EHARMON
MUTUAL FUNDS
INTERNET FUND
CLASS A SHARES
April 24, 2000
PROSPECTUS
The Securities and Exchange Commission
has not approved or disapproved these
securities or passed upon the adequacy
of this Prospectus. Any representation
to the contrary is a criminal offense.
e-harmon Internet Fund's investment objective is long-term capital appreciation.
It invests primarily in equity securities of Internet companies. e-harmon
Internet Fund is one of the portfolios, or funds, of e-harmon Funds.
TABLE OF CONTENTS
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Fund Overview 1
Fees and Expenses 4
Management 5
Investment Policies and Strategies 7
Buying and Selling Shares 13
Shareholder Communications 26
Distributions and Taxes 27
e-harmon internet fund
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FUND OVERVIEW
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What are the investment objective and principal investment strategies of the e-
harmon Internet Fund?
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E-HARMON INTERNET FUND'S investment objective is long-term capital appreciation.
The Fund invests at least 65% of its total assets in equity securities of
Internet companies. In addition, the Fund can invest in derivatives of equity
securities. e-harmon Capital Management LLC, the Fund's investment adviser,
decides where to invest the Fund's assets based on its research of attractive
opportunities in the Internet sector. Some of the key Internet industry
segments in which the Fund is likely to invest include:
- E-COMMERCE - companies directly or indirectly involved in the buying and
selling of products and services over the Internet
- BUSINESS-TO-BUSINESS (B2B) - companies that engage in or enable corporate
commercial transactions via the Internet
- BROADBAND - companies that design and develop products and services that
enable highspeed Internet infrastructure
- ACCESS - Internet service providers (ISPs) and companies that enable
access to the Internet
- SERVICES - firms that provide corporations with professional and
information services related to the Internet
- SOFTWARE - developers of applications that enable a variety of Internet
business activities, including, for example, electronic commerce,
communications, content provision and web development
- HARDWARE - computer, digital and electronic products designed and
developed to enable Internet business activities, products and services
The Fund may invest in Internet companies in industry segments not included in
the list above.
Stock selection is based on research that assesses a company's fundamental
prospects. The Fund may purchase securities in companies ranging from small
companies developing new technologies to mature firms with established track
records of developing and marketing technological advances. The Fund also may
invest in companies that could benefit from technological advances even if they
are not directly involved in research and development. The Fund may sell
securities for a variety of reasons, such as to lock-in gains, limit losses or
redeploy assets into more promising opportunities.
Equity securities include common stocks, non-convertible preferred stocks,
securities convertible or exchangeable for common stocks or preferred stocks,
equity investments in partnerships, joint ventures and other forms of non-
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corporate investments, American Depositary Receipts, American Depositary Shares,
and warrants and rights exercisable for equity securities.
WHAT IS AN INTERNET COMPANY?
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The Adviser considers an Internet company to be one that receives more than 50%
of its revenue from Internet related business activities. These activities
include, the research, development, production, sale or distribution of
technology and products related to the Internet, and the development, delivery,
sale or distribution of services or processes related to the Internet.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
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MARKET RISK. As with all equity funds, the Fund's share price may decline
because of weakness in the broad market, the Internet sector, other technology
sectors, a particular industry, or specific holdings. The equity market as a
whole may decline for many reasons, including adverse political or economic
developments here or abroad, changes in investor psychology, or heavy
institutional selling.
INTERNET COMPANIES. The Fund will invest primarily in companies engaged in
Internet related business activities. The value of such companies is
particularly vulnerable to rapidly changing technology, government regulation
and relatively high risks of obsolescence caused by scientific and technological
advances. The Fund may involve significantly greater risks and experience
greater volatility than a mutual fund that does not concentrate its investments
in one industry.
GLOBAL COMPETITION AND CURRENCY RISK. Often, Internet companies' products or
services compete on a global, rather than a predominately domestic or regional
basis. Because these companies compete globally, the securities of these
companies may be subject to fluctuations in value due to the effect of changes
in the relative values of currencies on such companies' businesses.
SMALL COMPANIES. To the extent that the Fund has significant investments in
smaller companies or those with less than three years of operating history,
which may not have established products or more experienced management, the
level of risk will be increased. This Fund may invest in smaller-capitalization
firms and have higher share price volatility than funds that invest only in
larger-capitalization, more established companies.
DERIVATIVES. The Fund may use various derivative strategies. These strategies
may improve the Fund's returns or protect its assets. However, using
derivatives may pose risks disproportionate to other portfolio investments of
equivalent value. Instruments necessary to implement these strategies may not
always be available, and these strategies may not work. The Fund may suffer
losses that would not otherwise have occurred. Derivatives, which include
futures, options and options on futures, also involve costs and can be volatile.
ILLIQUID SECURITIES. Although the Fund does not consider investments in
illiquid securities to be a principal strategy, the Fund may invest up to 15% of
its net assets
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in illiquid securities. To the extent the Fund invests in illiquid securities
the Fund may not be able to sell those securities at the time and price it would
like.
IPOs. The Fund may participate in the Initial Public Offering ("IPO") market
but IPO investments will not be a principal investment strategy. Investments in
IPOs that are not successful can have a significant negative effect on the
Fund's total return and may involve above average risk. IPOs may significantly
increase the Fund's total returns during any period that the Fund has a small
asset base. As the Fund's assets grow, any impact of IPO investments on the
Fund's total return is expected to decline.
NON-DIVERSIFICATION. The Fund is non-diversified under the Investment Company
Act of 1940, which means that there is no restriction under the
1940 Act on how much the Fund may invest in the securities of any one issuer.
However, in order to qualify for certain tax treatment the Fund will not invest
more than 25% of total assets in any one issuer. See "Investment Policies and
Strategies - Non-Diversification." Accordingly, the Fund may be more
susceptible to the effects of adverse economic, political or regulatory
developments affecting a single issuer or industry sector than funds that are
diversified.
FOREIGN INVESTMENTS. Although the Fund may invest up to 25% of its assets in
foreign securities, investment in foreign securities is not intended to be a
principal investment strategy. Foreign securities may pose significantly greater
risks than U.S. securities. Foreign markets can be more volatile than U.S.
markets, and are generally not subject to regulatory requirements equivalent to
U.S. regulation. In addition, changes in exchange rates and foreign currency
gains and losses may affect the Fund's performance.
Mutual fund shares are not deposits or obligations of, or guaranteed by, any
depository institution. Shares are not insured by the FDIC, Federal Reserve, or
any other government agency, and are subject to investment risks, including
possible loss of the principal amount invested.
As with any mutual fund, there can be no guarantee the Fund will achieve its
objective. The Fund's share price may decline, so when you sell your shares,
you may lose money. The Fund is not a complete investment program.
The Fund can be used in both regular and tax-deferred accounts, such as IRAs.
See "Distributions and Taxes."
HOW CAN YOU TELL IF THE FUND MAY BE AN APPROPRIATE INVESTMENT?
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The Fund may be appropriate if you have:
- a long-term investment time horizon
- familiarity with Internet stocks
- tolerance for fluctuations in stock valuations and prices
- no intention to actively trade mutual fund shares
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The Fund is not appropriate if you have:
- a short-term investment time horizon
- little knowledge of Internet stocks
- aversion to fluctuations in stock valuations and prices
- an intention to actively trade mutual fund shares
FEES AND EXPENSES
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The tables below are designed to help you understand the fees and expenses
investors may bear by investing in the e-harmon Internet Fund.
E-HARMON INTERNET FUND CLASS A
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Shareholder fees (fees paid directly from your investment)<F1>
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Maximum sales charge (load) imposed on
purchases as a % of offering price 5.75%<F2>
Maximum deferred sales charge (load) as a % of
purchase price or sales proceeds None
Redemption fees for shares held less than six months<F3> 1.00%
Exchange fees None
Annual Fund operating expenses (expenses that are deducted from Fund assets)
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Management fees 1.25%
Distribution and service (12b-1) fees .25%
Other expenses<F4> .57%
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Total annual Fund operating expenses<F5> 2.07%
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Fee Waivers (.07%)
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Net Expenses 2.00%
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<F1> Brokers, investment advisers, third party administrators or financial
planners may charge you a separate or additional fee for purchases and
sales of shares.
<F2> See "Buying and Selling Shares - Class A Shares" for reductions and waivers
of the initial sales charge. In addition, the Class A initial sales charge
is waived for investors purchasing directly through the Distributor,
Sunstone Distribution Services, LLC.
<F3> Redemption fees on shares held less than six months are collected by the
Fund to help offset portfolio costs associated with active trading by
investors.
<F4> Other expenses are estimated for the Fund's current fiscal year.
<F5> The Adviser has contractually agreed to limit the total operating expenses
for the Fund (excluding interest, taxes, brokerage and extraordinary
expenses) to an annual rate of 2.00% of the average daily net assets until
May 16, 2001. This fee waiver or expense reimbursement may be terminated
at any time after May 16, 2001.The Adviser is entitled to reimbursement
from the Fund of any fees waived or expenses reimbursed pursuant to this
arrangement if such reimbursement does not cause the Fund to exceed
existing expense limitations and the reimbursement is made within three
years after the year in which the Adviser incurred the expense.
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EXAMPLE
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The following table gives you an idea of how expenses for the Fund may translate
into dollars. It may help you compare the cost of investing in the Fund with
that of other funds. Although your actual costs may be higher or lower, the
table shows the costs you would incur for an investment of $10,000 for the
periods indicated. This example assumes a 5% annual return and fixed operating
expenses.<F1>
1 Year 3 Years
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Class A $766 $1,180
<F1> Operating expenses are based on an estimate of "Other Expenses" for the
current fiscal year.
MANAGEMENT
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GENERAL OVERSIGHT
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A Board of Trustees that meets regularly to review the Fund's investments,
performance, expenses and other business affairs governs the Fund. The majority
of the Board members are independent of e-harmon Capital Management LLC, the
Fund's investment adviser.
HOW THE FUND IS MANAGED
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e-harmon Capital Management LLC is the Fund's Adviser and manages the
Fund. The Adviser does not have any prior experience managing a mutual fund.
The Adviser makes all decisions regarding the purchase and sale of the Fund's
investments and handles its business affairs. The Adviser's business address is
400 Montgomery Street, 3rd Floor, San Francisco, California 94104.
The Adviser has contractually agreed to limit the total operating expenses
(excluding interest, taxes, brokerage and extraordinary expenses) of the Fund's
Class A shares to 2.00% of the average daily net assets through May 16, 2001.
The Fund is obligated to repay the amount waived or reimbursed to the extent
that repayment would not cause the Fund's total operating expenses for the year
in which the repayment is made to exceed 2.00% of the Fund's average daily net
assets and the reimbursement is made within three years after the year in which
the Adviser incurred the expense. The Fund's repayment obligation with respect
to a particular waiver or reimbursement ends with the third anniversary of the
waiver or reimbursement.
STEVE HARMON AND LISA CAVALLARI MANAGE E-HARMON INTERNET FUND, with support from
the Investment Team at e-harmon Capital Management LLC.
The other members of the Investment Team are Randy Chin and Patrick Wong. The
Fund's annual management fee is 1.25% of average daily net assets.
STEVE HARMON, CHIEF INVESTMENT OFFICER OF E-HARMON CAPITAL MANAGEMENT
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Steve Harmon is founder and CEO of e-harmon.com, Inc., a holding company, which
is the parent company of the Adviser. Mr. Harmon has been involved in
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the Internet investing field since 1994. Mr. Harmon authored "Zero Gravity"
(Bloomberg Press, November, 1999), an Internet venture capital book and a guide
for entrepreneurs and investors wanting to get inside the how-to of going from
garage to the Web.
Before launching his own firm in 1999, Mr. Harmon was Vice President of Business
Development & Senior Investment Analyst for Internet.com and Mecklermedia from
1996. Internet.com is a leading provider of global real-time news and
information resources for the Internet industry and Internet technology
professionals. Mr. Harmon's role at Internet.com and Mecklermedia
(Internet.com's former parent company) included responsibility for business and
content alliances, strategic acquisitions, new products and revenue streams.
While at Mecklermedia, Mr. Harmon spearheaded the creation of its Internet stock
index and Internet stock index futures trading on the Kansas City Board of
Trade.
Prior to Internet.com/Mecklermedia, Mr. Harmon was Senior Investment
Analyst for Jupiter Communications in 1995-96 where he covered Internet and
media industries. Mr. Harmon created and tracked five focused stock indices.
In December 1995, he authored "Internet Investment Outlook 1996" published by
Jupiter Communications, which forecast five years of Internet growth in several
areas including e-commerce, e-music, broadband cable Internet, content, software
and hardware.
LISA A. CAVALLARI, SENIOR VICE PRESIDENT/PORTFOLIO MANAGER
OF E-HARMON CAPITAL MANAGEMENT
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Prior to joining e-harmon Capital Management LLC in February 2000,
Ms. Cavallari was a Principal at Barclays Global Investors ("BGI"). As part of
the Advanced Active Group there, she served as Portfolio Manager for the retail
asset allocation funds, including the actively managed Barclays Global Investors
LifePath" mutual funds. As a Portfolio Manager for the U.S. Tactical Asset
Allocation products ($20 billion assets under management), she co-managed the
team that conducted $1 billion asset class mix shifts. At BGI she was also
responsible for the construction and trading of equity and fixed income
derivative strategies for institutional clients. From 1991 to 1995, Ms.
Cavallari was an analyst in the Russell Index Group at Frank Russell Company
where she was responsible for the annual index reconstitution efforts. Ms.
Cavallari holds a B.A. in Economics from Northwestern University and graduated
from the University of Chicago's Graduate School of Business with an MBA in
finance and statistics.
RANDY CHIN, CFA, DIRECTOR OF RESEARCH OF E-HARMON CAPITAL MANAGEMENT
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Mr. Chin joined e-harmon from Deutsche Banc Alex. Brown where he spent over
three years as an equity research analyst covering the e-Business/e-Process
sectors (B2B e-commerce, digital marketplaces, e-hubs, Internet infrastructure,
enterprise applications, business intelligence, ERP, etc.). Previously, Mr. Chin
was an Assistant Vice President, securities analyst and Portfolio Manager at
Beacon Fiduciary Advisors. Prior to Beacon, Mr. Chin worked at Hellman, Jordan
Management Co. as an Assistant Vice President and equity analyst.
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Mr. Chin received his A.B. magna cum laude from Harvard College. Mr. Chin
is a Chartered Financial Analyst and is currently a member of the Los Angeles
Society of Financial Analysts, the Security Analysts of San Francisco, and the
Association for Investment Management and Research.
PATRICK WONG, SENIOR INVESTMENT RESEARCH ANALYST
OF E-HARMON CAPITAL MANAGEMENT
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Prior to joining e-harmon, Mr. Wong was an Associate in the International
Offshore Banking Group at Merrill Lynch in New York. Previously, Mr. Wong was an
analyst in the Fixed Income Derivatives Group at Morgan Stanley in Tokyo.
Mr. Wong graduated from Boston College with a B.S. degree from the Carroll
Wallace School of Management, and a M.S. and MBA from Northeastern University
Graduate School of Professional Accounting. Mr. Wong is a Certified Public
Accountant and a member of the AICPA.
INVESTMENT POLICIES AND STRATEGIES
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In pursuit of its investment objective, the Fund may invest in a variety of
securities and use a variety of investment practices. The section below
describes some of the types of securities and strategies that the Adviser may
use in its day-to-day management of the Fund's assets.
PRINCIPAL INVESTMENT STRATEGIES
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e-harmon Internet Fund will invest at least 65% of its total assets in equity
securities of Internet companies. The Adviser considers an Internet company to
be one that receives more than 50% of its revenue from Internet related business
activities. These activities include, the research, development, production,
sale or distribution of technology and products related to the Internet, and the
development, delivery, sale or distribution of services or processes related to
the Internet.
e-harmon Capital Management LLC, the Fund's investment adviser, decides where to
invest the Fund's assets based on its research of attractive opportunities in
the Internet sector. Some of the key Internet industry segments in which the
Fund is likely to invest include:
- E-COMMERCE - companies directly or indirectly involved in the buying and
selling of products and services over the Internet
- BUSINESS-TO-BUSINESS (B2B) - companies that engage in or enable corporate
commercial transactions via the Internet
- Broadband - companies that design and develop products and services that
enable highspeed Internet infrastructure
- ACCESS - Internet service providers (ISPs) and companies that enable
access to the Internet
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- SERVICES - firms that provide corporations with professional and
information services related to the Internet
- SOFTWARE - developers of applications that enable a variety of Internet
business activities, including, for example, electronic commerce,
communications, content provision and web development
- HARDWARE - computer, digital and electronic products designed and
developed to enable Internet business activities, products and services
The Fund may invest in Internet companies in industry segments not included in
the list above.
In addition to the above investments, the Fund can invest in derivatives of
equity securities, including futures, stock index futures, options and options
on futures for hedging purposes.
DERIVATIVES
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FUTURES CONTRACTS AND RELATED OPTIONS; FOREIGN CURRENCY FORWARD CONTRACTS. The
Fund may invest up to 25% of net assets in financial futures contracts and
related options on equity securities and indices of equity securities. A
financial futures contract is an agreement to buy or sell a set quantity of an
underlying financial instruments at a future date or to make or receive a cash
payment based on the value of the instrument where it is a securities index.
The Fund also may enter into foreign currency forward contracts to seek to
protect the value of its assets against future changes in the level of foreign
currency exchange rates. A foreign currency forward contract is an obligation
to buy or sell a given currency on a future date at a set price.
SECURITIES OPTIONS. The Fund may write (sell) covered call options, including
those that trade in the OTC market, to seek to provide a hedge against declines
in the market value of its portfolio securities. The Fund may write covered
call options on securities comprising no more than 5% of the Fund's net assets
at the time of any writing. The writing of call options is subject to various
risks, including the risk that the Fund will not be able to participate in any
appreciation in the value of the underlying securities above the exercise price.
The Fund may also purchase and write (sell) listed call options provided that
the value of the call options outstanding at any time will not exceed 5% of the
Fund's net assets. The Fund may buy call and put options on stock indices to
seek to hedge against the risk of market or industry-wide stock price
fluctuations.
PRINCIPAL RISKS OF INVESTING IN THE FUND
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When you own shares of the Fund, you not only have the ability to participate
in potential increases in share value, you also bear the risk that the value of
the Fund's shares may decline. This section discusses some of the special risks
associated with an investment in the Fund.
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MARKET RISK. As with all equity funds, the Fund's share price may decline
because of weakness in the broad market, the Internet sector, other technology
sectors, a particular industry, or specific holdings. The equity market as a
whole may decline for many reasons, including adverse political or economic
developments here or abroad, changes in investor psychology, or heavy
institutional selling. The prospects for an industry or company may deteriorate
because of a variety of factors, including earnings surprises or changes in the
competitive environment. The Adviser's analyses of companies held in the Funds
may prove wrong, resulting in losses or poor performance even in a rising
market.
INTERNET COMPANIES. The Fund's investment strategies pose investment
risks specific to the Internet sector. Companies in the rapidly changing
Internet industry may face unusually high price volatility, both gains and
losses. The potential for wide variation in performance is based on the special
risks common to these stocks. For example, products or services that at first
appear promising may not prove commercially successful or may become obsolete
quickly. Also, increasing competition, rapidly changing markets, frequent
mergers or acquisitions of Internet companies and changes in strategic alliances
among various Internet businesses may have a significant effect on the financial
condition of companies in the Internet industry. Changes in government
policies, such as telephone and cable regulations and antitrust enforcement and
the need for regulatory approvals, can also have a material effect on the
companies in the industry. A portfolio focused primarily on these stocks is
therefore likely to be much more volatile than one with broader diversification
that includes investments in more economic sectors.
GLOBAL COMPETITION AND CURRENCY RISK. Often, Internet companies' products
or services compete on a global, rather than a predominately domestic or
regional basis. The technology sectors historically have been volatile and
securities of companies in these sectors may be subject to abrupt or erratic
price movements. The Adviser will seek to reduce such risks through extensive
research and emphasis on more globally competitive companies. In addition,
because these companies compete globally, the securities of these companies may
be subject to fluctuations in value due to the effect of changes in the relative
values of currencies on such companies' businesses. The history of these
markets reflects both decreases and increases in worldwide currency valuations,
and these may reoccur unpredictably in the future.
SMALL COMPANIES. The Fund may invest in companies with small market
capitalizations (i.e., less than $500 million) or companies that have limited
product lines or a small share of the market for their products or services
(collectively, "small companies"). Small companies may lack depth of
management, may be unable to internally generate funds necessary for growth or
potential development or to generate such funds through external financing on
favorable terms, and they may be developing or marketing new products or
services for which markets are not yet established and may never become
established. Due to these and other factors, small companies may suffer
significant losses, as well as realize substantial growth. Securities of small
companies present greater risks than securities of larger,
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more established companies. Historically, stocks of small companies have been
more volatile than stocks of larger companies and are, therefore, riskier than
investments in larger companies. Among the reasons for the greater price
volatility are the less certain growth prospects of smaller companies, the lower
degree of liquidity in the markets for such stocks, and the greater sensitivity
of small companies to changing economic conditions. Besides exhibiting greater
volatility, small company stocks may, to a degree, fluctuate independently of
larger company stocks. Small company stocks may decline in price as large
company stocks increase; or increase in price as large company stocks decline.
Therefore, the value of the e-harmon Internet Fund shares may be more volatile
than the shares of a mutual fund that invests primarily in larger company
stocks.
DERIVATIVES. The Fund's risk is mostly dependent on the types of securities it
purchases and its investment techniques. The use of derivative instruments
exposes the Fund to additional risks and transaction costs. Risks inherent in
the use of derivative instruments include:
- movements in interest rates, securities prices and currency markets that
are counter to the direction that a portfolio manager anticipates
- imperfect correlation between the price of derivative instruments and
movements in the prices of the securities, interest rates or currencies
being hedged
- the skills needed to use these strategies are different than those needed
to select portfolio securities
- inability to close out certain hedged positions to avoid adverse tax
consequences
- absence of a liquid secondary market for any particular instrument and
exchange-imposed price fluctuation limits, either of which may make it
difficult or impossible to close out a position when desired
- adverse price movements in an instrument can result in a loss substantially
greater than the Fund's initial investment in that instrument (that is,
leverage risk)
- non-performance by the counterparty of its obligations, could leave the
Fund worse off than if it had not entered into the position (particularly
in the case of privately-negotiated instruments)
IPOs. e-harmon Internet Fund may participate in the Initial Public Offering
("IPO") market but IPO investments will not be a principal investment strategy.
Investments in IPOs that are not successful can have a significant negative
effect on the Fund's total return and may carry risks disproportionate to other
portfolio investments of equal value. IPOs may significantly increase the Fund's
total returns during any period that the Fund has a small asset base. As the
Fund's assets grow, any impact of IPO investments on the Fund's total return is
expected to decline.
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NON-DIVERSIFICATION. The Fund is non-diversified under the 1940 Act,
which means that there is no restriction on how much the Fund may invest
in the securities of any one issuer. However, to qualify for tax treatment as
a regulated investment company under the Internal Revenue Code ("Code"),
the Fund intends to comply, as of the end of each taxable quarter, with
certain diversification requirements imposed by the Code. Pursuant to these
requirements, the Fund will, among other things, limit its investments in
the securities of any one issuer (with some exceptions) to no more than 25%
of the value of the Fund's total assets. In addition, the Fund, with respect
to 50% of its total assets, will limit its investments in the securities of any
issuer to 5% of the Fund's total assets, and will not purchase more than 10% of
the outstanding voting securities of any one issuer. Nevertheless, as a general
matter, the Fund may be more susceptible than a diversified mutual fund to the
effects of adverse economic, political or regulatory developments affecting a
single issuer or industry sector in which the Fund may have investments.
OTHER INVESTMENT STRATEGIES AND RISKS
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ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities for which there is no
ready market (which inhibits the ability to sell them and obtain their full
market value) or which are legally restricted as to their resale by the Fund.
Investments in venture capital companies are illiquid.
RISKS. To the extent that the Fund invests in illiquid securities, the Fund may
not be able to sell securities at the time and the price that it would like.
The Fund may therefore have to lower the price, sell substitute securities or
forego an investment opportunity, each of which might adversely affect the Fund.
FOREIGN INVESTMENTS. The Fund may invest up to 25% of its total assets in
securities of foreign issuers or securities that are principally traded in
foreign markets ("foreign securities"). In most instances, foreign investments
will be made in companies principally based in developed countries. To attempt
to reduce exposure to currency fluctuations, the Fund may trade in foreign
currency forward contracts, currency futures contracts and options thereon and
securities indexed to foreign securities. The Fund may also invest in American
Depositary Receipts and American Depositary Shares which the Adviser does not
consider to be foreign securities.
RISKS. There are certain risks and costs involved in investing in securities of
foreign companies, such as outlined below.
- foreign companies are not generally subject to the uniform accounting,
auditing and financial reporting standards and practices applicable to U.S.
companies; and there may be less public information available about foreign
companies than is available about U.S. companies
- foreign markets have less volume than U.S. markets, and the securities of
some foreign companies are less liquid and more volatile than the
securities of comparable U.S. companies
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- there may be less government regulation of stock exchanges, brokers, listed
companies and banks in foreign countries than in the United States
- the Fund may incur fees on currency exchanges when it exchanges investments
from one currency to another
- the Fund's foreign investments could be affected by expropriation,
confiscatory taxation, nationalization of bank deposits, establishment of
exchange controls, political or social instability or diplomatic
developments
- fluctuations in foreign exchange rates will affect the value of the Fund's
portfolio securities, the value of dividends and interest earned, gains and
losses realized on the sale of securities, net investment income and
unrealized appreciation or depreciation of investments
- possible imposition of dividend or interest withholding by a foreign
country
U.S. GOVERNMENT SECURITIES. The Fund may invest in U.S. government securities,
including, U.S. Treasury obligations such as Treasury Bills (maturities of one
year or less) or Treasury Notes (maturities of less than three years).
RISKS. The market value of U.S. government securities will fluctuate with
changes in interest rate levels. Thus, if interest rates increase from the time
the security was purchased, the market value of the security will decrease.
Conversely, if interest rates decrease, the market value of the security will
increase.
TEMPORARY DEFENSIVE INVESTMENTS AND CASH MANAGEMENT. Under normal circumstances
the Fund may make investments in corporate debt securities, commercial paper,
certificates of deposit, bankers' acceptances and time deposits of U.S. or
foreign banks, obligations issued or guaranteed by the U.S. government and its
agencies and foreign governments and their agencies. In response to adverse
market, economic or political conditions, the Fund may temporarily invest up to
100% of the Fund's assets in money market instruments or hold cash.
RISKS. Investing heavily in these securities limits our ability to achieve the
Fund's investment objectives, but can help preserve the Fund's assets when the
markets are volatile.
BORROWING. The Fund may borrow money from banks and make other investments or
engage in other transactions permissible under the 1940 Act which may be
considered a borrowing. However, the Fund will not purchase securities when
bank borrowings exceed 5% of the Fund's total assets. Presently, the Fund only
intends to borrow from banks for temporary or emergency purposes.
RISKS. Borrowing involves costs and may reduce the Fund's returns.
LENDING OF PORTFOLIO SECURITIES. The Fund may lend securities to broker-
dealers, other institutions, or other persons to earn additional income.
RISKS. The principal risk is the potential insolvency of the broker-dealer or
other borrower. In this event, the Fund could experience delays in recovering
its securities and possibly capital losses.
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REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements,
where a party agrees to sell a security to the Fund and then repurchase it at an
agreed-upon price at a stated time. This creates a fixed return for the Fund
and is, in effect, a loan by the Fund. The Fund's repurchase agreements will be
collateralized.
RISKS. If the seller of the repurchase agreement defaults and the value of the
collateral securing the repurchase agreement declines, the Fund may incur a
loss.
BUYING AND SELLING SHARES
- ------------------------------------------------------------------------------
Here is what you need to know about buying and selling shares of the e-harmon
Internet Fund. Currently, the Fund only offers Class A shares. There is no
initial sales charge for Class A shares obtained through dividend reinvestment
or capital gain distributions.
You may invest either directly with the Fund through its Distributor or through
authorized broker-dealers, financial institutions or other organizations that
have entered into agreements with the Distributor ("Authorized Firms"). If you
invest through an investment professional, they can provide advice, determine
the suitability of the Fund, help you set up your account, make subsequent
investments for you and provide other services. Your investment professional
will forward your investment details and payment for you. Authorized Firms may
charge transaction and other fees in addition to those described in this
Prospectus, and may set minimum investments or limitations on buying or selling
shares different than those described in this Prospectus. You should consult
your investment professional for details.
INVESTING DIRECTLY THROUGH THE DISTRIBUTOR
You may purchase Class A shares directly with the Fund through the Distributor
via the Internet, by mail or other direct means without paying the initial sales
charge by following the procedures described below. Subsequent purchases of
Class A shares for accounts initially established by direct purchase through the
Distributor will also be made without paying any initial sales charge as long as
the additional purchases are directly with the Funds through the Distributor.
INVESTING THROUGH AN AUTHORIZED FIRM
Class A shares purchased through an Authorized Firm may be appropriate for long-
term investors who compensate their investment professional for the services
they provide with traditional front-end sales charges. If you invest through an
Authorized Firm, you buy Class A shares at the offering price, which is the net
asset value per share plus an up-front sales charge. There is no up-front sales
charge on Class A shares obtained through reinvested dividends and capital gain
distributions. You may qualify for a reduced sales charge, or the sales charge
may be waived, as described below.
13 e-harmon internet fund
SALES CHARGES
- ------------------------------------------------------------------------------
The up-front Class A sales charge is as follows:
Amount of Purchase Front End Sales Charge Maximum Dealers' Reallowance
- ------------------------------------------------------------------------------
As a As a As a
% of % of % of
offering net offering
price investment price
- ------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 4.75%
$50,000 or more but less than $99,999 5.00% 5.26% 4.00%
$100,000 or more but less than $249,999 4.00% 4.17% 3.00%
$250,000 or more but less than $499,999 3.00% 3.09% 2.00%
$500,000 or more but less than $999,999 1.50% 1.52% 1.00%
$1,000,000 or more 0% 0% 0%
The Fund offers a number of ways to reduce or eliminate the up-front sales
charge on Class A shares. You and your investment professional must notify the
Fund at the time of each purchase if you are eligible for any of these programs.
REDUCED SALES CHARGES FOR CLASS A SHARES
- ------------------------------------------------------------------------------
- Right of Accumulation. You may group prior investments made by you and/or
members of your immediate family in Class A shares of the Fund to count
towards volume discounts on new purchases.
- Letter of Intent Purchases. If you intend to make purchases in the Fund of
over $50,000 within a 13-month period, you may sign a letter of intent and
receive a volume discount on each purchase as if you were making a single
purchase. You must complete the Letter of Intent section of the Account
Application. If you fail to fulfill the Letter of Intent, the higher sales
charge applicable to your investment will be assessed retroactively. The
Fund's Transfer Agent will hold a portion of your shares in escrow, which
will be used to pay the applicable sales charge if the Letter of Intent is
not fulfilled.
SALES CHARGE WAIVERS FOR CLASS A SHARES
- ------------------------------------------------------------------------------
The sales charge on Class A shares is waived if the purchase is made:
- directly with the Fund through the Distributor
- for individual accounts of certain registered personnel and employees of
Authorized Firms, their spouses, children, grandchildren and parents, in
accordance with the internal policies of the employing Authorized Firm
- by state and local government entities that are prohibited from paying
mutual fund sales charges
- by registered investment companies
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<PAGE>
- by trustees and officers of the Fund, employees of and counsel for the
Adviser, employees of service providers of the Fund, and each of their
affiliates and their spouses, children, grandchildren and parents, in
accordance with the internal policies and procedures of their respective
employers
- by private partnerships managed by the Adviser
- for a retirement plan (other than an IRA, SIMPLE IRA, SEP or SARSEP or a
plan covering self employed individuals and their employees (formerly
Keough/H.R. 10 plans))
- through an account with a broker-dealer with which the Fund has an
agreement for the use of e-harmon Funds in particular investment products
on a load waived basis
- through certain broker-dealers, financial institutions, record keepers and
other financial intermediaries who charge a management, consulting or other
fee for their services and who have an agreement with or among the Funds,
the Adviser or the Distributor to compensate them for certain services
BEFORE YOU INVEST
- ------------------------------------------------------------------------------
ACCOUNT REGISTRATION
When purchasing shares, you need to select the appropriate form of account
registration. There are many different types of mutual fund ownership. How you
register your account with the Fund can affect your legal interests, as well as
the rights and interests of your family and beneficiaries. You should always
consult with your legal and/or tax adviser to determine what form of account
registration best meets your needs.
Available forms of registration include:
- Individual ownership. If you have reached the legal age of majority in
your state of residence, you may open an individual account.
- Joint ownership. Two or more individuals may open an account together as
joint tenants with right of survivorship, tenants in common or as community
property.
- Custodial account. You may open an account for a minor under the Uniform
Gift to Minors Act/Uniform Transfers to Minors Act for your state of
residence.
- Business/trust ownership. Corporations, trusts, charitable organizations
and other businesses may open accounts.
ACCOUNT MINIMUMS
You also need to decide how much money to invest. The following chart shows you
the minimum amounts that you will need to open or add to certain types
of accounts.
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<PAGE>
Initial Minimum Additional Minimum
Purchase Purchase
- ------------------------------------------------------------------------------
Regular accounts $2,500 $100
Automatic Investment Plan $500 $50
IRAs $1,000 $100
Gift to Minors $1,000 $100
You must make purchases in U.S. dollars, by checks drawn on U.S. banks or by
federal wire. The Fund does not accept cash, credit cards or third party
checks.
SHAREHOLDER ACTIVITIES
e-harmon Funds not only invests in Internet companies, but also believes that
the Internet can be a useful tool for shareholders and can benefit both the
shareholder and the Fund. Through the Fund's Web site, www.e-harmon.com,
investors can view account balances, historical transactions, current prices and
performance information, place transactions, receive statements, confirmations,
reports and other regulatory mailings, and learn more about the Fund and its
Adviser. e-harmon Funds encourages you to:
- obtain a New Account Application by visiting www.e-harmon.com
- buy additional shares and sell shares
- receive shareholder documents online
- view account information, such as balances, positions, and transaction
history online
- handle simple customer service issues and questions about the Funds online
HOW SHARES ARE PRICED
The Fund prices your transaction at the next net asset value ("NAV") determined
after the Fund receives your request in good order, together with the funds
necessary for the transaction. See "Other Buying and Selling Considerations"
for a definition of "good order." When purchasing shares, the price you receive
is the next determined NAV plus the applicable sales charge. When redeeming
shares, the price you receive is the next determined NAV less any applicable
redemption fee. The Fund calculates NAV by taking the total value of its
assets, subtracting its liabilities, and dividing the total by the number of
Fund shares that are outstanding. NAV is determined separately for each class
of shares.
NAV is calculated at the close of regular trading (generally 3:00 p.m. Central
Time) each day the New York Stock Exchange ("NYSE") is open. The Exchange
is closed on weekends and most national holidays. Because the Fund can invest
in foreign securities, the NAV can change on days when you cannot buy or
sell shares.
If the Transfer Agent (or other financial intermediary with the authority to
accept orders on the Fund's behalf) receives your buy or sell request in good
order before the close of regular trading on the Exchange, you will pay or
receive that day's
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<PAGE>
NAV less any applicable sales charges, or redemption fees. If the Transfer
Agent (or other financial intermediary with the authority to accept orders on
the Fund's behalf) receives your buy or sell request in good order after the
close of regular trading on the NYSE, you will pay or receive the next
determined NAV less any applicable sales charges or redemption fees. Shares
purchased by wire will receive the NAV next determined after the Fund receives
your completed New Account Application, the wired funds and all required
information is provided in the wire instructions.
Details on how to open an account and take advantage of online services are
described below.
OPENING AND ADDING TO AN ACCOUNT
- ------------------------------------------------------------------------------
You may open an account and add to the account either directly with the Fund or
through an Authorized Firm. If you are purchasing shares directly, you have a
number of ways to invest, each as described below. If you are purchasing shares
through an Authorized Firm, your investment professional will take action on
your behalf, and you will not personally perform the steps described below.
To Open an Account
- ------------------------------------------------------------------------------
VIA INTERNET:
- YOU MAY OBTAIN AND COMPLETE A NEW ACCOUNT APPLICATION OR AN IRA APPLICATION
ON THE FUND'S WEB SITE WWW.E-HARMON.COM OR BY CALLING 1-800-392-6563 AND
REQUESTING AN APPLICATION.
- Print, sign and mail the New Account Application to the Fund as provided
below.
VIA MAIL:
- Complete and sign the New Account Application or an IRA Application. If
you don't complete the Application properly, your purchase may be delayed
or rejected.
- Make your check payable to "e-harmon Funds."
- For IRA accounts, please specify the year for which the contribution is
made.
Mail your Application and check to:
e-harmon Funds
P.O. Box 1631
Milwaukee, WI 53201-1631
TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------------------------------
VIA INTERNET:
- You may purchase shares in an existing account through the Fund's Web site
at www.e-harmon.com. To establish online transaction privileges, you must
enroll through the Web site. You automatically have the ability to
establish online transaction privileges unless you decline them on your New
Account Application.
- For important information on this feature, see "Transactions Through the
Fund's Web site" in this Prospectus.
VIA MAIL:
- Complete the investment slip that is included in your account statement,
and write your account number on your check.
- If you no longer have your investment slip, please reference your name,
account number and address on your check.
- Make your check payable to "e-harmon Funds."
MAIL THE SLIP AND THE CHECK TO:
e-harmon Funds
P.O. Box 1631
Milwaukee, WI 53201-1631
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<PAGE>
TO OPEN AN ACCOUNT
- ------------------------------------------------------------------------------
VIA OVERNIGHT COURIER, SEND TO:
e-harmon Funds
207 E. Buffalo Street, Suite 315
Milwaukee, WI 53202
VIA TELEPHONE:
You may not make your initial purchase by telephone, but you may call
1-800-392-6563 and request an Application.
VIA WIRE:
- To purchase shares by wire, the Transfer Agent must have received a
completed New Account or IRA Application AND issued an account number to
you. Call 1-800-392-6563 for instructions prior to wiring the funds. Wires
received before receipt of a properly completed Application will be
rejected.
- Send your investment to UMB Bank, n.a. with these instructions:
UMB Bank, n.a.
ABA #101000695
For Credit to the e-harmon Funds
A/C #987-098-4040
For further credit to: investor account number; name(s) of investor(s); SSN
or TIN; name of Fund.
AUTOMATIC SERVICES
- The Fund offers a number of automatic investment procedures. See "Special
Features and Services" for a description of these services. To establish
any of these services after the account has been opened, call 1-800-392-
6563 for instructions and forms.
TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------------------------------
VIA OVERNIGHT COURIER, SEND TO:
e-harmon Funds
207 E. Buffalo Street, Suite 315
Milwaukee, WI 53202
VIA TELEPHONE:
- You automatically have the privilege to purchase additional shares by
telephone if you provided bank account information when you set up your
account. You may call 1-800-392-6563 to purchase shares for an existing
account.
- Investments made by electronic funds transfer must be in amounts of at
least $100 and not greater than $50,000.
VIA WIRE:
- Send your investment to UMB Bank, n.a., Custodian for the e-harmon Funds,
by following the instructions listed in the column to the left.
- Investments made by electronic funds transfer must be in amounts of at
least $100 and not greater than $50,000.
AUTOMATIC SERVICES
- The Fund offers a number of automatic investment procedures. See "Special
Features and Services" for a description of these services. To establish
any of these services after the account has been opened, call 1-800-392-
6563 for instructions and forms.
MORE YOU SHOULD KNOW ABOUT BUYING SHARE
ACCEPTING ORDERS. The Fund must receive a properly completed New Account
Application before an initial investment can be made and your account opened.
The Fund may return incomplete applications or checks. Once you place your
order, you may not cancel or revoke it. The Fund may reject any purchase order
or refuse a telephone transaction at any time. The Fund will not accept an
account if you are investing for another person as attorney-in-fact, or an
account with Power of Attorney or "POA" in the New Account Application's
registration section.
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<PAGE>
CERTIFICATES. The Fund does not issue stock certificates. You will receive a
statement confirming your purchase.
RETURNED CHECKS/INSUFFICIENT FUNDS, ETC. You will be charged a $20 service fee
against your account for any check returned or for any incomplete Automated
Clearing House ("ACH") or other electronic transfer of funds, or for
insufficient funds, stop payment, closed account or other reasons. YOUR
PURCHASE WILL BE CANCELLED, AND YOU WILL BE RESPONSIBLE FOR ANY RESULTING LOSS
TO THE FUND. The Fund may redeem shares you own in this or another identically
registered Fund account as reimbursement for any such losses.
PURCHASES THROUGH THIRD PARTIES. If you buy shares through an Authorized Firm,
other broker-dealers, investment advisers or financial planners their policies
may differ from those described here and they may charge you fees in addition to
those described in this Prospectus. The Fund may accept requests to buy
additional shares into an Authorized Firm's or other third party firm's street
name account only from that firm.
The Fund may authorize service providers and their designees to accept purchase
orders on the Fund's behalf. The Fund considers such orders received when the
service provider accepts them, and prices them at the offering price calculated
after receipt by the service provider.
The Fund has agreed to allow some service providers to enter purchase orders
for their customers by telephone, with payment to follow. The Fund prices these
telephone orders at the offering price next calculated after the service
provider receives them. The service provider is responsible for placing the
orders promptly and for ensuring that the Fund receives payment within the
agreed-upon period. Otherwise, the provider could be liable for resulting fees
or losses.
OTHER PURCHASE CONSIDERATIONS
- ------------------------------------------------------------------------------
- You must provide the Fund with a Social Security Number or Taxpayer
Identification Number before your account can be established. If you do
not certify the accuracy of your Social Security Number or Taxpayer
Identification Number on your Application, the Fund will be required to
withhold federal income tax at a rate of 31% from all of your dividends,
capital gain distributions and redemptions.
- The Fund is only offered and sold to residents of the United States. Your
Application will be accepted only if it contains a U.S. address. This
Prospectus should not be considered a solicitation to buy or an offer to
sell shares of the Fund in any jurisdiction where it would be unlawful to
do so under the securities laws of that jurisdiction.
SELLING SHARES
- ------------------------------------------------------------------------------
You may sell your shares on any day the Fund is open for business by following
the instructions below. Note that when you sell shares, you may realize a
capital gain or loss for federal tax purposes.
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<PAGE>
Shares purchased through an investment professional must be redeemed by the
investment professional if the professional is the shareholder of record. You
should contact your investment professional for instructions on redeeming
shares. If you purchased shares directly with the Fund, you may redeem those
shares using any of the methods described below.
VIA INTERNET:
- ------------------------------------------------------------------------------
- - You may redeem shares through the Fund's Web site at www.e-harmon.com. To
establish online privileges you must enroll through the Web site. You
automatically have the ability to establish online transaction privileges
unless you decline them on your Application or by calling 1-800-392-6563. For
important information on this feature, see "Transactions Through the Fund's
Web site."
VIA MAIL:
- ------------------------------------------------------------------------------
- - Send a letter of instruction that includes your account number, the Fund name
and the dollar value or number of shares you want to sell.
- - Sign the request exactly as the shares are registered. All registered owners
must sign.
- - Include a signature guarantee, if necessary (see "Signature Guarantees"
below).
MAIL TO:
- ------------------------------------------------------------------------------
e-harmon Funds
P.O. Box 1631
Milwaukee, WI 53201-1631
BY OVERNIGHT COURIER, SEND TO:
- ------------------------------------------------------------------------------
e-harmon Funds
207 E. Buffalo Street
Suite 315
Milwaukee, WI 53202
VIA TELEPHONE:
- ------------------------------------------------------------------------------
- - You automatically have the privilege to redeem shares by telephone unless you
declined this option on your Application.
- - Call 1-800-392-6563 between 8:00 a.m. and 8:00 p.m. Eastern time. You may
redeem as little as $500 and as much as $50,000 by telephone.
- - The Fund will mail proceeds to your address of record, or send by wire ($10
fee) or electronic funds transfer to the bank account listed in your account
records. There is also a $12.50 fee for redemptions from IRAs.
VIA WIRE:
- ------------------------------------------------------------------------------
- - If you choose to redeem your shares by wire, your redemption proceeds will be
sent to your bank account of record. A $10 fee will be deducted from your
proceeds.
- - If you wish to have your redemption proceeds sent by wire to a bank account
other than that of record, you must provide a written request signed by all
owners of the account with signatures guaranteed.
Please note that the Fund may require additional documents for redemptions by
corporations, executors, administrators, trustees and guardians. If you have
any questions about how to redeem shares, or to determine if a signature
guarantee or other documentation is required, please call 1-800-392-6563.
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<PAGE>
REDEMPTION FEES
Class A shares include a redemption fee of 1.00% of the redemption amount if
you sell your shares after holding them less than six months. When you redeem
your shares, your redemption request is processed to minimize the amount of
redemption fee that is payable. The Fund first redeems those shares that are
not subject to a redemption fee (e.g., shares acquired through reinvestment of
dividends or distributions), and then redeems those that have been held the
longest. There are additional transaction charges to sell shares if you redeem
by wire ($10) or if you redeem from an IRA account ($12.50) (detailed in your
IRA Disclosure Statement & Custodial Agreement) to cover tax reporting.
Transactions handled through broker-dealer, investment advisers, third party
administrators or financial planners may be subject to additional transaction
fees. Please consult your investment professional before executing an order.
SIGNATURE GUARANTEES
The Fund will require the signature guarantee of each account owner to redeem
shares in the following situations:
- - to send redemption proceeds to a different address than is currently on
the account;
- - to have the proceeds paid to someone other than the account's owner;
- - to transmit redemption proceeds by federal wire transfer or ACH to a bank
other than your bank of record;
- - if a change of address request has been received by the Transfer Agent within
the last 30 days; or
- - if your redemption is for more than $50,000.
The Fund requires signature guarantees to protect both you and the Fund
from possible fraudulent requests to redeem shares. You can obtain a signature
guarantee from most broker-dealers, national or state banks, credit unions,
federal savings and loan associations or other eligible institutions. A NOTARY
PUBLIC IS NOT AN ACCEPTABLE SIGNATURE GUARANTOR.
MORE YOU SHOULD KNOW ABOUT SELLING SHARES
PAYMENT. The Fund normally pays redemption proceeds within two business days,
but may take up to seven days. You can redeem shares purchased by check at any
time. However, while the Fund will process your redemption on the day it
receives your request, it will not pay your redemption proceeds until your check
has cleared, which may take up to 10 calendar days from the date of purchase.
You can avoid this delay by purchasing shares by a federal funds wire. Please
note that this provision is intended to protect the Fund and its shareholders
from loss. Wire payments for redemptions requested by phone will usually be made
on the next business day. Electronic funds transfers will ordinarily arrive at
your bank two to three banking days after transmission.
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<PAGE>
REDEEMING SHARES THROUGH THIRD PARTIES. An Authorized Firm, other broker-
dealer, investment adviser or financial planner may charge a fee to redeem your
Fund shares. If that firm is the shareholder of record, the Fund will accept
redemption requests only from that firm.
The Fund may authorize service providers and their designees to accept
redemptions on the Fund's behalf. The Fund considers these requests received
when the provider accepts them, and prices them at the next NAV calculated.
SMALL ACCOUNTS. All Fund account owners share the high cost of maintaining
accounts with low balances. To reduce this cost, the Fund reserves the right to
close an account when a redemption leaves your account balance below the
applicable initial minimum investment for a class of shares, or you discontinue
the automatic investment plan before you reach the minimum. We will notify you
in writing before we close your account, and you will have 60 days to add
additional money to bring the balance up to the applicable initial minimum
investment or to renew your automatic investment plan. This provision does not
apply to UGMA/UTMA accounts.
REDEMPTION IN KIND. If you sell shares during any 90-day period that reach the
lesser of $250,000 or 1% of the value of the Fund's net assets, the Fund can
give you securities from the Fund's portfolio instead of cash. If you wanted to
sell the securities for cash, you would have to pay the costs charged by a
broker.
ADDITIONAL REDEMPTION PROVISIONS
- Once we receive your order to sell shares, you may not revoke or cancel it.
We cannot accept an order to sell that specifies a particular date, price
or any other special conditions. The Fund does not accept redemption
requests via fax.
- If your redemption request exceeds the amount that you currently have in
your account, your entire account will be redeemed. The automatic purchase
plan that you have initiated for the account will be cancelled.
- The Fund reserves the right to suspend the redemption of Fund shares when
the securities markets are closed, trading is restricted for any reason, an
emergency exists and disposal of securities owned by the Fund is not
reasonably practicable, the Fund cannot fairly determine the value of its
net assets, or the Securities and Exchange Commission permits the
suspension of the right of redemption or postpones the date of payment of a
redemption.
- If you are redeeming from an IRA, please tell us the proper tax withholding
on your redemption request. The Fund will withhold the percentage of your
redemption proceeds indicated on your Application, unless you instruct the
Transfer Agent otherwise.
- If redeeming shares within 30 days after making an address change, your
redemption request must be in writing and the signature must be guaranteed.
22 e-harmon internet fund
OTHER BUYING AND SELLING CONSIDERATIONS
- ------------------------------------------------------------------------------
GOOD ORDER
The Fund must receive your request to buy or sell shares in good order. The
request must include:
- your account number
- the number or dollar amount of shares you want to buy or sell
- signatures of all owners, exactly as registered on the account
- signature guarantees, if necessary (see "Selling Shares-Signature
Guarantee" above)
- any documentation required for redemptions by corporations, partnerships,
fiduciaries, estates, trusts and other organizations
TELEPHONE AND WIRE TRANSACTIONS
- ------------------------------------------------------------------------------
- Only bank accounts held at domestic financial institutions that are
Automated Clearing House (ACH) members can be used for telephone and
Internet transactions. It takes 15 calendar days after receipt by the Fund
of your bank account information to establish this feature. Purchases by
ACH transfers may not be made during this time.
- In times of drastic economic or market conditions, you may have difficulty
selling shares by telephone. The Fund reserves the right to temporarily
discontinue or limit the telephone purchase and redemption privileges at
any time. If you are unable to reach the Fund by telephone, please send
your redemption request via the Internet or overnight courier.
- The Fund reserves the right to refuse a telephone redemption request if the
Transfer Agent believes it is advisable to do so. The Fund and its agents
use procedures reasonably designed to confirm that telephone instructions
are genuine. These may include recording telephone transactions, testing
the identity of the caller by asking for account information and sending
prompt written confirmations. If reasonable procedures are followed, the
Fund and its service providers will not be liable for any losses due to
unauthorized or fraudulent instructions.
- When opening an account by wire, the Fund's Transfer Agent must receive
your original executed Application to establish shareholder privileges and
to verify your account information. If the Fund does not receive your
original Application, it can delay payment of redemption proceeds and
require taxes to be withheld on any redemption or other distribution.
TRANSACTIONS THROUGH THE FUND'S WEB SITE
- You may check your Fund account balance(s) and historical transactions,
purchase shares in an existing account and sell shares of the Fund through
the Fund's Web site at www.e-harmon.com. You automatically have the
ability to view account balances and transactions by enrolling on the Web
site. You also automatically have the ability to complete transactions on
the Web site unless
23 e-harmon internet fund
<PAGE>
you decline them on your Application or call 1-800-392-6563.
- You will be required to enter into a user's agreement through the Web site
in order to enroll for these privileges. In order to conduct online
transactions, you must have telephone transaction privileges. To purchase
shares online you must also have ACH instructions on your account because
payment for purchase of shares online may be made only through an ACH debit
of your bank account.
- The Fund imposes a limit of $50,000 on purchase and redemption transactions
through the Web site.
- You should be aware that the Internet is an unsecured, unstable,
unregulated and unpredictable environment. Your ability to use the Web
site for transactions is dependent upon the Internet and equipment,
software, systems, data and services provided by various vendors and third
parties. While the Fund and its service providers have established certain
security procedures, the Fund, its Adviser, its Distributor and its
Transfer Agent cannot assure you that inquiries, account information or
trading activity will be completely secure.
- There also may be delays, malfunctions or other inconveniences associated
with the Internet, and times when the Web site is unavailable for
transactions or other purposes. Should this happen, you should consider
purchasing or redeeming using another method. Neither the Fund, its
Adviser, Distributor or Transfer Agent will be liable for any such delays,
malfunctions, unauthorized interception or access to information. In
addition, provided reasonable security procedures are used, neither the
Fund, its Adviser, Distributor or Transfer Agent will be responsible for
any loss, liability or cost expense for following instructions communicated
through the Internet, including fraudulent or unauthorized transactions.
SIGNATURE GUARANTEES
Generally, whenever you change your account privileges, your bank information,
or your registration information, you need signature guarantees for each
registered account owner. You also sometimes need a signature guarantee when
you sell shares. See "Selling Shares." These guarantee requirements help
protect you from fraud. You can have signatures guaranteed by a U.S. commercial
bank or trust company, a member of the National Association of Securities
Dealers, Inc. or other eligible institutions. A notary public is not an
acceptable guarantor.
MAKING CHANGES TO YOUR ACCOUNT
You may call or write us to make changes to your account. Common changes
include:
NAME CHANGES. If your name has changed due to marriage or divorce, send us a
letter of instruction signed with both your old and new names. Include a
certified copy of your marriage certificate or divorce decree or have your
signatures guaranteed.
ADDRESS CHANGES. The easiest way to notify us is to return the stub from a
recent confirmation or statement. You can also call the Transfer Agent with any
changes at
24 e-harmon internet fund
<PAGE>
1-800-392-6563. If redeeming shares within 30 days after making an address
change, your redemption request must be in writing and the signature must be
guaranteed.
TRANSFER OF ACCOUNT OWNERSHIP. Send us a letter including your account number,
number of shares or dollar amount that are being transferred along with the
name, address and Social Security Number or Taxpayer Identification Number of
the person to whom the shares are being transferred. All living registered
owners must sign the letter. You will also need to include a signature
guarantee. Corporations, businesses and trusts may have to provide additional
documents. In order to avoid delays in processing account transfers, please
call the Transfer Agent at 1-800-392-6563 to determine the additional documents
that are required.
DISTRIBUTION PLAN
- ------------------------------------------------------------------------------
The Fund has a Distribution Plan (the"Plan"). Under the Plan, the Fund can pay
for the sale and distribution of its shares and servicing and maintenance of
accounts, including compensation to the Distributor and Authorized Firms, at an
annual rate based on average daily net assets of .25% for Class A shares. These
distribution fees are paid from the Fund's assets on a continuous basis. Over
time, the fees will increase the cost of your investment and may cost you more
than paying other types of sales charges.
SPECIAL FEATURES AND SERVICES
- ------------------------------------------------------------------------------
RETIREMENT ACCOUNT OPTIONS
The Fund offers a variety of retirement accounts for individuals and
organizations. These accounts may offer you tax advantages. For information on
establishing retirement accounts, please call 1-800-392-6563. You should
consult with your legal and/or tax adviser before you establish a retirement
account.
The Fund currently accepts investments into the following kinds of retirement
accounts:
- Traditional IRA (including spousal IRA)
- "Rollover" IRA
- Roth IRA
- SEP-IRA
ACH TRANSACTIONS
If you would like to purchase shares electronically or have redemption proceeds
sent directly to your bank account, you must first have certain bank account
information on file with us so that funds can be transferred electronically
between your mutual fund and bank accounts. There is no charge to you for this
procedure. You can establish this privilege by filling out the appropriate
section of your Application. If you have questions about this feature, call us
at 1-800-392-6563.
AUTOMATED TELEPHONE SERVICE
The Fund offers 24-hour, seven day a week access to Fund and account information
via a toll-free line. The system provides total returns, share prices and
25 e-harmon internet fund
<PAGE>
price changes for the Fund and gives you account balances and history (e.g.,
last transaction, latest dividend distribution). To access the automated
system, please call 1-800-392-6563.
AUTOMATIC INVESTMENT PLAN ("AIP")
To make regular investing more convenient, you can open an AIP with an initial
investment of $500 and a minimum investment of $50 per month after you start
your plan. We will automatically transfer from your checking or savings account
the amount you want to invest on the 5th, 10th, 15th, 20th, 25th or last day of
each month. You can terminate your AIP at any time by calling the Fund at least
10 days before your next scheduled withdrawal date. To implement this plan,
please fill out the appropriate area of your Application, or call 1-800-392-6563
for assistance.
SYSTEMATIC WITHDRAWAL PLAN ("SWP")
You can have shares automatically redeemed from your account on a regular
basis by using our SWP. If your account balance is $10,000 or more, you may
take systematic withdrawals of $500 or more on a monthly or quarterly basis.
The proceeds of a withdrawal can be sent to your address of record or sent by
electronic transfer to your bank. This plan may be a useful way to deal with
mandatory withdrawals from an IRA. If you want to implement this plan,
please fill out the appropriate section of the Application or call 1-800-392-
6563 for assistance.
SHAREHOLDER COMMUNICATIONS
- ------------------------------------------------------------------------------
ELECTRONIC COMMUNICATIONS
- ------------------------------------------------------------------------------
You may elect to receive statements, confirmations and/or regulatory mailings
electronically instead of paper copies by registering for this feature on the
Web site. You may revoke your election to receive electronic communications on
the Web site or by calling 1-800-392-6563. You may also call that number to
request a paper copy of a specific report without charge. There is a $5 charge
for copies of statements for calendar years prior to the preceding calendar
year.
CONFIRMATIONS
You will receive a confirmation each time you buy, sell or exchange Fund shares.
AIP participants receive quarterly confirmations of all automatic transactions.
Please review your confirmation and notify us immediately if there are any
discrepancies in the information.
QUARTERLY AND ANNUAL STATEMENTS
You will receive a quarterly statement listing all distributions, purchases and
redemptions of Fund shares for the preceding calendar quarter. Your December
statement will include a listing of all transactions for the entire year.
SEMI-ANNUAL AND ANNUAL REPORTS
The Fund sends semi-annual and annual reports to its shareholders. These
reports provide financial information on your investments and give you a
"snapshot"
26 e-harmon internet fund
<PAGE>
of the Fund's portfolio holdings at the end of its semi-annual and fiscal year
periods. Additionally, the annual report discusses the factors that materially
affected the Fund's performance for its most recently completed year, including
relevant market conditions and the investment strategies and techniques that
were used.
PROSPECTUS
Each year, the Fund sends all shareholders a new Prospectus. Please read the
Prospectus and keep it for future reference.
FORMS 1099 AND 5498
Each year you will receive a Form 1099-DIV, showing the source of distributions
for the preceding year and a Form 1099-B showing shares you sold during the
year. If you contributed to an IRA during the year, you will receive a Form
5498 verifying your contribution.
DISTRIBUTIONS AND TAXES
- ------------------------------------------------------------------------------
DIVIDENDS AND OTHER DISTRIBUTIONS
- ------------------------------------------------------------------------------
All net investment income and realized capital gains are distributed to
shareholders.
- Dividend and capital gain distributions are reinvested in additional Fund
shares in your account unless you select another option on your
Application.
- Distributions that are not reinvested are paid by check or transmitted to
your bank account via ACH. If the Post Office cannot deliver your check,
or if your check remains uncashed for six months, the Fund reserves the
right to reinvest your distribution check in your account at the net asset
value on the business day of the reinvestment and to reinvest all
subsequent distributions in shares of the Fund. No interest accrues on
amounts represented by uncashed distribution or redemption checks.
- The Fund declares and pays income dividends (if any) and capital gains
distributions (if any) annually. Both are usually declared and paid in
December to shareholders of record on a specified date that month.
TAX INFORMATION
- ------------------------------------------------------------------------------
The following discussion is intended to summarize certain federal income tax
considerations applicable to an investment in the Fund. It does not address
state, local, or foreign income or other taxes, and is not meant to be tax
advice. For tax advice, please consult with your tax adviser.
TAXES WHEN YOU SELL SHARES
- ------------------------------------------------------------------------------
When you sell shares in the Fund, you may realize a capital gain or loss.
An exchange of shares of one Fund for shares of the other Fund is generally
considered a sale for tax purposes.
27 e-harmon internet fund
<PAGE>
In January of each year, you will be sent Form 1099-B indicating the date and
amount of each sale of Fund shares you made during the prior year. This
information will also be reported to the Internal Revenue Service (the"IRS").
The Fund will report to you the gain or loss on the shares you sold during the
prior year, based on the "average cost," single category method. This
calculation of gain or loss will not be reported to the IRS, and you do not have
to use it in determining your gain or loss. You may calculate your cost basis
in the shares sold using other methods acceptable to the IRS, such as"specific
identification."
The Fund will send you a confirmation immediately following each transaction you
make (except for systematic purchases and redemptions) and a year-end statement
detailing all your transactions in the Fund account during the year.
TAXES ON FUND DISTRIBUTIONS
- ------------------------------------------------------------------------------
The following does not apply to qualified retirement accounts, such as IRAs,
which are not subject to income tax.
In January of each year, you will be sent Form 1099-DIV indicating the tax
status of any dividend and capital gain distributions made to you. This
information will also be reported to the IRS. Distributions are generally
taxable to you in the year in which they were paid. Distributions are taxable
whether reinvested in additional shares or received in cash. You will be sent
any additional information you need to determine your taxes on Fund
distributions, such as the portion of your dividends, if any, that may be exempt
from state income taxes.
The tax treatment of a capital gain distribution is determined by how long the
Fund held the portfolio securities generating the capital gains, not how long
you held shares in the Fund. Distributions of short-term capital gains, which
arise from the sale of securities held by the Fund for one year or less, are
taxable at ordinary income rates of up to 39.6% for individuals. Distributions
of long-term capital gains, which arise from the sale of securities held by the
Fund for more than one year, are generally taxed at a rate of 20% for
individuals. Different rates apply to corporations.
If you realized a loss on the sale of Fund shares that you held six months or
less, your short-term loss will be reclassified to a long-term loss to the
extent of any long-term capital gain distribution received during the period you
held the shares.
TAX EFFECT OF BUYING SHARES BEFORE A CAPITAL GAIN OR DIVIDEND DISTRIBUTION
- ------------------------------------------------------------------------------
If you buy shares shortly before or on the "record date" - the date that
establishes you as the person to receive the upcoming distribution - you will
receive a portion of the money you just invested in the form of a taxable
distribution. Therefore, you may wish to find out the Fund's record date before
investing. Of course, the Fund's share price may, at any time, reflect
undistributed capital gains or income and unrealized appreciation, which may
result in future taxable distributions.
Shareholders are urged to consult their tax adviser to discuss the tax
implications of an investment in the Fund.
28 e-harmon internet fund
<PAGE>
E-HARMON INTERNET FUND, A SERIES OF E-HARMON FUNDS
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Prospectus Supplement dated April 24, 2000 to the Prospectus dated
April 24, 2000
The following supplements the information contained in"Buying and
Selling Shares."
INITIAL OFFERING OF SHARES
- ------------------------------------------------------------------------------
e-harmon will solicit subscriptions for its Class A shares during an initial
offering period from April 24, 2000 to May 15, 2000 (the "Subscription Period").
Class A shares are subject to a front-end sales charge as described under
"Buying and Selling Shares." However, Class A shares purchased directly through
the Distributor do not pay the Class A sales charge.
All purchase requests received during the Subscription Period will be deemed
orders to purchase on May 16, 2000 (the "Closing Date"), and will be held
uninvested in an escrow account. Shares ordered directly through the
Distributor will be purchased at the net asset value per share of $10.00 on the
Closing Date. Class A shares purchased through an investment professional will
be purchased at the public offering price which is the net asset value per share
plus the applicable front-end sales charge. Investors will not receive interest
during the Subscription Period. The escrow account will be maintained with UMB
Bank, n.a., the Fund's Custodian.
On the Closing Date, all orders received in proper form during the Subscription
Period will be processed. Subscribers for shares will not have any of the
rights of a shareholder of the Fund until the shares subscribed for and their
issuance has been reflected in the books of the Fund. The Fund reserves the
right to withdraw, modify or terminate the initial offering without notice and
to refuse any order in whole or in part.
CONTINUOUS OFFERING OF SHARES
- ------------------------------------------------------------------------------
The Fund will commence operations and begin a continuous offering of its
shares on May 16, 2000. Orders received on or after that date will receive the
next calculated net asset value as provided in the Prospectus.
<PAGE>
Please read this Prospectus before you invest in the Fund and keep it for future
reference. For information or shareholder questions contact:
MAILING ADDRESS:
- ------------------------------------------------------------------------------
e-harmon Funds
P.O. Box 1631
Milwaukee, WI 53201-1631
OVERNIGHT DELIVERY ADDRESS:
- ------------------------------------------------------------------------------
e-harmon Funds
207 E. Buffalo St., Suite 315
Milwaukee, WI 53202-5712
WIRING INFORMATION:
- ------------------------------------------------------------------------------
Call 1-800-392-6563 for Investor Account Number
Wiring Instruction
NEW ACCOUNT APPLICATION:
- ------------------------------------------------------------------------------
Visit www.e-harmon.com
Call 1-800-392-6563
INVESTOR SERVICES:
- ------------------------------------------------------------------------------
e-mail [email protected]
Call 1-800-392-6563
TELEPHONE TRANSACTIONS:
- ------------------------------------------------------------------------------
If you have previously authorized the telephone privilege, you can call 1-800-
392-6563 to make share transactions.
VISIT E-HARMON.COM, INC.'S WEB SITE AT:
- ------------------------------------------------------------------------------
http://www.e-harmon.com
You may elect to receive statements, confirmations and/or regulatory mailings
electronically in lieu of paper copies by electing this feature on the Web site.
Additional information about the Fund can be found in the following documents,
available without charge upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI)
- ------------------------------------------------------------------------------
Incorporated by reference into this Prospectus
ANNUAL REPORT AND SEMI-ANNUAL REPORT
- ------------------------------------------------------------------------------
Contain discussions of the market conditions and investment strategies that
significantly affected the Fund's performance during its most recent fiscal year
You can also obtain copies of the Fund's documents from the Securities and
Exchange Commission as follows:
BY MAIL:
- ------------------------------------------------------------------------------
Securities and Exchange Commission
Public Reference Section
Washington, DC 20549-0102
(The SEC charges a fee to copy documents)
BY ELECTRONIC REQUEST:
- ------------------------------------------------------------------------------
[email protected]
In Person:
Public Reference Room in Washington, DC
(For hours of operation, call 1(202) 942-8090)
VIA THE INTERNET:
- ------------------------------------------------------------------------------
http://www.sec.gov
CUSIP NUMBERS:
- ------------------------------------------------------------------------------
e-harmon Internet Fund
Class A 26852R104
E HARMON
MUTUAL FUNDS
EH-401-0400 Investment Company Act File No: 811-09787
xxxxx
STATEMENT OF ADDITIONAL INFORMATION
April 24, 2000
e-harmon Internet Fund is a portfolio or "Fund" of e-harmon Funds (the "Trust"),
an open-end management investment company.
The Fund is managed by e-harmon Capital Management LLC (the "Adviser").
This Statement of Additional Information is not a prospectus but should be read
in conjunction with the Prospectus dated April 24, 2000, which may be obtained
upon request. The Fund's address is 400 Montgomery Street, 3rd floor, San
Francisco, California 94104, and the telephone number is 1-800-392-6563.
HISTORY OF THE TRUST................................................B-2
INVESTMENT POLICIES AND STRATEGIES..................................B-2
INVESTMENT RESTRICTIONS............................................B-15
MANAGEMENT OF THE FUND.............................................B-16
PRINCIPAL HOLDERS OF SECURITIES....................................B-18
INVESTMENT MANAGEMENT SERVICES.....................................B-19
PORTFOLIO TRANSACTIONS.............................................B-22
PRICING OF SECURITIES..............................................B-26
NET ASSET VALUE PER SHARE..........................................B-26
TAX STATUS.........................................................B-27
INVESTMENT PERFORMANCE.............................................B-29
SHARES.............................................................B-30
LEGAL COUNSEL......................................................B-31
INDEPENDENT ACCOUNTANTS............................................B-31
FINANCIAL STATEMENTS...............................................B-32
<PAGE>
HISTORY OF THE TRUST
The Trust was organized as an unincorporated business trust in December 1999
under the laws of the State of Delaware.
CLASSIFICATION
The Trust is an open-end management investment company.
INVESTMENT POLICIES AND STRATEGIES
The Prospectus describes the fundamental investment objectives and certain
investment policies and restrictions applicable to the Fund. The following is
additional information for your consideration.
EQUITY SECURITIES
WARRANTS. The Fund may invest in warrants. A warrant is a security that gives
the holder the right, but not the obligation, to purchase a given number of
shares of a particular company at a fixed price within a certain period of time.
Warrants generally trade in the open market and may be sold rather than
exercised. The purchaser of a warrant expects the market price of the security
underlying the warrant to exceed the purchase price of the warrant plus the
exercise price of the warrant, thus yielding a profit. Of course, it is
possible that the market price of the security underlying a warrant won't exceed
the exercise price of the warrant before the expiration date of the warrant.
Consequently, the purchaser of a warrant risks the loss of the entire purchase
price of the warrant. Additionally, price movements in the security underlying
a warrant are generally magnified in the price movements of the warrant.
Therefore, the price of a warrant tends to be more volatile than, and may not
correlate exactly to, the price of its underlying security.
CONVERTIBLE SECURITIES. The Fund may invest in convertible securities, that is,
securities which convert into common stock. These convertible securities are
typically not rated in one of the four highest rating categories by a Nationally
Recognized Statistical Ratings Organization ("NRSRO"). The yields on such lower
rated securities, which include securities also known as junk bonds, generally
are higher than the yields available on higher-rated securities. However,
investments in lower rated securities and comparable unrated securities
generally involve greater volatility of price and risk of loss of income and
principal, including the probability of default by or bankruptcy of the issuers
of such securities. Lower rated securities and comparable unrelated securities
(1) will likely have some quality and protective characteristics that, in the
judgment of the rating organization, are outweighed by large uncertainties or
major risk exposures to adverse conditions and (2) are predominantly speculative
with respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Accordingly, it is possible that
these types of factors could, in certain instances, reduce the value of
securities held in the Fund's portfolio, with a commensurate effect on the value
of the Fund's shares.
While the market values of lower rated securities and comparable unrated
securities tend to react less to fluctuations in interest rate levels than the
market values of higher-rated securities, the
<PAGE>
market values of certain lower rated securities and comparable unrated
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
lower rated securities and comparable unrated securities generally present a
higher degree of credit risk. Issuers of lower rated securities and comparable
unrated securities often are highly leveraged and may not have more traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. This risk of loss due to default by such
issuers is significantly greater because lower rated securities and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Fund may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings. The existence
of limited markets for lower rated securities and comparable unrated securities
may diminish the Fund's ability to (1) obtain accurate market quotations for
purposes of valuing such securities and calculating its net assets value and
(2) sell the securities at fair value either to meet redemption requests or to
respond to changes in the economy or in financial markets.
Certain lower rated debt securities and comparable unrated securities frequently
have call or buy-back features that permit their issuers to call or repurchase
the securities from their holders, such as the Fund. If an issuer exercises
these rights during periods of declining interest rates, the Fund may have to
replace the security with a lower yielding security, thus resulting in a
decreased return to the Fund.
The market for certain lower rated securities and comparable unrated securities
is relatively new and has not weathered a major economic recession. The effect
that such a recession might have on such securities is not known. Any such
recession, however, could disrupt severely the market for such securities and
adversely affect the value of such securities. Any such economic downturn also
could adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
The Fund may invest in convertible securities that provide current income and
are issued by companies with the characteristics described above and that have a
strong earnings and credit record. The Fund may purchase convertible securities
that are fixed-income debt securities or preferred stock, and which may be
converted at a stated price within a specified period of time into a certain
quantity of the common stock of the same issuer. Convertible securities, while
usually subordinate to similar nonconvertible securities, are senior to common
stocks in an issuer's capital structure. Convertible securities offer
flexibility by provided the investor with a steady income stream (which
generally yield a lower amount than similar nonconvertible securities and a
higher amount than common stocks) as well as the opportunity to take advantage
of increased in the price of the issuer's common stock through the conversion
feature. Fluctuations in the convertible security's price can reflect changes
in the market value of the common stock or changes in market interest rates. At
most, 5% of the Fund's net assets will be invested, at the time of purchase, in
convertible securities that are not rated in the four highest rating categories
by one or more NRSROs,s such as Moody's Investors Services, Inc.
<PAGE>
("Moody's") or Standard & Poor's Ratings Group ("S&P"), or unrated but
determined by the Advisor to be of comparable quality.
FUTURES, OPTIONS AND OTHER DERIVATIVE INSTRUMENTS
FUTURES CONTRACTS. The Fund may enter into contracts for the purchase or sale
for future delivery of equity securities, financial indices and foreign
currencies. U.S. futures contracts are traded on exchanges which have been
designated "contract markets" by the CFTC and must be executed through a futures
commission merchant ("FCM"), or brokerage firm, which is a member of the
relevant contract market. Through their clearing corporations, the exchanges
guarantee performance of the contracts as between the clearing members of the
exchange.
The buyer or seller of a futures contract is not required to deliver or pay for
the underlying instrument unless the contract is held until the delivery date.
However, both the buyer and seller are required to deposit "initial margin" for
the benefit of the FCM when the contract is entered into. Initial margin
deposits are equal to a percentage of the contract's value, as set by the
exchange on which the contract is traded, and may be maintained in cash or
certain other liquid assets by the Fund's custodian for the benefit of the FCM.
Initial margin payments are similar to good faith deposits or performance bonds.
Unlike margin extended by a securities broker, initial margin payments do not
constitute purchasing securities on margin for purposes of the Fund's investment
limitations. If the value of either party's position declines, that party will
be required to make additional "variation margin" payments for the benefit of
the FCM to settle the change in value on a daily basis. The party that has a
gain may be entitled to receive all or a portion of this amount. In the event
of the bankruptcy of the FCM that holds margin on behalf of the Fund, the Fund
may be entitled to a return of margin owed to the Fund only in proportion to the
amount received by the FCM's other customers. The Adviser will attempt to
minimize the risk by careful monitoring of the creditworthiness of the FCMs with
which the Fund does business and by depositing margin payments in a segregated
account with the Fund's custodian.
The Fund intends to comply with guidelines of eligibility for exclusion from the
definition of the term "commodity pool operator" adopted by the CFTC and the
National Futures Association, which regulate trading in the futures markets.
The Fund will use futures contracts and related options primarily for bona fide
hedging purposes within the meaning of CFTC regulations. To the extent that the
Fund holds positions in futures contracts and related options that do not fall
within the definition of bona fide hedging transactions, the aggregate initial
margin and premiums required to establish such positions will not exceed 5% of
the fair market value of the Fund's net assets, after taking into account
unrealized profits and unrealized losses on any such contracts it has entered
into.
The Fund's primary purpose in entering into futures contracts is to protect the
Fund from fluctuations in the value of securities or interest rates without
actually buying or selling the underlying security. For example, if the Fund
anticipates an increase in the price of stocks, and it intends to purchase
stocks at a later time, the Fund could enter into a futures contract to purchase
a stock index as a temporary substitute for stock purchases. If an increase in
the market occurs that influences the stock index as anticipated, the value of
the futures contracts will increase,
<PAGE>
thereby serving as a hedge against the Fund not participating in a market
advance. This technique is sometimes known as an anticipatory hedge. To the
extent the Fund enters into futures contracts for this purpose, the segregated
assets maintained to cover the Fund's obligations with respect to the futures
contracts will consist of other liquid assets from its portfolio in an amount
equal to the difference between the contract price and the aggregate value of
the initial and variation margin payments made by the Fund with respect to the
futures contracts. Conversely, if the Fund holds stocks and seeks to protect
itself from a decrease in stock prices, the Fund might sell stock index futures
contracts, thereby hoping to offset the potential decline in the value of its
portfolio securities by a corresponding increase in the value of the futures
contract position. The Fund could protect against a decline in stock prices by
selling portfolio securities and investing in money market instruments, but the
use of futures contracts enables it to maintain a defensive position without
having to sell portfolio securities.
The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial margin and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close out futures contracts through offsetting
transactions which could distort the normal price relationship between the cash
and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery of the instrument underlying a futures contract. To the extent
participants decide to make or take delivery, liquidity in the futures market
could be reduced and prices in the futures market distorted. Third, from the
point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of the foregoing
distortions, a correct forecast of general price trends by the portfolio manager
still may not result in a successful use of futures.
RISK CONSIDERATIONS REGARDING FUTURES CONTRACTS. Although the Adviser believes
that use of such contracts will benefit the Fund, the Fund's overall performance
could be worse than if the Fund had not entered into futures contracts if the
portfolio manager's investment judgement proves incorrect. For example, if the
Fund has hedged against the effects of a possible decrease in prices of
securities held in its portfolio and prices increase instead, the Fund will lose
part or all of the benefit of the increased value of these securities because of
offsetting losses in its futures positions. In addition, if the Fund has
insufficient cash, it may have to sell securities from its portfolio to meet
daily variation margin requirements. Those sales may be, but will not
necessarily be, at increased prices which reflect the rising market and may
occur at a time when the sales are disadvantageous to the Fund.
Although the Fund will segregate cash and liquid assets in an amount sufficient
to cover its open futures obligations, the segregated assets would be available
to the Fund immediately upon closing out the futures position, while settlement
of securities transactions could take several days. However, because the Fund's
cash that may otherwise be invested would be held uninvested or invested in
other liquid assets so long as the futures position remains open, the
<PAGE>
Fund's return could be diminished due to the opportunity losses of foregoing
other potential investments.
The prices of futures contracts depend primarily on the value of their
underlying instruments. Because there are a limited number of types of futures
contracts, it is possible that the standardized futures contracts available to
the Fund will not match exactly the Fund's current or potential investments.
The Fund may buy and sell futures contracts based on underlying instruments with
different characteristics from the securities in which it typically invests -
for example, by hedging investments in portfolio securities with a futures
contract based on a broad index of securities - which involves a risk that the
futures position will not correlate precisely with the performance of the Fund's
investments.
Futures prices can also diverge from the prices of their underlying instruments,
even if the underlying instruments closely correlate with the Fund's
investments. Futures prices are affected by factors such as current and
anticipated short-term interest rates, changes in volatility of the underlying
instruments and the time remaining until expiration of the contract. Those
factors may affect securities prices differently from futures prices. Imperfect
correlations between the Fund's investments and its futures positions also may
result from differing levels of demand in the futures markets and the securities
markets, from structural differences in how futures and securities are traded,
and from imposition of daily price fluctuation limits for futures contracts.
The Fund may buy or sell futures contracts with a greater or lesser value than
the securities it wishes to hedge or is considering purchasing in order to
attempt to compensate for differences in historical volatility between the
futures contract and the securities, although this may not be successful in all
cases. If price changes in the Fund's futures positions are poorly correlated
with its other investments, its futures positions may fail to produce desired
gains or result in losses that are not offset by the gains in the Fund's other
investments.
Because futures contracts are generally settled within a day from the date they
are closed out, compared with a settlement period of three days for some types
of securities, the futures markets can provide superior liquidity to the
securities markets. Nevertheless, there is no assurance that a liquid secondary
market will exist for any particular futures contract at any particular time.
In addition, futures exchanges may establish daily price fluctuation limits for
futures contracts and may halt trading if a contract's price moves upward or
downward more than the limit in a given day. On volatile trading days when the
price fluctuation limit is reached, it may be impossible for the Fund to enter
into new positions or close out existing positions. If the secondary market for
a futures contract is not liquid because of price fluctuation limits or
otherwise, the Fund may not be able to promptly liquidate unfavorable futures
positions and potentially could be required to continue to hold a futures
position until the delivery date, regardless of changes in its value. As a
result, the Fund's access to other assets held to cover its futures positions
also could be impaired.
OPTIONS ON FUTURES CONTRACTS. The Fund may buy and write put and call options
on futures contracts. An option on a future gives the Fund the right (but not
the obligation) to buy or sell a futures contract at a specified price on or
before a specified date. The purchase of a call option on a futures contract is
similar in some respects to the purchase of a call option on an individual
<PAGE>
security. Depending on the pricing of the option compared to either the price
of the futures contract upon which it is based or the price of the underlying
instrument, ownership of the option may or may not be less risky than ownership
of the futures contract or the underlying instrument. As with the purchase of
futures contracts, when the Fund is not fully invested it may buy a call option
on a futures contract to hedge against a market advance.
The writing of a call option on a futures contract constitutes a partial hedge
against declining prices of the security or foreign currency which is
deliverable under, or of the index comprising, the futures contract. If the
future's price at the expiration of the option is below the exercise price, the
Fund will retain the full amount of the option premium which provides a partial
hedge against any decline that may have occurred in the Fund's portfolio
holdings. The writing of a put option on a futures contract constitutes a
partial hedge against increasing prices of the security or foreign currency
which is deliverable under, or of the index comprising, the futures contract.
If the futures' price at expiration of the option is higher than the exercise
price, the Fund will retain the full amount of the option premium which provides
a partial hedge against any increase in the price of securities which the Fund
is considering buying.
The purchase of a put option on a futures contract is similar in some respects
to the purchase of protective put options on portfolio securities. For example,
the Fund may buy a put option on a futures contract to hedge its portfolio
against the risk of falling prices or rising interest rates.
RISK CONSIDERATIONS REGARDING OPTIONS ON FUTURES. If a call or put option the
Fund has written is exercised, the Fund will incur a loss which will be reduced
by the amount of the premium it received. Depending on the degree of
correlation between the change in the value of its portfolio securities and
changes in the value of the futures positions, the Fund's losses from existing
options on futures may to some extent be reduced or increased by changes in the
value of portfolio securities.
The amount of risk the Fund assumes when it buys an option on a futures contract
is the premium paid for the option plus related transaction costs. In addition
to the correlation risks discussed above, the purchase of an option also entails
the risk that changes in the value of the underlying futures contract will not
be fully reflected in the value of the options bought.
FOREIGN CURRENCY FORWARD CONTRACTS. A forward contract is an agreement between
two parties in which one party is obligated to deliver a stated amount of a
stated asset at a specified time in the future and the other party is obligated
to pay a specified amount for the assets at the time of delivery. The Fund may
enter into forward contracts to purchase and sell equity securities, foreign
currencies or other financial instruments. Forward contracts generally are
traded in an interbank market conducted directly between traders (usually large
commercial banks) and their customers. Unlike futures contracts, which are
standardized contracts, forward contracts can be specifically drawn to meet the
needs of the parties that enter into them. The parties to a forward contract may
agree to offset or terminate the contract before its maturity, or may hold the
contract to maturity and complete the contemplated exchange. The following
discussion summarizes the Fund's principal uses of foreign currency forward
exchange contracts ("forward currency contracts").
<PAGE>
The Fund may enter into forward currency contracts with stated contract values
of up to the value of the Fund's assets. A forward currency contract is an
obligation to buy or sell an amount of a specified currency for an agreed price
(which may be in U.S. dollars or a foreign currency). The Fund will exchange
foreign currencies for U.S. dollars and for other foreign currencies in the
normal course of business and may buy and sell currencies through forward
currency contracts in order to fix a price for securities it has agreed to buy
or sell ("transaction hedge"). The Fund also may hedge some or all of its
investments denominated in a foreign currency or exposed to foreign currency
fluctuations against a decline in the value of that currency relative to the
U.S. dollar by entering into forward currency contracts to sell an amount of
that currency (or a proxy currency whose performance is expected to replicate or
exceed the performance of that currency relative to the U.S. dollar)
approximating the value of some or all of its portfolio securities denominated
in that currency ("position hedge") or by participating in options or futures
contracts with respect to the currency. The Fund also may enter into a forward
currency contract with respect to a currency where the Fund is considering the
purchase or sale of investments denominated in that currency but has not yet
selected the specific investments ("anticipatory hedge"). In any of these
circumstances the Fund may, alternatively, enter into a forward currency
contract to purchase or sell one foreign currency for a second currency that is
expected to perform more favorably relative to the U.S. dollar if the portfolio
manager believes there is a reasonable degree of correlation between movements
in the two currencies ("cross-hedge").
These types of hedging minimize the effect of currency appreciation as well as
depreciation, but do not eliminate fluctuations in the underlying U.S. dollar
equivalent value of the proceeds of or rates of return on the Fund's foreign
currency denominated portfolio securities. The matching of the increase in
value of a forward contract and the decline in the U.S. dollar equivalent value
of the foreign currency denominated asset that is the subject of the hedge
generally will not be precise.
The Fund will cover outstanding forward currency contracts by maintaining liquid
portfolio securities denominated in or whose value its tied to, the currency
underlying the forward contract or the currency being hedged. To the extent
that the Fund is not able to cover its forward currency positions with
underlying portfolio securities, the Fund's custodian will segregate cash or
other liquid assets having a value equal to the aggregate amount of the Fund's
commitments under forward contracts entered into with respect to position
hedges, cross-hedges and anticipatory hedges. If the value of the securities
used to cover a position or the value of segregated assets declines, the Fund
will find alternative cover or segregate additional cash or liquid assets on a
daily basis so that the value of the covered and segregated assets will be equal
to the amount of the Fund's commitments with respect to such contracts. As an
alternative to segregating assets, the Fund may buy call options permitting the
Fund to buy the amount of foreign currency being hedged by a forward sale
contract or the Fund may buy put options permitting it to sell the amount of
foreign currency subject to a forward buy contract.
RISK CONSIDERATIONS REGARDING FORWARD CURRENCY CONTRACTS. Shifting the Fund's
currency exposure from one foreign currency to another removes the Fund's
opportunity to profit from increases in the value of the original currency and
involves a risk of increased losses to the Fund
<PAGE>
if its portfolio manager's projection of future exchange rates is inaccurate.
Proxy hedges and cross-hedges may result in losses if the currency used to hedge
does not perform similarly to the currency in which hedged securities are
denominated. Unforeseen changes in currency prices may result in poorer overall
performance for the Fund than if it had not entered into such contracts.
While forward contracts are not currently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward contacts. In such event, the
Fund's ability to utilize forward contracts may be restricted. In addition, the
Fund may not always be able to enter into forward contracts at attractive prices
and may be limited in its ability to use these contracts to hedge Fund assets.
OPTIONS ON SECURITIES. In an effort to increase current income and to reduce
fluctuations in net asset value, the Fund may write covered put and call options
and buy put and call options on securities that are traded on United States and
foreign securities exchanges and over-the-counter. The Fund may write and buy
options on the same types of securities that the Fund may purchase directly.
A put option written by the Fund is "covered" if the Fund (i) segregates cash
not available for investment or other liquid assets with a value equal to the
exercise price of the put with the Fund's custodian or (ii) holds a put on the
same security and in the same principal amount as the put written and the
exercise price of the put held is equal to or greater than the exercise price of
the put written. The premium paid by the buyer of an option will reflect, among
other things, the relationship of the exercise price to the market price and the
volatility of the underlying security, the remaining term of the option, supply
and demand and interest rates.
A call option written by the Fund is "covered" if the Fund owns the underlying
security covered by the call or has an absolute and immediate right to acquire
that security without additional cash consideration (or for additional cash
consideration held in a segregated account by the Fund's custodian) upon
conversion or exchange of other securities held in its portfolio. A call option
is also deemed to be covered if the Fund holds a call on the same security and
in the same principal amount as the call written and the exercise price of the
call held (i) is equal to or less than the exercise price of the call written or
(ii) is greater than the exercise price of the call written if the difference is
maintained by the Fund in cash and other liquid assets in a segregated account
with its custodian.
The Fund also may write call options that are not covered for cross-hedging
purposes. The Fund collateralizes its obligation under a written call option
for cross-hedging purposes by segregating cash or other liquid assets in an
amount not less than the market value of the underlying security, marked-to-
market daily. The Fund would write a call option for cross-hedging purposes,
instead of writing a covered call option, when the premium to be received from
the cross-hedge transaction would exceed that which would be received from
writing a covered call option and its portfolio manager believes that writing
the option would achieve the desired hedge.
<PAGE>
The writer of an option that wishes to terminate its obligation 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 clearing corporation.
However, a writer may not effect a closing purchase transaction after being
notified of the exercise of an option. Likewise, an investor who is the holder
of an option may liquidate its position by effecting a "closing sale
transaction." This is accomplished by selling an option of the same series as
the option previously bought.
In the case of a written call option, effecting a closing transaction will
permit the Fund to write another call option on the underlying security with
either a different exercise price or expiration date or both. In the case of a
written put option, such transaction will permit the Fund to write another put
option to the extent that the exercise price is secured by other liquid assets.
Effecting a closing transaction also will permit the Fund to use the cash or
proceeds from the concurrent sale of any securities subject to the option for
other investments. If the Fund desires to sell a particular security from its
portfolio on which it has written a call option, the Fund will effect a closing
transaction prior to or concurrent with the sale of the security.
The Fund will realize a profit from a closing transaction if the price of the
purchase transaction is less than the premium received from writing the option
or the price received from a sale transaction is more than the premium paid to
buy the option. The Fund will realize a loss from a closing transaction if the
price of the purchase transaction is more than the premium received from writing
the option or the price received from a sale transaction is less than the
premium paid to buy the option. Because increases in the market of a call
option generally will reflect increases in the market price of the underlying
security, any loss resulting from the repurchase of a call option is likely to
be offset in whole or in part by appreciation of the underlying security owned
by the Fund.
The Fund may write options in connection with buy-and-write transactions. In
other words, the Fund may buy a security and then write a call option against
that security. The exercise price of such call will depend upon the expected
price movement of the underlying security. The exercise price of a call option
may be below ("in-the-money"), equal to ("at-the-money") or above ("out-of-the-
money") the current value of the underlying security at the time the option is
written. Buy-and-write transactions using in-the-money call options may be used
when it is expected that the price of the underlying security will remain flat
or decline moderately during the option period. Buy-and-write transactions
using at-the-money call options may be used when it is expected that the price
of the underlying security will remain fixed or advance moderately during the
option period. Buy-and-write transactions using out-of-the-money call options
may be used when it is expected that the premiums received from writing the call
option plus the appreciation in the market price of the underlying security up
to the exercise price will be greater than the appreciation in the price of the
underlying security alone. If the call options are exercised in such
transactions, the Fund's maximum gain will be the premium received by it for
writing the option, adjusted upwards or downwards by the difference between the
Fund's purchase price of the security and the exercise price. If the options
are not exercised and the price of the underlying security declines, the amount
of such decline will be offset by the amount of premium received.
<PAGE>
RISK CONSIDERATIONS REGARDING OPTIONS. The writer of an option may have no
control over when the underlying securities must be sold, in the case of a call
option, or bought, in the case of a put option, since with regard to certain
options, the writer may be assigned an exercise notice at any time prior to the
termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount, of course, may, in
the case of a covered call option, be offset by a decline in the market value of
the underlying security during the option period. If a call option is
exercised, the writer experiences a profit or loss from the sale of the
underlying security. If a put option is exercised, the writer must fulfill the
obligation to buy the underlying security at the exercise price, which will
usually exceed the then market value of the underlying security.
There is no guarantee that either a closing purchase or a closing sale
transaction can be effected. An option position may be closed out only where a
secondary market for an option of the same series exists. If a secondary market
does not exist, the Fund may not be able to effect closing transactions in
particular options and the Fund would have to exercise the options in order to
realize any profit. If the Fund is unable to effect a closing purchase
transaction in a secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying security upon
exercise. The absence of a liquid secondary market may be due to the following:
(i) insufficient trading interest in certain options, (ii) restrictions imposed
by a national securities exchange ("Exchange") on which the option is traded on
opening or closing transactions or both, (iii) trading halts, suspensions or
other restrictions imposed with respect to particular classes or series of
options or underlying securities, (iv) unusual or unforeseen circumstances that
interrupt normal operations on an Exchange, (v) the facilities of an Exchange or
of the Options Clearing Corporation ("OCC") may not at all times be adequate to
handle current trading volume, or (vi) one or more Exchanges could, for economic
or other reasons, decide or be compelled at some future date to discontinue the
trading of options (or a particular class or series of options), in which event
the secondary market on that Exchange (or in that class or series of options)
would cease to exist, although outstanding options on that Exchange that had
been issued by the OCC as a result of trades on that Exchange would continue to
be exercisable in accordance with their terms.
The writing of covered put options is similar in terms of risk and return
characteristics to buy-and-write transactions. If the market price of the
underlying security rises or otherwise is above the exercise price, the put
option will expire worthless and the Fund's gain will be limited to the premium
received. If the market price of the underlying security declines or otherwise
is below the exercise price, the Fund may elect to close the position or take
delivery of the security at the exercise price and the Fund's return will be the
premium received from the put options minus the amount by which the market price
of the security is below the exercise price.
The Fund may buy put options to hedge against a decline in the value of its
portfolio. By using put options in this way, the Fund will reduce any profit it
might otherwise have realized in the underlying security by the amount of the
premium paid for the put option and by transaction costs.
<PAGE>
The Fund may buy call options to hedge against an increase in the price of
securities that it may buy in the future. The premium paid for the call option
plus any transaction costs will reduce the benefit, if any, realized by the Fund
upon exercise of the option, and, unless the price of the underlying security
rises sufficiently, the option may expire worthless to the Fund.
WRITING COVERED OVER-THE-COUNTER ("OTC") OPTIONS. A Fund may write (sell)
covered call options that trade in the OTC market in the same manner that it
will engage in exchange traded options. Just as with exchange traded options,
OTC call options give the holder the right to buy an underlying security from an
option writer at a stated exercise price. However, OTC options differ from
exchange traded options in certain material respects. Because there is no
exchange, pricing is typically done by reference to information from market
makers. OTC options are available for a greater variety of securities, and in a
wider range of expiration dates and exercise prices, than exchange traded
options, and the writer of an OTC option is paid the premium in advance by the
dealer.
RISK CONSIDERATIONS REGARDING OTC OPTIONS. OTC options are arranged directly
with dealers and not, as is the case with exchange traded options, with a
clearing corporation. Thus, there is a risk of non-performance by the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. When a Fund writes an OTC
option, it generally can close out that option prior to its expiration only by
entering into a closing purchase transaction with the dealer to which the Fund
originally wrote the option.
RISK CONSIDERATIONS REGARDING OPTIONS ON SECURITIES INDICES. The risks of
investment in index options may be greater than options on securities. Because
index options are settled in cash, when the Fund writes a call option on an
index it cannot provide in advance for its potential settlement obligations by
acquiring and holding the underlying securities. The Fund can offset some of
the risk of writing a call index option position by holding a diversified
portfolio of securities similar to those on which the underlying index is based.
However, the Fund cannot, as a practical matter, acquire and hold a portfolio
containing exactly the same securities as underlie the index and, as a result,
bears a risk that the value of the securities held will vary from the value of
the index.
Even if the Fund could assemble a securities portfolio that exactly reproduced
the composition of the underlying index, it still would not be fully covered
from a risk standpoint because of the "timing risk" inherent in writing index
options. When an index option is exercised, the amount of cash that the holder
is entitled to receive is determined by the difference between the exercise
price and the closing index level on the date when the option is exercised. As
with other kinds of options, the Fund as the call writer will not know that it
has been assigned until the next business day at the earliest. The time lag
between exercise and notice of assignment poses no risk for the writer of a
covered call on a specific underlying security, such as a common stock, because
there the writer's obligation is to deliver the underlying security, not to pay
its value as of a fixed time in the past. So long as the writer already owns
the underlying security, it can satisfy its settlement obligations by simply
delivering it, and the risk that its value may have declined since the exercise
date is borne by the exercising holder. In contrast, even if the writer of an
index call
<PAGE>
holds securities that exactly match the composition of the underlying index, it
will not be able to satisfy its assignment obligations by delivering those
securities against payment of the exercise price. Instead, it will be required
to pay cash in an amount based on the closing index value on the exercise date;
and by the time it learns that it has been assigned, the index may have
declined, with a corresponding decline in the value of its securities portfolio.
This "timing risk" is an inherent limitation on the ability of index call
writers to cover their risk exposure by holding securities positions.
If the Fund has purchased an index option and exercises it before the closing
index value for that day is available, it runs the risk that the level of the
underlying index may subsequently change. If such a change causes the exercised
option to fall out-of-the-money, the Fund will be required to pay the difference
between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
ILLIQUID AND RESTRICTED SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities,
including repurchase agreements with maturities in excess of seven days.
RESTRICTED/RULE 144A SECURITIES. Subject to the 15% limitation, the Board of
Trustees has authorized the Fund to invest in restricted securities where such
investment is consistent with that Fund's investment objective, and has
authorized such securities to be considered liquid to the extent e-harmon
Capital Management LLC (the "Adviser") determines that there is a liquid
institutional or other market for such securities -- for example, restricted
securities that may be freely transferred among qualified institutional buyers
under Rule 144A of the Securities Act of 1933 ("1933 Act"), and for which a
liquid institutional market has developed. The Board of Trustees will review
any determination by the Adviser to treat a restricted security as a liquid
security on an ongoing basis, including the Adviser's assessment of current
trading activity and the availability of reliable price information. In
determining whether a restricted security is properly considered a liquid
security, the Adviser will take into account the following factors:
- the frequency of trades and quotes for the security;
- the number of dealers willing to buy or sell the security and the
number of other potential buyers;
- dealer undertakings to make a market in the security;
- the nature of the security and marketplace trades, including the
time needed to dispose of the security, the method of soliciting offers,
and the mechanics of transfer; and
- such other factors as the Adviser may determine to be relevant to
such determination.
<PAGE>
VENTURE CAPITAL COMPANIES. The Fund expects to invest in venture capital
companies that it determines to be in the "late-stage" or "pre-IPO" stage of
development. The Adviser considers a company to be in the late stage if it has
a developed infrastructure and has commenced earning revenues. The Fund expects
that late-stage companies will undertake an initial public offering within a
period of one to three years. A pre-IPO company is somewhat more developed than
a late-stage company. The Adviser expects to be able to acquire equity
securities for the Fund of pre-IPO companies in private placements within a year
prior to their planned initial public offerings. Of the Fund's venture capital
investments, up to 5% of the Fund's total assets may be invested in securities
of investment funds that invest primarily in venture capital companies.
RISKS. Late-stage and pre-IPO companies will typically have small market
capitalizations and limited or no liquidity; even after an initial public
offering, liquidity may be limited and the Fund may be subject to contractual
limitations on its ability to sell shares.
BORROWING
The Fund may (1) borrow money from banks and (2) make other investments or
engage in other transactions permissible under the Investment Company Act of
1940 ("1940 Act") which may involve a borrowing, provided that the combination
of (1) and (2) 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. The Fund will not purchase securities when bank borrowings
exceed 5% of the Fund's total net assets.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements. A repurchase agreement is an
instrument under which the Fund acquires ownership of a debt security and the
seller agrees, at the time of the sale, to repurchase the obligation at a
mutually agreed upon time and price, thereby determining the yield during the
Fund's holding period. Although the Fund will enter into repurchase agreements
only with institutions that the Adviser believes present minimal credit risk, it
is conceivable that a repurchase agreement issuer could seek relief under
bankruptcy laws or otherwise default on its obligations under its repurchase
agreement. In that event, the Fund could experience both delays in liquidating
the underlying securities and losses, including: (1) a possible decline in the
value of the underlying security during the period while the Fund seeks to
enforce its rights thereto; (2) possible subnormal levels of income and lack of
access to income during this period; (3) a possible loss on the sale of the
underlying collateral; and (4) expenses of enforcing its rights.
LENDING OF PORTFOLIO SECURITIES
Securities loans are made to broker-dealers or institutional investors or other
persons, pursuant to agreements requiring that the loans be continuously secured
by collateral at least equal at all
<PAGE>
times to the value of the securities lent, marked to market on a daily basis.
The collateral received will consist of cash, U.S. Government securities,
letters of credit or such other collateral as may be permitted under the Fund's
investment program. While the securities are being lent, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the
securities, as well as interest on the investment of the collateral or a fee
from the borrower. The Fund has a right to call each loan and obtain the
securities, within such period of time which coincides with the normal
settlement period for purchases and sales of such securities in the respective
markets. The Fund will not have the right to vote on securities while they are
being lent, but it will call a loan in anticipation of any important vote.
RISKS. The risks in lending portfolio securities, as with other extensions of
secured credit, consist of possible delay in receiving additional collateral or
in the recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. Loans will only be made to firms deemed
by the Adviser to be of good standing and will not be made unless, in the
judgment of the Adviser, the consideration to be earned from such loans would
justify the risk.
PORTFOLIO TURNOVER
The Fund may sell a portfolio security, and will reinvest the proceeds, whenever
the Adviser deems such action prudent. The Fund's annual portfolio turnover
rate may vary significantly from year to year. A higher rate of portfolio
turnover may result in higher transaction costs, including brokerage
commissions. Also, to the extent that higher portfolio turnover results in a
higher rate of net realized capital gains to the Fund, the portion of the Fund's
distributions constituting taxable capital gains may increase. The Adviser does
not expect the annual portfolio turnover rates for the Fund to exceed 100%.
INVESTMENT RESTRICTIONS
The Trust has adopted the following restrictions as fundamental policies for the
Fund as stated. These restrictions are fundamental policies of the Fund and may
not be changed for any given Fund without the approval of the lesser of (i) more
than 50% of the outstanding voting securities of the Fund or (ii) 67% or more of
the voting securities present at a shareholder meeting of the Fund if more than
50% of the outstanding voting securities of the Fund are represented at the
meeting in person or by proxy. The investment restrictions of one Fund thus may
be changed without affecting those of the other Fund. Under the restrictions,
the Fund MAY NOT:
1. Issue senior securities, except to the extent permitted by the 1940 Act,
including permitted borrowings.
2. Make loans, except for collateralized loans of portfolio securities in an
amount not exceeding 331/3% of the Fund's total assets (at the time of the
most recent loan). This limitation does not apply to purchases of debt
securities or to repurchase agreements.
3. (1) Borrow money from banks and (2) make other investments or engage in
other transactions permissible under the Investment Company Act of 1940
("1940 Act") which
<PAGE>
may involve a borrowing, provided that the combination
of (1) and (2) 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.
4. Invest 25% or more of the Fund's total assets (at the time of the most
recent investment) in any single industry. The Internet is not considered
an industry for purposes of this limitation. This limitation does not
apply to investments in obligations of the US. Government or any of its
agencies or instrumentalities.
5. Act as an underwriter, except to the extent that, in connection with the
disposition of portfolio securities, the Fund may be deemed to be an
underwriter for purposes of the 1933 Act.
6. Purchase securities of other investment companies, except to the extent
permitted by the 1940 Act, regulations thereunder, or exemptions therefrom.
7. Purchase or sell commodity contracts, except that the Fund may, as
appropriate and consistent with its investment objectives and policies,
enter into financial futures contracts, options on such futures contracts,
foreign currency forward contracts, forward commitments, and repurchase
agreements.
8. Make short sales of securities or maintain a short position if, when added
together, more than 25% of the value of the Fund's net assets would be
(i) deposited as collateral for the obligation to replace securities
borrowed to effect short sales and (ii) allocated to segregated accounts in
connection with short sales. Short sales "against-the-box" are not subject
to this limitation.
9. Purchase or sell real estate or any interest therein, except that the Fund
may, as appropriate and consistent with its investment objectives and
policies, invest in securities of corporate and governmental entities
secured by real estate or marketable interests therein, or securities of
issuers that engage in real estate operations or interests therein, and may
hold and sell real estate acquired as a result of ownership of such
securities.
The 1940 Act generally prohibits investment companies from issuing any class of
senior securities. Senior securities include preferred stock, bonds,
debentures, notes and other securities evidencing indebtedness. Funds may,
however, borrow from banks if they maintain 300% asset coverage.
MANAGEMENT OF THE FUND
The officers and Trustees of the Fund are listed below. Unless otherwise noted,
the address of each is 400 Montgomery Street, 3rd Floor, San Francisco,
California 94104. In the list below,
<PAGE>
the Fund's Trustees who are considered "interested persons" of e-harmon Capital
Management LLC, as defined under Section 2(a)(19) of the 1940 Act are noted with
an asterisk (<F1>).
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
- ------------ -------------- -----------------------
Joseph N. Van President Senior Vice President, Business Development,
Remortel e-harmon.com, Inc. (since December 1999);
(35) Senior Vice President, e-harmon Capital
Management LLC (since February 2000); Vice
President and Secretary, E*TRADE Funds,
January 1999 - November 1999; Vice President
of Operations, E*TRADE Asset Management,
December 1998 - November 1999; Senior Manager,
E*TRADE Securities, Inc., September 1996 -
November 1999; Senior Consultant, KPMG Peat
Marwick Strategic Consulting, March 1994 -
September 1996; Associate, Analysis Group,
Inc, May 1992 - March 1994.
<F1>James A. Secretary, President, Chief Operating Officer and Chief
Hartmann Treasurer Compliance Officer (since August 1999) of e-
(34) and Trustee harmon.com, Inc. and Zero Gravity Management
LLC (since January 2000); President of e-
harmon Capital Management LLC (since February
2000); Director of Institutional Services,
Capstone Investments (January 1999 - July
1999); Consultant, MCG LLC (June 1998 -
January 1999); Vice President of Institutional
Marketing and Product Development, Summit
Capital Management LLC and Summit Capital
Partners LP (June 1997 - May 1998); Chief
Compliance Officer, Prudential Insurance Co.
of America (April 1994 - June 1997);
Investment Company Examiner, U.S. Securities &
Exchange Commission (January 1990 - April
1994).
Lisa A. Cavallari Vice Senior Vice President and Portfolio Manager,
(30) President e-harmon.com, Inc. and Senior Vice President
and Portfolio Manager, e-harmon Capital
Management LLC (since February 2000);
Principal, Barclays Global Investors (August
1997 - February 2000); Analyst, Frank Russel
Company (1991-1995).
Cheryl A. Trustee Retired in 1999; formerly Chief Financial
Burgermeister (48) Officer and Treasurer of Crabbe Huson Group
<PAGE>
and Treasurer of Crabbe Huson Mutual Fund
Family (January 1995 - August 1999); also a
Trustee of Select Sector SPDR Funds.
<F1>Steve Harmon Trustee Chairman, Chief Executive Officer and Chief
(35) Investment Officer, e-harmon Capital
(Robert S. Harmon) Management LLC (1999 - present); Chairman,
Chief Executive Officer and Chief Investment
Officer, e-harmon.com, Inc. (1999 - present)
and Zero Gravity Management LLC (since January
2000); Vice President of Business Development
& Senior Investment Analyst
Internet.com/Mecklermedia (1996 - 1999).
Ming Huang (36) Trustee Assistant Professor or Finance, Stanford
Graduate School of Business (since July 1998);
Assistant Professor of Finance, University of
Chicago Graduate School of Business (April
1996 - June 1998); PhD candidate in finance,
Stanford Graduate School of Business; also a
partner in The U Group, engaged in short-term
business strategy consulting.
Ashley T. Rabun (47) Trustee Owner, Chief Executive Officer and Trustee of
InvestorReach (since 1996); Partner, Nicholas-
Applegate Capital Management, President
Nicholas-Applegate Mutual Funds and President
of Nicholas-Applegate Securities (January
1995-May 1996); also a Trustee of E*TRADE
Mutual Funds and Trust Investment Management.
The Fund does not pay pension or retirement benefits to its officers. Also, any
trustee of the Fund who is an officer or employee of e-harmon.com, Inc. or e-
harmon Capital Management LLC does not receive any compensation from the Fund.
We will pay our trustees who are not interested persons a $2,000 quarterly
retainer and $2,000 for each board meeting attended.
PRINCIPAL HOLDERS OF SECURITIES
As of the date of the Prospectus, the officers and trustees of the Trust, as a
group, owned less than 1% of the outstanding shares of the Fund and e-harmon
Capital Management LLC owned all of the Fund's shares. Upon the public offering
of the Fund's shares, that control position is expected to diminish.
<PAGE>
INVESTMENT MANAGEMENT SERVICES
SERVICES
Under an Advisory Agreement, e-harmon Capital Management LLC (which we call the
Adviser) provides the Fund with discretionary investment services.
Specifically, it is responsible for supervising and directing the investments of
the Fund in accordance with the Fund's investment objectives, program, and
restrictions as provided in the Prospectus and this Statement of Additional
Information. The Adviser is also responsible for effecting all security
transactions on behalf of the Fund, including the negotiation of commissions and
the allocation of portfolio brokerage. In addition to these services, the
Adviser provides the Fund with certain corporate administrative services,
including: maintaining the Fund's corporate records; registering and qualifying
Fund shares under federal laws; monitoring the financial, accounting, and
administrative functions of the Fund; maintaining relationships with the agents
employed by the Fund such as the Fund's custodian and transfer agent; assisting
the Fund in the coordination of such agents' activities; and permitting the
Adviser's employees to serve as officers, trustees, and committee members of the
Trust without cost to the Fund.
The Advisory Agreement also provides that the Adviser, its members, officers,
employees, and certain other persons performing specific functions for the Fund
will only be liable to the Fund for losses resulting from willful misfeasance,
bad faith, gross negligence, or reckless disregard of duty.
MANAGEMENT FEE
The Fund pays the Adviser a management fee of 1.25% of the average daily net
assets of the Fund. The Advisory Agreement between the Fund and the Adviser
provides that the Fund bears all expenses of its operations not specifically
assumed by the Adviser.
The Advisory Agreement permits the Adviser to seek reimbursement of any
reductions made to its management fee and payments made to limit expenses which
are the responsibility of the Fund within the three-year period after such
reduction, subject to the Fund's ability to effect such reimbursement and remain
in compliance with applicable expense limitations. Any such management fee or
expense reimbursement will be accounted for on the financial statements of the
Fund as a contingent liability of the Fund until such time as it appears that
the Fund will be able to effect reimbursement. When it appears that the Fund is
able to effect reimbursement, the amount of reimbursement that the Fund is able
to effect as an expense of the Fund will be accrued as an expense of the Fund
for that current period.
FUND EXPENSES
In addition to the management fee, the Fund pays for the following: shareholder
service expenses; custodial, accounting, legal and audit fees; costs of
preparing and printing prospectuses and reports sent to shareholders;
registration fees and expenses; proxy and annual meeting expenses (if any) and
Trustee fees and expenses.
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ADMINISTRATION AND FUND ACCOUNTING
Sunstone Financial Group, Inc., 207 East Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202 ("Sunstone") provides various administrative and fund accounting
services to the Fund under an Administration and Fund Accounting Agreement dated
April 23, 2000 (the "Administration Agreement"). Sunstone's services include,
but are not limited to, the following: calculating the daily net asset value for
the Fund; overseeing the Fund's Custodian; assistance in preparing and filing
all federal income and excise tax filings (other than those to be made by the
Fund's Custodian); overseeing the Fund's fidelity insurance relationships;
preparing notice and renewal securities filings pursuant to state securities
laws; compiling data for and preparing notices to the SEC; preparing financial
statements for the annual and semi-annual reports to the SEC and current
investors; monitoring the Fund's expenses; monitoring the Fund's status as a
regulated investment company under Subchapter M of the Code; monitoring
compliance with the Fund's investment policies and restrictions and generally
assisting the Fund's administrative operations.
Sunstone, at its own expense, and without reimbursement from the Fund, furnishes
office space and all necessary office facilities, equipment, supplies and
clerical and executive personnel for performing the services required to be
performed by it under the Administration Agreement. The Administration
Agreement will remain in effect until April 23, 2002 (the "Initial Term") and
thereafter for successive annual periods. After the Initial Term, the
Administration Agreement may be terminated on not less than 90 days' notice,
without the payment of any penalty, by the Board of Trustees of the Trust or by
Sunstone. Sunstone may provide similar services to others, including other
investment companies.
For the foregoing, Sunstone receives a fee on the value of the Fund computed
daily and payable monthly, at the annual rate of 0.15 percent of the first $50
million of its average daily net assets, and decreasing as assets reach certain
levels, subject to an annual minimum fee of $70,000, plus out-of-pocket
expenses.
TRANSFER AGENT AND DIVIDEND-PAYING AGENT
Sunstone also acts as the Fund's transfer agent and dividend-paying agent. As
such, Sunstone processes purchase and redemption requests for the securities of
the Fund, keeps records of shareholder accounts and transactions, pays dividends
as declared by the Board of Trustees and issues confirmations of transactions to
shareholders. For these services, the Fund pays Sunstone a fee based on the
number of shareholder accounts, transactions and other activities, subject to a
minimum annual fee. Sunstone does not exercise any supervisory functions over
the management of the Fund or the purchase and sale of Fund securities. Under
the Transfer Agency Agreement, the Fund has agreed to indemnify Sunstone against
all claims except those resulting from the willful misfeasance, bad faith or
gross negligence of Sunstone.
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FUND DISTRIBUTION
Sunstone Distribution Services, LLC ("Sunstone Distribution") serves as
distributor to the Fund pursuant to a Distribution Agreement ("Distribution
Agreement"). The offering of the Fund's shares is continuous. The
Distribution Agreement provides that Sunstone Distribution may incur expenses
for appropriate distribution activities that it deems reasonable and which are
primarily intended to result in the sale of shares of the Fund, including, but
not limited to, advertising, the printing and mailing of prospectuses to other
than current shareholders, and the printing and mailing of sales literature.
Under the Distribution Agreement, the Fund has agreed to indemnify Sunstone
against all claims except those resulting from the willful misfeasance, bad
faith or gross negligence of Sunstone. At the direction of the Trust, Sunstone
Distribution may enter into servicing and/or selling agreements with qualified
broker-dealers and other persons with respect to the offering of Shares to the
public. Sunstone Distribution's address is 207 East Buffalo Street, Milwaukee,
WI 53202.
DISTRIBUTION AND SERVICE PLAN
The Fund has adopted a Distribution and Service Plan (the "Plan") for its Class
A shares. Only Class A shares are currently offered. The Plan authorizes
payments by the Fund in connection with the distribution of its shares at an
annual rate based on average daily net assets of .25% for Class A shares.
Payments may be made by the Fund under the Plan for the purpose of financing any
activity primarily intended to result in the sales of shares of the Fund as
determined by the Board of Trustees. Such activities typically include
advertising compensation for sales and sales marketing activities, such as
dealers or distributors; shareholder account servicing; and production and
dissemination of prospectuses and sales and marketing materials to prospective
investors. To the extent any activity is one which the Fund may finance without
a Plan, the Fund may also make payments to finance such activity outside of the
Plan and not subject to its limitations. Payments under the Plan are not tied
exclusively to actual distribution and service expenses, and the payments may
exceed distribution and service expenses actually incurred.
Administration of the Class A Plan is regulated by Rule 12b-1 under the 1940
Act, under which the Board of Trustees is required to receive and review at
least quarterly reports concerning the nature and qualification of expenses
incurred and approve all agreements implementing the Plan. The Plan may be
continued from year-to-year only if the Board of Trustees concludes at least
annually that continuation of the Plan is likely to benefit shareholders.
SHAREHOLDER SERVICES
The Fund from time to time may enter into agreements with outside parties
through which shareholders hold Fund shares. The shares would be held by such
parties in omnibus accounts. The agreements would provide for payments by the
Fund to the outside party for shareholder services provided to shareholders in
the omnibus accounts.
<PAGE>
CUSTODIAN
UMB Bank, n.a., is the custodian for the Fund's U.S. securities and cash, but it
does not participate in the Fund's investment decisions. Portfolio securities
purchased in the U.S. are maintained in the custody of the Bank. UMB Bank's
main office is at Kansas City, Missouri.
CODE OF ETHICS
The Board of Trustees of the Trust has adopted a Code of Ethics. The Adviser
has the same Code of Ethics. The Code permits persons subject to the Code to
invest in securities, including securities that may be purchased or held by the
Fund. However, the Code prohibits certain investments and limits these persons
from making investments during periods when the Fund is making such investments.
The Code is on file with the Securities and Exchange Commission and copies are
publicly available.
PORTFOLIO TRANSACTIONS
INVESTMENT OR BROKERAGE DISCRETION
Decisions with respect to the purchase and sale of portfolio securities on
behalf of the Fund are made by the Adviser. The Adviser is also responsible for
implementing these decisions, including the negotiation of commissions and the
allocation of portfolio brokerage and principal business.
HOW BROKERS AND DEALERS ARE SELECTED
EQUITY SECURITIES
In purchasing and selling equity securities, it is the Adviser's policy to
obtain quality execution at the most favorable prices through responsible
brokers and dealers and, in the case of agency transactions, at competitive
commission rates. However, under certain conditions, the Fund may pay higher
brokerage commissions in return for brokerage and research services. As a
general practice, over-the-counter orders are executed with market-makers. In
selecting among market-makers, the Adviser generally seeks to select those it
believes to be actively and effectively trading the security being purchased or
sold. In selecting broker-dealers to execute the Fund's portfolio transactions,
consideration is given to such factors as the price of the security, the rate of
the commission, the size and difficulty of the order, the reliability,
integrity, financial condition, general execution and operational capabilities
of competing brokers and dealers, their expertise in particular markets and
brokerage and research services provided by them. It is not the policy of the
Adviser to seek the lowest available commission rate where it is believed that a
broker or dealer charging a higher commission rate would offer greater
reliability or provide better price or execution services.
<PAGE>
FIXED INCOME SECURITIES
Fixed income securities are generally purchased from the issuer or a primary
market-maker acting as principal for the securities on a net basis, with no
brokerage commission being paid by the client although the price usually
includes an undisclosed compensation. Transactions placed through dealers
serving as primary market-makers reflect the spread between the bid and asked
prices. Securities may also be purchased from underwriters at prices which
include underwriting fees.
With respect to equity and fixed income securities, the Adviser may effect
principal transactions on behalf of the Fund with a broker or dealer who
furnishes brokerage and/or research services, designate any such broker or
dealer to receive selling concessions, discounts or other allowances, or
otherwise deal with any such broker or dealer in connection with the acquisition
of securities in underwritings. The Adviser may receive research services in
connection with brokerage transactions, including designations in a fixed price
offerings.
HOW EVALUATIONS ARE MADE OF THE OVERALL
REASONABLENESS OF BROKERAGE COMMISSIONS PAID
On a continuing basis, the Adviser seeks to determine what levels of commission
rates are reasonable in the marketplace for transactions executed on behalf of
the Fund. In evaluating the reasonableness of commission rates, the Adviser
considers: (1) historical commission rates, (2) rates which other institutional
investors are paying, based on available public information, (3) rates quoted by
brokers and dealers, (4) the size of a particular transaction, in terms of the
number of shares, dollar amount, and number of clients involved, (5) the
complexity of a particular transaction in terms of both execution and
settlement, (6) the level and type of business done with a particular firm over
a period of time, and (7) the extent to which the broker or dealer has capital
at risk in the transaction.
RESEARCH SERVICES RECEIVED FROM BROKERS AND DEALERS
The Adviser receives a wide range of research services from brokers and dealers.
These services include information on the economy, industries, groups of
securities, individual companies, statistical information, accounting and tax
law interpretations, political developments, legal developments affecting
portfolio securities, technical market action, pricing and appraisal services,
credit analysis, risk measurement analysis, performance analysis and analysis of
corporate responsibility issues. These services provide both domestic and
international perspective. Research services are received primarily in the form
of written reports, computer generated services, telephone contacts and personal
meetings with security analysts. In addition, such services may be provided in
the form of meetings arranged with corporate and industry spokespersons,
economists, and government representatives. In some cases, research services
are generated by third parties but are provided to the adviser by or through
broker-dealers.
Research services received from brokers and dealers are supplemental to the
Adviser's own research efforts and, when utilized, are subject to internal
analysis before being incorporated by the Adviser into its investment process.
As a practical matter, it would not be possible for the
<PAGE>
Adviser to generate all of the information presently provided by brokers and
dealers. The Adviser pays cash for certain research services received from
external sources. The Adviser also allocates brokerage for research services
which are available for cash. While receipt of research services from brokerage
firms has not reduced the Adviser's normal research activities, the expenses of
the Adviser could be materially increased if it attempted to generate such
additional information through its own staff. To the extent that research
services of value are provided by brokers or dealers, the Adviser may be
relieved of expenses which it might otherwise bear.
The Adviser has a policy of not allocating brokerage business in return for
products or services other than brokerage or research services. In accordance
with the provisions of Section 28(e) of the Securities Exchange Act of 1934, the
Adviser may from time to time receive services and products which serve both
research and non-research functions. In such event, the Adviser makes a good
faith determination of the anticipated research and non-research use of the
product or service and allocates brokerage only with respect to the research
component.
COMMISSIONS TO BROKERS WHO FURNISH RESEARCH SERVICES
Certain brokers and dealers who provide quality brokerage and execution services
also furnish research services to the Adviser. With regard to the payment of
brokerage commissions, the Adviser has adopted a brokerage allocation policy
embodying the concepts of Section 28(e) of the Securities Exchange Act of 1934,
which permits an investment adviser to cause an account to pay commission rates
in excess of those another broker or dealer would have charged for effecting the
same transaction, if the Adviser determines in good faith that the commission
paid is reasonable in relation to the value of the brokerage and research
services provided. The determination may be viewed in terms of either the
particular transaction involved or the overall responsibilities of the Adviser
with respect to the accounts over which it exercises investment discretion.
Accordingly, while the Adviser cannot readily determine the extent to which
commission rates or net prices charged by broker-dealers reflect the value of
their research services, the Adviser would expect to assess the reasonableness
of commissions in light of the total brokerage and research services provided by
each particular broker. The Adviser may receive research, as defined in Section
28(e), in connection with selling concessions and designations in fixed price
offerings in which the Fund participates.
INTERNAL ALLOCATION PROCEDURES
The Adviser has a policy of not precommitting a specific amount of business to
any broker or dealer over any specific time period. Brokerage placement is
determined by the needs of a specific transaction such as market-making,
availability of a buyer or seller of a particular security, or specialized
execution skills. However, the Adviser does have an internal brokerage
allocation procedure for that portion of its discretionary client brokerage
business where special needs do not exist, or where the business may be
allocated among several brokers or dealers which are able to meet the needs of
the transaction.
Each year, the Adviser assesses the contribution of the brokerage and research
services provided by brokers or dealers, and attempts to allocate a portion of
its brokerage business in response to these assessments. The investment team
seeks to evaluate the brokerage and research services
<PAGE>
they receive from brokers or dealers and make judgments as to the level of
business which would recognize such services. In addition, brokers or dealers
sometimes suggest a level of business they would like to receive in return for
the various brokerage and research services they provide. Actual brokerage
received by any firm may be less than the suggested allocations but can, and
often does, exceed the suggestions, because the total business is allocated on
the basis of all the considerations described above. In no case is a broker or
dealer excluded from receiving business from the Adviser because it has not been
identified as providing research services.
MISCELLANEOUS
The Adviser's brokerage allocation policy is consistently applied to all its
fully discretionary accounts, which represent a substantial majority of all
assets under management. Research services furnished by brokers or dealers
through which the Adviser effects securities transactions may be used in
servicing all accounts (including non-Fund accounts) managed by the Adviser.
Conversely, research services received from brokers or dealers which execute
transactions for the Fund are not necessarily used by the Adviser exclusively in
connection with the management of the Fund. From time to time, orders for
clients may be placed through a computerized transaction network.
The Fund does not allocate business to any broker-dealer on the basis of sales
of the Fund's shares. However, this does not mean that broker-dealers who
purchase Fund shares for their clients will not receive business from the Fund.
Some of the Adviser's other clients have investment objectives and programs
similar to those of the Fund. The Adviser may occasionally make recommendations
to other clients which result in their purchasing or selling securities
simultaneously with the Fund. As a result, the demand for securities being
purchased or the supply of securities being sold may increase, and this could
have an adverse effect on the price of those securities. It is the Adviser's
policy not to favor one client over another in making recommendations or in
placing orders. The Adviser frequently follows the practice of grouping orders
of various clients for execution which generally results in lower commission
rates being attained. In certain cases, where the aggregate order is executed
in a series of transactions at various prices on a given day, each participating
client's proportionate share of such order reflects the average price paid or
received with respect to the total order.
At the present time, the Adviser does not recapture commissions or underwriting
discounts or selling group concessions in connection with taxable securities
acquired in underwritten offerings.
TRADE ALLOCATION POLICIES
The Adviser has developed written trade allocation guidelines for its accounts.
Generally, when the amount of securities available in a public offering or the
secondary market is insufficient to satisfy the volume or price requirements for
the participating client portfolios, the guidelines require a pro-rata
allocation based upon the amounts initially requested by each portfolio manager.
In allocating trades made on combined basis, the Adviser seeks to achieve the
same net unit price of the securities for each participating client. Because a
pro-rata allocation may not
<PAGE>
always adequately accommodate all facts and circumstances, the guidelines
provide for exceptions to allocate trades on an adjusted, pro-rata basis.
Examples of where adjustments may be made include: (1) reallocations to
recognize the efforts of a portfolio manager in negotiating a transaction or a
private placement, (2) reallocations to eliminate de minimis positions,
(3) priority for accounts with specialized investment policies and objectives
and (4) reallocations in light of a participating portfolio's characteristics
(e.g., industry or issuer concentration, duration, and credit exposure).
PRICING OF SECURITIES
Equity securities listed or regularly traded on a securities exchange are valued
at the last quoted sales price at the time the valuations are made. A security
that is listed or traded on more than one exchange is valued at the quotation on
the exchange determined to be the primary market for such security. Listed
securities not traded on a particular day and securities regularly traded in the
over-the-counter market are valued at the mean of the latest bid and asked
prices. Other equity securities are valued at a price pursuant to procedures
approved by the Board of Trustees, or by persons delegated by the Board, best to
reflect fair value.
Debt securities are generally traded in the over-the-counter market and are
valued at the bid price obtained from an independent pricing service.
Investments in mutual funds are valued at the closing net asset value per share
of the mutual fund on the day of valuation. In the absence of a last sale
price, purchased and written options are valued at the mean of the latest bid
and asked prices, respectively.
For the purposes of determining the Fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the prevailing rates provided by an
independent pricing source. Assets and liabilities for which the above
valuation procedures are inappropriate or are deemed not to reflect fair value,
are stated at fair value as determined in good faith by or under the supervision
of the officers of the Adviser, as authorized by the Board of Trustees.
NET ASSET VALUE PER SHARE
The Fund's net asset value per share is determined by subtracting its
liabilities (including accrued expenses and dividends payable) from its total
assets (the market value of the securities the Fund holds plus cash and other
assets, including income accrued but not yet received) and dividing the result
by the total number of shares outstanding. The net asset value per share of the
Fund is normally calculated as of the close of trading (generally 3 p.m. Central
time) on the New York Stock Exchange ("NYSE") every day the NYSE is open for
trading. The NYSE is closed on the following days: New Year's Day, Dr. Martin
Luther King, Jr. Holiday, Presidents' Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
Determination of net asset value (and the offering, redemption and repurchase of
shares) for the Fund may be suspended at times (1) during which the NYSE is
closed, other than customary weekend and holiday closings, (2) during which
trading on the NYSE is restricted, (3) during which an emergency exists as a
result of which disposal by the Fund of securities owned by it is
<PAGE>
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (4) during which a
governmental body having jurisdiction over the Fund may by order permit such a
suspension for the protection of the Fund's shareholders; provided that
applicable rules and regulations of the SEC shall govern as to whether the
conditions prescribed in (2), (3), or (4) exist.
TAX STATUS
The Fund intends to qualify as a "regulated investment company" under Subchapter
M of the Internal Revenue Code of 1986, as amended (the "Code"). Qualification
as a regulated investment company essentially allows the Fund (but not its
shareholders) to avoid paying federal income tax on ordinary income and capital
gains which are distributed to shareholders. In addition, it permits net
capital gains (the excess of net long-term capital gains over net short-term
capital losses) of the Fund to be treated as long-term capital gains of the
Fund's shareholders, regardless of how long the shareholders have held their
shares.
If the Fund fails to qualify for treatment as a regulated investment company
under the Code, that Fund will not be afforded this special treatment. Rather,
the Fund will be subject to federal income tax on its net income and capital
gains at the applicable corporate income tax rate, regardless of whether
distributions are made to shareholders. In addition, any dividend distributions
to the shareholders will constitute ordinary income which will be subject to
federal income tax at the shareholder level.
As a regulated investment company, the Fund will be required to distribute 98%
of its ordinary income in the same calendar year in which such income is earned.
During the calendar year, the Fund is also required to distribute 98% of the
capital gain net income they earned during the twelve-month period ending on
October 31 of such calendar year. In addition, during the calendar year, the
Fund must distribute all undistributed ordinary income from the prior year and
all undistributed capital gain net income from the twelve-month period ending on
October 31 of the prior calendar year. To the extent they do not meet these
distribution requirements, the Fund will be subject to a non-deductible 4%
excise tax on the undistributed amount. For purposes of this excise tax, income
on which the Fund pays income tax is treated as distributed.
At the time of an investor's purchase, the Fund's net asset values may reflect
undistributed income, capital gains, and/or net unrealized appreciation of
securities held by the Fund. A subsequent distribution to an investor of such
amounts, although constituting a return of his or her investment, would be
taxable as a dividend or capital gain distribution. For federal income tax
purposes, dividends and capital gain distributions paid to shareholders in
additional shares are treated the same as if such payments were made in cash. A
portion of the dividends paid by the Fund to corporate shareholders may be
eligible for the 70% dividends-received deduction.
Gains or losses on sales of securities by the Fund will be treated as long-term
capital gains or losses if the securities have been held by it for more than one
year, except in certain cases where the Fund acquires a put or writes a call
thereon or otherwise holds an offsetting position with respect to the
securities. Other gains or losses on the sale of securities will be short-term
capital
<PAGE>
gains or losses. Gains and losses on the sale, lapse or other termination of
options on securities will be treated as gains and losses from the sale of
securities. If an option written by the Fund on securities lapses or is
terminated through a closing transaction, such as a repurchase by the Fund of
the option from its holder, the Fund will generally realize short-term capital
gain or loss. If securities are sold by the Fund pursuant to the exercise of a
call option written by it, the Fund will include the premium received in the
sale proceeds of the securities delivered in determining the amount of gain or
loss on the sale. Certain of the Fund's transactions may be subject to wash
sale, short sale, constructive sale, anti-conversion and straddle provisions of
the Code which may, among other things, require the Fund to defer recognition of
losses. In addition, debt securities acquired by the Fund may be subject to
original issue discount and market discount rules which, respectively, may cause
the Fund to accrue income in advance of the receipt of cash with respect to
interest or cause gains to be treated as ordinary income.
Special rules apply to most options on stock indices, future contracts and
options thereon, and foreign currency forward contracts in which the Fund may
invest. These investments will generally constitute Section 1256 contracts
under the Code, and will be required to be "marked to market" for federal income
tax purposes at the end of the Fund's taxable year; that is, treated as having
been sold at market value. Except with respect to certain foreign currency
forward contracts, sixty percent of any gain or loss recognized on such deemed
sales and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss.
For federal income tax purposes, the Fund is permitted to carry forward their
net realized capital losses, if any, for eight years and thus may realize net
capital gains up to the amount of such losses without being required to pay
taxes on, or distribute, such gains. However, the Fund currently does not have
any net realized capital losses, and thus will not be able to offset any net
realized capital gains.
Dividends and capital gain distributions may also be subject to state and/or
local taxes.
FOREIGN CURRENCY GAINS AND LOSSES
Gains or losses attributable to fluctuations in exchange rates which occur
between the time the Fund accrues interest or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities are treated as
ordinary income or ordinary loss. Similarly, gains or losses on foreign
currency forward contracts or dispositions of debt securities denominated in a
foreign currency attributable to fluctuations in the value of the foreign
currency between the date of acquisition of the security 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, increase or
decrease the amount of the Fund's investment company taxable income available to
be distributed to its shareholders as ordinary income, rather than increasing or
decreasing the amount of the Fund's net capital gain. If Section 988 losses
exceed other investment company taxable income during a taxable year, (1) the
Fund would not be able to make any ordinary dividend distributions, or
(2) distributions made before the losses were realized would be recharacterized
as a return of
<PAGE>
capital to shareholders (as opposed to being treated as an ordinary dividend)
thereby reducing each shareholder's basis in his or her Fund shares.
Investors should consult their own tax advisers with respect to the particular
tax consequences to them of an investment in the Fund.
PASSIVE FOREIGN INVESTMENT COMPANIES
The Fund may purchase the securities of certain foreign investment funds or
trusts called passive foreign investment companies ("PFICs"). In addition to
bearing their proportionate share of the Fund's expenses (management fees and
operating expenses), the Fund's shareholders will also indirectly bear similar
expenses of any PFICs in which the Fund invests. Capital gains on the sale of
such holdings are considered ordinary income regardless of how long the Fund
holds the investment. In addition, the Fund may be subject to corporate income
tax and an interest charge on certain dividends and capital gains earned from
these investments, regardless of whether such income and gains are distributed
to the Fund's shareholders.
To avoid such tax and interest, the Fund intends to treat these securities as
sold on the last day of its fiscal year and recognize any gains for federal
income tax purposes at that time. Deductions for losses are allowable only to
the extent of any gains resulting from these deemed sales for prior taxable
years. Such gains and losses will be treated as ordinary income. The Fund will
be required to distribute any resulting income even though it has not actually
sold the security and received cash to pay such distributions.
Income received by the Fund from sources within foreign countries may be subject
to withholding and other taxes imposed by such countries. Income tax treaties
between certain countries and the United States may reduce or eliminate such
taxes. However, it is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries will vary.
INVESTMENT PERFORMANCE
ZERO GRAVITY
Steve Harmon, the Chief Investment Officer of the Adviser, uses the term "Zero
Gravity" to describe the Internet. According to Mr. Harmon, "heavy gravity
businesses" are held to earth with buildings, delivery vehicles and paperwork.
He defines "Zero Gravity" as "the ability to operate in a purely digital
environment"[where] information, entertainment, communications all flow"as
easily in one direction as another, similar to the way in which an astronaut can
move in all directions in a weightless environment."
TOTAL RETURN PERFORMANCE
The Fund's calculation of total return performance includes the reinvestment of
all capital gain distributions and income dividends for the period or periods
indicated, without regard to tax
<PAGE>
consequences to a shareholder in the Fund. Total return is calculated as the
percentage change between the beginning value of a static account in the Fund
and the ending value of that account measured by the then current net asset
value, including all shares acquired through reinvestment of income and capital
gain dividends.
OUTSIDE SOURCES OF INFORMATION
From time to time, in reports and promotional literature: (1) the Fund's total
return performance, ranking, or any other measure of the Fund's performance may
be compared to any one or combination of the following: (a) a broad-based index;
(b) other groups of mutual funds, tracked by independent research firms ranking
entities, or financial publications; (c) indices of securities comparable to
those in which the Fund invests; (2) the Consumer Price Index (or any other
measure for inflation, government statistics, such as GNP may be used to
illustrate investment attributes of the Fund or the general economic, business,
investment, or financial environment in which the Fund operates; (3) various
financial, economic and market statistics developed by brokers, dealers and
other persons may be used to illustrate aspects of the Fund's performance; (4)
the effect of tax-deferred compounding on the Fund's investment returns, or on
returns in general in both qualified and nonqualified retirement plans or any
other tax advantage product, may be illustrated by graphs, charts, etc.; and (5)
the sectors or industries in which the Fund invests may be compared to relevant
indices or surveys in order to evaluate the Fund's historical performance or
current or potential value with respect to the particular industry or sector.
OTHER PUBLICATIONS
From time to time, in newsletters and other publications issued by e-harmon.com,
Inc. our mutual fund portfolio managers or analysts may discuss economic,
financial and political developments in the U.S. and abroad and how these
conditions have affected or may affect securities prices or the Fund; individual
securities within the Fund's portfolio; and their philosophy regarding the
selection of individual stocks, including why specific stocks have been added,
removed or excluded from the Fund's portfolio.
SHARES
The Trust was organized as an unincorporated business trust in 1999 under the
laws of Delaware. The Trust is authorized to issue an unlimited number of
shares of beneficial interest, $.01 par value per share, divided into two series
(the Funds).
e-harmon Internet Fund is divided into three classes, designated Class A, Class
B and Class C shares. Only Class A shares are currently offered. Each class of
shares represents an interest in the same assets of the Fund and is identical in
all respects except that (1) each class is subject to different sales charges
and distribution and/or service fees which will affect performance, (2) each
class has exclusive voting rights on any matter submitted to shareholders that
relates solely to its arrangement and has separate voting rights on any matter
submitted to shareholders in which the interests of one class differ from the
interests of any other class, (3) and only Class B shares have a conversion
feature.
<PAGE>
In accordance with the Trust's Declaration of Trust, the Trustees may authorize
the creation of additional series and classes within such series, with such
preferences, privileges, limitations and voting and dividend rights as the
Trustees may determine. The voting rights of the shareholders of a series or
class can be modified only by the vote of shareholders of that series or class.
Shares of the Trust, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Trust under certain circumstances. Each share of
each class is equal as to earnings, assets and voting privileges, except as
noted above, and each class of shares bears the expenses related to the
distribution of its shares. Except for the conversion feature applicable to the
Class B shares, there are no conversion, preemptive or other subscription
rights. In the event of liquidation, each share of the Fund is entitled to its
portion of all of the Fund's assets after all debt and expenses of the Fund have
been paid.
The Trust does not intend to hold annual meetings of shareholders unless
otherwise required by law. The Trust will not be required to hold meetings of
shareholders unless, for example, the election of Trustees is required to be
acted on by shareholders under the 1940 Act. Shareholders have certain rights,
including the right to call a meeting upon the vote of 10% of the Trust's
outstanding shares for the purpose of voting on the removal of one or more
Trustees or to transact any other business. Under the Declaration of Trust, the
Trustees may authorize the creation of additional series of shares (the proceeds
of which would be invested in separate, independently managed portfolios with
distinct investment objectives and policies and share purchase, redemption and
net asset value procedures) with such preferences, privileges, limitations and
voting and dividend rights as the Trustees may determine. All consideration
received by the Trust for shares of any additional series, and all assets in
which such consideration is invested, would belong to that series (subject only
to the rights of creditors of that series) and would be subject to the
liabilities related thereto. Under the 1940 Act, shareholders of any additional
series of shares would normally have to approve the adoption of any advisory
contract relating to such series and of certain changes in the investment
policies related thereto. The Trustees have the power to alter the number and
the terms of office of the Trustees, provided that always at least a majority of
the Trustees have been elected by the shareholders of the Trust. The voting
rights of shareholders are not cumulative, so that holders of more than 50
percent of the shares voting can, if they choose, elect all Trustees being
selected, while the holders of the remaining shares would be unable to elect any
Trustees.
LEGAL COUNSEL
Gardner, Carton & Douglas, whose address is 321 North Clark Street, Suite 3300,
Chicago, Illinois 60610 is legal counsel to the Trust.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105
are the independent accountants to the Trust.
<PAGE>
FINANCIAL STATEMENTS
E-HARMON INTERNET FUND
Statement of Assets and Liabilities
APRIL 18, 2000
ASSETS
INTERNET FUND
--------------
Cash $100,000
Receivable from Adviser 84,042
Prepaid initial registration expenses (Note 2) 22,310
-------
TOTAL ASSETS 206,352
-------
LIABILITIES AND NET ASSETS
Payable to Adviser 106,352
-------
TOTAL LIABILITIES 106,352
-------
Net Assets
Applicable to 10,000 shares of
beneficial interest (par value $0.01) $100,000
========
CALCULATION OF OFFERING PRICE:
Class A:Net asset value and redemption price per Class A share
($100,000/10,000 shares of
beneficial interest
issued and outstanding)<F1> $10.00
======
Maximum sales charge (% of offering price) 5.75%
======
Offering price to public $10.61
======
<F1> A redemption fee of 1.00% is imposed for shares held less than six months.
- -----------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
<PAGE>
E-HARMON INTERNET FUND
Statement of Operations
FOR THE PERIOD FROM DECEMBER 22, 1999 (INCEPTION) TO APRIL 18, 2000
INTERNET FUND
-------------
Organization expenses $ 84,042
Less: Expenses paid by Adviser (84,042)
--------
NET INVESTMENT INCOME $-
========
- -----------------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
<PAGE>
E-HARMON INTERNET FUND
NOTES TO THE FINANCIAL STATEMENTS
FOR THE PERIOD FROM DECEMBER 22, 1999 (INCEPTION) TO APRIL 18, 2000
Note 1 - Organization and Registration
e-harmon Funds (the "Trust") was established on December 22, 1999 as a Delaware
business trust and is registered under the Investment Company Act of 1940, as
amended (the "1940 Act"), as an open-end management investment company. The
Trust currently consists of two series: e-harmon Internet Fund and e-harmon
Net30 Index Fund. The e-harmon Internet Fund (the "Fund"), included in this
report, is a separate, non-diversified investment portfolio of the Trust. The
Fund has had no operations other than those relating to organizational matters,
including the sale of 10,000 Class A shares of beneficial interest of the Fund
to capitalize the Trust ("Original Shares"), which were sold to e-harmon Capital
Management LLC on April 18, 2000, for cash in the amount of $100,000. As of
April 18, 2000, e-harmon Net30 Index Fund had no assets.
Note 2 - Significant Accounting Policies
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. These
policies are in conformity with accounting principles generally accepted in the
United States ("GAAP").
A. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported changes in net assets during
the reporting period. Actual results could differ from those estimates.
B. ORGANIZATION AND PREPAID INITIAL REGISTRATION EXPENSES
Expenses incurred by the Trust in connection with the organization and the
initial public offering of shares are expensed as incurred. These expenses were
advanced by the Adviser, and the Adviser has agreed to voluntarily reimburse the
Fund for these expenses, subject to potential recovery (see Note 3). Prepaid
initial registration expenses are deferred and amortized over the period of
benefit (not to exceed twelve months).
C. FEDERAL INCOME TAXES
The Fund intends to qualify annually for treatment as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986, as
amended, and, if so qualified, will not be liable for federal income taxes to
the extent earnings are distributed to shareholders on a timely basis.
<PAGE>
Note 3 - Agreements and Transactions with Affiliates
e-harmon Capital Management LLC (the "Adviser") serves as the Fund's investment
adviser. As compensation for its services to the Fund, the Adviser will
receive, upon commencement of operations an investment advisory fee at an annual
rate of 1.25% of the average daily net assets of the Fund, which is accrued
daily and paid monthly. The Adviser has also agreed to voluntarily pay Fund
expenses (exclusive of brokerage, interest, taxes and extraordinary expenses)
that exceed 2.00% of average daily net assets of the Fund's Class A shares and
2.75% of the Fund's Class B and C shares until May 16, 2001. The Adviser is
entitled to recoup amounts waived or reimbursed for a period of up to three
years after the date such amounts were reimbursed or waived, to the extent that
actual fees and expenses for a period are less than the expense limitation.
The officers and the "interested" trustees of the Trust are also officers and
directors of the Adviser.
The Trust has entered into an administration and fund accounting agreement and
transfer agent agreement with Sunstone Financial Group, Inc. The administrative
services agreement provides for an annual fee of 0.15%, which decreases as the
assets of the Fund reach certain levels, subject to a minimum annual fee of
$70,000, plus out-of-pocket expenses. The transfer agent agreement provides for
an annual base fee per shareholder account, with a minimum annual fee of
$18,000. The transfer agent is also paid certain fees related to set-up costs,
processing and out-of-pocket expenses.
The Trust has entered into a distribution agreement with Sunstone Distribution
Services, LLC (the "Distributor"). Under the Distribution Agreement, the
Distributor shall offer shares of the Fund on a continuous basis and may engage
in advertising and solicitation activities in connection therewith.
Note 4 - Service and Distribution Plan
The Fund has adopted a Service and Distribution Plan for Class A shares (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan authorizes payments
by the Fund in connection with the distribution of its shares at an annual rate,
as determined from time to time by the Board of Trustees, of up to 0.25% of
average daily net assets for Class A shares.
Note 5 - Beneficial Interests
The Trust is authorized to issue an unlimited number of shares of beneficial
interest in the Trust with a par value of $0.01 per share. The Fund has three
separate classes: Class A, Class B, and Class C. Each class of shares has a
different combination of sales charges, fees and eligibility requirements. As
of April 18, 2000, Class A shares are the only class of shares outstanding.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Trustees
of e-harmon Funds
In our opinion, the accompanying statements of assets and liabilities and of
operations present fairly, in all material respects, the financial position of
the e-harmon Internet Fund (a portfolio of e-harmon Funds, hereinafter referred
to as the "Fund") at April 18, 2000 and the results of its operations for the
period from December 22, 1999 (inception) through April 18, 2000, in conformity
with accounting principles generally accepted in the United States. These
financial statements are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with auditing standards generally accepted in the United States which require
that we plan and perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
April 18, 2000
CH02/22055148.4
04/19/00 5:43 PM
<PAGE>
