHER OPINIONS: Not applicable.
(k) OMITTED FINANCIAL STATEMENTS: Not applicable.
(l) INITIAL CAPITAL AGREEMENTS: Not applicable.
(m) RULE 12B-1 PLAN: Not applicable.
(n) FINANCIAL DATA SCHEDULE: Not applicable.
(o) RULE 18F-3 PLAN: Not applicable.
ITEM 24: PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
Not applicable.
ITEM 25: INDEMNIFICATION
The Delaware Business Trust Act (Del. Code Ann. tit. 12) and Article X of
the Registrant's Agreement and Declaration of Trust (the "Declaration of Trust")
provide for indemnification.
Section 3803 of the Delaware Business Trust Act provides that, except
to the extent otherwise provided in the governing instrument of a Delaware
business trust, the trustees and officers of such business trust, when acting in
such capacity, shall not be personally liable to any person other than the
business trust or a beneficial owner for any act, omission or obligation of the
business trust or any trustee thereof.
Section 3817 of the Delaware Business Trust Act provides that, subject
to any standards and restrictions set forth in the governing instrument of the
business trust, a business trust shall have the power to indemnify and hold
harmless any trustee or shareholder or other person from and against any and all
claims and demands whatsoever. Section 3817 further provides that the absence of
a provision for indemnity in the governing instrument of a business trust shall
not be construed to deprive any trustee or shareholder or other person of any
right to indemnity which is otherwise available to such person under the laws of
Delaware.
Pursuant to the Declaration of Trust, the Trustees, officers, employees
and managers of the Registrant are not responsible or liable for any act or
omission or for neglect or wrongdoing of them or any officer, agent, employee,
manager, investment adviser, delegate or independent contractor of the
Registrant, provided they have exercised reasonable care and have acted under
the reasonable belief that their actions are in the best interest of the
Registrant. However, nothing in the Declaration of Trust protects any Trustee,
officer, employee or manager of the Registrant against liability to the
Registrant or its shareholders to which he would otherwise be subject by reason
of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his office. In addition, the Declaration of
Trust provides that all persons contracting with or having any claim against the
Registrant or a particular Series shall look only to the assets of the
Registrant or such Series for payment under such contract or claim; and neither
the Trustees nor any of the Registrant's officers, employees or agents, whether
past, present or future, shall be personally liable therefor.
The Declaration of Trust further provides that the Registrant shall
indemnify every person who is, or has been, a Trustee, officer, employee,
manager or agent of the Registrant ("Covered Person") to the fullest extent
permitted by law against liability and against all expenses reasonably incurred
or paid by such person in connection with any claim, action, suit or proceeding
in which such person becomes involved as a party or otherwise by virtue of being
or having been a Covered Person and against amounts paid or incurred by such
person in the settlement thereof, whether or not such person is a Covered Person
at the time such expenses are incurred. However, no such indemnification will be
provided to a Covered Person under certain circumstances, such as if the Covered
Person is adjudicated by a court or body before which the proceeding was brought
(a) to be liable to the Registrant or its Shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office, or (b) not to have acted in good faith in
the reasonable belief that his action was in or not opposed to the best
interests of the Registrant. Also, by action of the Trustees, and
notwithstanding any interest of the Trustees in the action, the Registrant shall
have power to purchase and maintain insurance, in such amounts as the Trustees
deem appropriate, on behalf of any Covered Person, whether or not such person is
indemnified against such liability or expense under the Registrant's Declaration
of Trust and whether or not the Registrant would have the power or would be
required to indemnify such person against such liability under the provisions of
the Declaration of Trust or of the Delaware Business Trust Act or by any other
applicable law, subject only to any limitations imposed by the Investment
Company Act of 1940. Reference is made to Article X, Section 2 of the
Registrant's Declaration of Trust (filed herewith).
ITEM 26: BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Information required by this item relative to TD Investment Management
Inc., investment adviser to each of Registrant's separate series to be added by
amendment.
Reference is made to the Form ADV of T. Rowe Price Associates, Inc. ("T.
Rowe Price"), sub-adviser to Registrant's TD Waterhouse Systematic Technology
Fund(TM) and TD Waterhouse Tax Managed Growth Fund. The list required by this
Item 26 of officers and directors of T. Rowe Price, together with information as
to any other business profession, vocation or employment of a substantial nature
engaged in by such officers and directors during the past two years, is
incorporated by reference to Schedules A and D of T. Rowe Price's Form ADV.
ITEM 27: PRINCIPAL UNDERWRITERS
(a) To be identified by amendment.
(b) To be added by amendment.
(c) To be added by amendment.
ITEM 28: LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained
pursuant to Section 31(a) of the Investment Company Act and the Rules thereunder
are maintained at the offices of the Registrant and the offices of the
Registrant's Investment Adviser, P.O. Box 100, Toronto-Dominion Centre, 26th
Floor, Toronto Dominion Tower, 55 King Street West, Toronto, Ontario, Canada M5K
1A2.
ITEM 29: MANAGEMENT SERVICES
Not applicable.
ITEM 30: UNDERTAKINGS
Not applicable.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, duly authorized, in the City of Boston,
and The Commonwealth of Massachusetts, on the 13th day of August, 1999.
TD WATERHOUSE FAMILY OF FUNDS
By: Hilari D'Aguiar*
President
By: JOHN V. O'HANLON
John V. O'Hanlon, Attorney-in-Fact
Pursuant to the requirements of the Securities Act, this registration
statement has been signed below by the following person in the capacities and on
the dates indicated.
SIGNATURE: TITLE: DATE:
Hilari D'Aguiar* President, Secretary, August 13, 1999
Treasurer and Trustee
(Principal Executive, Financial
and Accounting Officer)
By: JOHN V. O'HANLON
John V. O'Hanlon, Attorney-in-Fact
* Executed pursuant to powers of attorney filed herewith.
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Joseph R. Fleming, Sheldon A. Jones and John V. O'Hanlon its
true and lawful attorney-in-fact and agent, each with full power of substitution
and re-substitution for him in his name, place and stead, to sign any and all
Registration Statements on Form N-1A applicable to TD Waterhouse Family of Funds
and any notices, amendments or supplements related thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as the undersigned might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed to these presents as of the
10th day of August, 1999.
TD WATERHOUSE FAMILY OF FUNDS
By: HILARI D'AGUIAR
Hilari D'Aguiar, President
<PAGE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that the undersigned constitutes and
appoints each of Joseph R. Fleming, Sheldon A. Jones and John V. O'Hanlon his
true and lawful attorney-in-fact and agent, each with full power of substitution
and resubstitution for him in his name, place and stead, to sign any and all
Registration Statements on Form N-1A applicable to TD Waterhouse Family of Funds
and any notices, amendments or supplements related thereto, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said attorney-in-fact
and agent full power and authority to do and perform each and every act and
thing requisite and necessary to be done, as fully to all intents and purposes
as he might or could do in person, hereby ratifying and confirming all that said
attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has subscribed to these presents this 10th
day of August, 1999.
By: Title:
HILARI D'AGUIAR President, Secretary, Treasurer and Trustee
Hilari D'Aguiar
<PAGE>
EXHIBIT INDEX
(a)(1) Agreement and Declaration of Trust of TD Waterhouse Family of Funds
AGREEMENT AND DECLARATION OF TRUST
of
TD WATERHOUSE FAMILY OF FUNDS
a Delaware Business Trust
Principal Place of Business:
P.O. Box 1
Toronto Dominion Tower, 12th Floor
Toronto-Dominion Centre
Toronto, Ontario, Canada M5K 1A2
Dated August 10, 1999
<PAGE>
TABLE OF CONTENTS
Page
ARTICLE I....................................................................1
DEFINITIONS.............................................................1
ARTICLE II...................................................................2
PURPOSE OF TRUST....................................................2
ARTICLE III..................................................................2
THE TRUSTEES........................................................2
Section 1. Management of the Trust...................2
Section 2. Initial Trustee and Number of Trustees....2
Section 3. Term of Office of Trustees................3
Section 4. Vacancies; Appointment of Trustees........3
Section 5. Temporary Vacancy or Absence..............3
Section 6. Chairman..................................3
Section 7. Delegation; Committees....................3
Section 8. Action by the Trustees....................4
Section 9. Ownership of Trust Property...............4
Section 10. Effect of Trustees Not Serving............4
Section 11. Trustees, Etc. as Shareholders............4
ARTICLE IV...................................................................5
POWERS OF THE TRUSTEES..............................................5
Section 1. Powers....................................5
Section 2. Certain Transactions......................7
Section 3. Payment of Expenses by Shareholders.......8
ARTICLE V....................................................................8
SERIES; CLASSES; SHARES.............................................8
Section 1. Establishment of Series or Classes........8
Section 2. Shares....................................8
Section 3. Investment in the Trust...................9
Section 4. Assets and Liabilities of Series..........9
Section 5. Ownership and Transfer of Shares.........10
Section 6. Exchange Privilege.......................10
Section 7. Status of Shares:Limitation of
Shareholder Liability...............10
ARTICLE VI..................................................................10
DISTRIBUTIONS AND REDEMPTIONS......................................10
Section 1. Distributions............................10
Section 2. Redemptions..............................11
Section 3. Determination of Net Asset Value.........11
Section 4. Suspension of Right of Redemption........11
Section 5. Redemptions Necessary for Qualification
as Regulated Investment Company
or Other Regulatory Purpose..............12
ARTICLE VII.................................................................12
SHAREHOLDERS' VOTING POWERS AND MEETINGS...........................12
Section 1. Voting Powers............................12
Section 2. Meetings of Shareholders.................12
Section 3. Quorum; Required Vote....................13
ARTICLE VIII................................................................13
CONTRACTS WITH SERVICE PROVIDERS...................................13
Section 1. Investment Adviser.......................13
Section 2. Principal Underwriter....................13
Section 3. Transfer Agency, Shareholder Services
and Administration Agreements............14
Section 4. Custodian................................14
Section 5. Parties to Contracts with Service
Providers.............................14
ARTICLE IX..................................................................14
EXPENSES OF THE TRUST AND SERIES...................................14
ARTICLE X...................................................................15
LIMITATION OF LIABILITY AND INDEMNIFICATION........................15
Section 1. Limitation of Liability..................15
Section 2. Indemnification..........................15
Section 3. Indemnification of Shareholders..........17
ARTICLE XI..................................................................17
MISCELLANEOUS......................................................17
Section 1. Trust Not a Partnership..................17
Section 2. Trustee Action; Expert Advice; No
Bond or Surety........................17
Section 3. Record Dates.............................18
Section 4. Termination of the Trust.................18
Section 5. Reorganization; Merger; Consolidation....18
Section 6. Derivative Actions.......................19
Section 7. Declaration of Trust.....................20
Section 8. Applicable Law...........................20
Section 9. Amendments...............................21
Section 10. Fiscal Year..............................21
Section 11. Severability.............................21
<PAGE>
AGREEMENT AND DECLARATION OF TRUST
OF
TD WATERHOUSE FAMILY OF FUNDS
This AGREEMENT AND DECLARATION OF TRUST is made on August ___,
1999, by the Trustee named hereunder, to establish a business trust under the
law of Delaware for the investment and reinvestment of funds contributed to the
Trust by investors. The Trustee declares that all money and property contributed
to the Trust shall be held and managed in trust pursuant to this Agreement and
Declaration of Trust. The name of the Trust created by this Agreement and
Declaration of Trust is TD Waterhouse Family of Funds.
ARTICLE I
DEFINITIONS
Unless otherwise provided or required by the context:
(a)......"Bylaws" means the Bylaws of the Trust adopted by the
Trustees, which Bylaws are incorporated by reference herein in their entirety,
as amended from time to time;
(b)......"Class" means the class of Shares of a Series
established pursuant to Article V;
(c)......"Code" means the Internal Revenue Code of 1986, as
amended from time to time, and the rules and regulations thereunder, as adopted
or amended from time to time;
(d)......"Commission," "Interested Person," and "Principal
Underwriter" have the meanings provided in the 1940 Act;
(e)......"Covered Person" means a person so defined in Article
X, Section 2;
(f)......"Declaration of Trust" means this Agreement and
Declaration of Trust, as amended or restated from time to time;
(g)......"Delaware Act" means Chapter 38 of Title 12 of the
Delaware Code entitled "Treatment of Delaware Business Trusts," as amended from
time to time;
(h)......"Majority Shareholder Vote" means "the vote of a
majority of the outstanding voting securities" as defined in the 1940 Act;
(i)......"Outstanding Shares" means Shares shown in the books
of the Trust or its transfer agent as then outstanding;
(j)......"Series" means a series of Shares established
pursuant to Article V;
(k)......"Shareholder" means a record owner of Outstanding
Shares;
(l)......"Shares" mean the equal proportionate transferable
units of interest into which the beneficial interest of each Series or Class is
divided from time to time (including whole Shares and fractions of Shares);
(m)......"Trust" means TD Waterhouse Family of Funds
established hereby, and reference to the Trust, when applicable to one or more
Series, refers to that Series;
(n)......"Trustees" means the person who has signed this
Declaration of Trust and all other Person or Persons who may from time to time
be duly elected or appointed to serve as Trustee or Trustees in accordance with
the provisions hereof, in each case so long as such Person or Persons shall
continue in office in accordance with the terms of this Declaration of Trust,
and reference herein to the Trustee or the Trustees shall refer to such Person
or Persons in his, her or their capacities as trustee or trustees hereunder;
(o)......"Trust Property" means any and all property, real or
personal, tangible or intangible, which is owned or held by or for the Trust or
the Trustees on behalf of the Trust or any Series;
(p)......The "1940 Act" means the Investment Company Act of
1940, as amended from time to time.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to conduct, operate and carry on
the business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities, and to carry on
such other business as the Trustees may from time to time determine pursuant to
the Trustees' authority under this Declaration of Trust.
ARTICLE III
THE TRUSTEES
Section 1. Management of the Trust. The business and affairs
of the Trust shall be managed by or under the direction of the Trustees, and
they shall have all powers necessary or desirable to carry out that
responsibility. The Trustees may execute all instruments and take all action
they deem necessary or desirable to promote the interests of the Trust. Any
determination made by the Trustees in good faith as to what is in the interests
of the Trust shall be conclusive.
Section 2. Initial Trustee and Number of Trustees. The initial
Trustee shall be the person signing this Declaration of Trust. The exact number
of Trustees (other than the initial Trustee) shall be fixed from time to time by
a majority of the Trustees. Other than the initial Trustee and Trustees
appointed to fill vacancies pursuant to Section 4 of this Article, the
Shareholders shall elect the Trustees on such dates as the Trustees may fix from
time to time.
Section 3. Term of Office of Trustees. Each Trustee shall hold
office for life or until his successor is elected and qualified or the Trust
terminates; except that (a) any Trustee may resign by delivering to the other
Trustees or to any Trust officer a written resignation effective upon such
delivery or a later date specified therein; (b) any Trustee who requests to be
retired, or who has become physically or mentally incapacitated or is otherwise
unable to serve, may be retired by a written instrument signed by a majority of
the other Trustees, specifying the effective date of retirement; (c) any Trustee
shall be retired or removed with or without cause at any time upon the unanimous
written request of the remaining Trustees; and (d) any Trustee may be removed at
any meeting of the Shareholders by a vote of at least two-thirds of the
Outstanding Shares. Except to the extent expressly provided in a written
agreement with the Trust, no Trustee or Trustees resigning and no Trustee or
Trustees removed shall have any right to any compensation for any period
following the effective date of his or her resignation or removal, or any right
of damages on account of such removal.
Section 4. Vacancies; Appointment of Trustees. Whenever a
vacancy shall exist, regardless of the reason for such vacancy, the remaining
Trustees shall appoint any person as they determine in their sole discretion to
fill that vacancy, consistent with the limitations under the 1940 Act. Such
appointment shall be made by a written instrument signed by a majority of the
Trustees or by a resolution of the Trustees, duly adopted and recorded in the
records of the Trust, specifying the effective date of the appointment. The
Trustees may appoint a new Trustee as provided above in anticipation of a
vacancy expected to occur because of the retirement, resignation or removal of a
Trustee, or an increase in number of Trustees, provided that such appointment
shall become effective only at or after the expected vacancy occurs. As soon as
any such Trustee has accepted his or her appointment in writing, the Trust
estate shall vest in the new Trustee, together with the continuing Trustees,
without any further act or conveyance, and he or she shall be deemed a Trustee
hereunder. In the event of death, declination, resignation, retirement, removal,
or incapacity of all the then Trustees within a short period of time and without
the opportunity for at least one Trustee being able to appoint additional
Trustees to replace those no longer serving, the Trust's investment adviser(s)
are empowered to appoint a new Trustee or new Trustees subject to the provisions
of Section 16(a) of the 1940 Act.
Section 5. Temporary Vacancy or Absence. Whenever a vacancy in
the Trustees shall occur, until such vacancy is filled, or while any Trustee is
absent from his domicile (unless that Trustee has made arrangements to be
informed about, and to participate in, the affairs of the Trust during such
absence), or is physically or mentally incapacitated, the remaining Trustees
shall have all the powers hereunder and their certificate as to such vacancy,
absence or incapacity shall be conclusive. Any Trustee may, by power of
attorney, delegate his powers as Trustee for a period not to exceed six (6)
months, unless otherwise extended for one or more additional consecutive six (6)
month periods, to any other Trustee or Trustees.
Section 6. Chairman. The Trustees shall appoint one
of their number to be Chairman of the Trustees. The Chairman shall preside
at all meetings of the Trustees, and shall be responsible for the execution
of policies established by the Trustees and the administration of the Trust.
Section 7. Delegation; Committees. The Trustees shall have
power to delegate from time to time to such of their number or to officers,
employees or agents of the Trust the doing of such things and the execution of
such instruments either in the name of the Trust or the names of the Trustees or
otherwise as the Trustees may deem expedient, to the same extent as such
delegation is permitted by the 1940 Act.
Section 8. Action by the Trustees. The Trustees shall act by
majority vote at a meeting duly called (including at a telephonic meeting at
which all participants can hear one another, unless the 1940 Act requires that a
particular action be taken only at a meeting of the Trustees in person) at which
a quorum is present or by written consent of a majority of Trustees (or such
greater number as may be required by applicable law) without a meeting.
One-third of the Trustees shall constitute a quorum at any meeting. Meetings of
the Trustees may be called orally or in writing by the Chairman of the Trustees
or by any two other Trustees. Notice of the time, date and place of all Trustees
meetings shall be given to each Trustee by telephone, facsimile or other
electronic mechanism sent to his home or business address at least twenty-four
hours in advance of the meeting or by written notice mailed to his home or
business address at least seventy-two hours in advance of the meeting, unless,
in case of exigency, the Chairman of the Trustees, the President or the
Secretary shall prescribe any shorter notice period with the notice to be given
personally by telephone, facsimile or other electronic mechanism to all of the
Trustees at their respective residences or places of business. Notice need not
be given to any Trustee who attends the meeting without objecting to the lack of
notice or who signs a waiver of notice either before, at or after the meeting.
Subject to the requirements of the 1940 Act, the Trustees by majority vote may
delegate to any Trustee or Trustees authority to approve particular matters or
take particular actions on behalf of the Trust. Any written consent or waiver
may be provided and delivered to the Trust by facsimile or other similar
electronic mechanism.
Section 9. Ownership of Trust Property. The Trust Property of
the Trust and of each Series shall be held separate and apart from any assets
now or hereafter held in any capacity other than as Trustee hereunder by the
Trustees or any successor Trustees. All of the Trust Property and legal title
thereto shall at all times be considered as vested in the Trust, provided that
the Trustees may cause legal title to any Trust Property to be held by or in the
name of the Trustees acting on behalf of the Trust, or in the name of any person
as nominee. No Shareholder shall be deemed to have a severable ownership in any
individual asset of the Trust or of any Series or any right of partition or
possession thereof, but each Shareholder shall have, as provided in Article V, a
proportionate undivided beneficial interest in the Trust or Series represented
by Shares. The Trust or the Trustees on behalf of the Trust shall be deemed to
hold legal and beneficial ownership of any income earned on securities held by
the Trust issued by any business entity formed, organized or existing under the
laws of any jurisdiction other than a state, commonwealth, possession or colony
of the United States or the laws of the United States.
Section 10. Effect of Trustees Not Serving. The death,
resignation, retirement, removal, incapacity or inability or refusal to serve of
the Trustees, or any one of them, shall not operate to annul the Trust or to
revoke any existing agency created pursuant to the terms of this Declaration of
Trust.
Section 11. Trustees, Etc. as Shareholders. Subject to
any restrictions in the Bylaws, any Trustee, officer, agent or independent
contractor of the Trust may acquire, own and dispose of Shares to the same
extent as any other Shareholder, and the Trustees may issue and sell Shares
to and buy Shares from any such person or any firm or company in which
such person is interested, subject only to any general limitations herein.
ARTICLE IV
POWERS OF THE TRUSTEES
Section 1. Powers. The Trustees in all instances shall act as
principals, free of the control of the Shareholders. The Trustees shall have
full power and authority to take or refrain from taking any action and to
execute any contracts and instruments that they may consider necessary or
desirable in the management of the Trust. The Trustees shall not in any way be
bound or limited by current or future laws or customs applicable to trust
investments, but shall have full power and authority to make any investments
which they, in their sole discretion, deem proper to accomplish the purposes of
the Trust. The Trustees may exercise all of their powers without recourse to any
court or other authority. Subject to any applicable limitation herein or in the
Bylaws or resolutions of the Trust, the Trustees shall have power and authority,
without limitation:
(a)......To invest and reinvest cash and other property, and
to hold cash or other property uninvested, without in any event being bound or
limited by any current or future law or custom concerning investments by
trustees, and to sell, exchange, lend, pledge, mortgage, hypothecate, write
options on and lease any or all of the Trust Property; to invest in obligations,
securities and assets of any kind, and without regard to whether they may mature
before or after the possible termination of the Trust; and without limitation to
invest all or any part of its cash and other assets and property in securities
issued by any investment company or series thereof;
(b)......To operate as and carry on the business of an
investment company, and exercise all the powers necessary and proper to conduct
such a business;
(c)......To adopt Bylaws not inconsistent with this
Declaration of Trust providing for the conduct of the business of the Trust and
to amend and repeal them to the extent such right is not reserved to the
Shareholders;
(d)......To elect and remove such officers and appoint and
terminate such agents, independent contractors and delegates as they deem
appropriate;
(e)......To employ an investment adviser (subject to such
general or specific instruments as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of Trust Property on behalf of the
Trustees or to authorize any officer, employee or Trustee to effect such
purchases, sales, loans or exchanges pursuant to recommendations of any such
investment adviser;
(f)......To employ as custodian of any Trust Property, subject
to any provisions herein or in the Bylaws, one or more banks, trust companies or
companies that are members of a national securities exchange, or other entities
permitted by the Commission to serve as such;
(g)......To retain one or more transfer agents, dividend
disbursing agents, placement agents, administrators, or Shareholder servicing
agents, or both;
(h)......To provide for the distribution of Shares, either
through a Principal Underwriter or distributor as provided herein, or by the
Trust itself, or both, or pursuant to a distribution plan of any kind, in the
United States and any foreign jurisdiction selected by the Trustees;
(i)......To set record dates in the manner provided for herein
or in the Bylaws;
(j)......To delegate such authority as they consider desirable
to any officers of the Trust and to any agent, subagent, independent contractor,
delegate, manager, investment adviser, custodian or underwriter;
(k)......To sell or exchange any or all of the Trust Property;
(l)......To vote or give assent, or exercise any rights of
ownership, with respect to securities or other property; and to execute and
deliver powers of attorney delegating such power to other persons;
(m)......To exercise powers and rights of subscription or
otherwise which in any manner arise out of ownership of securities;
(n)......To hold any security or other Trust Property (i) in a
form not indicating any trust, whether in bearer, book entry, unregistered or
other negotiable form, or (ii) either in the Trust's or Trustees' own name or in
the name of a custodian or a nominee or nominees, subject to safeguards
according to the usual practice of business trusts or investment companies;
(o)......To establish separate and distinct Series with
separately defined investment objectives, policies or restrictions and distinct
investment purposes, and with separate Shares representing beneficial interests
in such Series, and to establish separate Classes, all in accordance with the
provisions of Article V;
(p)......To the full extent permitted by Section 3806 of the
Delaware Act, to allocate assets, liabilities and expenses of the Trust to a
particular Series and liabilities and expenses to a particular Class or to
apportion the same between or among two or more Series or Classes, provided that
any liabilities or expenses incurred by a particular Series or Class shall be
payable solely out of the assets belonging to that Series or Class as provided
for in Article V, Section 4;
(q)......To consent to or participate in any plan for the
liquidation, reorganization, consolidation or merger of any corporation or
concern whose securities are held by the Trust; to consent to any contract,
lease, mortgage, purchase or sale of property by such corporation or concern;
and to pay calls or subscriptions with respect to any security held by the
Trust;
(r)......To compromise, arbitrate or otherwise adjust claims
in favor of or against the Trust or any matter in controversy including, but not
limited to, claims for taxes;
(s)......To make distributions of income and of capital gains
to Shareholders in the manner provided in this Declaration of Trust or in the
Bylaws;
(t)......To borrow money and in connection therewith to issue
notes or other evidences of indebtedness and to pledge or grant security
interests in Trust Property as security therefor;
(u)......To establish committees for such purposes, with such
membership, and with such responsibilities, as the Trustees may consider proper;
(v)......To issue, sell, repurchase, redeem, cancel, retire,
acquire, hold, resell, reissue, dispose of and otherwise deal in Shares; to
establish terms and conditions regarding the issuance, sale, repurchase,
redemption, cancellation, retirement, acquisition, holding, resale, reissuance,
disposition of or dealing in Shares; and, subject to Articles V and VI, to apply
to any such repurchase, redemption, retirement, cancellation or acquisition of
Shares any funds or property of the Trust or of the particular Series with
respect to which such Shares are issued;
(w)......To adopt, establish and carry out pension,
profit-sharing, share bonus, share purchase, savings, thrift and other
retirement, incentive and benefit plans, trusts and provisions, including the
purchasing of life insurance and annuity contracts as a means of providing such
retirement and other benefits, for any or all of the Trustees, officers,
employees and agents of the Trust;
(x)......To sell all or a portion of the Shares to another
investment company that is registered under the 1940 Act, in the Trustees' sole
discretion, without the vote or approval of any Shareholder or Shareholders,
notwithstanding any other provision of this Declaration of Trust or the Bylaws
to the contrary; and
(y)......To carry on any other business in connection with or
incidental to any of the foregoing powers, to do everything necessary or
desirable to accomplish any purpose or to further any of the foregoing powers,
and to take every other action incidental to the foregoing business or purposes,
objects or powers.
The clauses above shall be construed as objects and powers,
and the enumeration of specific powers shall not limit in any way the general
powers of the Trustees. Any action by one or more of the Trustees in their
capacity as such hereunder shall be deemed an action on behalf of the Trust or
the applicable Series, and not an action in an individual capacity. No one
dealing with the Trustees shall be under any obligation to make any inquiry
concerning the authority of the Trustees, or to see to the application of any
payments made or property transferred to the Trustees or upon their order. In
construing this Declaration of Trust, the presumption shall be in favor of a
grant of power to the Trustees.
Section 2. Certain Transactions. Except as prohibited by
applicable law, the Trustees may, on behalf of the Trust, buy any securities
from or sell any securities to, or lend any assets of the Trust to, any Trustee
or officer of the Trust or any firm of which any such Trustee or officer is a
member acting as principal, or have any such dealings with any investment
adviser, administrator, distributor or transfer agent for the Trust or with any
Interested Person of such person. The Trust may employ any such person or entity
in which such person is an Interested Person, as broker, legal counsel,
registrar, investment adviser, administrator, distributor, transfer agent,
dividend disbursing agent, custodian or in any other capacity upon customary
terms.
Section 3. Payment of Expenses by Shareholders. The Trustees
shall have the power, as frequently as they may determine, to cause each
Shareholder, or each Shareholder of any particular Series, to pay directly, in
advance or arrears, for charges of the Trust's custodian or transfer,
Shareholder servicing or similar agent, an amount fixed from time to time by the
Trustees, by setting off such charges due from such Shareholder from declared
but unpaid dividends owed such Shareholder and/or by reducing the number of
Shares in the account of such Shareholder by that number of full and/or
fractional Shares which represents the outstanding amount of such charges due
from such Shareholder.
ARTICLE V
SERIES; CLASSES; SHARES
Section 1. Establishment of Series or Classes. The Trust shall
consist of one or more Series. The Trustees hereby establish the Series listed
in Schedule A attached hereto and made a part hereof. Each additional Series
shall be established by the adoption of a resolution of the Trustees. The
Trustees may designate the relative rights and preferences of the Shares of each
Series. The Trustees may divide the Shares of any Series into Classes. In such
case each Class of a Series shall represent interests in the assets of that
Series and have identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that expenses allocated to a Class may be
borne solely by such Class as determined by the Trustees and a Class may have
exclusive voting rights with respect to matters affecting only that Class. The
Trust shall maintain separate and distinct records for each Series and hold and
account for the assets thereof separately from the other assets of the Trust or
of any other Series. A Series may issue any number of Shares and need not issue
Shares. Each Share of a Series shall represent an equal beneficial interest in
the net assets of such Series. Each holder of Shares of a Series shall be
entitled to receive his pro rata share of all distributions made with respect to
such Series. Upon redemption of his Shares, such Shareholder shall be paid
solely out of the funds and property of such Series. The Trustees may change the
name of any Series or Class. At any time that there are no Shares outstanding of
any particular Series previously established and designated, the Trustees may by
a majority vote abolish that Series and rescind the establishment and
designation thereof.
Section 2. Shares. The beneficial interest in the Trust shall
be divided into Shares of one or more separate and distinct Series or Classes
established by the Trustees. The number of Shares of each Series and Class is
unlimited and each Share shall have a par value of $0.001 per Share. All Shares
issued hereunder shall be fully paid and nonassessable. Shareholders shall have
no preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust. The Trustees shall have full power and
authority, in their sole discretion and without obtaining Shareholder approval:
to issue original or additional Shares at such times and on such terms and
conditions as they deem appropriate; to issue fractional Shares and Shares held
in the treasury; to establish and to change in any manner Shares of any Series
or Classes with such preferences, terms of conversion, voting powers, rights and
privileges as the Trustees may determine (but the Trustees may not change
Outstanding Shares in a manner materially adverse to the Shareholders of such
Shares); to divide or combine the Shares of any Series or Classes into a greater
or lesser number; to classify or reclassify any unissued Shares of any Series or
Classes into one or more Series or Classes of Shares; to abolish any one or more
Series or Classes of Shares; to issue Shares to acquire other assets (including
assets subject to, and in connection with, the assumption of liabilities) and
businesses; and to take such other action with respect to the Shares as the
Trustees may deem desirable. Shares held in the treasury shall not confer any
voting rights on the Trustees and shall not be entitled to any dividends or
other distributions declared with respect to the Shares.
Section 3. Investment in the Trust. The Trustees shall accept
investments in any Series from such persons and on such terms as they may from
time to time authorize. At the Trustees' discretion, such investments, subject
to applicable law, may be in the form of cash or securities in which that Series
is authorized to invest, valued as provided in Article VI, Section 3.
Investments in a Series shall be credited to each Shareholder's account in the
form of full Shares at the Net Asset Value per Share next determined after the
investment is received or accepted as may be determined by the Trustees;
provided, however, that the Trustees may, in their sole discretion, (a) impose a
sales charge upon investments in any Series or Class, (b) issue fractional
Shares, or (c) determine the Net Asset Value per Share of the initial capital
contribution. The Trustees shall have the right to refuse to accept investments
in any Series at any time without any cause or reason therefor whatsoever.
Section 4. Assets and Liabilities of Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof (including any proceeds
derived from the sale, exchange or liquidation of such assets, and any funds or
payments derived from any reinvestment of such proceeds in whatever form the
same may be), shall be held and accounted for separately from the other assets
of the Trust and every other Series and are referred to as "assets belonging to"
that Series. The assets belonging to a Series shall belong only to that Series
for all purposes, and to no other Series, subject only to the rights of
creditors of that Series. Any assets, income, earnings, profits, and proceeds
thereof, funds, or payments which are not readily identifiable as belonging to
any particular Series shall be allocated by the Trustees between and among one
or more Series as the Trustees deem fair and equitable. Each such allocation
shall be conclusive and binding upon the Shareholders of all Series for all
purposes, and such assets, earnings, income, profits or funds, or payments and
proceeds thereof shall be referred to as assets belonging to that Series. The
assets belonging to a Series shall be so recorded upon the books of the Trust,
and shall be held by the Trustees in trust for the benefit of the Shareholders
of that Series. The assets belonging to a Series shall be charged with the
liabilities of that Series and all expenses, costs, charges and reserves
attributable to that Series, except that liabilities and expenses allocated
solely to a particular Class shall be borne by that Class. Any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular Series or Class shall be
allocated and charged by the Trustees between or among any one or more of the
Series or Classes in such manner as the Trustees deem fair and equitable. Each
such allocation shall be conclusive and binding upon the Shareholders of all
Series or Classes for all purposes.
Without limiting the foregoing, but subject to the right of
the Trustees to allocate general liabilities, expenses, costs, charges or
reserves as herein provided, the debts, liabilities, obligations and expenses
incurred, contracted for or otherwise existing with respect to a particular
Series shall be enforceable against the assets of such Series only, and not
against the assets of the Trust generally or of any other Series. Notice of this
contractual limitation on liabilities among Series may, in the Trustees'
discretion, be set forth in the certificate of trust of the Trust (whether
originally or by amendment) as filed or to be filed in the Office of the
Secretary of State of the State of Delaware pursuant to the Delaware Act, and
upon the giving of such notice in the certificate of trust, the statutory
provisions of Section 3806 of the Delaware Act relating to limitations on
liabilities among Series (and the statutory effect under Section 3806 of setting
forth such notice in the certificate of trust) shall become applicable to the
Trust and each Series. Any person extending credit to, contracting with or
having any claim against any Series may look only to the assets of that Series
to satisfy or enforce any debt, liability, obligation or expense incurred,
contracted for or otherwise existing with respect to that Series. No Shareholder
or former Shareholder of any Series shall have a claim on or any right to any
assets allocated or belonging to any other Series.
Section 5. Ownership and Transfer of Shares. The Trust shall
maintain a register containing the names and addresses of the Shareholders of
each Series, the number of Shares of each Series and Class thereof, and a record
of all Share transfers. The register shall be conclusive as to the identity of
Shareholders of record and the Shares held by them from time to time. The
Trustees may authorize the issuance of certificates representing Shares and
adopt rules governing their use. The Trustees may make rules governing the
transfer of Shares, whether or not represented by certificates.
Section 6. Exchange Privilege. The Trustees shall have the
authority to provide that the holders of the Shares of any Series shall have the
right to exchange said Shares for Shares of one or more other Series of Shares
in accordance with such requirements and procedures as may be established by the
Trustees.
Section 7. Status of Shares: Limitation of Shareholder
Liability. Shares shall be deemed to be personal property giving Shareholders
only the rights provided in this Declaration of Trust. Every Shareholder, by
virtue of having acquired a Share, shall be held expressly to have assented to
and agreed to be bound by the terms of this Declaration of Trust. No Shareholder
shall be personally liable for the debts, liabilities, obligations and expenses
incurred by, contracted for, or otherwise existing with respect to, the Trust or
any Series. Neither the Trust nor the Trustees shall have any power to bind any
Shareholder personally or to demand payment from any Shareholder for anything,
other than as agreed by the Shareholder. Shareholders shall have the same
limitation of personal liability as is extended to shareholders of a private
corporation for profit incorporated in the State of Delaware. Every written
obligation of the Trust or any Series shall contain a statement to the effect
that such obligation may only be enforced against the assets of the Trust or
such Series; however, the omission of such statement shall not operate to bind
or create personal liability for any Shareholder or Trustee.
ARTICLE VI
DISTRIBUTIONS AND REDEMPTIONS
Section 1. Distributions. The Trustees may declare and pay
dividends and other distributions, including dividends on Shares of a particular
Series and other distributions from the assets belonging to that Series. The
amount and payment of dividends or distributions and their form, whether they
are in cash, Shares or other Trust Property, shall be determined by the
Trustees. Dividends and other distributions may be paid pursuant to a standing
resolution adopted once or more often as the Trustees determine. All dividends
and other distributions on Shares of a particular Series shall be distributed
pro rata to the Shareholders of that Series in proportion to the number of
Shares of that Series they held on the record date established for such payment,
except that such dividends and distributions shall appropriately reflect
expenses allocated to a particular Class of such Series. The Trustees may adopt
and offer to Shareholders such dividend reinvestment plans, cash dividend payout
plans or similar plans as the Trustees deem appropriate.
Section 2. Redemptions. Each Shareholder of a Series shall
have the right at such times as may be permitted by the Trustees to require the
Series to redeem all or any part of his Shares at a redemption price per Share
equal to the Net Asset Value per Share at such time as the Trustees shall have
prescribed by resolution. In the absence of such resolution, the redemption
price per Share shall be the Net Asset Value next determined after receipt by
the Series of a request for redemption in proper form less such charges as are
determined by the Trustees and described in the Trust's Registration Statement
for that Series under the Securities Act of 1933, as amended from time to time.
The Trustees may specify conditions, prices, and places of redemption, and may
specify binding requirements for the proper form or forms of requests for
redemption. Payment of the redemption price may be wholly or partly in
securities or other assets at the value of such securities or assets used in
such determination of Net Asset Value, or may be in cash. Upon redemption,
Shares may be reissued from time to time. The Trustees may require Shareholders
to redeem Shares for any reason under terms set by the Trustees, including the
failure of a Shareholder to supply a personal identification number if required
to do so, or to have the minimum investment required, or to pay when due for the
purchase of Shares issued to him. To the extent permitted by law, the Trustees
may retain the proceeds of any redemption of Shares required by them for payment
of amounts due and owing by a Shareholder to the Trust or any Series or Class.
Notwithstanding the foregoing, the Trustees may postpone payment of the
redemption price and may suspend the right of the Shareholders to require any
Series or Class to redeem Shares during any period of time when and to the
extent permissible under the 1940 Act.
Section 3. Determination of Net Asset Value. The Trustees
shall cause the Net Asset Value of Shares of each Series or Class to be
determined from time to time in a manner consistent with applicable laws and
regulations. The Trustees may delegate the power and duty to determine Net Asset
Value per Share to one or more Trustees or officers of the Trust or to a
custodian, depository or other agent appointed for such purpose. The Net Asset
Value of Shares shall be determined separately for each Series or Class at such
times as may be prescribed by the Trustees or, in the absence of action by the
Trustees, as of the close of trading on the New York Stock Exchange on each day
for all or part of which such Exchange is open for unrestricted trading.
Section 4. Suspension of Right of Redemption. If, as referred
to in Section 2 of this Article, the Trustees postpone payment of the redemption
price and suspend the right of Shareholders to redeem their Shares, such
suspension shall take effect at the time the Trustees shall specify, but not
later than the close of business on the business day next following the
declaration of suspension. Thereafter Shareholders shall have no right of
redemption or payment until the Trustees declare the end of the suspension. If
the right of redemption is suspended, a Shareholder may either withdraw his
request for redemption or receive payment based on the Net Asset Value per Share
next determined after the suspension terminates.
Section 5. Redemptions Necessary for Qualification as
Regulated Investment Company or Other Regulatory Purpose. If the Trustees shall
determine that direct or indirect ownership of Shares of any Series by any
person (a) has or may become concentrated in that person to an extent which
would disqualify any Series as a regulated investment company under the Internal
Revenue Code of 1986, as amended or superseded from time to time ("Internal
Revenue Code"), or (b) would conflict with any other applicable regulatory
requirement, then the Trustees shall have the power (but not the obligation) by
lot or other means they deem equitable to (a) call for redemption by any such
person of a number, or principal amount, of Shares sufficient to maintain or
bring the direct or indirect ownership of Shares into conformity with the
requirements for such qualification or regulatory requirement and (b) refuse to
transfer or issue Shares to any person whose acquisition of Shares in question
would, in the Trustees' judgment, result in such disqualification or conflict.
Any such redemption shall be effected at the redemption price and in the manner
provided in this Article. Shareholders shall upon demand disclose to the
Trustees in writing such information concerning direct and indirect ownership of
Shares as the Trustees deem necessary to comply with the requirements of any
taxing or regulatory authority.
ARTICLE VII
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. Voting Powers. The Shareholders shall have power to
vote only with respect to (a) the election of Trustees; (b) the removal of
Trustees; (c) the amendment of this Declaration of Trust to the extent and as
provided in Article XI, Section 9; and (d) such additional matters relating to
the Trust as may be required by law, this Declaration of Trust, or the Bylaws or
any registration of the Trust with the Commission or any State, or as the
Trustees may consider desirable.
On any matter submitted to a vote of the Shareholders, all
Shares shall be voted by individual Series or Class, except (a) when required by
the 1940 Act, Shares shall be voted in the aggregate and not by individual
Series or Class, and (b) when the Trustees have determined that the matter
affects the interests of more than one Series or Class, then the Shareholders of
all such Series or Classes shall be entitled to vote thereon. Each whole Share
shall be entitled to one vote as to any matter on which it is entitled to vote,
and each fractional Share shall be entitled to a proportionate fractional vote.
There shall be no cumulative voting in the election of Trustees. Shares may be
voted in person or by proxy or in any manner provided for in the Bylaws. The
Bylaws may provide that proxies may be given by any electronic or
telecommunications device or in any other manner, but if a proposal by anyone
other than the officers or Trustees is submitted to a vote of the Shareholders
of any Series or Class, or if there is a proxy contest or proxy solicitation or
proposal in opposition to any proposal by the officers or Trustees, Shares may
be voted only in person or by written proxy. Until Shares of a Series are
issued, as to that Series, the Trustees may exercise all rights of Shareholders
and may take any action required or permitted to be taken by Shareholders by
law, this Declaration of Trust or the Bylaws.
Section 2. Meetings of Shareholders. The first Shareholders'
meeting shall be held to elect Trustees at such time and place as the Trustees
designate, provided, however, that such election may be accomplished by the
Shareholders' written consent. Special meetings of the Shareholders of any
Series or Class may be called by the Trustees and shall be called by the
Trustees upon the written request of Shareholders owning at least ten percent
(10%) of the Outstanding Shares of such Series entitled to vote. Shareholders
shall be entitled to at least ten days' notice of any meeting, given as
determined by the Trustees.
Section 3. Quorum; Required Vote. One third of the Outstanding
Shares of each Series or Class, or one third of the Outstanding Shares of the
Trust, entitled to vote in person or by proxy shall be a quorum for the
transaction of business at a Shareholders meeting with respect to such Series or
Class, or with respect to the entire Trust, respectively. Except when a larger
vote is required by law, this Declaration of Trust or the Bylaws, at any meeting
at which a quorum is present, a majority of the total Shares voted in person or
by proxy shall decide any matters to be voted upon with respect to the entire
Trust and a plurality of such Shares shall elect a Trustee; provided, that if
this Declaration of Trust or applicable law permits or requires that Shares be
voted on any matter by individual Series or Classes, then a majority of the
Shares of that Series or Class (or, if required by law, a Majority Shareholder
Vote of that Series) voted in person or by proxy on the matter shall decide that
matter insofar as that Series or Class is concerned. Shareholders may act as to
the Trust or any Series or Class by the written consent of a majority (or such
greater amount as may be required by applicable law) of the Outstanding Shares
of the Trust or of such Series or Class, as the case may be.
Notwithstanding any other provision herein or in the Bylaws,
any meeting of Shareholders, whether or not a quorum is present, may be
adjourned from time to time by the vote of the majority of the total Shares
represented at that meeting, either in person or by proxy. Any adjourned session
of a meeting of Shareholders may be held within a reasonable time without
further notice.
ARTICLE VIII
CONTRACTS WITH SERVICE PROVIDERS
Section 1. Investment Adviser. Subject to a Majority
Shareholder Vote, the Trustees may enter into one or more investment advisory
contracts on behalf of the Trust or any Series, providing for investment
advisory services, statistical and research facilities and services, and other
facilities and services to be furnished to the Trust or Series on terms and
conditions acceptable to the Trustees. Any such contract may provide for the
investment adviser to effect purchases, sales or exchanges of portfolio
securities or other Trust Property on behalf of the Trustees or may authorize
any officer or agent of the Trust to effect such purchases, sales or exchanges
pursuant to recommendations of the investment adviser. The Trustees may
authorize the investment adviser to employ one or more subadvisers. Any
reference in this Declaration of Trust to the investment adviser shall be deemed
to include such subadvisers, unless the context otherwise requires.
Section 2. Principal Underwriter. The Trustees may enter into
contracts on behalf of the Trust or any Series or Class, providing for the
distribution and sale of Shares by the other party, either directly or as sales
agent, on terms and conditions acceptable to the Trustees. The Trustees may
adopt a plan or plans of distribution with respect to Shares of any Series or
Class and enter into any related agreements, whereby the Series or Class
finances directly or indirectly any activity that is primarily intended to
result in sales of its Shares, subject to the requirements of Section 12 of the
1940 Act, Rule 12b-1 thereunder, and other applicable rules and regulations.
Section 3. Transfer Agency, Shareholder Services and
Administration Agreements. The Trustees, on behalf of the Trust or any Series or
Class, may enter into transfer agency agreements, Shareholder service agreements
and administration and management agreements with any party or parties on terms
and conditions acceptable to the Trustees or delegate to a service provider the
arrangement of these and other services.
Section 4. Custodian. The Trustees shall at all times place
and maintain the securities and similar investments of the Trust and of each
Series in custody meeting the requirements of Section 17(f) of the 1940 Act and
the rules thereunder. The Trustees, on behalf of the Trust or any Series, may
enter into an agreement with a custodian on terms and conditions acceptable to
the Trustees, providing for the custodian, among other things, to (a) hold the
securities owned by the Trust or any Series and deliver the same upon written
order or oral order confirmed in writing, (b) receive and receipt for any moneys
due to the Trust or any Series and deposit the same in its own banking
department or elsewhere, (c) disburse such funds upon orders or vouchers, and
(d) employ one or more sub-custodians.
Section 5. Parties to Contracts with Service Providers. The
Trustees may enter into any contract referred to in this Article with any
entity, although one or more of the Trustees or officers of the Trust may be an
officer, director, trustee, partner, shareholder or member of such entity, and
no such contract shall be invalidated or rendered void or voidable because of
such relationship. No person having such a relationship shall be disqualified
from voting on or executing a contract in his capacity as Trustee and/or
Shareholder, or be liable merely by reason of such relationship for any loss or
expense to the Trust with respect to such a contract or accountable for any
profit realized directly or indirectly therefrom.
Any contract referred to in Sections 1 and 2 of this Article
shall be consistent with and subject to the applicable requirements of Section
15 of the 1940 Act and the rules and orders thereunder with respect to its
continuance in effect, its termination and the method of authorization and
approval of such contract or renewal. No amendment to a contract referred to in
Section 1 of this Article shall be effective unless assented to in a manner
consistent with the requirements of Section 15 of the 1940 Act, and the rules
and orders thereunder.
ARTICLE IX
EXPENSES OF THE TRUST AND SERIES
Subject to Article V, Section 4, the Trust or a particular
Series shall pay, directly or indirectly through contractual arrangements, or
shall reimburse the Trustees from the Trust estate or the assets belonging to
the particular Series, for their expenses and disbursements, including, but not
limited to, interest charges, taxes, brokerage fees and commissions; expenses of
pricing Trust portfolio securities; expenses of sale, addition and reduction of
Shares; certain insurance premiums; applicable fees, interest charges and
expenses of third parties, including the Trust's investment advisers, managers,
administrators, distributors, custodians, transfer agents and fund accountants;
fees of pricing, interest, dividend, credit and other reporting services; costs
of membership in trade associations; telecommunications expenses; funds
transmission expenses; auditing, legal and compliance expenses; costs of forming
the Trust and its Series and maintaining its existence; costs of preparing and
printing the prospectuses of the Trust and each Series, statements of additional
information and Shareholder reports and delivering them to Shareholders;
expenses of meetings of Shareholders and proxy solicitations therefor; costs of
maintaining books and accounts; costs of reproduction, stationery and supplies;
fees and expenses of the Trustees; compensation of the Trust's officers and
employees and costs of other personnel performing services for the Trust or any
Series; costs of Trustee meetings; Commission registration fees and related
expenses; registration fees and related expenses under state or foreign
securities or other laws; and for such non-recurring items as may arise,
including litigation to which the Trust or a Series (or a Trustee or officer of
the Trust acting as such) is a party, and for all losses and liabilities by them
incurred in administering the Trust. The Trustees shall have a lien on the
assets belonging to the appropriate Series, or in the case of an expense
allocable to more than one Series, on the assets of each such Series, prior to
any rights or interests of the Shareholders thereto, for the reimbursement to
them of such expenses, disbursements, losses and liabilities. This Article shall
not preclude the Trust from directly paying any of the aforementioned fees and
expenses.
ARTICLE X
LIMITATION OF LIABILITY AND INDEMNIFICATION
Section 1. Limitation of Liability. All persons contracting
with or having any claim against the Trust or a particular Series shall look
only to the assets of the Trust or such Series for payment under such contract
or claim; and neither the Trustees nor any of the Trust's officers, employees or
agents, whether past, present or future, shall be personally liable therefor.
Every written instrument or obligation on behalf of the Trust or any Series may
contain a statement to the foregoing effect, but the absence of such statement
shall not operate to make any Trustee or officer of the Trust liable thereunder.
Provided they have exercised reasonable care and have acted under the reasonable
belief that their actions are in the best interest of the Trust, the Trustees,
officers, employees and managers of the Trust shall not be responsible or liable
for any act or omission or for neglect or wrongdoing of them or any officer,
agent, employee, manager, investment adviser, delegate or independent contractor
of the Trust, but nothing contained in this Declaration of Trust or in the
Delaware Act shall protect any Trustee, officer, employee or manager of the
Trust against liability to the Trust or to Shareholders to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
Section 2. Indemnification.
(a)......Subject to the exceptions and limitations contained
in subsection (b) below:
(i)......every person who is, or has been, a Trustee, officer,
employee, manager or agent of the Trust (including persons who serve at the
Trust's request as directors, trustees, officers or agents of another
organization in which the Trust has any interest as a shareholder, creditor or
otherwise) ("Covered Person") shall be indemnified by the Trust or the
appropriate Series to the fullest extent permitted by law against liability and
against all expenses reasonably incurred or paid by such person in connection
with any claim, action, suit or proceeding in which such person becomes involved
as a party or otherwise by virtue of being or having been a Covered Person and
against amounts paid or incurred by such person in the settlement thereof,
whether or not such person is a Covered Person at the time such expenses are
incurred;
(ii).....as used herein, the words "claim," "action," "suit,"
or "proceeding" shall apply to all claims, actions, suits or proceedings (civil,
criminal or other, including appeals), actual or threatened while in office or
thereafter, and the words "liability" and "expenses" shall include, without
limitation, attorney's fees, costs, judgments, amounts paid in settlement,
fines, penalties and other liabilities.
(b)......No indemnification shall be provided hereunder to a
Covered Person:
(i)......Who shall have been adjudicated by a court or body
before which the proceeding was brought (A) to be liable to the Trust or its
Shareholders by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office, or (B)
not to have acted in good faith in the reasonable belief that his action was in
or not opposed to the best interests of the Trust; or
(ii).....In the event of a settlement, unless there has been a
determination that such Covered Person did not engage in willful misfeasance,
bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his office: (A) by the court or other body approving the settlement;
(B) by at least a majority of those Trustees who are neither Interested Persons
of the Trust nor are parties to the matter based upon a review of readily
available facts (as opposed to a full trial type inquiry); or (C) by written
opinion of independent legal counsel based upon a review of readily available
facts (as opposed to a full trial type inquiry).
(c)......To the maximum extent permitted by applicable law,
expenses in connection with the preparation and presentation of a defense to any
claim, action, suit or proceeding of the character described in subsection (a)
of this Section may be paid by the Trust or applicable Series from time to time
prior to final disposition thereof upon receipt of an undertaking by or on
behalf of such Covered Person that such amount will be paid over by such person
to the Trust or applicable Series if it is ultimately determined that such
person is not entitled to indemnification under this Section; provided, however,
that either (i) such Covered Person shall have provided appropriate security for
such undertaking, (ii) the Trust is insured against losses arising out of any
such advance payments or (iii) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the matter, or independent legal
counsel in a written opinion, shall have determined, based upon a review of
readily available facts (as opposed to a full trial type inquiry) that there is
reason to believe that such Covered Person will not be disqualified from
indemnification under this Section.
(d)......The rights of indemnification herein provided shall
be severable, shall not be exclusive of or affect any other rights to which any
Covered Person may now or hereafter be entitled, and shall inure to the benefit
of the heirs, executors and administrators of a Covered Person.
(e)......By action of the Trustees, and notwithstanding any
interest of the Trustees in the action, the Trust shall have power to purchase
and maintain insurance, in such amounts as the Trustees deem appropriate, on
behalf of any Covered Person, whether or not such person is indemnified against
such liability or expense under the provisions of this Article X and whether or
not the Trust would have the power or would be required to indemnify such person
against such liability under the provisions of this Article X or of the Delaware
Act or by any other applicable law, subject only to any limitations imposed by
the 1940 Act.
(f)......Any repeal or modification of this Article X by the
Shareholders of the Trust, or adoption or modification of any other provision of
the Declaration of Trust or Bylaws inconsistent with this Article, shall be
prospective only, to the extent that such repeal or modification would, if
applied retrospectively, adversely affect any limitation on the liability of any
Covered Person or indemnification available to any Covered Person with respect
to any act or omission which occurred prior to such repeal, modification or
adoption.
Section 3. Indemnification of Shareholders. If any Shareholder
or former Shareholder of any Series shall be held personally liable solely by
reason of being or having been a Shareholder and not because of acts or
omissions or for some other reason, the Shareholder or former Shareholder (or
such person's heirs, executors, administrators or other legal representatives or
in the case of any entity, its general successor) shall be entitled out of the
assets belonging to the applicable Series to be held harmless from and
indemnified against all loss and expense arising from such liability. The Trust,
on behalf of the affected Series, shall, upon request by such Shareholder,
assume the defense of any such claim made against such Shareholder for any act
or obligation of the Series and satisfy any judgment thereon from the assets of
the Series.
ARTICLE XI
MISCELLANEOUS
Section 1. Trust Not a Partnership. This Declaration of Trust
creates a trust and not a partnership, except to the extent such trust is deemed
to constitute a partnership under the Internal Revenue Code and applicable state
tax laws. No Trustee shall have any power to bind personally either the Trust's
officers or any Shareholder.
Section 2. Trustee Action; Expert Advice; No Bond or Surety.
The exercise by the Trustees of their powers and discretion hereunder in good
faith and with reasonable care under the circumstances then prevailing shall be
binding upon everyone interested. Subject to the provisions of Article X, the
Trustees shall not be liable for errors of judgment or mistakes of fact or law.
The Trustees may take advice of counsel or other experts with respect to the
meaning and operation of this Declaration of Trust, and subject to the
provisions of Article X, shall not be liable for any act or omission in
accordance with such advice or for failing to follow such advice. The Trustees
shall not be required to give any bond as such, nor any surety if a bond is
obtained.
Section 3. Record Dates. The Trustees may fix in advance a
date up to ninety (90) days before the date of any Shareholders meeting, or the
date for the allotment of rights, or the date when any change or conversion or
exchange of Shares shall go into effect as a record date for the determination
of the Shareholders entitled to notice of, and to vote at, any such meeting, or
to receive any such allotment of rights, or to exercise such rights in respect
of any such change, conversion or exchange of Shares. Any Shareholder who was a
Shareholder at the date and time so fixed shall be entitled to vote at such
meeting or any adjournment thereof.
Section 4. Termination of the Trust.
(a)......Except as provided herein, the Trust shall have
perpetual existence. The Trust may be terminated at any time by vote of a
majority of the Shares of each Series entitled to vote, voting separately by
Series, or by the Trustees by written notice to the Shareholders. Any Series of
Shares or Class thereof may be terminated at any time by vote of a majority of
the Shares of such Series or Class entitled to vote or by the Trustees by
written notice to the Shareholders of such Series or Class.
(b)......Upon the requisite Shareholder vote or action by the
Trustees to terminate the Trust or any one or more Series or any Class thereof,
after making reasonable provision for the payment of all known liabilities of
the Trust or any affected Series, the Trustees shall distribute the remaining
proceeds or assets (as the case may be) ratably among the Shareholders of the
Trust or any affected Series or Class; however, the payment to any particular
Class of such Series may be reduced by any fees, expenses or charges allocated
to that Class. Upon completion of the distribution of the remaining proceeds or
assets, the Trust or affected Series or Class shall terminate and the Trustees
and the Trust shall be discharged of any and all further liabilities and duties
hereunder with respect thereto and the right, title and interest of all parties
therein shall be canceled and discharged.
(c)......Upon termination of the Trust, following completion
of winding up of its business, the Trustees shall cause a certificate of
cancellation of the Trust's certificate of trust to be filed in accordance with
the Delaware Act, which certificate of cancellation may be signed by any one
Trustee.
Section 5. Reorganization; Merger; Consolidation.
(a)......Notwithstanding anything else herein, to change the
Trust's form of organization the Trustees may, without Shareholder approval to
the extent permitted by applicable law, (i) cause the Trust to merge or
consolidate with or into one or more entities, if the surviving or resulting
entity is the Trust or another open-end management investment company under the
1940 Act, or a series thereof, that will succeed to or assume the Trust's
registration under the 1940 Act, (ii) cause the Shares to be exchanged under or
pursuant to any state or federal statute to the extent permitted by law, (iii)
sell the assets of the Trust in exchange for shares of another management
investment company, or (iv) cause the Trust to incorporate under the laws of
Delaware. Any agreement of merger or consolidation or certificate of merger may
be signed by a majority of Trustees and facsimile signatures conveyed by
electronic or telecommunication means shall be valid.
(b)......Pursuant to and in accordance with the provisions of
Section 3815(f) of the Delaware Act, an agreement of merger or consolidation
approved in accordance with this Section 5 may effect any amendment to the
governing instrument of the Trust or effect the adoption of a new declaration of
trust of the Trust if it is the surviving or resulting trust in the merger or
consolidation.
(c)......The Trustees may create one or more business trusts
to which all or any part of the assets, liabilities, profits, or losses of the
Trust or any Series or Class thereof may be transferred and may provide for the
conversion of Shares in the Trust or any Series or Class thereof into beneficial
interests in any such newly created trust or trusts or any series or classes
thereof.
(d)......Notwithstanding anything else herein, the Trustees
may, without Shareholder approval, invest all or a portion of the Trust Property
of any Series, or dispose of all or a portion of the Trust Property of any
Series, and invest the proceeds of such disposition in interests issued by one
or more other investment companies registered under the 1940 Act. Any such other
investment company may (but need not) be a trust (formed under the laws of the
State of Delaware or any other state or jurisdiction) (or subtrust thereto)
which is classified as a partnership for federal income tax purposes.
Notwithstanding anything else herein, the Trustees may, without Shareholder
approval unless such approval is required by applicable law, cause a Series that
is organized in the master/feeder fund structure to withdraw or redeem its Trust
Property from the master fund and cause such Series to invest its Trust Property
directly in securities and other financial instruments or in another master
fund.
Section 6. Derivative Actions. In addition to the
requirements set forth in Section 3816 of the Delaware Act, a Shareholder
may bring a derivative action on behalf of the Trust only if the following
conditions are met:
(a)......The Shareholder or Shareholders must make a pre-suit
demand upon the Trustees to bring the subject action unless an effort to cause
the Trustees to bring such an action is not likely to succeed. For purposes of
this Section 6(a), a demand on the Trustees shall only be deemed not likely to
succeed and therefore excused if a majority of the Board of Trustees, or a
majority of any committee established to consider the merits of such action, has
a personal financial interest in the transaction at issue, and a Trustee shall
not be deemed interested in a transaction or otherwise disqualified from ruling
on the merits of a Shareholder demand by virtue of the fact that such Trustee
receives remuneration for his service on the Board of Trustees of the Trust or
on the boards of one or more trusts that are under common management with or
otherwise affiliated with the Trust.
(b)......Unless a demand is not required under paragraph (a)
of this Section 6, Shareholders eligible to bring such derivative action under
the Delaware Act who collectively hold at least 10% of the Outstanding Shares of
the Trust, or who collectively hold at least 10% of the Outstanding Shares of
the Series or Class to which such action relates, shall join in the request for
the Trustee to commence such action; and
(c)......Unless a demand is not required under paragraph (a)
of this Section 6, the Trustees must be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such claim.
The Trustees shall be entitled to retain counsel or other advisers in
considering the merits of the request and shall require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
such advisers in the event that the Trustees determine not to bring such action.
For purposes of this Section 6, if there is more than one
Trustee, the Board of Trustees may designate a committee of one Trustee to
consider a Shareholder demand if necessary to create a committee with a majority
of Trustees who do not have a personal financial interest in the transaction at
issue. The Trustees shall be entitled to retain counsel or other advisers in
considering the merits of the request and may require an undertaking by the
Shareholders making such request to reimburse the Trust for the expense of any
such advisers in the event that the Trustees determine not to bring such action.
Section 7. Declaration of Trust. The original or a copy of
this Declaration of Trust and of each amendment hereto or Declaration of Trust
supplemental shall be kept at the office of the Trust where it may be inspected
by any Shareholder. Anyone dealing with the Trust may rely on a certificate by a
Trustee or an officer of the Trust as to the authenticity of the Declaration of
Trust or any such amendments or supplements and as to any matters in connection
with the Trust. The masculine gender herein shall include the feminine and
neuter genders. Headings herein are for convenience only and shall not affect
the construction of this Declaration of Trust. This Declaration of Trust may be
executed in any number of counterparts, each of which shall be deemed an
original.
Section 8. Applicable Law. This Declaration of Trust and the
Trust created hereunder are governed by and construed and administered according
to the Delaware Act and the applicable laws of the State of Delaware; provided,
however, that there shall not be applicable to the Trust, the Trustees or this
Declaration of Trust (a) the provisions of Section 3540 of Title 12 of the
Delaware Code, or (b) any provisions of the laws (statutory or common) of the
State of Delaware (other than the Delaware Act) pertaining to trusts which
relate to or regulate (i) the filing with any court or governmental body or
agency of trustee accounts or schedules of trustee fees and charges, (ii)
affirmative requirements to post bonds for trustees, officers, agents or
employees of a trust, (iii) the necessity for obtaining court or other
governmental approval concerning the acquisition, holding or disposition of real
or personal property, (iv) fees or other sums payable to trustees, officers,
agents or employees of a trust, (v) the allocation of receipts and expenditures
to income or principal, (vi) restrictions or limitations on the permissible
nature, amount or concentration of trust investments or requirements relating to
the titling, storage or other manner of holding of trust assets, or (vii) the
establishment of fiduciary or other standards of responsibility or limitations
on the acts or powers of trustees, which are inconsistent with the limitations
on liabilities or authority and powers of the Trustees set forth or referenced
in this Declaration of Trust. The Trust shall be of the type commonly called a
Delaware business trust, and, without limiting the provisions hereof, the Trust
may exercise all powers which are ordinarily exercised by such a trust under
Delaware law. The Trust specifically reserves the right to exercise any of the
powers or privileges afforded to trusts or actions that may be engaged in by
trusts under the Delaware Act, and the absence of a specific reference herein to
any such power, privilege or action shall not imply that the Trust may not
exercise such power or privilege or take such actions.
Section 9. Amendments. The Trustees may, without any
Shareholder vote, amend or otherwise supplement this Declaration of Trust by
making an amendment, a Declaration of Trust supplemental hereto or an amended
and restated declaration of trust; provided, that Shareholders shall have the
right to vote on any amendment (a) which would affect the voting rights of
Shareholders granted in Article VII, Section 1, (b) to this Section 9, (c)
required to be approved by Shareholders by law or by the Trust's registration
statement(s) filed with the Commission, and (d) submitted to them by the
Trustees in their discretion. Any amendment submitted to Shareholders which the
Trustees determine would affect the Shareholders of any Series or Class shall be
authorized by vote of the Shareholders of such Series or Class and no vote shall
be required of Shareholders of a Series or Class not affected.
Notwithstanding anything else herein, any amendment to Article
X which would have the effect of reducing the indemnification and other rights
provided thereby to Trustees, officers, employees and agents of the Trust or to
Shareholders or former Shareholders, and any repeal or amendment of this
sentence, shall each require the affirmative vote of the holders of two-thirds
of the Outstanding Shares of the Trust entitled to vote thereon.
Section 10. Fiscal Year. The fiscal year of the Trust
shall end on the date set by resolution approved by the Trustees. The Trustees
may change the fiscal year of the Trust without Shareholder approval.
Section 11. Severability. The provisions of this Declaration
of Trust are severable. If the Trustees determine, with the advice of counsel,
that any provision hereof conflicts with the 1940 Act, the regulated investment
company or other provisions of the Internal Revenue Code or with other
applicable laws and regulations, the conflicting provision shall be deemed never
to have constituted a part of this Declaration of Trust; provided, however, that
such determination shall not affect any of the remaining provisions of this
Declaration of Trust or render invalid or improper any action taken or omitted
prior to such determination. If any provision hereof shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision only in such jurisdiction and shall not affect any
other provision of this Declaration of Trust.
<PAGE>
IN WITNESS WHEREOF, the undersigned, being the initial
Trustee, has executed this Declaration of Trust as of the date first above
written.
......... /s/ HILARI D'AGUIAR
------------------------------
......... Hilari D'Aguiar, as
Trustee and not individually
P.O. Box 1
Toronto Dominion Tower, 12th Floor
Toronto-Dominion Centre
Toronto, Ontario, Canada M5K 1A2
<PAGE>
SCHEDULE A
SERIES OF THE TRUST
TD Waterhouse Bond Index Fund
TD Waterhouse 500 Index Fund
TD Waterhouse Extended Market Index Fund
TD Waterhouse Systematic Technology Fund
TD Waterhouse Asian Index Fund
TD Waterhouse European Index Fund
TD Waterhouse Tax Managed Growth Fund
