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As filed with the Securities and Exchange Commission on April 19, 2000.
Securities Act Registration No. 333-94897
Investment Company Act Registration No. 811-09787
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM N-1A
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 [ ]
Pre-Effective Amendment No. 2 [X]
Post-Effective Amendment No [ ]
AND/OR
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 2 [X]
e-harmon Funds
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(Exact Name of Registrant as Specified in Charter)
400 Montgomery Street, 3rd Floor, San Francisco, California 94104
-----------------------------------------------------------------
(Address of Principal Executive Offices)(Zip Code)
Registrant's Telephone Number, Including Area Code:
(415-391-5335)
James Hartmann
e-harmon Funds
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400 Montgomery Street, 3rd Floor
San Francisco, California 94104
--------------------
(Name and Address of Agent for Service)
With a copy to:
Maureen A. Miller
Gardner, Carton & Douglas
321 N. Clark Street
Chicago, Illinois 60610
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date.
REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
Title of Securities Being Registered.........Shares of Beneficial Interest,
$.01 par value per share
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e-harmon INTERNET FUND,
A SERIES OF e-harmon FUNDS
PROSPECTUS SUPPLEMENT DATED APRIL 24, 2000
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 16, 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.
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PROSPECTUS April 24, 2000
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.
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.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND OVERVIEW..................................................................................................... 1
FEES AND EXPENSES................................................................................................. 5
MANAGEMENT........................................................................................................ 6
INVESTMENT POLICIES AND STRATEGIES................................................................................ 8
BUYING AND SELLING SHARES......................................................................................... 14
SHAREHOLDER COMMUNICATIONS........................................................................................ 29
DISTRIBUTIONS AND TAXES........................................................................................... 30
</TABLE>
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FUND OVERVIEW
WHAT ARE THE INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES OF THE
e-HARMON INTERNET FUND?
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:
o E-COMMERCE - companies directly or indirectly involved in the
buying and selling of products and services over the Internet
o BUSINESS-TO-BUSINESS (B2B) - companies that engage in or
enable corporate commercial transactions via the Internet
o BROADBAND - companies that design and develop products and
services that enable highspeed Internet infrastructure
o ACCESS - Internet service providers (ISPs) and companies that
enable access to the Internet
o SERVICES - firms that provide corporations with professional
and information services related to the Internet
o SOFTWARE - developers of applications that enable a variety of
Internet business activities, including, for example,
electronic commerce, communications, content provision and web
development
o 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-corporate investments, American Depositary Receipts, American Depositary
Shares, and warrants and rights exercisable for equity securities.
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WHAT IS AN INTERNET COMPANY?
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?
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 in illiquid
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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.
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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?
The Fund may be appropriate if you have:
o a long-term investment time horizon
o familiarity with Internet stocks
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o tolerance for fluctuations in stock valuations and prices
o no intention to actively trade mutual fund shares
The Fund is not appropriate if you have:
o a short-term investment time horizon
o little knowledge of Internet stocks
o aversion to fluctuations in stock valuations and prices
o an intention to actively trade mutual fund shares
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FEES AND EXPENSES
The tables below are designed to help you understand the fees and expenses
investors may bear by investing in the e-harmon Internet Fund.
<TABLE>
<CAPTION>
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e-HARMON INTERNET FUND Class A
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<S> <C>
Shareholder fees (fees paid directly from
your investment)(1)
Maximum sales charge (load) imposed on
purchases as a % of offering price 5.75%(2)
Maximum deferred sales charge (load) as
a % of purchase price or sales proceeds None
Redemption fees for shares held less than
six months(3) 1.00%
Exchange fees None
Annual Fund operating expenses
(expenses that are deducted from
Fund assets)
Management fees 1.25%
Distribution and service (12b-1) fees .25%
Other expenses(4) .57%
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Total annual Fund
operating expenses(5) 2.07%
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Fee Waivers (.07)%
Net Expenses 2.00%
====
</TABLE>
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(1) Brokers, investment advisers, third party administrators or financial
planners may charge you a separate or additional fee for purchases and sales of
shares.
(2) 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.
(3) 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.
(4) Other expenses are estimated for the Fund's current fiscal year.
(5) 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
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.*
<TABLE>
<S> <C>
1 Year 3 Years
$766 $1,180
</TABLE>
* Operating expenses are based on an estimate of "Other Expenses" for the
current fiscal year.
MANAGEMENT
GENERAL OVERSIGHT
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
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.
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STEVE HARMON, CHIEF INVESTMENT OFFICER OF e-HARMON CAPITAL MANAGEMENT
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 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
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(R) 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
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,
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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.
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
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
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
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:
o E-COMMERCE - companies directly or indirectly involved in the
buying and selling of products and services over the Internet
o BUSINESS-TO-BUSINESS (B2B) - companies that engage in or
enable corporate commercial transactions via the Internet
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o BROADBAND - companies that design and develop products and
services that enable highspeed Internet infrastructure
o ACCESS - Internet service providers (ISPs) and companies that
enable access to the Internet
o SERVICES - firms that provide corporations with professional
and information services related to the Internet
o SOFTWARE - developers of applications that enable a variety of
Internet business activities, including, for example,
electronic commerce, communications, content provision and web
development
o 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
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.
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PRINCIPAL RISKS OF INVESTING IN THE FUND
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.
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
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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, 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:
o movements in interest rates, securities prices and currency
markets that are counter to the direction that a portfolio
manager anticipates
o imperfect correlation between the price of derivative
instruments and movements in the prices of the securities,
interest rates or currencies being hedged
o the skills needed to use these strategies are different than
those needed to select portfolio securities
o inability to close out certain hedged positions to avoid
adverse tax consequences
o 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
o 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)
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o 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.
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
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
12
<PAGE> 17
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.
o 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
o 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
o there may be less government regulation of stock exchanges,
brokers, listed companies and banks in foreign countries than
in the United States
o the Fund may incur fees on currency exchanges when it
exchanges investments from one currency to another
o 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
o 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
o 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
13
<PAGE> 18
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.
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 divided reinvestment or
capital gain distributions.
14
<PAGE> 19
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.
SALES CHARGES
The up-front Class A sales charge is as follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------
MAXIMUM
AMOUNT OF FRONT END SALES CHARGE DEALERS'
PURCHASE REALLOWANCE
- -------------------------------------------------------------------------------------------------------------
As a % of offering As a % of net As a % of offering
price investment price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------
Less than $50,000 5.75% 6.10% 4.75%
- -------------------------------------------------------------------------------------------------------------
$50,000 or more but less 5.00% 5.26% 4.00%
than $99,999
- -------------------------------------------------------------------------------------------------------------
$100,000 or more but less 4.00% 4.17% 3.00%
than $249,999
- -------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 20
<TABLE>
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$250,000 or more but less 3.00% 3.09% 2.00%
than $499,999
- -------------------------------------------------------------------------------------------------------------
$500,000 or more but less 1.50% 1.52% 1.00%
than $999,999
- -------------------------------------------------------------------------------------------------------------
$1,000,000 or more 0% 0% 0%
- -------------------------------------------------------------------------------------------------------------
</TABLE>
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
o 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.
o 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:
o directly with the Fund through the Distributor
o 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
o by state and local government entities that are prohibited from paying
mutual fund sales charges
o by registered investment companies
o 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
16
<PAGE> 21
- - 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
Funds, the Advisor 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:
o Individual ownership. If you have reached the legal age of majority in your
state of residence, you may open an individual account.
o 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.
o 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.
o 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.
<TABLE>
<CAPTION>
Initial Minimum Purchase Additional Minimum Purchase
<S> <C> <C>
Regular accounts $2,500 $100
Automatic Investment Plan $ 500 $ 50
IRAs $1,000 $100
Gift to Minors $1,000 $100
</TABLE>
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.
17
<PAGE> 22
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 website, 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:
o obtain a New Account Application by visiting www.e-harmon.com
o buy additional shares and sell shares
o receive shareholder documents online
o view account information, such as balances, positions, and transaction
history online
o 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 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.
18
<PAGE> 23
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.
<TABLE>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------- -----------------------------------------------------
VIA INTERNET: VIA INTERNET:
o You may obtain and complete a New Account o You may purchase shares in an existing
Application or an IRA Application on the Fund's account through the Fund's website at
Web site www.e-harmon.com. or by calling www.e-harmon.com. To establish online
1-800-392-6563 and requesting an Application. transaction privileges, you must enroll
through the Web site. You automatically have
the ability to establish online transaction
o Print, sign and mail the New Account privileges unless you decline them on your New
Application to the Fund as provided below. Account Application.
o For important information on this feature, see
"Transaction Through the Fund's Website" in this
Prospectus.
- ------------------------------------------------------- -----------------------------------------------------
VIA MAIL: VIA MAIL:
o Complete and sign the New Account Application o Complete the investment slip that is included
or an IRA Application. If you don't complete in your account statement, and write your
the Application properly, your purchase may be account number on your check.
delayed or rejected.
o If you no longer have your investment slip,
o Make your check payable to "e-harmon Funds." please reference your name, account number and
address on your check.
o For IRA accounts, please specify the year for
which the contribution is made. o Make your check payable to "e-harmon Funds."
- ------------------------------------------------------- -----------------------------------------------------
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
e-harmon Funds e-harmon Funds
P.O. Box 1631 P.O. Box 1631
Milwaukee, WI 53201-1631 Milwaukee, WI 53201-1631
- ------------------------------------------------------- -----------------------------------------------------
VIA OVERNIGHT COURIER, SEND TO: VIA OVERNIGHT COURIER, SEND TO:
e-harmon Funds e-harmon Funds
207 E. Buffalo Street 207 E. Buffalo Street
Suite 315 Suite 315
Milwaukee, WI 53202 Milwaukee, WI 53202
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
19
<PAGE> 24
<TABLE>
<S> <C>
- ------------------------------------------------------- -----------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- ------------------------------------------------------- -----------------------------------------------------
VIA TELEPHONE: VIA TELEPHONE:
You may not make your initial purchase by telephone, o You automatically have the privilege to
but you may call 1-800-392-6563 and request an purchase additional shares by telephone if you
Application. provided bank account information when you set
up your account. You may call 1-800-392-6563
to purchase shares for an existing account.
o Investments made by electronic funds transfer
must be in amounts of at least $100 and not
greater than $50,000.
- ------------------------------------------------------- -----------------------------------------------------
VIA WIRE: VIA WIRE:
o To purchase shares by wire, the Transfer Agent o Send your investment to UMB Bank, n.a.,
must have received a completed New Account or Custodian for the e-harmon Funds, by following
IRA Application AND issued an account number to the instructions listed in the column to the
you. Call 1-800-392-6563 for instructions prior left.
to wiring the funds. Wires received before receipt
of a properly completed Application will be o Investments made by electronic funds
rejected. transfer must be in amounts of at least $100
and not greater than $50,000.
o 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 AUTOMATIC SERVICES
o The Fund offers a number of automatic o The Fund offers a number of automatic
investment procedures. See "Special Features investment procedures. See "Special Features
and Services" for a description of these and Services" for a description of these
services. To select them when opening an services. To establish any of these services
account, mark the appropriate places on the after the account has been opened, call
Application. To establish any of these services 1-800-392-6563 for instructions and forms.
after the account has been opened, call
1-800-392-6563 for instructions and forms.
- ------------------------------------------------------- -----------------------------------------------------
</TABLE>
MORE YOU SHOULD KNOW ABOUT BUYING SHARES
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
20
<PAGE> 25
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.
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.
o 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.
o 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.
21
<PAGE> 26
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.
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:
o 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:
o 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.
o Sign the request exactly as the shares are registered. All registered
owners must sign.
o 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
- --------------------------------------------------------------------------------
22
<PAGE> 27
- --------------------------------------------------------------------------------
VIA TELEPHONE:
o You automatically have the privilege to redeem shares by telephone unless
you declined this option on your Application.
o 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.
o 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:
o 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.
o 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.
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:
o to send redemption proceeds to a different address than is currently on the
account;
o to have the proceeds paid to someone other than the account's owner;
o to transmit redemption proceeds by federal wire transfer or ACH to a bank
other than your bank of record;
23
<PAGE> 28
o if a change of address request has been received by the Transfer Agent
within the last 30 days; or
o 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.
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.
24
<PAGE> 29
Additional Redemption Provisions
o 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.
o 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.
o 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.
o 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.
o If redeeming shares within 30 days after making an address change, your
redemption request must be in writing and the signature must be guaranteed.
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:
o your account number
o the number or dollar amount of shares you want to buy or sell
o signatures of all owners, exactly as registered on the account
o signature guarantees, if necessary (see "Selling Shares - Signature
Guarantees" above)
o any documentation required for redemptions by corporations,
partnerships, fiduciaries, estates, trusts, and other organizations
TELEPHONE AND WIRE TRANSACTIONS
o 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.
25
<PAGE> 30
o 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.
o 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.
o 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
o 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 you decline them on your Application or call 1-800-392-6563.
o 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.
o The Fund imposes a limit of $50,000 on purchase and redemption transactions
through the Web site.
o 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.
26
<PAGE> 31
o 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 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
27
<PAGE> 32
daily net assets of up to .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:
o Traditional IRA (including spousal IRA)
o "Rollover" IRA
o Roth IRA
o 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 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.
28
<PAGE> 33
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 website 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" 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
29
<PAGE> 34
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.
o Dividend and capital gain distributions are reinvested in additional Fund
shares in your account unless you select another option on your
Application.
o 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.
o 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.
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."
30
<PAGE> 35
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.
31
<PAGE> 36
- --------------------------------------------------------------------------------
[Back Cover]
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
<PAGE> 37
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
<PAGE> 38
PROSPECTUS April __, 2000
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.
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.
<PAGE> 39
TABLE OF CONTENTS
<TABLE>
<S> <C>
FUND OVERVIEW....................................................................................................1
FEES AND EXPENSES................................................................................................5
MANAGEMENT.......................................................................................................6
INVESTMENT POLICIES AND STRATEGIES...............................................................................8
BUYING AND SELLING SHARES.......................................................................................18
SHAREHOLDER COMMUNICATIONS......................................................................................30
DISTRIBUTIONS AND TAXES.........................................................................................31
</TABLE>
i
<PAGE> 40
FUND OVERVIEW
WHAT ARE THE INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES OF THE
e-HARMON INTERNET FUND?
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:
o E-COMMERCE - companies directly or indirectly involved in the
buying and selling of products and services over the Internet
o BUSINESS-TO-BUSINESS (B2B) - companies that engage in or
enable corporate commercial transactions via the Internet
o BROADBAND - companies that design and develop products and
services that enable highspeed Internet infrastructure
o ACCESS - Internet service providers (ISPs) and companies that
enable access to the Internet
o SERVICES - firms that provide corporations with professional
and information services related to the Internet
o SOFTWARE - developers of applications that enable a variety of
Internet business activities, including, for example,
electronic commerce, communications, content provision and web
development
o 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-corporate investments, American Depositary Receipts, American Depositary
Shares, and warrants and rights exercisable for equity securities.
1
<PAGE> 41
WHAT IS AN INTERNET COMPANY?
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?
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 may 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 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.
2
<PAGE> 42
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?
The Fund may be appropriate if you have:
o a long-term investment time horizon
o familiarity with Internet stocks
o tolerance for fluctuations in stock valuations and prices
o no intention to actively trade mutual fund shares
3
<PAGE> 43
The Fund is not appropriate if you have:
o a short-term investment time horizon
o little knowledge of Internet stocks
o aversion to fluctuations in stock valuations and prices
o an intention to actively trade mutual fund shares
4
<PAGE> 44
FEES AND EXPENSES
The tables below are designed to help you understand the fees and expenses
investors may bear by investing in the e-harmon Internet Fund.
<TABLE>
<CAPTION>
e-HARMON INTERNET FUND Class A Class B Class C
------- ------- -------
<S> <C> <C> <C>
Shareholder fees (fees paid directly from
your investment)(1)
Maximum sales charge (load) imposed on 5.75%(2) None None
purchases as a % of offering price
Maximum deferred sales charge (load) as None 5.00%(3) 1.00%(4)
a % of purchase price
Redemption fees for shares held less than
six months(5) 1.00% 1.00% 1.00%
Exchange fees None None None
Annual Fund operating expenses
(expenses that are deducted from
Fund assets)
Management fees 1.25% 1.25% 1.25%
Distribution and service (12b-1) fees(6) .25% 1.00%(6) 1.00%(6)
Other expenses(7) .57% .50% .50%
---- ----- -----
Total annual Fund
operating expenses(8) 2.07% 2.75% 2.75%
----- ----- -----
Fee waivers .07%
Net expenses 2.00%
=====
</TABLE>
- ---------------
(1) Brokers may charge you a separate or additional fee for purchases and
sales of shares.
(2) 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.
(3) The Contingent Deferred Sales Charge (CDSC) for Class B Shares
decreases by 1% annually to 0% in the sixth year and beyond.
(4) The CDSC for Class C shares is 1% for shares redeemed within one year
of purchase.
(5) 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.
(6) The distribution fee for Class B and Class C shares is .75% and the
service fee for Class B and Class C shares is .25%.
(7) Other expenses are estimated for the Fund's current fiscal year.
(8) The Adviser has contractually agreed to reimburse the Fund for total
operating expenses of each Class (excluding interest, taxes, brokerage
and extraordinary expenses) to the extent they exceed an annual rate of
2.00% of the average daily net assets of the Class A shares, 2.75% of
the average daily net assets of the Class B shares and 2.75% of the
average daily assets of the Class C shares, until__________, 2001. This
fee waiver may be terminated at any time after ____________, 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.
5
<PAGE> 45
EXAMPLE
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.*
<TABLE>
<CAPTION>
1 Year 3 Years
<S> <C> <C>
Class A $766 $1,180
Class B $ $
Class C $ $
</TABLE>
You would pay the following expenses on the same investment if you did not sell
your shares:
<TABLE>
<CAPTION>
1 Year 3 Year
<S> <C> <C>
Class A $ $
Class B $ $
Class C $ $
</TABLE>
* Operating expenses are based on an estimate of "Other Expenses" for the
current fiscal year.
MANAGEMENT
GENERAL OVERSIGHT
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
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.
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
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 the
Internet investing field
6
<PAGE> 46
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
Prior to joining e-harmon Capital Management LLC in January 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(R) 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
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, security 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.
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.
7
<PAGE> 47
PATRICK WONG, SENIOR INVESTMENT RESEARCH ANALYST OF e-HARMON CAPITAL MANAGEMENT
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
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
e-harmon Internet Fund will invest at least 65% of its total assets in the
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:
o E-COMMERCE - companies directly or indirectly involved in the
buying and selling of products and services over the Internet
o BUSINESS-TO-BUSINESS (B2B) - companies that engage in or
enable corporate commercial transactions via the Internet
o BROADBAND - companies that design and develop products and
services that enable highspeed Internet infrastructure
o ACCESS - Internet service providers (ISPs) and companies that
enable access to the Internet
o SERVICES - firms that provide corporations with professional
and information services related to the Internet
o SOFTWARE - developers of applications that enable a variety of
Internet business activities, including, for example,
electronic commerce, communications, content provision and web
development
o HARDWARE - computer, digital and electronic products designed
and developed to enable Internet business activities, products
and services
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<PAGE> 48
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
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
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.
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.
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<PAGE> 49
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, 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.
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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<PAGE> 50
RISKS OF 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:
o movements in interest rates, securities prices and currency
markets that are counter to the direction that a portfolio
manager anticipates
o imperfect correlation between the price of derivative
instruments and movements in the prices of the securities,
interest rates or currencies being hedged
o the skills needed to use these strategies are different than
those needed to select portfolio securities
o inability to close out certain hedged positions to avoid
adverse tax consequences
o 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
o adverse price movements in an instrument can result in a loss
substantially greater than the Fund's initial investment in
that instrument (that is, leveraged risk)
o nonperformance 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.
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.
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<PAGE> 51
OTHER INVESTMENT STRATEGIES AND RISKS
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.
o 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
o 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
o there may be less government regulation of stock exchanges,
brokers, listed companies and banks in foreign countries than
in the United States
o the Fund may incur fees on currency exchanges when it
exchanges investments from one currency to another
o 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
o 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
o 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).
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<PAGE> 52
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.
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.
CHOOSING A SHARE CLASS
You can choose from different classes for the Fund. The different classes
represent investments in the same portfolio of securities, but each has a
different combination of sales charges, fees, eligibility requirements and other
features.
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<PAGE> 53
The Fund offers three different classes of shares - Class A, Class B and Class
C. In deciding whether to purchase Class A, Class B or Class C shares, you
should consider:
o the amount of your purchase
o how long you expect to hold the shares
o the amount of any up-front sales charge
o whether you intend to purchase through a broker or other
authorized firm or directly with the Fund
o whether a contingent deferred sales charge (CDSC) would apply
upon redemption o the amount of any distribution or service
fees that you may incur while you own the shares
o whether you qualify for a sales charge waiver or reduction
o whether you meet the eligibility criteria for the class
If you are purchasing through a broker or other institution, your investment
professional can help you determine which class is best for you. For a summary
of the charges and expenses for each class, please see "Fees and Expenses."
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 sales agreements with the Distributor ("Authorized Firms"). If
you invest through an Authorized Firm with an investment professional, they can
provide advice, determine the suitability of the Fund and class, 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.
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<PAGE> 54
<TABLE>
<CAPTION>
CLASS A CLASS B(1) CLASS C
- ----------------------------------------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C>
Minimum purchase amount(2) $2,500 $2,500 $2,500
- ----------------------------------------------------- -------------------- -------------------- --------------------
Minimum amount for subsequent purchases(2) $100 $100 $100
- ----------------------------------------------------- -------------------- -------------------- --------------------
Maximum initial sales charge 5.75% of the None None
public offering
price(3)
- ----------------------------------------------------- -------------------- -------------------- --------------------
Contingent Deferred Sales Charge (CDSC) None If sold during: 1% if sold within
Year 1 5% 12 months of
Year 2 4% purchase
Year 3 3%
Year 4 2%
Year 5 1%
Year 6 0%
- ----------------------------------------------------- -------------------- -------------------- --------------------
Redemption Fee for shares held less than
six months(4) 1.00% 1.00% 1.00%
- ----------------------------------------------------- -------------------- -------------------- --------------------
Annual distribution and service (12b-1) fees shown
as a percentage of average net assets(5) .25% 1.00% 1.00%
- ----------------------------------------------------- -------------------- -------------------- --------------------
</TABLE>
(1) After 6 years, Class B shares will convert automatically to Class A
shares of the Fund.
(2) Different minimum investment requirements apply to Automatic Investment
Plans, IRSs and custodial accounts for minors. For more information, see "Buying
and Selling Shares, Before you Invest --Account Minimums."
(3) If you choose to make your own investment decisions, you may purchase
Class A shares directly with the Fund through its Distributor without paying the
initial sales charge by following the procedures described below. In addition,
sales charges are reduced for purchases of $50,000 or more.
(4) Class A, Class B and Class C shares have a redemption fee of 1.00% of
the redemption amount if you sell your shares after holding them less than 6
months. This fee, which is paid to the Fund, is designed to offset the brokerage
commissions, market impact, and other costs associated with fluctuations in Fund
asset levels and cash flow caused by short-term trading.
(5) 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. The service fee for
Class B and Class C shares is .25 of 1%. The distribution fee for Class A shares
is .25 of 1% and is .75 of 1% for Class B and Class C shares.
The CDSC is calculated by multiplying the CDSC percentage by the lesser of the
net asset value of the shares being redeemed at the time of their purchase or
their net asset value at the time of redemption. To ensure that you pay the
lowest CDSC possible, the Funds use the shares with the lowest CDSC to fill your
redemption request. No CDSC sales charge is imposed on shares you buy through
the reinvestment of dividends and capital gains.
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<PAGE> 55
CLASS A SHARES
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.
SALES CHARGES
The up-front Class A sales charge is as follows:
<TABLE>
<CAPTION>
MAXIMUM DEALERS'
AMOUNT OF PURCHASE FRONT END SALES CHARGE REALLOWANCE
- ---------------------------- ------------------------------------------------------ -------------------------
As a % of offering price As a % of net investment As a % of offering price
- ---------------------------- -------------------------- --------------------------- -------------------------
- ---------------------------- -------------------------- --------------------------- -------------------------
<S> <C> <C> <C>
Less than $50,000 5.75% 6.10% 4.75%
- ---------------------------- -------------------------- --------------------------- -------------------------
$50,000 or more but less 5.00% 5.26% 4.00%
than $99,999
- ---------------------------- -------------------------- --------------------------- -------------------------
$100,000 or more but less 4.00% 4.17% 3.00%
than $249,999
- ---------------------------- -------------------------- --------------------------- -------------------------
$250,000 or more but less 3.00% 3.09% 2.00%
than $499,999
- ---------------------------- -------------------------- --------------------------- -------------------------
$500,000 or more but less 1.50% 1.52% 1.00%
than $999,999
- ---------------------------- -------------------------- --------------------------- -------------------------
$1,000,000 or more 0% 0% 0%
- ---------------------------- -------------------------- --------------------------- -------------------------
</TABLE>
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<PAGE> 56
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
o 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.
o 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:
o directly with the Fund through the Distributor
o 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
o by state and local government entities that are prohibited from paying
mutual fund sales charges
o by registered investment companies
o 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
o by private partnerships managed by the Adviser
o 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))
o through an account with a broker deal with which the Fund has an
agreement for the use of e-harmon Funds in particular investment
products on a load waived basis
o 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 Advisor or the Distributor to compensate them for
certain services
CLASS B SHARES
Class B shares may be appropriate if you are purchasing shares through an
Authorized Firm and you don't want to pay a front-end sales charge and/or if you
are not planning to redeem shares in
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<PAGE> 57
the short-term. After 6 years, Class B shares will convert automatically to
Class A shares of the Fund.
CLASS C SHARES
Class C shares may be appropriate if you are purchasing shares through an
Authorized Firm and you do not want to pay a traditional front-end sales charge
or you are unsure of the length of time you will hold your investment. Class C
shares do not convert to another share class.
CDSC Waivers on Certain Redemptions of Class B and Class C Shares
CDSCs are waived on shares:
o acquired through dividends or capital gains reinvestment
o redeemed because of death or disability (as defined in the Internal
Revenue Code of 1986, as amended)
o that are mandatory retirement distributions on IRA accounts that
represent the minimum required distribution from an IRA effected
pursuant to a Systematic Withdrawal Plan
BUYING AND SELLING SHARES
Here is what you need to know about buying and selling shares of the e-Harmon
Internet Fund. If you hold more than one class, you must identify the class you
intend to buy or sell.
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:
o Individual ownership. If you have reached the legal age of majority in
your state of residence, you may open an individual account.
o 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.
o 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.
o Business/trust ownership. Corporations, trusts, charitable
organizations and other businesses may open accounts.
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<PAGE> 58
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.
<TABLE>
<CAPTION>
Initial Minimum Purchase Additional Minimum Purchase
Class A, B and C Class A, B and C
<S> <C> <C>
Regular accounts $2,500 $100
Automatic Investment Plan $ 500 $ 50
IRAs $1,000 $100
Gift to Minors $1,000 $100
</TABLE>
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 website, 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:
o obtain a New Account Application by visiting www.e-harmon.com
o buy additional shares and sell shares
o receive shareholder documents online
o view account information, such as balances, positions, and transaction
history online
o 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 any applicable sales charge. When redeeming shares,
the price you receive is the next determined NAV less any applicable CDSC and
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
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<PAGE> 59
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 NAV plus or less any applicable sales charges, redemption
fees and/or CDSCs. 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 plus or less any applicable sales
charges, redemption fees and/or CDSCs. 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. When
purchasing shares, remember to specify the class you intend to purchase. If no
selection is made, you will be deemed to have selected Class A shares.
20
<PAGE> 60
<TABLE>
<CAPTION>
- -------------------------------------------------- --------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- -------------------------------------------------- --------------------------------------------------
<S> <C>
VIA INTERNET: VIA INTERNET:
o You may obtain and complete a New Account o You may purchase shares in an existing
Application or an IRA Application on the account through the Fund's website at
Fund's Web site www.e-harmon.com. or by www.e-harmon.com. To establish online
calling 1-800-392-6563 and requesting an transaction privileges, you must enroll
Application. through the Web site. You automatically
have the ability to establish online
o Print, sign and mail the New Account transaction privileges unless you decline
Application to the Fund as provided them on your New Account Application.
below.
o For important information on this
feature, see "Transactions Through the
Fund's Website" in this Prospectus.
- -------------------------------------------------- --------------------------------------------------
VIA MAIL: VIA MAIL:
o Complete and sign the New Account o Complete the investment slip that is
Application or an IRA Application. If you included in your account statement, and
don't complete the Application properly, write your account number on your check.
your purchase may be delayed or rejected.
o If you no longer have your investment
o Make your check payable to "e-harmon slip, please reference your name, account
Funds." number and address on your check.
o For IRA accounts, please specify the year o Make your check payable to "e-harmon
for which the contribution is made. Funds."
- -------------------------------------------------- --------------------------------------------------
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
e-harmon Funds e-harmon Funds
P.O. Box 1631 P.O. Box 1631
Milwaukee, WI 53201-1631 Milwaukee, WI 53201-1631
- -------------------------------------------------- --------------------------------------------------
VIA OVERNIGHT COURIER, SEND TO: VIA OVERNIGHT COURIER, SEND TO:
e-Harmon Funds e-Harmon Funds
207 E. Buffalo Street 207 E. Buffalo Street
Suite 315 Suite 315
Milwaukee, WI 53202 Milwaukee, WI 53202
- -------------------------------------------------- --------------------------------------------------
VIA TELEPHONE: VIA TELEPHONE:
You may not make your initial purchase by o You automatically have the privilege to
telephone, but you may call 1-800-392-6563 and purchase additional shares by telephone
request an Application. 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.
o Investments made by electronic funds
transfer must be in amounts of at least
$100 and not greater than $50,000.
- -------------------------------------------------- --------------------------------------------------
</TABLE>
21
<PAGE> 61
<TABLE>
<S> <C>
- -------------------------------------------------- --------------------------------------------------
VIA WIRE: VIA WIRE:
o To purchase shares by wire, the Transfer o Send your investment to UMB Bank, n.a.,
Agent must have received a completed New Custodian for the e-harmon Funds, by
Account or IRA Application AND issued an following the instructions listed in the
account number to you. Call column to the left.
1-800-392-6563 for instructions prior to
wiring the funds. Wires received before o Investments made by electronic funds
receipt of a properly completed transfer must be in amounts of at least
Application will be rejected. $100 and not greater than $50,000.
o 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 AUTOMATIC SERVICES
o The Fund offers a number of automatic o The Fund offers a number of automatic
investment procedures. See "Special investment procedures. See "Special
Features and Services" for a description Features and Services" for a description
of these services. To select them when of these services. To establish any of
opening an account, mark the appropriate these services after the account has been
places on the Application. To establish opened, call 1-800-392-6563 for
any of these services after the account instructions and forms.
has been opened, call 1-800-392-6563 for
instructions and forms.
- -------------------------------------------------- --------------------------------------------------
</TABLE>
MORE YOU SHOULD KNOW ABOUT BUYING SHARES
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.
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 Cleaing House ("ACH") or other electronic transfer of funds, or for
insufficient funds, stop payment, closed account or
22
<PAGE> 62
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.
o 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.
o 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.
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.
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<PAGE> 63
- -------------------------------------------------------------------------------
VIA INTERNET:
o 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:
o Send a letter of instruction that includes your account number, the
Fund name, the Class and the dollar value or number of shares you want
to sell.
o Sign the request exactly as the shares are registered. All registered
owners must sign.
o 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:
o You automatically have the privilege to redeem shares by telephone
unless you declined this option on your Application.
o 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.
o 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:
o 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 for Class A shares.
o 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> 64
CDSCS AND REDEMPTION FEES
Class A, B and C 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. Class B and Class C shares are also subject to a CDSC as described
under "Choosing a Share Class." 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-dealers 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:
o to send redemption proceeds to a different address than is currently on
the account;
o to have the proceeds paid to someone other than the account's owner;
o to transmit redemption proceeds by federal wire transfer or ACH to a
bank other than your bank of record;
o if a change of address request has been received by the Transfer Agent
within the last 30 days; or
o 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.
25
<PAGE> 65
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
redemption 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 or 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
o 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.
o 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.
o 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.
o 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.
o If redeeming shares within 30 days after making an address change, your
redemption request must be in writing and the signature must be
guaranteed.
26
<PAGE> 66
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:
o your account number
o the number or dollar amount of shares you want to buy or sell and the
specific class(es)
o signatures of all owners, exactly as registered on the account
o signature guarantees, if necessary (see "Selling Shares - Signature
Guarantees" above)
o any documentation required for redemptions by corporations,
partnerships, fiduciaries, estates, trusts, and other organizations
TELEPHONE AND WIRE TRANSACTIONS
o 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.
o 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.
o 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.
o 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
o 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 you decline them on your
Application or call 1-800-392-6563.
27
<PAGE> 67
o 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.
o The Fund imposes a limit of $50,000 on purchase and redemption
transactions through the Web site.
o 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.
o There also may be delays, malfunctions or other inconveniences
associated with the Internet, and times when the website 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 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,
the share class, number of shares or dollar amount that are being transferred
along with the name, address and
28
<PAGE> 68
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 up to .25% for Class A shares
and .75% for each of Class B and Class C 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:
o Traditional IRA (including spousal IRA)
o "Rollover" IRA
o Roth IRA
o 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 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.
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<PAGE> 69
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 own Class B or Class C shares,
withdrawals may be subject to a CDSC. 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 website 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 investment plan 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" 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
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<PAGE> 70
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.
o Dividend and capital gain distributions are reinvested in additional
Fund shares in your account unless you select another option on your
Application.
o 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.
o 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.
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
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<PAGE> 71
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.
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<PAGE> 72
[Back Cover]
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 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
Class B: 26852R203
Class C: 26852R302
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PROSPECTUS April __, 2000
e-harmon Net30 Index Fund's investment objective is to provide
investment results that correspond to the performance of the e-harmon Net30
Index. e-harmon Internet Fund is one of the portfolios, or funds, of e-harmon
Funds.
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.
<PAGE> 74
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
FUND OVERVIEW.................................................................1
FEES AND EXPENSES.............................................................4
MANAGEMENT....................................................................5
INVESTMENT POLICIES AND STRATEGIES............................................7
BUYING AND SELLING SHARES....................................................12
SHAREHOLDER COMMUNICATIONS...................................................24
DISTRIBUTIONS AND TAXES......................................................25
</TABLE>
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<PAGE> 75
FUND OVERVIEW
WHAT ARE THE INVESTMENT OBJECTIVE AND PRINCIPAL INVESTMENT STRATEGIES OF THE
e-HARMON NET30 INDEX FUND?
e-HARMON NET30 INDEX FUND'S objective is to provide investment results that
correspond to the performance of the e-harmon Net30 Index. The Fund will invest
at least 80% of its total assets in common stocks that comprise the Net30 Index
in the same proportions as those of the index. e-harmon Net30 Index is an
unmanaged group of the top 30 Internet companies ranked by total revenues. For a
current list of securities in the Net30 Index, visit the Fund's website at
www.e-harmon.com. The Adviser will sell a security within a reasonable time
after it is removed from the Index.
The availability of assets for investment in the start-up period and the
availability of the stocks suitable for the Fund's portfolio may affect the
ability of the Fund to invest in the complete proportions of the Index. Tracking
with the Index will be monitored on a daily basis.
The e-harmon Net30 Index is compiled by the Adviser as a modified market
capitalization weighted index that limits the weighting of any single stock to
4.5% of the total capitalization of the companies in the index at the time of
each quarterly rebalancing. The effect of this weighting restriction is to limit
the impact that any single stock might have on the performance of the index.
The Fund may also invest in stock index futures contracts and futures contracts
on equity securities.
WHAT ARE THE MAIN RISKS OF INVESTING IN THE FUND?
Stock Index Risk. As an index fund, the Fund will attempt to match its portfolio
to stocks comprising the Index. The Adviser will not actively manage the Fund
and will not attempt to maximize its performance by purchasing or selling
securities other than to track the Index. Potential tracking differences,
brokerage costs and the Fund's operating expenses may cause the Fund's return to
be lower than that of the Net30 Index.
Market Risk. As with all equity funds, the Fund's share prices 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 this industry.
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<PAGE> 76
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.
Derivatives. The Fund may enter in to futures contracts in order to enable it to
track the Index more closely or to hedge a portion of its portfolio. Using
derivatives may pose risks disproportionate to other portfolio investments of
equivalent value. Instruments necessary to implement the Fund's strategies may
not always be available, and the strategies may not work. The Fund may suffer
losses that would not otherwise have occurred. These strategies also involve
costs and can make the Fund more volatile.
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.
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, each 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
objectives. 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."
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HOW CAN YOU TELL IF THE FUND MAY BE AN APPROPRIATE INVESTMENT?
The Fund may be appropriate if you have:
o a long-term investment time horizon
o familiarity with Internet stocks
o tolerance for fluctuations in stock valuations and
prices
o no intention to actively trade mutual fund shares
The Fund is not appropriate if you have:
o a short-term investment time horizon
o little knowledge of Internet stocks
o aversion to fluctuations in stock valuations and prices
o an intention to actively trade mutual fund shares
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<PAGE> 78
FEES AND EXPENSES
The tables below are designed to help you understand the fees and expenses
investors may bear by investing in the e-harmon Net30 Index Fund.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
e-HARMON NET30 INDEX FUND Investor Shares
- --------------------------------------------------------------------------------
<S> <C>
Shareholder fees (fees paid directly from
your investment(1)
Maximum sales charge (load) imposed on
purchases as a % of offering price None
Maximum deferred sales charge (load) as
a % of purchase price None
Redemption fees for shares held less than
six months(2) .50%
Exchange fees None
Annual Fund operating expenses
(expenses that are deducted from Fund assets)
Management fee 0.40%
Distribution and Service (12b-1) fee 0.25%
Other expenses(3) 0.30%
-----
Total annual Fund operating expenses(4) 0.95%
=====
Fee Waivers
Net Expenses
</TABLE>
- -----------------------------
(1) Brokers may charge you a separate or additional fee for purchases and sales
of shares.
(2) 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.
(3) Other expenses are estimated for the Fund's current fiscal year.
(4) The Adviser has contractually agreed to reimburse the Fund for total
operating expenses (excluding interest, taxes, brokerage and extraordinary
expenses) to an annual rate of .95% of the average daily net assets, until
________, 2001. This fee waiver may be terminated at any time after
____________, 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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<PAGE> 79
EXAMPLE
The following table gives you an idea of how expenses for the Fund may translate
into dollars. It may help you compare the costs 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. The examples assumes a 5% annual return and fixed operating
expenses.*
1 Year 3 Years
* Operating expenses are based on estimated an estimate of "Other Expenses" for
the current fiscal year.
MANAGEMENT
GENERAL OVERSIGHT
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
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.
STEVE HARMON and LISA CAVALLARI manage the e-HARMON NET30 INDEX 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 is
passively managed as an index fund based on the e-harmon Net30 Index. The Fund's
annual management fee is .40% of average daily net assets.
STEVE HARMON, CHIEF INVESTMENT OFFICER OF e-HARMON CAPITAL MANAGEMENT
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 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
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<PAGE> 80
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
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(R) 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
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, security 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.
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
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.
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<PAGE> 81
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
PRINCIPAL INVESTMENT STRATEGIES
e-harmon Net30 Index Fund will invest at least 80% of its total assets in the
common stocks that comprise the e-harmon Net30 Index. The Fund seeks to provide
investment results that correspond to the performance of the e-harmon Net 30
Index. e-harmon Net30 Index is compiled by the Adviser and is an index of the
top 30 Internet companies ranked by total revenues. e-harmon Capital Management
believes the use of revenue as the primary measurement criteria results in an
index comprised of large Internet companies with promising prospects for future
business success. The Fund may also invest in futures and options on equity
securities in the Net30 Index and stock index futures.
The e-harmon Net30 Index is a modified market capitalization weighted index that
limits the weighting of any single stock to 4.5% of the total capitalization of
the companies in the Index. The effect of this weighting restriction is to
prevent any single stock from dominating the Index. There is a $1 billion market
capitalization minimum for companies to be included in the Index. The Index is
rebalanced quarterly, at the end of each quarter. [The Adviser] determines which
stocks should be in the Index by ranking the top 30 Internet companies based on
revenue from the latest publicly available financial information. [The Adviser]
computes and provides the adjustment to be applied to each company in order to
properly weight the stocks in the portfolio to achieve the 4.5% cap. Using the
information provided by the Adviser, Bridge Information Services, a financial
information service, computes the real-time value of the Index.
In order to track the Index as closely as possible, the Fund will seek to invest
in all of the stocks in the Net30 Index in proportion to their representation in
the Index. When a security is added or dropped from the Index, the Fund will buy
or sell the security accordingly within a reasonable amount of time. Tracking
with the Index will be monitored on a daily basis.
Pending full investment of the Fund's assets the Fund may not match the exact
weights of the companies comprising the Net 30 Index.
DERIVATIVES
Futures Contracts and Related Options. The Fund may invest up to 25% of net
assets and enter into 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.
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<PAGE> 82
PRINCIPAL RISKS OF INVESTING IN THE FUND
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.
STOCK INDEX RISK. The Fund is passively managed, which means it will try to
match its portfolio to the stocks comprising the Net30 Index, but it will not
attempt to maximize its performance by investing in securities not in the Index.
Since the Fund's objective is to seek to provide investment results that
correspond to the performance of the e-harmon Net 30 Index, the Adviser will not
actively look for investment opportunities outside of the index. Potential
tracking differences, brokerage costs and operating expenses may cause the
Fund's return to be lower than that of the Index.
MARKET RISK. As with all equity funds, the Fund's share prices 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.
INTERNET COMPANIES. The Fund's investment strategies pose 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.
In addition, because these companies compete globally, the securities of these
companies may be subject to fluctuations in value due to the effect of
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<PAGE> 83
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, 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.
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:
o movements in securities prices and currency markets that are
counter to the direction that a portfolio manager anticipates
o imperfect correlation between the price of derivative
instruments and movements in the prices of the securities,
interest rates or currencies being hedged
o the skills needed to use these strategies are different than
those needed to select portfolio securities
o inability to close out certain hedged positions to avoid
adverse tax consequences
o 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
o 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)
o nonperformance 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.
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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
(other than U.S. Government securities or securities of other regulated
investment companies) 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
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 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.
Risks. 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.
FOREIGN INVESTMENTS. The Fund may invest in securities of foreign issuers or
securities that are principally traded in foreign markets ("foreign
securities"). The Fund does not intend to invest in foreign securities except to
the extent that securities in the Index are foreign securities. 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 Depository
Receipts and American Depository 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:
o 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
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o 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
o there may be less government regulation of stock exchanges,
brokers, listed companies and banks in foreign countries than
in the United States
o the Fund may incur fees on currency exchanges when it
exchanges investments from one currency to another
o 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
o 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
o 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 securities 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.
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<PAGE> 86
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.
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
Net30 Index Fund.
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:
o Individual ownership. If you have reached the legal age of
majority in your state of residence, you may open an
individual account.
o 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.
o 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.
o Business/trust ownership. Corporations, trusts, charitable
organizations and other businesses may open accounts.
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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.
<TABLE>
<CAPTION>
Initial Minimum Purchase Additional Minimum Purchase
<S> <C> <C>
Regular accounts $2,500 $ 100
Automatic Investment Plan $ 500 $ 50
IRAs $1,000 $ 100
Gift to Minors $1,000 $ 100
</TABLE>
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 website, 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:
o obtain a New Account Application by visiting www.e-harmon.com
o buy additional shares and sell shares
o receive shareholder documents online
o view account information, such as balances, positions, and
transaction history online
o 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 any 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
13
<PAGE> 88
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 NAV less any applicable 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 redemption fees. Shares purchased by wire
will receive the NAV next determined after the Fund receives your completed
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- -------------------------------------------------------------------------------------
<S> <C>
VIA INTERNET: VIA INTERNET:
o You may obtain and complete a New o You may purchase shares in an
Account Application or an IRA existing account through the Fund's
Application on the Fund's Web site website at www.e-harmon.com. To
www.e-harmon.com. or by calling establish online transaction
1-800-392-6563 and requesting an privileges, you must enroll through
Application. the Web site. You automatically have
the ability to establish online
o Print, sign and mail the New Account transaction privileges unless you
Application to the Fund as provided decline them on your New Account
below. Application.
o For important information on this
feature, see "Transaction Through
the Fund's Website" in this
Prospectus.
- -------------------------------------------------------------------------------------
</TABLE>
14
<PAGE> 89
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C>
VIA MAIL: VIA MAIL:
o Complete and sign the New Account o Complete the investment slip that is
Application or an IRA Application. If you included in your account statement, and
don't complete the Application properly, write your account number on your check.
your purchase may be delayed or rejected. o If you no longer have your investment
o Make your check payable to "e-harmon slip, please reference your name, account
Funds." number and address on your check.
o For IRA accounts, please specify the year o Make your check payable to "e-harmon
for which the contribution is made. Funds."
- -------------------------------------------------------------------------------------------------------
MAIL YOUR APPLICATION AND CHECK TO: MAIL THE SLIP AND THE CHECK TO:
e-harmon Funds e-harmon Funds
P.O. Box 1631 P.O. Box 1631
Milwaukee, WI 53201-1631 Milwaukee, WI 53201-1631
- -------------------------------------------------------------------------------------------------------
VIA OVERNIGHT COURIER, SEND TO: VIA OVERNIGHT COURIER, SEND TO:
e-harmon Funds e-harmon Funds
207 E. Buffalo Street 207 E. Buffalo Street
Suite 315 Suite 315
Milwaukee, WI 53202 Milwaukee, WI 53202
- -------------------------------------------------------------------------------------------------------
VIA TELEPHONE: VIA TELEPHONE:
You may not make your initial purchase by o You automatically have the privilege to
telephone, but you may call 1-800-392-6563 purchase additional shares by telephone
and request an Application. 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.
o Investments made by electronic funds
transfer must be in amounts of at least $100
and not greater than $50,000.
- -------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 90
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
TO OPEN AN ACCOUNT TO ADD TO AN EXISTING ACCOUNT
- --------------------------------------------------------------------------------------------------------
<S> <C>
VIA WIRE: VIA WIRE:
o To purchase shares by wire, the o Send your investment to UMB Bank,
Transfer Agent must have received a n.a., Custodian for the e-harmon
completed New Account Application Funds, by following the
AND issued an account number to instructions listed in the column
you. Call 1-800-392-6563 for to the left.
instructions prior to wiring the o Investments made by electronic
funds. Wires received before funds transfer must be in amounts
receipt of a properly completed of at least $100 and not greater
Application will be rejected. than $50,000.
o 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 AUTOMATIC SERVICES
o The Fund offers a number of o The Fund offers a number of
automatic investment procedures. automatic investment procedures.
See "Special Features and Services" See "Special Features and Services"
for a description of these for a description of these
services. To select them when services. To establish any of these
opening an account, mark the services after the account has been
appropriate places on the opened, call 1-800-392-6563 for
Application. To establish any of instructions and forms.
these services after the account
has been opened, call
1-800-392-6563 for instructions and
forms.
- --------------------------------------------------------------------------------------------------------
</TABLE>
MORE YOU SHOULD KNOW ABOUT BUYING SHARES
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.
Certificates. The Fund does not issue stock certificates. You will
receive a statement confirming your purchase.
16
<PAGE> 91
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.
o 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.
o 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.
17
<PAGE> 92
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:
o 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:
o 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.
o Sign the request exactly as the shares are registered. All registered owners
must sign.
o 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:
o You automatically have the privilege to redeem shares by telephone unless
you declined this option on your Application.
o 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.
o 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:
o 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.
o 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.
- --------------------------------------------------------------------------------
18
<PAGE> 93
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.
REDEMPTION FEES
Investor Class shares include a redemption fee of .50% 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:
o to send redemption proceeds to a different address than is currently on the
account;
o to have the proceeds paid to someone other than the account's owner;
o to transmit redemption proceeds by federal wire transfer or ACH to a bank
other than your bank of record;
o if a change of address request has been received by the Transfer Agent
within the last 30 days; or
o 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.
19
<PAGE> 94
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
o 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.
o 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.
o 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.
o 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.
20
<PAGE> 95
o If redeeming shares within 30 days after making an address change, your
redemption request must be in writing and the signature must be guaranteed.
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:
o your account number
o the number or dollar amount of shares you want to buy or sell
o signatures of all owners, exactly as registered on the account
o signature guarantees, if necessary (see "Selling Shares -
Signature Guarantees" above)
o any documentation required for redemptions by corporations,
partnerships, fiduciaries, estates, trusts, and other
organizations
TELEPHONE AND WIRE TRANSACTIONS
o 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.
o 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.
o 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.
o 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.
21
<PAGE> 96
TRANSACTIONS THROUGH THE FUND'S WEB SITE
o 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 you decline them on your Application or call 1-800-392-6563.
o 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.
o The Fund imposes a limit of $50,000 on purchase and redemption transactions
through the Web site.
o 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.
o 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.
22
<PAGE> 97
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 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 of up to .25% of average daily net assets. 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:
o Traditional IRA (including spousal IRA)
o "Rollover" IRA
o Roth IRA
o SEP-IRA
23
<PAGE> 98
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 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 website 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.
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<PAGE> 99
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" 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.
o Dividend and capital gain distributions are reinvested in additional Fund
shares in your account unless you select another option on your Application.
o 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.
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<PAGE> 100
o 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.
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
26
<PAGE> 101
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.
27
<PAGE> 102
[Back Cover]
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 Net30 Index Fund
Investor Class 26852R401
Investment Company Act File No. 811-09787
<PAGE> 103
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 (800) XXX-XXXX.
<TABLE>
<S> <C>
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-18
PORTFOLIO TRANSACTIONS...............................................................................B-22
PRICING OF SECURITIES................................................................................B-25
NET ASSET VALUE PER SHARE............................................................................B-26
TAX STATUS...........................................................................................B-26
INVESTMENT PERFORMANCE...............................................................................B-29
SHARES...............................................................................................B-30
LEGAL COUNSEL........................................................................................B-31
INDEPENDENT ACCOUNTANTS..............................................................................B-31
FINANCIAL STATEMENTS.................................................................................B-32
</TABLE>
<PAGE> 104
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
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<PAGE> 105
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.
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<PAGE> 106
("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,
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<PAGE> 107
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
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<PAGE> 108
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
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<PAGE> 109
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").
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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
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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.
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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.
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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.
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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
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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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to buy or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security;
o 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
o such other factors as the Adviser may determine to be relevant to such
determination.
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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
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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 33 1/3% 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
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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,
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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 (*).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
------------ --------- ----------------------
<S> <C> <C>
Joseph N. Van Remortel President Senior Vice President, Business Development, e-harmon.com, Inc.
(35) (since December 1999); 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.
*James A. Hartmann Secretary, President, Chief Operating Officer and Chief Compliance Officer of
(34) Treasurer and e-harmon.com, Inc. (since August 1999) and Zero Gravity Management LLC
Trustee (since January 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 (30) Vice President Senior Vice President and Portfolio Manager, 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. Burgermeister (48) Trustee Retired in 1999; formerly Chief Financial Officer and Treasurer
of Crabbe Huson Group and Treasurer of Crabbe Huson Mutual Fund
Family (January 1995 - August 1999); also a Trustee of Select
Sector SPDR Funds.
*Steve Harmon (35) Trustee Chairman, Chief Executive Officer and Chief Investment Officer,
e-harmon Capital Management
</TABLE>
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<TABLE>
<S> <C> <C>
(Robert S. Harmon) 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); Ph.D. 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.
</TABLE>
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.
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
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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.
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
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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.
Under the Administration 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. 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 $_________, 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.
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. 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.
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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.
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 Fund 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.
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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.
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.
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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 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.
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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 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
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<PAGE> 127
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 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
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equity securities are valued at a price within the limits of the latest bid and
asked prices deemed 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 a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost in local currency
which, when combined with accrued interest, approximates fair value. 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 mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank. 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 Trust, 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 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-
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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 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.
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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 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
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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
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 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.
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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.
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
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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 Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105
are the independent accountants to the Fund.
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FINANCIAL STATEMENTS
e-HARMON INTERNET FUND
Statement of Assets and Liabilities
APRIL 18, 2000
<TABLE>
<CAPTION>
ASSETS
INTERNET FUND
<S> <C>
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)(1) $ 10.00
========
Maximum sales charge (% of offering price) 5.75%
========
Offering price to public $ 10.61
========
</TABLE>
(1) 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.
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<PAGE> 135
e-HARMON INTERNET FUND
Statement of Operations
FOR THE PERIOD FROM DECEMBER 22, 1999 (INCEPTION) TO APRIL 18, 2000
<TABLE>
INTERNET FUND
-------------
<S> <C>
Organization expenses $ 84,042
Less: Expenses paid by Adviser (84,042)
--------
NET INVESTMENT INCOME $ --
========
</TABLE>
- ------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
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<PAGE> 136
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.
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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.
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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
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STATEMENT OF ADDITIONAL INFORMATION
April _____, 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 _____, 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 (800) XXX-XXXX.
<TABLE>
<S> <C>
HISTORY OF THE TRUST.......................................................B-2
INVESTMENT POLICIES AND STRATEGIES.........................................B-2
INVESTMENT RESTRICTIONS....................................................B-15
MANAGEMENT OF THE FUND.....................................................B-17
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
</TABLE>
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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
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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.
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("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,
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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
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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
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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").
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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
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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.
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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.
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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.
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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
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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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to buy or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security;
o 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
o such other factors as the Adviser may determine to be relevant to such
determination.
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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
B-14
<PAGE> 153
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 33 1/3% 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
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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.
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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, 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 (*).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
------------ --------- ----------------------
<S> <C> <C>
Joseph N. Van Remortel President Senior Vice President, Business Development,
(35) e-harmon.com, Inc. (since December 1999);
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.
*James A. Hartmann Secretary, President, Chief Operating Officer and Chief
Remortel Treasurer and Compliance Officer of e-harmon.com, Inc.
(34) Trustee (since August 1999) and Zero Gravity Management
LLC (since January 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 (30) Vice President Senior Vice President and Portfolio Manager,
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).
</TABLE>
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<PAGE> 156
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
------------ --------- ----------------------
<S> <C> <C>
Cheryl A. Burgermeister (48) Trustee Retired in 1999; formerly Chief Financial
Officer and Treasurer of Crabbe Huson Group
and Treasurer of Crabbe Huson Mutual Fund
Family (January 1995 - August 1999); also a
Trustee of Select Sector SPDR Funds.
*Steve Harmon (35) Trustee Chairman, Chief Executive Officer and Chief
(Robert S. Harmon) Investment Officer, e-harmon Capital
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); Ph.D.
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.
</TABLE>
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 committee 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.
B-18
<PAGE> 157
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.
Under the Administration 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. 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 $_________, 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.
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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. 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") with respect
to Class A, Class B and Class C share of the Fund. The Class A 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. The
Class B and Class C Plans authorize payments of (1) .25% of the average daily
net assets of the Class B and Class C shares, respectively, as a service fee and
(2) .75% of the average daily net assets of the Class B and Class C shares,
respectively, for distribution-related expenses (not including the service fee.
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 each 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.
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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 Fund 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.
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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
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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
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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
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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 within the limits of the
latest bid and asked prices deemed 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 a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost in local currency
which, when combined with accrued interest, approximates fair value. 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 mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank. 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 Trust, 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
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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 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
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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 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
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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 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
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 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.
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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. 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.
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
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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. Since Class B and Class C shares
have higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders.
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 Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105
are the independent accountants to the Fund.
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FINANCIAL STATEMENTS
e-HARMON INTERNET FUND
Statement of Assets and Liabilities
APRIL 18, 2000
Assets
<TABLE>
<CAPTION>
INTERNET FUND
<S> <C>
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 per Class A share
($100,000/10,000 shares of beneficial interest
issued and outstanding)(1) $ 10.00
========
Maximum sales charge (% of offering price) 5.75%
========
Offering price to public $ 10.61
========
(1) A redemption fee of 1.00% is imposed for shares held less than six months.
</TABLE>
- --------------------------------------------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
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<PAGE> 171
e-HARMON INTERNET FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM DECEMBER 22, 1999 (INCEPTION) TO APRIL 18, 2000
<TABLE>
<CAPTION>
INTERNET FUND
-------------
<S> <C>
Organization expenses $ 84,042
Less: Expenses paid by Adviser (84,042)
----------
NET INVESTMENT INCOME $ --
==========
</TABLE>
- --------------------------------------------------
The accompanying Notes to the Financial Statements are an integral part of this
statement.
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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.
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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 the 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.
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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
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STATEMENT OF ADDITIONAL INFORMATION
April _____, 2000
e-harmon Net30 Index 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 _____, 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 (800) XXX-XXXX.
<TABLE>
<S> <C>
HISTORY OF THE TRUST..................................................................................B-2
INVESTMENT POLICIES AND STRATEGIES....................................................................B-2
INVESTMENT RESTRICTIONS..............................................................................B-14
MANAGEMENT OF THE FUND...............................................................................B-16
PRINCIPAL HOLDERS OF SECURITIES......................................................................B-18
INVESTMENT MANAGEMENT SERVICES.......................................................................B-18
PORTFOLIO TRANSACTIONS...............................................................................B-21
PRICING OF SECURITIES................................................................................B-25
NET ASSET VALUE PER SHARE............................................................................B-26
TAX STATUS...........................................................................................B-26
INVESTMENT PERFORMANCE...............................................................................B-29
SHARES ..............................................................................................B-30
LEGAL COUNSEL........................................................................................B-31
INDEPENDENT ACCOUNTANTS..............................................................................B-31
</TABLE>
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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.
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
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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, 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.
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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 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.
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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 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
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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").
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
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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 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.
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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.
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
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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.
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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
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realized in the underlying security by the amount of the premium paid for the
put option and by transaction costs.
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
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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 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:
o the frequency of trades and quotes for the security;
o the number of dealers willing to buy or sell the security and the
number of other potential buyers;
o dealer undertakings to make a market in the security;
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o 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
o such other factors as the Adviser may determine to be relevant to such
determination.
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
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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 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 either 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:
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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 33-1/3% 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 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.
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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, 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 (*).
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
- ------------ --------- ----------------------
<S> <C> <C>
Joseph N. Van Remortel President Senior Vice President, Business Development, e-harmon.com, Inc.
(35) (since December 1999); 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.
*James A. Hartmann Secretary, President, Chief Operating Officer and Chief Compliance Officer
(34) Treasurer and of e-harmon.com, Inc. (since August 1999) and Zero Gravity Management LLC
Trustee (since January 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).
</TABLE>
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<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE THE TRUST DURING PAST FIVE YEARS
- ------------ --------- ----------------------
<S> <C> <C>
Lisa A. Cavallari (30) Vice President Senior Vice President and Portfolio Manager, 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 Russell Company (1991-1995).
Cheryl A. Burgermeister (48) Trustee Retired in 1999; formerly Chief Financial Officer and
Treasurer of Crabbe Huson Group and Treasurer of Crabbe
Huson Mutual Fund Family (January 1995 - August 1999); also
a Trustee of Select Sector SPDR Funds.
*Steve Harmon (35) Trustee Chairman, Chief Executive Officer and Chief Investment Officer,
(Robert S. Harmon) e-harmon Capital 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); 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); Ph.D. 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.
</TABLE>
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.
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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.
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 0.40% 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.
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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.
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.
Under the Administration 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. 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.__ percent of the first $__
million of its average daily net assets, and decreasing as assets reach certain
levels, subject to an annual minimum fee of $_________ per Fund, 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
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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.
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. 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"). 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, or up to [.25]% of the Fund's average daily net assets.
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 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.
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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.
CUSTODIAN
[UMB, 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's main
office is at Kansas City, Missouri.
CODE OF ETHICS
The Board of Trustees of the Fund 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
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commission rate would offer greater reliability or provide better price or
execution services.
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
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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 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
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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 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.
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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 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 within the limits of the
latest bid and asked prices deemed 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 a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost in local currency
which, when combined with accrued interest, approximates fair value. 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 mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank. 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
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in good faith by or under the supervision of the officers of the Trust, 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 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
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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 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.
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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 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
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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
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 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;
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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 Net 30 Index Fund has one class of shares, the Investor Class shares.
Each share represents an interest in the same assets of the Fund and is
identical in all respects.
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. 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.
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LEGAL COUNSEL
Gardner, Carton & Douglas, whose address is 321 North Clark Street, Suite 3300,
Chicago, Illinois 60610 is legal counsel to the Fund.
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, California 94105
are the independent accountants to the Fund.
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PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Agreement and Declaration of Trust*
(b) By-Laws of Registrant(1)
(c) Inapplicable
(d) (1) Advisory Agreement for Internet Fund*
(2) Advisory Agreement for Net30 Index Fund*
(e) (1) Distribution Agreement*
(2) Dealer Agreement for the Sale of Shares of e-harmon Funds*
(3) NSCC Agreement by and between Sunstone Distribution Services,
LLC and e-harmon Funds*
(f) Inapplicable
(g) (1) Custody Agreement*
(2) Custody, Recordkeeping and Administrative Services Agreement*
(h) (1) Transfer Agency Agreement*
(2) Administration and Fund Accounting Agreement*
(3) Inbound Call Management and Fulfillment Services Agreement*
(i) Opinion of Morris, Nichols, Arsht & Tunnell*
(j) Consent of Independent Accountants*
(k) Inapplicable
(l) Purchase Agreement*
(m) (1) Distribution and Service Plan for Class A shares of e-harmon
Internet Fund*
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(2) Distribution and Service Plan for Class B shares of e-harmon
Internet Fund*
(3) Distribution and Service Plan for Class C shares of e-harmon
Internet Fund*
(4) Distribution and Service Plan for Investor Class of e-harmon
Net30 Index Fund*
(n) Rule 18f-3 Plan*
(p) Code of Ethics*
*Filed herewith.
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A filed on January 18, 2000 (File Nos. 333-94897 and 811-09787)
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Zero Gravity Venture Fund LP
ITEM 25. INDEMNIFICATION
As permitted by Sections 17(h) and (i) of the Investment Company Act of 1940, as
amended, (the Investment Company Act) and pursuant to Article VII of the
Agreement and Declaration of Trust (Exhibit (a) to the Registration Statement)
and Article XI of the Trust's By-Laws (Exhibit (b) to the Registration
Statement), officers, trustees, employees and agents of the Registrant will not
be liable to the Registrant, any stockholder, officer, director, employee, agent
or other person for any action or failure to act, except for bad faith, willful
misfeasance, gross negligence or reckless disregard of duties, and those
individuals may be indemnified against liabilities in connection with the
Registrant, subject to the same exceptions. Section 3817 of the Delaware
Business Trust Act permits indemnification of trustees who acted in good faith
and reasonably believed that the conduct was in the best interest of the
Registrant.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreement in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the
Investment Company Act as long as the interpretation of Section 17(h) and 17(i)
of such Act remains in effect and is consistently applied.
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<PAGE> 208
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
<TABLE>
<CAPTION>
NAME POSITION COMPANY
- ---- -------- -------
<S> <C> <C>
Lisa A. Cavallari Senior Vice President and Portfolio Manager, e-harmon Capital Management LLC (2000 - present)
Senior Vice President and Portfolio Manager e-harmon.com, Inc. (2000 - present)
Principal Barclays Global Investors (1997 - 2000)
Robert S. Harmon (Steve Chairman, Chief Executive Officer and Chief e-harmon Capital Management LLC (1999
Harmon) Investment Officer - present)
Chairman, Chief Executive Officer and Chief e-harmon.com, Inc. (1999 - present)
Investment Officer
Chairman, Chief Executive Officer and Chief Zero Gravity Management LLC (1999 -
Investment Officer present)
Vice President of Business Development & Internet.com/Mecklermedia (1996 - 1999)
Senior Investment Analyst
James A. Hartmann President, Chief Operating Officer and e-harmon Capital Management LLC (1999
Chief Compliance Officer - present)
President and Chief Operating Officer e-harmon.com, Inc. (1999 - present)
President, Chief Operating Officer and Zero Gravity Management LLC (1999 -
Chief Compliance Officer present)
Director of Institutional Services Capstone Investments (1999)
Consultant MCG LLC (1998 - 1999)
Vice President of Institutional Marketing Summit Capital Management LLC and
and Product Development Summit Capital Partners LP (1997 -
1998)
Mark W. Moorberg Senior Vice President, Marketing and Client e-harmon Capital Management LLC (1999
Services - present)
Senior Vice President, Marketing and Client e-harmon.com, Inc.
Services
Vice President/Financial Consultant Private Merrill Lynch (1996 - 1999)
Placement Division
Joe N. Van Remortel Senior Vice President Business Development e-harmon Capital Management LLC (1999
- present)
Senior Vice President Business Development e-harmon.com, Inc. (1999 - present)
Vice President and Secretary E*TRADE Funds (1999)
Vice President of Operations E*TRADE Asset Management (1998 - 1999)
Senior Manager E*TRADE Securities, Inc. (1996 - 1999)
</TABLE>
*Addresses are 400 Montgomery Street, 3rd Floor, San Francisco, California
94104, unless otherwise indicated.
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<PAGE> 209
ITEM 27. PRINCIPAL UNDERWRITER
(a) Sunstone Distribution Services, LLC currently serves as the distributor of
the shares of Choice Funds, First Omaha Funds, Inc., The Marsico Investment
Fund, Green Century Funds, The Haven Funds, Johnson Family Funds and La Crosse
Funds.
(b) The principal business address of Sunstone Distribution Services, LLC, the
Registrant's distributor, is 207 East Buffalo Street, Suite 400, Milwaukee,
Wisconsin 53202. To the best of the Registrant's knowledge, the following are
the members and officers of Sunstone Distribution Services, LLC:
<TABLE>
<CAPTION>
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
<S> <C> <C>
Miriam M. Allison President, Treasurer, Member None
Therese A. Ladwig Vice President None
Peter Hammond Vice President None
</TABLE>
(c) None
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books or other documents required to be maintained by Section
31(a) of the Investment Company Act and the rules promulgated thereunder, are in
the possession of the Registrant, located at 400 Montgomery Street, 3rd Floor,
San Francisco, California 94104, other than records held and maintained by (i)
UMB Bank, n.a., the Registrant's custodian, located at Kansas City, Missouri;
(ii) Sunstone Financial Group, Inc., the Trust's administrator and fund
accountant, transfer agent and dividend-paying agent and Sunstone Distribution
Services, LLC, the Registrant's distributor, each of which is located at 207
East Buffalo Street, Suite 400, Milwaukee, Wisconsin 53202.
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ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the caption "Management" in the Prospectus and the
caption "Management of the Funds" in the Statement of Additional Information,
constituting Parts A and B, respectively, of this Registration Statement,
Registrant is not a party to any management-related service contract.
ITEM 30.
Not applicable.
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<PAGE> 211
SIGNATURES
Pursuant to the requirements of the Securities Act and the Investment
Company Act, the Registrant has duly caused this Registration Statement to be
signed on its behalf by the undersigned, duly authorized, in the City of San
Francisco, State of California, on the 18th day of April, 2000.
e-harmon Funds
/s/ Joseph Van Remortel
------------------------------------
Joseph Van Remortel, President
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Cheryl Burgermeister Trustee April 18, 2000
- ------------------------ ------------------------
Cheryl Burgermeister
/s/ Steve Harmon Trustee April 18, 2000
- ------------------------ ------------------------
Steve Harmon
/s/ James Hartmann Principal Financial and Accounting April 18, 2000
- ------------------------ Officer and Trustee ------------------------
James Hartmann
/s/ Ming Huang Trustee April 18, 2000
- ------------------------ ------------------------
Ming Huang
/s/ Ashley Rabun Trustee April 18, 2000
- ------------------------ ------------------------
Ashley Rabun
</TABLE>
<PAGE> 212
EXHIBIT INDEX
<TABLE>
<S> <C>
(a) Agreement and Declaration of Trust*
(b) By-Laws of Registrant(1)
(c) Inapplicable
(d) (1) Advisory Agreement for Internet Fund*
(2) Advisory Agreement for Net30 Index Fund*
(e) (1) Distribution Agreement*
(2) Dealer Agreement for the Sale of Shares of e-harmon Funds*
(3) NSCC Agreement by and between Sunstone Distribution Services, LLC and
e-harmon Funds*
(f) Inapplicable
(g) (1) Custody Agreement*
(2) Custody, Recordkeeping and Administrative Services Agreement*
(h) (1) Transfer Agency Agreement*
(2) Administration and Fund Accounting Agreement*
(3) Inbound Call Management and Fulfillment Services Agreement*
(i) Opinion of Morris, Nichols, Arsht & Tunnell*
(j) Consent of Independent Accountants*
(k) Inapplicable
(l) Purchase Agreement*
(m) (1) Distribution and Service Plan for Class A shares of e-harmon Internet Fund*
(2) Distribution and Service Plan for Class B shares of e-harmon Internet Fund*
(3) Distribution and Service Plan for Class C shares of e-harmon Internet Fund*
</TABLE>
<PAGE> 213
<TABLE>
<S> <C>
(4) Distribution and Service Plan for Investor Class of e-harmon Net30 Index Fund*
(n) Rule 18f-3 Plan*
(p) Code of Ethics*
</TABLE>
* Filed herewith.
(1) Incorporated by reference to Registrant's Registration Statement on Form
N-1A filed on January 18, 2000 (File Nos. 333-94897 and 811-09787)
<PAGE> 1
EXHIBIT (a)
AGREEMENT AND DECLARATION OF TRUST
of
E-HARMON FUNDS,
a Delaware Business Trust
Principal Place of Business:
400 Montgomery Street, 3rd Floor
San Francisco, California 94104
<PAGE> 2
<TABLE>
<CAPTION>
PAGE
TABLE OF CONTENTS
<S> <C> <C>
ARTICLE I. Name and Definitions......................................................................1
Section 1. Name....................................................................1
Section 2. Definitions.............................................................1
ARTICLE II. Purpose of Trust..........................................................................2
ARTICLE III. Shares....................................................................................3
Section 1. Division of Beneficial Interest.........................................3
Section 2. Ownership of Shares.....................................................3
Section 3. Transfer of Shares......................................................4
Section 4. Investments in the Trust................................................4
Section 5. Status of Shares and Limitation of Personal Liability...................4
Section 6. Establishment and Designation of Series.................................4
Section 7. Indemnification of Shareholders.........................................6
ARTICLE IV. The Board of Trustees.....................................................................7
Section 1. Number, Election and Tenure.............................................7
Section 2. Effect of Death, Resignation, etc. of a Trustee.........................7
Section 3. Powers..................................................................7
Section 4. Payment of Expenses by the Trust.......................................11
Section 5. Payment of Expenses by Shareholders....................................11
Section 6. Ownership of Assets of the Trust.......................................11
Section 7. Service Contracts......................................................12
Section 8. Trustees and Officers as Shareholders..................................13
ARTICLE V. Shareholders' Voting Powers and Meetings.................................................13
Section 1. Voting Powers, Meetings, Notice and Record Dates.......................13
Section 2. Quorum and Required Vote...............................................14
Section 3. Record Dates...........................................................14
Section 4. Additional Provisions..................................................14
ARTICLE VI. Net Asset Value, Distributions and Redemptions...........................................15
Section 1. Determination of Net Asset Value, Net Income, and Distributions........15
Section 2. Redemptions and Repurchases............................................15
ARTICLE VII. Compensation and Limitation of Liability of Trustees.....................................16
Section 1. Compensation...........................................................16
Section 2. Indemnification and Limitation of Liability............................16
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or Surety..........17
Section 4. Insurance..............................................................17
</TABLE>
-i-
<PAGE> 3
TABLE OF CONTENTS
(CONTINUED)
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
ARTICLE VIII. Miscellaneous............................................................................17
Section 1. Liability of Third Persons Dealing with Trustees.......................17
Section 2. Termination of Trust or Series.........................................18
Section 3. Reorganization and Master/Feeder.......................................18
Section 4. Amendments.............................................................19
Section 5. Filing of Copies, References, Headings.................................19
Section 6. Applicable Law.........................................................20
Section 7. Provisions in Conflict with Law or Regulations.........................20
Section 8. Business Trust Only....................................................21
Section 9. Derivative Actions.....................................................21
</TABLE>
-ii-
<PAGE> 4
AGREEMENT AND DECLARATION OF TRUST OF E-HARMON FUNDS
THIS AGREEMENT AND DECLARATION OF TRUST is made and entered into as of
the date set forth below by the Trustees named hereunder for the purpose of
forming a Delaware business trust in accordance with the provisions hereinafter
set forth.
NOW, THEREFORE, the Trustees hereby direct that the Certificate of
Trust be filed with the Office of the Secretary of State of the State of
Delaware and do hereby declare that the Trustees will hold IN TRUST all cash,
securities and other assets which the Trust now possesses or may hereafter
acquire from time to time in any manner and manage and dispose of the same upon
the following terms and conditions for the benefit of the holders of Shares in
this Trust.
ARTICLE I.
Name and Definitions
Section 1. Name. This Trust shall be known as e-harmon Funds and the
Trustees shall conduct the business of the Trust under that name or any other
name as they may from time to time determine.
Section 2. Definitions. Whenever used herein, unless otherwise required
by the context or specifically provided:
(a) "By-Laws" shall mean the By-Laws of the Trust as amended
from time to time, which By-Laws are expressly herein incorporated by
reference as part of the "governing instrument" within the meaning of
the Delaware Act;
(b) "Certificate of Trust" means the certificate of trust, as
amended or restated from time to time, filed by the Trustees in the
Office of the Secretary of State of the State of Delaware in accordance
with the Delaware Act;
(c) "Class" means a class of Shares of a Series of the Trust
established in accordance with the provisions of Article III hereof;
(d) "Commission" and "Principal Underwriter" shall have the
meanings given them in the 1940 Act;
(e) "Declaration of Trust" means this Agreement and Declaration
of Trust, as amended or restated from time to time;
(f) "Delaware Act" means the Delaware Business Trust Act, 12
Del. C. Sections 3801 et seq., as amended from time to time;
(g) "Interested Person" shall have the meaning given it in
Section 2(a)(19) of the 1940 Act;
<PAGE> 5
(h) "Investment Manager" or "Manager" means a party furnishing
services to the Trust pursuant to any contract described in Article IV,
Section 7(a)hereof;
(i) "1940 Act" means the Investment Company Act of 1940 and the
Rules and Regulations thereunder, all as amended from time to time;
(j) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures, estates and other
entities, whether or not legal entities, and governments and agencies
and political subdivisions thereof, whether domestic or foreign;
(k) "Series" means each Series of Shares established and
designated under or in accordance with the provisions of Article III;
(l) "Shareholder" means a record owner of outstanding Shares;
(m) "Shares" means the shares of beneficial interest into which
the beneficial interest in the Trust shall be divided from time to time
and includes fractions of Shares as well as whole Shares;
(n) "Trust" means the Delaware Business Trust established under
the Delaware Act by this Declaration of Trust and the filing of the
Certificate of Trust in the Office of the Secretary of State of the
State of Delaware;
(o) "Trust Property" means any and all property, real or
personal, tangible or intangible, which is from time to time owned or
held by or for the account of the Trust; and
(p) "Trustees" means the persons who have signed this
Declaration of Trust and all other Persons who may from time to time be
duly elected or appointed to serve as Trustees in accordance with the
provisions hereof, in each case so long as such Person shall continue
in office in accordance with the terms of this Declaration of Trust,
and reference herein to a Trustee or the Trustees shall refer to such
Person or Persons in his or their capacity as trustees hereunder.
ARTICLE II.
PURPOSE OF TRUST
The purpose of the Trust is to conduct, operate and carry on the
business of a management investment company registered under the 1940 Act
through one or more Series investing primarily in securities, and to carry on
such other business as the Trustees may from time to time determine pursuant to
their authority under this Declaration of Trust.
2
<PAGE> 6
ARTICLE III.
SHARES
Section 1. Division of Beneficial Interest. The beneficial interest in the
Trust shall be divided into one or more Series. Each Series may be divided into
two or more Classes. Subject to the further provisions of this Article III and
any applicable requirements of the 1940 Act, the Trustees shall have full power
and authority, in their sole discretion, and without obtaining any authorization
or vote of the Shareholders of any Series or Class thereof, (i) to divide the
beneficial interest in each Series or Class thereof into Shares, with or without
par value as the Trustees shall determine, (ii) to issue Shares without
limitation as to number (including fractional Shares), to such Persons and for
such amount and type of consideration, subject to any restriction set forth in
the By-Laws, including cash or securities, at such time or times and on such
terms as the Trustees may deem appropriate, (iii) to establish and designate and
to change in any manner any Series or Class thereof and to fix such preferences,
voting powers, rights, duties and privileges and business purpose of each Series
or Class thereof as the Trustees may from time to time determine, which
preferences, voting powers, rights, duties and privileges may be senior or
subordinate to (or in the case of business purpose, different from) any existing
Series or Class thereof and may be limited to specified property or obligations
of the Trust or profits and losses associated with specified property or
obligations of the Trust, (iv) to divide or combine the Shares of any Series or
Class thereof into a greater or lesser number without thereby materially
changing the proportionate beneficial interest of the Shares of such Series or
Class in the assets held with respect to that Series, (v) to classify or
reclassify any issued Shares of any Series or Class thereof into shares of one
or more Series or Classes thereof and (vi) to take such other action with
respect to the Shares as the Trustees may deem desirable. Subject to the
distinctions permitted among Classes of the same Series as established by the
Trustees consistent with the requirements of the 1940 Act, each Share of a
Series of the Trust shall represent an equal beneficial interest in the net
assets of such Series, and each holder of Shares of a Series shall be entitled
to receive such holder's pro rata share of distributions of income and capital
gains, if any, made with respect to such Series. Upon redemption of the Shares
of any Series, the applicable Shareholder shall be paid solely out of the funds
and property of such Series of the Trust. All references to Shares in this
Declaration of Trust shall be deemed to be Shares of any or all Series or
Classes thereof, as the context may require. All provisions herein relating to
the Trust shall apply equally to each Series of the Trust and each Class
thereof, except as the context otherwise requires. All Shares issued hereunder,
including, without limitation, Shares issued in connection with a dividend in
Shares or a split or reverse split of shares, shall be fully paid and
non-assessable. Except as otherwise provided by the Trustees, Shareholders shall
have no preemptive or other right to subscribe to any additional Shares or other
securities issued by the Trust.
Section 2. Ownership of Shares. The Ownership of Shares shall be recorded
on the books of the Trust or a transfer or similar agent for the Trust, which
books shall be maintained separately for the Shares of each Series (or Class).
No certificates certifying the ownership of Shares shall be issued except as the
Board of Trustees may otherwise determine from time to time. The Trustees may
make such rules as they consider appropriate for the issuance of Share
3
<PAGE> 7
certificates, the transfer of Shares of each Series (or Class) and similar
matters. The record books of the Trust as kept by the Trust or any transfer or
similar agent, as the case may be, shall be conclusive as to the identity of the
Shareholders of each Series (or Class) and as to the number of Shares of each
Series (or Class) held from time to time by each Shareholder.
Section 3. Transfer of Shares. Except as otherwise provided by the
Trustees, Shares shall be transferable on the books of the Trust only by the
record holder thereof or by his duly authorized agent upon delivery to the Trust
or the Trust's transfer agent of a duly executed instrument of transfer,
together with a Share certificate if one is outstanding, and such evidence of
the genuineness of each such execution and authorization and of such other
matters as may be required by the Trustees. Upon such delivery, and subject to
any further requirements specified by the Trustees or contained in the By-Laws,
the transfer shall be recorded on the books of the Trust. Until a transfer is so
recorded, the Shareholder of record of Shares shall be deemed to be the holder
of such Shares for all purposes hereunder and neither the Trustees nor the
Trust, nor any transfer agent or registrar or any officer, employee or agent of
the Trust, shall be affected by any notice of a proposed transfer.
Section 4. Investments in the Trust. Investments may be accepted by the
Trust from such Persons, at such times, on such terms, and for such
consideration as the Trustees from time to time may authorize.
Section 5. Status of Shares and Limitation of Personal Liability. Shares
shall be deemed to be personal property giving only the rights provided in this
instrument. Every Shareholder by virtue of having become a Shareholder shall be
held to have expressly assented and agreed to the terms hereof. The death,
incapacity, dissolution, termination or bankruptcy of a Shareholder during the
existence of the Trust shall not operate to terminate the Trust, nor entitle the
representative of any such Shareholder to an accounting or to take any action in
court or elsewhere against the Trust or the Trustees, but entitles such
representative only to the rights of such Shareholder under this Trust.
Ownership of Shares shall not entitle the Shareholder to any title in or to the
whole or any part of the Trust Property or right to call for a partition or
division of the same or for an accounting, nor shall the ownership of Shares
constitute the Shareholders as partners. Neither the Trust nor the Trustees, nor
any officer, employee or agent of the Trust shall have any power to bind
personally any Shareholders, nor, except as specifically provided herein, to
call upon any Shareholder for the payment of any sum of money or assessment
whatsoever other than such as the Shareholder may at any time personally agree
to pay.
Section 6. Establishment and Designation of Series. The establishment and
designation of any Series (or Class) of Shares shall be effective upon the
adoption by a majority of the then Trustees of a resolution that sets forth such
establishment and designation and the relative rights and preferences of such
Series (or Class), whether directly in such resolution or by reference to
another document including, without limitation, any registration statement of
the Trust, or as otherwise provided in such resolution. Shares of each Series
(or Class) established pursuant to this Article III, unless otherwise provided
in the resolution establishing such Series, shall have the following relative
rights and preferences:
4
<PAGE> 8
(a) Assets Held with Respect to a Particular Series. All consideration
received by the Trust for the issue or sale of Shares of a particular Series,
together with all assets in which such consideration is invested or reinvested,
all income, earnings, profits, and proceeds thereof from whatever source
derived, including, without limitation, any proceeds derived from the sale,
exchange or liquidation of such assets, and any funds or payments derived from
any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably be held with respect to that Series for all purposes, subject only
to the rights of creditors of such Series, and shall be so recorded upon the
books of account of the Trust. Such consideration, assets, income, earnings,
profits and proceeds thereof, from whatever source derived, including, without
limitation, any proceeds derived from the sale, exchange or liquidation of such
assets, and any funds or payments derived from any reinvestment of such
proceeds, in whatever form the same may be, are herein referred to as "assets
held with respect to" that Series. In the event that there are any assets,
income, earnings, profits and proceeds thereof, funds or payments which are not
readily identifiable as assets held with respect to any particular
Series (collectively "General Assets"), the Trustees shall allocate such General
Assets to, between or among any one or more of the Series in such manner and on
such basis as the Trustees, in their sole discretion, deem fair and equitable,
and any General Assets so allocated to a particular Series shall be held with
respect to that Series. Each such allocation by the Trustees shall be conclusive
and binding upon the Shareholders of all Series for all purposes. Separate and
distinct records shall be maintained for each Series and the assets held with
respect to each Series shall be held and accounted for separately from the
assets held with respect to all other Series and the General Assets of the Trust
not allocated to such Series.
(b) Liabilities Held with Respect to a Particular Series. The assets of the
Trust held with respect to each particular Series shall be charged against the
liabilities of the Trust held with respect to that Series and all expenses,
costs, charges and reserves attributable to that Series. Any general liabilities
of the Trust which are not readily identifiable as being held with respect to
any particular Series shall be allocated and charged by the Trustees to and
among any one or more of the Series in such manner and on such basis as the
Trustees in their sole discretion deem fair and equitable. All liabilities,
expenses, costs, charges, and reserves so charged to a Series are herein
referred to as "liabilities held with respect to" that Series. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all Series for all purposes. All
liabilities held with respect to a particular Series shall be enforceable
against the assets held with respect to such Series only and not against the
assets of the Trust generally or against the assets held with respect to any
other Series and, except as otherwise provided in this Declaration of Trust,
none of the debts, liabilities, obligations and expenses incurred, contracted
for or otherwise existing with respect to the Trust generally or any other
Series thereof shall be enforceable against the assets of such Series. Notice of
this contractual limitation on the liability of each Series shall be set forth
in the Certificate of Trust or in an amendment thereto prior to the issuance of
any Shares of a Series.
5
<PAGE> 9
(c) Dividends, Distributions, Redemptions, and Repurchases.
Notwithstanding any other provisions of this Declaration of Trust,
including, without limitation, Article VI, no dividend or distribution,
including, without limitation, any distribution paid upon termination
of the Trust or of any Series (or Class) with respect to, nor any
redemption or repurchase of, the Shares of any Series (or Class) shall
be effected by the Trust other than from the assets held with respect
to such Series, nor shall any Shareholder of any particular Series
otherwise have any right or claim against the assets held with respect
to any other Series except to the extent that such Shareholder has such
a right or claim hereunder as a Shareholder of such other Series. The
Trustees shall have full discretion, to the extent not inconsistent
with the 1940 Act, to determine which items shall be treated as income
and which items as capital; and each such determination and allocation
shall be conclusive and binding upon the Shareholders.
(d) Equality. All the Shares of each particular Series shall
represent an equal proportionate interest in the assets held with
respect to that Series (subject to the liabilities held with respect to
that Series and such rights and preferences as may have been
established and designated with respect to Classes of Shares within
such Series), and each Share of any particular Series shall be equal to
each other Share of that Series.
(e) Fractions. Any fractional Share of a Series shall carry
proportionately all the rights and obligations of a whole Share of that
Series, including rights with respect to voting, receipt of dividends
and distributions, redemption of Shares and termination of the Trust.
(f) Exchange Privilege. The Trustees shall have the
authority to provide that the holders of Shares of any Series shall
have the right to exchange said Shares for Shares of one or more other
Series of Shares in accordance with such requirements and procedures as
may be established by the Trustees.
(g) Combination of Series. The Trustees shall have the
authority, without the approval of the Shareholders of any Series
unless otherwise required by applicable law, to combine the assets and
liabilities held with respect to any two or more Series into assets and
liabilities held with respect to a single Series.
(h) Elimination of Series. At any time that there are no
Shares outstanding of any particular Series (or Class) previously
established and designated, the Trustees may by resolution of a
majority of the then Trustees abolish that Series (or Class) and
rescind the establishment and designation thereof.
Section 7. Indemnification of Shareholders. If any Shareholder or
former Shareholder shall be exposed to liability by reason of a claim or demand
relating to such Person being or having been a Shareholder, and not because of
such Person's acts or omissions, the Shareholder or former Shareholder (or such
Person's heirs, executors, administrators, or other legal representatives or in
the case of a corporation or other entity, its corporate or other general
successor) shall be entitled to be held harmless from and indemnified out of the
assets of the Trust against all loss and expense arising from such claim or
demand, but only out of the assets
6
<PAGE> 10
held with respect to the particular Series of Shares of which such Person is or
was a Shareholder and from or in relation to which such liability arose.
ARTICLE IV.
THE BOARD OF TRUSTEES
Section 1. Number, Election and Tenure. The number of Trustees shall
initially be one, who shall be James Hartmann. Hereafter, the number of Trustees
shall at all times be at least one and no more than fifteen as determined, from
time to time, by the Trustees pursuant to Section 3 of this Article IV. Each
Trustee shall serve during the continued lifetime of the Trust until he or she
dies, resigns, is declared bankrupt or incompetent by a court of appropriate
jurisdiction, or is removed, or, if sooner, until the next meeting of
Shareholders called for the purpose of electing Trustees and until the election
and qualification of his or her successor. In the event that less than the
majority of the Trustees holding office have been elected by the Shareholders,
the Trustees then in office shall call a Shareholders' meeting for the election
of Trustees. Any Trustee may resign at any time by written instrument signed by
him and delivered to any officer of the Trust or to a meeting of the Trustees.
Such resignation shall be effective upon receipt unless specified to be
effective at some other time. Except to the extent expressly provided in a
written agreement with the Trust, no Trustee resigning and no Trustee removed
shall have any right to any compensation for any period following the effective
date of his or her resignation or removal, or any right to damages on account of
such removal. The Shareholders may elect Trustees at any meeting of Shareholders
called by the Trustees for that purpose. Any Trustee may be removed at any
meeting of Shareholders by a vote of two-thirds of the outstanding Shares of the
Trust.
Section 2. Effect of Death, Resignation, etc. of a Trustee. The death,
declination to serve, resignation, retirement, removal, or incapacity of one or
more Trustees, or all of them, shall not operate to annul the Trust or to revoke
any existing agency created pursuant to the terms of this Declaration of Trust.
Whenever there shall be fewer than the designated number of Trustees, until
additional Trustees are elected or appointed as provided herein to bring the
total number of Trustees equal to the designated number, the Trustees in office,
regardless of their number, shall have all the powers granted to the Trustees
and shall discharge all the duties imposed upon the Trustees by this Declaration
of Trust. As conclusive evidence of such vacancy, a written instrument
certifying the existence of such vacancy may be executed by an officer of the
Trust or by a majority of the Trustees. In the event of the death, declination,
resignation, retirement, removal, or incapacity of all the then Trustees within
a short period of time and without the opportunity for at least one Trustee
being able to appoint additional Trustees to replace those no longer serving,
the Trust's Investment Manager(s) are empowered to appoint new Trustees subject
to the provisions of Section 16(a) of the 1940 Act.
Section 3. Powers. Subject to the provisions of this Declaration of Trust,
the business of the Trust shall be managed by the Trustees, and the Trustees
shall have all powers necessary or convenient to carry out that responsibility
including the power to engage in securities transactions of all kinds on behalf
of the Trust. Without limiting the foregoing, the
7
<PAGE> 11
Trustees may: adopt By-Laws not inconsistent with this Declaration of Trust
providing for the regulation and management of the affairs of the Trust and may
amend and repeal them to the extent that such By-Laws do not reserve that right
to the Shareholders; enlarge or reduce their number; remove any Trustee with or
without cause at any time by written instrument signed by at least two-thirds of
the number of Trustees prior to such removal, specifying the date when such
removal shall become effective, and fill vacancies caused by enlargement of
their number or by the death, resignation or removal of a Trustee; elect and
remove, with or without cause, such officers and appoint and terminate such
agents as they consider appropriate; appoint from their own number and establish
and terminate one or more committees consisting of two or more Trustees which
may exercise the powers and authority of the Board of Trustees to the extent
that the Trustees determine; employ one or more custodians of the assets of the
Trust and authorize such custodians to employ subcustodians and to deposit all
or any part of such assets in a system or systems for the central handling of
securities or with a Federal Reserve Bank; retain a transfer agent or a
shareholder servicing agent, or both; provide for the issuance and distribution
of Shares by the Trust directly or through one or more Principal Underwriters or
otherwise; redeem, repurchase and transfer Shares pursuant to applicable law;
set record dates for the determination of Shareholders with respect to various
matters; declare and pay dividends and distributions to Shareholders of each
Series from the assets of such Series; and in general delegate such authority as
they consider desirable to any officer of the Trust, to any committee of the
Trustees and to any agent or employee of the Trust or to any such custodian,
transfer or Shareholder servicing agent, or Principal Underwriter. Any
determination as to what is in the interests of the Trust made by the Trustees
in good faith shall be conclusive. In construing the provisions of this
Declaration of Trust, the presumption shall be in favor of a grant of power to
the Trustees. Unless otherwise specified herein or in the By-Laws or required
bylaw, any action by the Trustees shall be deemed effective if approved or taken
by a majority of the Trustees present at a meeting of Trustees at which a quorum
(as defined in the By-Laws, as may be amended from time to time) of Trustees is
present, within or without the State of Delaware.
Without limiting the foregoing, the Trustees shall have the power and
authority to cause the Trust (or to act on behalf of the Trust):
(a) To invest and reinvest cash, to hold cash uninvested, and to
subscribe for, invest in, reinvest in, purchase or otherwise acquire, own,
hold, pledge, sell, assign, transfer, exchange, distribute, write options
on, lend or otherwise deal in or dispose of contracts for the future
acquisition or delivery of fixed income or other securities, and securities
of every nature and kind, including, without limitation, all types of
bonds, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or
indebtedness, commercial paper, repurchase agreements, bankers'
acceptances, and other securities of any kind, issued, created, guaranteed,
or sponsored by any and all Persons, including, without limitation, states,
territories, and possessions of the United States and the District of
Columbia and any political subdivision, agency, or instrumentality thereof,
any foreign government or any political subdivision of the U.S. Government
or any foreign government, or any international instrumentality, or by any
bank or savings institution, or by any corporation or organization
organized under the laws of the United States or of any state, territory,
or
8
<PAGE> 12
possession thereof, or by any corporation or organization organized under
any foreign law, or in "when issued" contracts for any such securities, to
change the investments of the assets of the Trust; and to exercise any and
all rights, powers, and privileges of ownership or interest in respect of
any and all such investments of every kind and description, including,
without limitation, the right to consent and otherwise act with respect
thereto, with power to designate one or more Persons, to exercise any of
said rights, powers, and privileges in respect of any of said instruments;
(b) To sell, exchange, lend, pledge, mortgage, hypothecate, lease,
or write options (including, options on futures contracts) with respect to
or otherwise deal in any property rights relating to any or all of the
assets of the Trust or any Series;
(c) To vote or give assent, or exercise any rights of ownership,
with respect to stock or other securities or property; and to execute and
deliver proxies or powers of attorney to such Person or Persons as the
Trustees shall deem proper, granting to such Person or Persons such power
and discretion with relation to securities or property as the Trustees
shall deem proper;
(d) To exercise powers and right of subscription or otherwise which
in any manner arise out of ownership of securities;
(e) To hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, or in its
own name or in the name of a custodian or subcustodian or a nominee or
nominees or otherwise;
(f) To consent to or participate in any plan for the
reorganization, consolidation or merger of any corporation or issuer of any
security which is held in the Trust; to consent to any contract, lease,
mortgage, purchase or sale of property by such corporation or issuer; and
to pay calls or subscriptions with respect to any security held in the
Trust;
(g) To join with other security holders in acting through a
committee, depository, voting trustee or otherwise, and in that connection
to deposit any security with, or transfer any security to, any such
committee, depository or trustee, and to delegate to them such power and
authority with relation to any security (whether or not so deposited or
transferred) as the Trustees shall deem proper, and to agree to pay, and to
pay, such portion of the expenses and compensation of such committee,
depository or trustee as the Trustees shall deem proper;
(h) To compromise, arbitrate or otherwise adjust claims in favor of
or against the Trust or any matter in controversy, including, but not
limited to, claims for taxes;
(i) To enter into joint ventures, general or limited partnerships
and any other combinations or associations;
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(j) To borrow funds or other property in the name of the Trust
exclusively for Trust purposes and in connection therewith issue notes or
other evidence of indebtedness; and to mortgage and pledge the Trust
Property or any part thereof to secure any or all of such indebtedness;
(k) To endorse or guarantee the payment of any notes or other
obligations of any Person; to make contracts of guaranty or suretyship, or
otherwise assume liability for payment thereof; and to mortgage and pledge
the Trust Property or any part thereof to secure any of or all of such
obligations;
(l) To purchase and pay for entirely out of Trust Property such
insurance as the Trustees may deem necessary or appropriate for the conduct
of the business, including, without limitation, insurance policies insuring
the assets of the Trust or payment of distributions and principal on its
portfolio investments, and insurance policies insuring the Shareholders,
Trustees, officers, employees, agents, investment advisers, principal
underwriters, or independent contractors of the Trust, individually against
all claims and liabilities of every nature arising by reason of holding
Shares, holding, being or having held any such office or position, or by
reason of any action alleged to have been taken or omitted by any such
Person as Trustee, officer, employee, agent, investment adviser, principal
underwriter, or independent contractor, including any action taken or
omitted that may be determined to constitute negligence, whether or not the
Trust would have the power to indemnify such Person against liability;
(m) To adopt, establish and carry out pension, profit-sharing,
share bonus, share purchase, savings, thrift and other retirement,
incentive and benefit plans and trusts, including the purchasing of life
insurance and annuity contracts as a means of providing such retirement and
other benefits, for any or all of the Trustees, officers, employees and
agents of the Trust;
(n) To operate as and carry out the business of an investment
company, and exercise all the powers necessary or appropriate to the
conduct of such operations;
(o) To enter into contracts of any kind and description;
(p) To employ one or more banks, trust companies or companies that
are members of a national securities exchange or such other entities as the
Commission may permit as custodians of any assets of the Trust subject to
any conditions set forth in this Declaration or Trust or in the By-Laws;
(q) To interpret the investment policies, practices or limitations
of any Series or Class; and
(r) To invest part or all of the Trust Property (or part or all of
the assets of any Series), or to dispose of part or all of the Trust
Property(or part or all of the assets of any Series) and invest the
proceeds of such disposition, in securities issued by one or more other
investment companies registered under the 1940 Act (including investment by
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means of transfer of part or all of the Trust Property in exchange for an
interest or interests in such one or more investment companies) all without
any requirement of approval by Shareholders unless required by the 1940
Act. Any such other investment company may (but need not) be a trust
(formed under the laws of the State of Delaware or of any other state)
which is classified as a partnership for federal income tax purposes.
(s) Subject to the 1940 Act, to engage in any other lawful act or
activity in which a business trust organized under the Delaware Act may
engage.
The Trust shall not be limited to investing in obligations maturing before
the possible termination of the Trust or one or more of its Series. The Trust
shall not in any way be bound or limited by any present or future law or custom
in regard to investment by fiduciaries. The Trust shall not be required to
obtain any court order to deal with any assets of the Trust or take any other
action hereunder.
Section 4. Payment of Expenses by the Trust. The Trustees are authorized to
pay or cause to be paid out of the principal or income of the Trust, or partly
out of the principal and partly out of income, as they deem fair, all expenses,
fees, charges, taxes and liabilities incurred or arising in connection with the
Trust, or in connection with the management thereof, including, but not limited
to, the Trustees compensation and such expenses and charges for the services of
the Trust's officers, employees, investment adviser or manager, Principal
Underwriter, auditors, counsel, custodian, transfer agent, shareholder servicing
agent, and such other agents or independent contractors and such other expenses
and charges as the Trustees may deem necessary or proper to incur, which
expenses, fees, charges, taxes and liabilities shall be allocated in accordance
with Article III, Section 6 hereof.
Section 5. Payment of Expenses by Shareholders. The Trustees shall have the
power, as frequently as they may determine, to cause each Shareholder, or each
Shareholder of any particular Series, to pay directly, in advance or arrears,
for charges of the Trust's custodian or transfer, Shareholder servicing or
similar agent, an amount fixed from time to time by the Trustees, by setting off
such charges due from such Shareholder from declared but unpaid dividends owed
such Shareholder and/or by reducing the number of Shares in the account of such
Shareholder by that number of full and/or fractional Shares which represents the
outstanding amount of such charges due from such Shareholder.
Section 6. Ownership of Assets of the Trust. Title to all of the assets of
the Trust shall at all times be considered as vested in the Trust, except that
the Trustees shall have power to cause legal title to any Trust Property to be
held by or in the name of one or more of the Trustees, or in the name of the
Trust, or in the name of any other Person as nominee, on such terms as the
Trustees may determine. The right, title and interest of the Trustees in the
Trust Property shall vest automatically in each Person who may hereafter become
a Trustee. Upon the resignation, removal or death of a Trustee, he or she shall
automatically cease to have any right, title or interest in any of the Trust
Property, and the right, title and interest of such Trustee in the Trust
Property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective whether or not conveyancing documents have
been executed and delivered.
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Section 7. Service Contracts.
(a) Subject to such requirements and restrictions as may be set
forth under federal and/or state law and in the By-Laws, including, without
limitation, the requirements of Section 15 of the 1940 Act, the Trustees
may, at any time and from time to time, contract for exclusive or
nonexclusive advisory, management and/or administrative services for the
Trust or for any Series (or Class thereof) with any corporation, trust,
association or other organization; and any such contract may contain such
other terms as the Trustees may determine, including, without limitation,
authority for the Investment Manager or administrator to delegate certain
or all of its duties under such contracts to qualified investment advisers
and administrators and to determine from time to time without prior
consultation with the Trustees what investments shall be purchased, held,
sold or exchanged and what portion, if any, of the assets of the Trust
shall be held uninvested and to make changes in the Trust's investments, or
such other activities as may specifically be delegated to such party.
(b) The Trustees may also, at any time and from time to time,
contract with any corporation, trust, association or other organization,
appointing it exclusive or nonexclusive distributor or Principal
Underwriter for the Shares of one or more of the Series (or Classes) or
other securities to be issued by the Trust. Every such contract shall
comply with such requirements and restrictions as may be set forth under
federal and/or state law and in the By-Laws, including, without limitation,
the requirements of Section 15 of the1940 Act; and any such contract may
contain such other terms as the Trustees may determine.
(c) The Trustees are also empowered, at any time and from time to
time, to contract with any corporations, trusts, associations or other
organizations, appointing it or them the custodian, transfer agent and/or
Shareholder servicing agent for the Trust or one or more of its Series.
Every such contract shall comply with such requirements and restrictions as
may be set forth under federal and/or state law and in the By-Laws or
stipulated by resolution of the Trustees.
(d) Subject to applicable law, the Trustees are further empowered,
at any time and from time to time, to contract with any entity to provide
such other services to the Trust or one or more of the Series, as the
Trustees determine to be in the best interests of the Trust and the
applicable Series.
(e) The fact that: (i) Any of the Shareholders, Trustees, or
officers of the Trust is a shareholder, director, officer, partner,
trustee, employee, Manager, adviser, Principal Underwriter, distributor, or
affiliate or agent of or for any corporation, trust, association, or other
organization, or for any parent or affiliate of any organization with which
an advisory, management or administration contract, or principal
underwriter's or distributor's contract, or transfer, shareholder servicing
or other type of service contract may have been or may hereafter be made,
or that any such organization, or any parent or affiliate thereof, is a
Shareholder or has an interest in the Trust, or that (ii) any corporation,
trust, association or other organization with which an advisory, management
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or administration contract or principal underwriter's or distributor's
contract, or transfer, shareholder servicing or other type of service
contract may have been or may hereafter be made also has an advisory,
management or administration contract, or principal underwriter's or
distributor's contract, or transfer, shareholder servicing or other service
contract with one or more other corporations, trusts, associations, or
other organizations, or has other business or interests, shall not affect
the validity of any such contract or disqualify any Shareholder, Trustee or
officer of the Trust from voting upon or executing the same, or create any
liability or accountability to the Trust or its Shareholders, provided
approval of each such contract is made pursuant to the requirements of the
1940 Act.
Section 8. Trustees and Officers as Shareholders. Any Trustee, officer or
agent of the Trust may acquire, own and dispose of Shares to the same extent as
if he were not a Trustee, officer or agent; and the Trustees may issue and sell
and cause to be issued and sold Shares to, and redeem such Shares from, any such
Person or any firm or company in which such Person is interested, subject only
to the general limitations contained herein or in the By-Laws relating to the
sale and redemption of such Shares.
ARTICLE V.
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. Voting Powers, Meetings, Notice and Record Dates. The
Shareholders shall have power to vote only (i) for the election or removal of
Trustees as provided in Article IV, Section 1, and (ii) with respect to such
additional matters relating to the Trust as may be required by applicable law,
this Declaration of Trust, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. As determined by the Trustees without the vote
or consent of Shareholders (except as required by the 1940 Act), on any matter
submitted to a vote of Shareholders, either (i) each whole Share shall be
entitled to one vote as to any matter on which it is entitled to vote and each
fractional Share shall be entitled to a proportionate fractional vote or (ii)
each dollar of Net Asset Value (number of Shares owned times Net Asset Value per
share of such Series or Class, as applicable) shall be entitled to one vote on
any matter on which such Shares are entitled to vote and each fractional dollar
amount shall be entitled to a proportionate fractional vote.
Without limiting the power of the Trustees in any way to designate
otherwise in accordance with the preceding sentence, the Trustees hereby
establish that each whole Share shall be entitled to one vote as to any matter
on which it is entitled to vote and each fractional Share shall be entitled to a
proportionate fractional vote. Notwithstanding any other provision of this
Declaration of Trust, on any matter submitted to a vote of the Shareholders, all
Shares of the Trust then entitled to vote shall be voted in aggregate, except
(i) when required by the 1940 Act, Shares shall be voted by individual Series;
(ii) when the matter involves the termination of a Series or any other action
that the Trustees have determined will affect only the interests of one or more
Series, then only Shareholders of such Series shall be entitled to vote thereon;
and (iii)
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when the matter involves any action that the Trustees have determined will
affect only the interests of one or more Classes, then only the Shareholders of
such Class or Classes shall be entitled to vote thereon. There shall be no
cumulative voting in the election of Trustees. Shares may be voted in person or
by proxy. A proxy may be given in writing. The By-Laws may provide that proxies
may also, or may instead, be given by any electronic or telecommunications
device or in any other manner. Notwithstanding anything else contained herein or
in the By-Laws, in the event a proposal by anyone other than the officers or
Trustees of the Trust is submitted to a vote of the shareholders of one or more
Series or Classes thereof or of the Trust, or in the event of any proxy contest
or proxy solicitation or proposal in opposition to any proposal by the officers
or Trustees of the Trust, Shares may be voted only in person or by written proxy
at a meeting. Until Shares are issued, the Trustees may exercise all rights of
Shareholders and may take any action required by law, this Declaration of Trust
or the By-Laws to be taken by the Shareholders. Meetings of the Shareholders
shall be called and notice thereof and record dates therefor shall be given and
set as provided in the By-Laws.
Section 2. Quorum and Required Vote. Except when a larger quorum is
required by applicable law, by the By-Laws or by this Declaration of Trust,
forty percent (40%) of the Shares entitled to vote shall constitute a quorum at
a Shareholders' meeting. When any one or more Series (or Class) is to vote as a
single class separate from any other Shares, forty percent (40%) of the Shares
of each such Series (or Class) entitled to vote shall constitute a quorum at a
Shareholders' meeting of that Series (or Class). Except when a larger vote is
required by any provision of this Declaration of Trust or the By-Laws or by
applicable law, when a quorum is present at any meeting, a majority of the
Shares voted shall decide any questions and a plurality of the Shares voted
shall elect a Trustee, provided that where any provision of law or of this
Declaration of Trust requires that the holders of any Series shall vote as a
Series (or that holders of a Class shall vote as a Class), then a majority of
the Shares of that Series (or Class) voted on the matter (or a plurality with
respect to the election of a Trustee) shall decide that matter insofar as that
Series (or Class) is concerned.
Section 3. Record Dates. For the purpose of determining the Shareholders of
any Series (or Class) who are entitled to receive payment of any dividend or of
any other distribution, the Trustees may from time to time fix a date, which
shall be before the date for the payment of such dividend or such other payment,
as the record date for determining the Shareholders of such Series (or Class)
having the right to receive such dividend or distribution. Without fixing a
record date, the Trustees may for distribution purposes close the register or
transfer books for one or more Series (or Classes) at any time prior to the
payment of a distribution. Nothing in this Section shall be construed as
precluding the Trustees from setting different record dates for different Series
(or Classes).
Section 4. Additional Provisions. The By-Laws may include further
provisions for Shareholders' votes and meetings and related matters.
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ARTICLE VI.
NET ASSET VALUE, DISTRIBUTIONS AND REDEMPTIONS
Section 1. Determination of Net Asset Value, Net Income, and
Distributions. Subject to applicable law and Article III, Section 6 hereof, the
Trustees, in their absolute discretion, may prescribe and shall set forth in a
duly adopted vote of the Trustees such bases and time for determining the per
Share or net asset value of the Shares of any Series (or Class) or net income
attributable to the Shares of any Series (or Class), or the declaration and
payment of dividends and distributions on the Shares of any Series (or Class),
as they may deem necessary or desirable.
Section 2. Redemptions and Repurchases.
(a) The Trust shall purchase such Shares as are offered by any
Shareholder for redemption, upon the presentation of a proper instrument of
transfer together with a request directed to the Trust or a Person
designated by the Trust that the Trust purchase such Shares or in
accordance with such other procedures for redemption as the Trustees may
from time to time authorize; and the Trust will pay therefor the net asset
value thereof as determined by the Trustees (or on their behalf), in
accordance with any applicable provisions of the By-Laws and applicable
law, less any fees imposed on such redemption. Unless extraordinary
circumstances exist, payment for said Shares shall be made by the Trust to
the Shareholder within seven (7) days after the date on which the request
is made in proper form. The obligation set forth in this Section 2 is
subject to the provision that in the event that any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays, or
if permitted by the rules and regulations or an order of the Commission
during periods when trading on the Exchange is restricted or during any
emergency which makes it impracticable for the Trust to dispose of the
investments of the applicable Series or to determine fairly the value of
the net assets held with respect to such Series or during any other period
permitted by order of the Commission for the protection of investors, such
obligations may be suspended or postponed by the Trustees. In the case of a
suspension of the right of redemption as provided herein, a Shareholder may
either withdraw the request for redemption or receive payment based on the
net asset value per share next determined after the termination of such
suspension, less any fees imposed on such redemption.
(b) The redemption price may in any case or cases be paid wholly or
partly in kind if the Trustees determine that such payment is advisable in
the interest of the remaining Shareholders of the Series for which the
Shares are being redeemed. Subject to the foregoing, the fair value,
selection and quantity of securities or other property so paid or delivered
as all or part of the redemption price may be determined by or under
authority of the Trustees. In no case shall the Trust be liable for any
delay of any corporation or other Person in transferring securities
selected for delivery as all or part of any payment in kind.
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(c) The Trustees may require Shareholders to redeem Shares
for any reason under terms set by the Trustees, including, but not
limited to, (i) the determination of the Trustees that direct or
indirect ownership of Shares of any Series has or may become
concentrated in such Shareholder to an extent that would disqualify any
Series as a regulated investment company under the Internal Revenue
Code of 1986, as amended (or any successor statute thereto), (ii) the
failure of a Shareholder to supply a tax identification number if
required to do so, or to have the minimum investment required (which
may vary by Series), or (iii) the failure of a Shareholder to pay when
due for the purchase of Shares issued to him. Any such redemption shall
be effected at the redemption price and in the manner provided in this
Article VI.
(d) The holders of Shares shall upon demand disclose to the
Trustees in writing such information with respect to direct and
indirect ownership of Shares as the Trustees deem necessary to comply
with the provisions of the Internal Revenue Code of 1986, as amended
(or any successor statute thereto), or to comply with the requirements
of any other taxing authority.
ARTICLE VII.
COMPENSATION AND LIMITATION OF LIABILITY OF TRUSTEES
Section 1. Compensation. The Trustees as such shall be entitled to
reasonable compensation from the Trust, and they may fix the amount of such
compensation. Nothing herein shall in any way prevent the employment of any
Trustee for advisory, management, legal, accounting, investment banking or other
servicesand payment for the same by the Trust.
Section 2. Indemnification and Limitation of Liability. A Trustee, when
acting in such capacity, shall not be personally liable to any Person, other
than the Trust or a Shareholder to the extent provided in this Article VII, for
any act, omission or obligation of the Trust, of such Trustee or of any other
Trustee. The Trustees shall not be responsible or liable in any event for any
neglect or wrongdoing of any officer, agent, employee, Manager, adviser,
sub-adviser or Principal Underwriter of the Trust. The Trust shall indemnify
each Person who is, or has been, a Trustee, officer, employee or agent of the
Trust and any Person who is serving or has served at the Trust's request as a
director, officer, trustee, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise to the extent
and in the manner provided in the By-Laws.
All persons extending credit to, contracting with or having any claim
against the Trust or the Trustees shall look only to the assets of the Series
that such person extended credit to, contracted with or has a claim against, or,
if the Trustees have yet to establish Series, of the Trust for payment under
such credit, contract or claim; and neither the Trustees nor the Shareholders,
nor any of the Trust's officers, employees or agents, whether past, present or
future, shall be personally liable therefor.
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Every note, bond, contract, instrument, certificate or undertaking and
every other act or thing whatsoever executed or done by or on behalf of the
Trust or the Trustees by any of them in connection with the Trust shall
conclusively be deemed to have been executed or done only in or with respect to
his or their capacity as Trustee or Trustees, and such Trustee or Trustees shall
not be personally liable thereon. At the Trustees' discretion, any note, bond,
contract, instrument, certificate or undertaking made or issued by the Trustees
or by any officer or officers may give notice that the Certificate of Trust is
on file in the Office of the Secretary of State of the State of Delaware and
that a limitation on liability of Series exists and such note, bond, contract,
instrument, certificate or undertaking may, if the Trustees so determine, recite
that the same was executed or made on behalf of the Trust by a Trustee or
Trustees in such capacity and not individually or by an officer or officers in
such capacity and not individually and that the obligations of such instrument
are not binding upon any of them or the Shareholders individually but are
binding only on the assets and property of the Trust or a Series thereof, and
may contain such further recital as such Person or Persons may deem appropriate.
The omission of any such notice or recital shall in no way operate to bind any
Trustees, officers or Shareholders individually.
Section 3. Trustee's Good Faith Action, Expert Advice, No Bond or
Surety. The exercise by the Trustees of their powers and discretions hereunder
shall be binding upon everyone interested. A Trustee shall be liable to the
Trust and to any Shareholder solely for his or her own willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment
or mistakes of fact or law. The Trustees may take advice of counsel or other
experts with respect to the meaning and operation of this Declaration of Trust,
and shall be under no liability for any act or omission in accordance with such
advice nor for failing to follow such advice. The Trustees shall not be required
to give any bond as such, nor any surety if a bond is required.
Section 4. Insurance. The Trustees shall be entitled and empowered to
the fullest extent permitted by law to purchase with Trust assets insurance for
liability and for all expenses reasonably incurred or paid or expected to be
paid by a Trustee, officer, employee or agent of the Trust in connection with
any claim, action, suit or proceeding in which he or she becomes involved by
virtue of his or her capacity or former capacity with the Trust.
ARTICLE VIII.
MISCELLANEOUS
Section 1. Liability of Third Persons Dealing with Trustees. No Person
dealing with the Trustees shall be bound to make any inquiry concerning the
validity of any transaction made or to be made by the Trustees or to see to the
application of any payments made or property transferred to the Trust or upon
its order.
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Section 2. Termination of Trust or Series.
(a) Unless terminated as provided herein, the Trust shall
continue without limitation of time. The Trust may be terminated at any
time by vote of a majority of the Shares of each Series entitled to
vote, voting separately by Series, or by the Trustees by written notice
to the Shareholders. Any Series of Shares or Class thereof may be
terminated at any time by vote of a majority of the Shares of such
Series or Class entitled to vote or by the Trustees by written notice
to the Shareholders of such Series or Class.
(b) Upon the requisite Shareholder vote or action by the
Trustees to terminate the Trust or any one or more Series of Shares or
any Class thereof, after paying or otherwise providing for all charges,
taxes, expenses and liabilities, whether due or accrued or anticipated,
of the Trust or of the particular Series or any Class thereof as may be
determined by the Trustees, the Trust shall in accordance with such
procedures as the Trustees consider appropriate reduce the remaining
assets of the Trust or of the affected Series or Class to distributable
form in cash or Shares (if any Series remain) or other securities, or
any combination thereof, and distribute the proceeds to the
Shareholders of the Series or Classes involved, ratably according to
the number of Shares of such Series or Class held by the several
Shareholders of such Series or Class on the date of distribution.
Thereupon, the Trust or any affected Series or Class shall terminate
and the Trustees and the Trust shall be discharged of any and all
further liabilities and duties relating thereto or arising therefrom,
and the right, title and interest of all parties with respect to the
Trust or such Series or Class shall be canceled and discharged.
(c) Upon termination of the Trust, following completion of
winding up of its business, the Trustees shall cause a certificate of
cancellation of the Trust's Certificate of Trust to be filed in
accordance with the Delaware Act, which certificate of cancellation may
be signed by any one Trustee.
Section 3. Reorganization and Master/Feeder.
(a) Notwithstanding anything else herein, the Trustees may,
without Shareholder approval unless such approval is required by
applicable law, (i) cause the Trust to merge or consolidate with or
into one or more trusts (or series thereof to the extent permitted by
law), partnerships, associations, corporations or other business
entities (including trusts, partnerships, associations, corporations or
other business entities created by the Trustees to accomplish such
merger or consolidation) so long as the surviving or resulting entity
is an open-end management investment company under the 1940 Act, or is
a series thereof, that will succeed to or assume the Trust's
registration under the 1940 Act and that is formed, organized or
existing under the laws of the United States or of a state,
commonwealth, possession or colony of the United States, (ii) cause the
Shares to be exchanged under or pursuant to any state or federal
statute to the extent permitted by law or (iii) cause the Trust to
incorporate under the laws of Delaware. Any agreement of merger or
consolidation or exchange or certificate of merger may be signed by a
majority of the Trustees and facsimile signatures conveyed by
electronic or telecommunication means shall be valid.
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(b) Pursuant to and in accordance with the provisions of
Section 3815(f) of the Delaware Act, and notwithstanding anything to
the contrary contained in this Declaration of Trust, an agreement of
merger or consolidation approved by the Trustees in accordance with
this Section 3 may effect any amendment to the governing instrument of
the Trust or effect the adoption of a new trust instrument of the Trust
if the Trust is the surviving or resulting trust in the merger or
consolidation.
(c) The Trustees may create one or more business trusts to
which all or any part of the assets, liabilities, profits or losses of
the Trust or any Series or class thereof may be transferred and may
provide for the conversion of Shares in the Trust or any Series or
Class thereof into beneficial interests in any such newly created trust
or trusts or any series or classes thereof.
(d) Notwithstanding anything else herein, the Trustees may,
without Shareholder approval, invest all or a portion of the Trust
Property of any Series, or dispose of all or a portion of the Trust
Property of any Series, and invest the proceeds of such disposition in
interests issued by one or more other investment companies registered
under the 1940 Act. Any such other investment company may (but need
not) be a trust (formed under the laws of the State of Delaware or any
other state or jurisdiction) (or subtrust thereof) which is classified
as a partnership for federal income tax purposes. Notwithstanding
anything else herein, the Trustees may, without Shareholder approval
unless such approval is required by applicable law, cause a Series that
is organized in the master/feeder fund structure to withdraw or redeem
its Trust Property from the master fund and cause such series to invest
its Trust Property directly in securities and other financial
instruments or in another master fund.
Section 4. Amendments. Except as specifically provided in this Section,
the Trustees may, without Shareholder vote, restate, amend or otherwise
supplement this Declaration of Trust. Shareholders shall have the right to vote
(i) on any amendment that would affect their right to vote granted in Article V,
Section 1 hereof, (ii) on any amendment to this Section 4 of Article VIII, (iii)
on any amendment that may be required to be approved by Shareholders by
applicable law or by the Trust's registration statement filed with the
Commission and (iv) on any amendment submitted to them by the Trustees. Any
amendment required or permitted to be submitted to the Shareholders that, as the
Trustees determine, shall affect the Shareholders of one or more Series shall be
authorized by a vote of the Shareholders of each Series affected and no vote of
Shareholders of a Series not affected shall be required. Notwithstanding
anything else herein, no amendment hereof shall limit the rights to insurance
provided by Article VII, Section 4 with respect to any acts or omissions of
Persons covered thereby prior to such amendment nor shall any such amendment
limit the rights to indemnification referenced in Article VII, Section 2 hereof
as provided in the By-Laws with respect to any actions or omissions of Persons
covered thereby prior to such amendment. The Trustees may, without Shareholder
vote, restate, amend, or otherwise supplement the Certificate of Trust as they
deem necessary or desirable.
Section 5. Filing of Copies, References, Headings. The original or a
copy of this instrument and of each restatement and/or amendment hereto shall be
kept at the office of the
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Trust where it may be inspected by any Shareholder. Anyone dealing with the
Trust may rely on a certificate by an officer of the Trust as to whether or
not any such restatements and/or amendments have been made and as to any
matters in connection with the Trust hereunder; and, with the same effect
as if it were the original, may rely on a copy certified by an officer of the
Trust to be a copy of this instrument or of any such restatements and/or
amendments. In this instrument and in any such restatements and/or amendments,
references to this instrument, and all expressions such as "herein", "hereof"
and "hereunder", shall be deemed to refer to this instrument as amended or
affected by any such restatements and/or amendments. Headings are placed herein
for convenience of reference only and shall not be taken as a part hereof or
control or affect the meaning, construction or effect of this instrument.
Whenever the singular number is used herein, the same shall include the plural;
and the neuter, masculine and feminine genders shall include each other, as
applicable. This instrument may be executed in any number of counterparts each
of which shall be deemed an original.
Section 6. Applicable Law.
(a) The Trust is created under, and this Declaration of Trust
is to be governed by, and construed and enforced in accordance with,
the laws of the State of Delaware. The Trust shall be of the type
commonly called a business trust, and without limiting the provisions
hereof, the Trust specifically reserves the right to exercise any of
the powers or privileges afforded to business trusts or actions that
may be engaged in by business trusts under the Delaware Act, and the
absence of a specific reference herein to any such power, privilege or
action shall not imply that the Trust may not exercise such power or
privilege or take such actions.
(b) Notwithstanding the first sentence of Section 6(a) of this
Article VIII, there shall not be applicable to the Trust, the Trustees
or this Declaration of Trust (x) the provisions of Section 3540 of
Title 12 of the Delaware Code or (y) any provisions of the laws
(statutory or common) of the State of Delaware (other than the Delaware
Act) pertaining to trusts that relate to or regulate: (i) the filing
with any court or governmental body or agency of trustee accounts or
schedules of trustee fees and charges, (ii) affirmative requirements to
post bonds for trustees, officers, agents or employees of a trust,
(iii) the necessity for obtaining a court or other governmental
approval concerning the acquisition, holding or disposition of real or
personal property, (iv) fees or other sums applicable to trustees,
officers, agents or employees of a trust, (v) the allocation of
receipts and expenditures to income or principal, (vi) restrictions or
limitations on the permissible nature, amount or concentration of trust
investments or requirements relating to the titling, storage or other
manner of holding of trust assets, or (vii) the establishment of
fiduciary or other standards or responsibilities or limitations on the
acts or powers of Trustees that are inconsistent with the limitations
or liabilities or authorities and powers of the Trustees set forth or
referenced in this Declaration of Trust.
Section 7. Provisions in Conflict with Law or Regulations.
(a) The provisions of the Declaration of Trust are severable,
and if the Trustees shall determine, with the advice of counsel, that
any of such provision is in
20
<PAGE> 24
conflict with the 1940 Act, the regulated investment company
provisions of the Internal Revenue Code of 1986, as amended (or any
successor statute thereto), and the regulations thereunder, the
Delaware Act or with other applicable laws and regulations, the
conflicting provision shall be deemed never to have constituted a part
of the Declaration of Trust; provided, however, that such determination
shall not affect any of the remaining provisions of the Declaration of
Trust or render invalid or improper any action taken or omitted prior
to such determination.
(b) If any provision of the Declaration of Trust shall be held
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall attach only to such provision in such
jurisdiction and shall not in any manner affect such provision in any
other jurisdiction or any other provision of the Declaration of Trust
in any jurisdiction.
Section 8. Business Trust Only. It is the intention of the Trustees to
create a business trust pursuant to the Delaware Act. It is not the intention of
the Trustees to create a general partnership, limited partnership, joint stock
association, corporation, bailment, or any form of legal relationship other than
a business trust pursuant to the Delaware Act. Nothing in this Declaration of
Trust shall be construed to make the Shareholders, either by themselves or with
the Trustees, partners or members of a joint stock association.
Section 9. Derivative Actions. In addition to the requirements set
forth in Section 3816 of the Delaware Act, a Shareholder may bring a derivative
action on behalf of the Trust only if the following conditions are met:
(a) The Shareholder or Shareholders must make a pre-suit demand
upon the Trustees to bring the subject action unless an effort to cause
the Trustees to bring such an action is not likely to succeed. For
purposes of this Section 9(a), a demand on the Trustees shall only be
deemed not likely to succeed and therefore excused if a majority of the
Board of Trustees, or a majority of any committee established to
consider the merits of such action, has a personal financial interest
in the transaction at issue, and a Trustee shall not be deemed
interested in a transaction or otherwise disqualified from ruling on
the merits of a Shareholder demand by virtue of the fact that such
Trustee receives remuneration for his service on the Board of Trustees
of the Trust or on the boards of one or more trusts that are under
common management with or otherwise affiliated with the Trust.
(b) Unless a demand is not required under paragraph (a) of this
Section 9, Shareholders eligible to bring such derivative action under
the Delaware Act who collectively hold at least 10% of the Outstanding
Shares of the Trust, or who collectively hold at least 10% of the
Outstanding Shares of the Series or Class to which such action relates,
shall join in the request for the Trustees to commence such action; and
(c) Unless a demand is not required under paragraph (a) of this
Section 9, the Trustees must be afforded a reasonable amount of time to
consider such shareholder request and to investigate the basis of such
claim. The Trustees shall be entitled to retain
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<PAGE> 25
counsel or other advisors in considering the merits of the request and
shall require an undertaking by the Shareholders making such request to
reimburse the Trust for the expense of any such advisors in the event
that the Trustees determine not to bring such action.
For purposes of this Section 9, the Board of Trustees may designate a
committee of one Trustee to consider a Shareholder demand if necessary to create
a committee with a majority of Trustees who do not have a personal financial
interest in the transaction at issue. The Trustees shall be entitled to retain
counsel or other advisors in considering the merits of the request and may
require an undertaking by the Shareholders making such request to reimburse the
Trust for the expense of any such advisors in the event that the Trustees
determine not to bring such action.
IN WITNESS WHEREOF, the Trustee named below does hereby make and enter
into this Declaration of Trust as of the 21st day of December, 1999.
/s/ James Hartmann
-----------------------
James Hartmann, Trustee
THE PRINCIPAL PLACE OF BUSINESS OF THE TRUST IS:
400 Montgomery Street, 3rd Floor
San Francisco, California 94104
22
<PAGE> 1
EXHIBIT (d)(1)
E-HARMON FUNDS
E-HARMON INTERNET FUND
ADVISORY AGREEMENT
Agreement made this ___ day of , 2000, between e-harmon Funds (the "Trust")
on behalf of the e-harmon Internet Fund (the "Fund"), and e-harmon Capital
Management LLC, a Delaware limited liability company (the "Adviser").
W I T N E S S E T H
WHEREAS, the Trust is an open-end management investment company registered
under the Investment Company Act of 1940, as amended (the "1940 Act");
WHEREAS, the Fund is a series or portfolio of the Trust; and
WHEREAS, the Trust desires to retain the Adviser to render or contract to
obtain as hereinafter provided investment advisory services to the Fund and the
Trust also desires to avail itself of the facilities available to the Adviser to
oversee the administration of its day to day business affairs, and the Adviser
is willing to render such investment advisory and administrative services;
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Adviser to act as investment adviser to
the Trust and to oversee the administration of its business affairs for the
period and on the terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to render the services herein described, for the
compensation herein provided.
2. Subject to the supervision of the Board of Trustees of the Trust, the
Adviser shall oversee the administration of the Fund's business affairs and, in
connection therewith, shall furnish the Fund with office facilities and with
clerical, bookkeeping and recordkeeping services at such office facilities and,
subject to Section 1 hereof, the Adviser shall manage the investment operations
of the Trust and the composition of the Fund's portfolio, including the
purchase, retention and disposition thereof, in accordance with the Fund's
investment objective, policies and restrictions as stated in the Prospectus
(hereinafter defined) and subject to the following understandings:
(a) The Adviser shall provide supervision of the Fund's investments
and determine from time to time what investments or securities will be
purchased, retained, sold or loaned by the Fund, and what portion of the
assets will be invested or held uninvested as cash.
(b) The Adviser, in the performance of its duties and obligations
under this Agreement, shall act in conformity with the Declaration of Trust
and By-Laws of the Trust and the Prospectus (hereinafter defined) of the
Fund and with the instructions and
<PAGE> 2
directions of the Board of Trustees of the Trust and will conform to and
comply with the requirements of the 1940 Act and all other applicable
federal and state laws and regulations.
(c) The Adviser shall determine the securities and futures contracts
to be purchased or sold by the Fund and will place orders pursuant to its
determinations with or through such persons, brokers, dealers or futures
commission merchants (including but not limited to an affiliate of the
Adviser) in conformity with the policy with respect to brokerage as set
forth in the Trust's Registration Statement and the Fund's Prospectus
(hereinafter defined) or as the Board of Trustees may direct from time to
time. In providing the Fund with investment supervision, it is recognized
that the Adviser will give primary consideration to securing the most
favorable price and efficient execution. Consistent with this policy, the
Adviser may consider the financial responsibility, research and investment
information and other services provided by brokers, dealers or futures
commission merchants who may effect or be a party to any such transaction
or other transactions to which other clients of the Adviser may be a party.
[It is understood that __________________________________ may be used as
principal broker for securities transactions but that no formula has been
adopted for allocation of the Fund's investment transaction business.] It
is also understood that it is desirable for the Trust that the Adviser have
access to supplemental investment and market research and security and
economic analysis provided by brokers or futures commission merchants and
that such brokers may execute brokerage transactions at a higher cost to
the Fund than may result when allocating brokerage to other brokers or
futures commission merchants on the basis of seeking the most favorable
price and efficient execution. Therefore, the Adviser is authorized to pay
higher brokerage commissions for the purchase and sale of securities and
futures contracts for the Fund to brokers or futures commission merchants
who provide such research and analysis, subject to review by the Trust's
Board of Trustees from time to time with respect to the extent and
continuation of this practice. It is understood that the services provided
by such broker or futures commission merchant may be useful to the Adviser
in connection with its services to other clients.
On occasions when the Adviser deems the purchase or sale of a security
or a futures contract to be in the best interest of the Fund as well as
other clients of the Adviser, the Adviser, to the extent permitted by
applicable laws and regulations, may, but shall be under no obligation to,
aggregate the securities or futures contracts to be so sold or purchased in
order to obtain the most favorable price or lower brokerage commissions and
efficient execution. In such event, allocation of the securities or futures
contracts so purchased or sold, as well as the expenses incurred in the
transaction, will be made by the Adviser in the manner it considers to be
the most equitable and consistent with its fiduciary obligations to the
Fund and to such other clients.
(d) The Adviser shall maintain all books and records with respect to
the Fund's portfolio transactions and shall render to the Trust's Board of
Trustees such periodic and special reports as the Board may reasonably
request. The Adviser may delegate this responsibility to another entity.
2
<PAGE> 3
(e) The Adviser shall be responsible for the financial and accounting
records to be maintained by the Fund (including those being maintained by
the Trust's Custodian).
(f) The Adviser shall provide the Trust's Custodian on each business
day with information relating to all transactions concerning the Fund's
assets.
(g) The investment management services of the Adviser to the Fund
under this Agreement are not to be deemed exclusive, and the Adviser shall
be free to render similar services to others.
3. The Trust has delivered to the Adviser copies of each of the following
documents and will deliver to it all future amendments and supplements, if any:
(a) Agreement and Declaration of Trust, as registered pursuant to a
Certificate of Business Trust filed with the Secretary of State of Delaware
(such a Declaration of Trust, as in effect on the date hereof and as
amended from time to time, is herein called the "Declaration of Trust");
(b) By-Laws of the Trust (such By-Laws, as in effect on the date
hereof and as amended from time to time, are herein called the "By-Laws");
(c) Resolutions of the Board of Trustees of the Trust authorizing the
appointment of the Adviser and approving the form of this agreement;
(d) Registration Statement under the 1940 Act and the Securities Act
of 1933, as amended, on Form N-IA (the Registration Statement), as filed
with the Securities and Exchange Commission (the Commission) relating to
the Trust and its shares of beneficial interest and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940 Act on
Form N-8A as filed with the Commission and all amendments thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Adviser shall authorize and permit any of its officers and employees
who may be elected as trustees or officers of the Trust to serve in the
capacities in which they are elected. All services to be furnished by the
Adviser under this Agreement may be furnished through the medium of any such
officers or employees of the Adviser.
5. The Adviser shall keep the Trust's books and records required to be
maintained by it pursuant to paragraph 2 hereof, including all books and records
prescribed by Rule 31a-1 under the 1940 Act other than those books and records
maintained by the Trust or its other service providers. The Adviser agrees that
all records that it maintains for the Trust are the property of the Trust and it
will surrender promptly to the Trust any such records upon the
3
<PAGE> 4
Trust's request, provided however that the Adviser may retain a copy of such
records. The Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records as are required to be maintained
by the Adviser pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Adviser shall pay the following
expenses:
(a) the salaries and expenses of all personnel of the Trust and the
Adviser except the fees and expenses of trustees who are not affiliated
persons of the Adviser, and
(b) all expenses incurred by the Adviser or by the Fund in connection
with managing the ordinary course of the Fund's business other than those
assumed by the Fund herein.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection with the
management of the investment and reinvestment of the Fund's assets,
(b) the fees and expenses of trustees who are not affiliated persons
of the Adviser,
(c) the fees and expenses of the Custodian that relate to (i) the
custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund and
the providing of any such records to the Adviser useful to the Adviser in
connection with the Adviser's responsibility for the accounting records of
the Fund pursuant to Section 31 of the 1940 Act and the rules promulgated
thereunder, (iii) the pricing of the shares of the Fund, including the cost
of any pricing service or services which may be retained pursuant to the
authorization of the Board of Trustees of the Trust, and (iv) for both mail
and wire orders, the cashiering function in connection with the issuance
and redemption of the Fund's securities,
(d) the fees and expenses of the Trust's Transfer Agent that relate to
the maintenance of each shareholder account,
(e) the fees and expenses of the Trust's Administrator,
(f) the charges and expenses of legal Counsel and independent
accountants for the Trust,
(g) brokers' commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities and futures transactions,
(h) all taxes and corporate fees payable by the Fund to federal, state
or other governmental agencies,
(i) the fees of any trade associations of which the Trust may be a
member,
4
<PAGE> 5
(j) the cost of share certificates representing, and/or non-negotiable
share deposit receipts evidencing, shares of the Fund,
(k) the cost of fidelity, trustees and officers and errors and
omissions insurance,
(l) the fees and expenses involved in registering and maintaining
registration of the Trust and of its shares with the Securities and
Exchange Commission, registering the Trust as a broker or dealer and paying
notice filings under state securities laws, including the preparation and
printing of the Trust's registration statements, prospectuses and
statements of additional information for filing under federal and state
securities laws for such purposes,
(m) allocable communications expenses with respect to investor
services and expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(n) litigation and indemnification expenses and other extraordinary
expenses not incurred in the ordinary course of the Fund's business, and
(o) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Adviser as full compensation therefor a fee
at an annual rate of 1.25% of the Fund's average daily net assets. This fee will
be computed daily and will be paid to the Adviser monthly. Any reduction in the
fee payable and any payment by the Adviser to the Fund pursuant to paragraph 7
shall be made monthly. Any such reductions or payments are subject to
readjustment during the year.
8. The Adviser may voluntarily reduce any portion of the compensation or
reimbursement of expenses due it pursuant to this Agreement and may agree to
make payments to limit expenses that are the responsibility of the Fund under
this Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to Adviser hereunder or to continue
future payments. Any such reduction will be agreed upon prior to accrual of the
related expense or fee and will be estimated daily. Any fee withheld shall be
voluntarily reduced and any Fund expense paid by the Adviser voluntarily or
pursuant to an agreed expense limitation shall be reimbursed by the Fund to the
Adviser in the first, second, or third (or any combination thereof) fiscal year
next succeeding the fiscal year of the withholding, reduction, or payment to the
extent permitted by applicable law if the aggregate expenses for the next
succeeding fiscal year, second fiscal year of third succeeding fiscal year do
not exceed any limitation to with the Adviser has agreed.
9. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Trust or the Fund in connection with the matters to which
this Agreement relates, except a
5
<PAGE> 6
loss resulting from a breach of fiduciary duty with respect to the receipt of
compensation for services (in which case any award of damages shall be limited
to the period and the amount set forth in Section 36(b)(3) of the 1940 Act) or
loss resulting from willful misfeasance, bad faith or gross negligence on its
part in the performance of its duties or from reckless disregard by it of its
obligations and duties under this Agreement.
10. This Agreement shall continue in effect for a period of more than two
years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Adviser at any time, without the payment of any
penalty, on not more than 60 days' or less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any
officer or employee of the Adviser who may also be a trustee, officer or
employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Adviser to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Trustees of the Trust from time to time, the Adviser shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Trust in any way or otherwise be deemed an agent of the
Trust.
13. This Agreement may be amended by mutual consent, but the consent of the
Trust must be obtained in conformity with the requirements of the 1940 Act.
14. Any notice or other communication required to be given pursuant to this
Agreement shall be deemed duly given if delivered or mailed by registered mail,
postage prepaid, (1) to the Adviser at 400 Montgomery Street, 3rd Floor, San
Francisco, California 94104, Attention: President; or (2) to the Trust at 400
Montgomery Street, 3rd Floor, San Francisco, California 94104, Attention:
President.
15. This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
16. The Trust may use the name "e-harmon Funds" or any name including the
word "e-harmon" or "Harmon" only for so long as this Agreement or any extension,
renewal or amendment hereof remains in effect, including any similar agreement
with any organization which shall have succeeded to the Adviser's business as
Adviser or any extension, renewal or amendment thereof remain in effect. At such
time as such an agreement shall no longer be in effect, the Trust will (to the
extent that it lawfully can) cease to use such a name or any other name
indicating that it is advised by, managed by or otherwise connected with the
Adviser, or
6
<PAGE> 7
any organization which shall have so succeeded to such businesses. In no event
shall the Trust use the name "e-harmon Funds" or any name including the word
"e-harmon" or "Harmon" if the Adviser's function is transferred or assigned to a
company of which e-harmon.com, Inc. does not have control.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their officers designated below as of the day and year first above
written.
e-harmon Funds
By:
---------------------------------------------
Joseph N. Van Remortel
President
e-harmon Capital Management LLC
By:
---------------------------------------------
James Hartmann
President
7
<PAGE> 1
EXHIBIT (d)(2)
E-HARMON FUNDS
E-HARMON NET30 INDEX FUND
ADVISORY AGREEMENT
Agreement made this ___ day of , 2000, between e-harmon Funds (the
"Trust") on behalf of the e-harmon Net30 Index Fund (the "Fund"), and e-harmon
Capital Management LLC, a Delaware limited liability company (the "Adviser").
W I T N E S S E T H
WHEREAS, the Trust is an open-end management investment company
registered under the Investment Company Act of 1940, as amended (the "1940
Act");
WHEREAS, the Fund is a series or portfolio of the Trust; and
WHEREAS, the Trust desires to retain the Adviser to render or contract
to obtain as hereinafter provided investment advisory services to the Fund and
the Trust also desires to avail itself of the facilities available to the
Adviser to oversee the administration of its day to day business affairs, and
the Adviser is willing to render such investment advisory and administrative
services;
NOW, THEREFORE, the parties agree as follows:
1. The Trust hereby appoints the Adviser to act as investment adviser
to the Trust and to oversee the administration of its business affairs for the
period and on the terms set forth in this Agreement. The Adviser accepts such
appointment and agrees to render the services herein described, for the
compensation herein provided.
2. Subject to the supervision of the Board of Trustees of the Trust,
the Adviser shall oversee the administration of the Fund's business affairs and,
in connection therewith, shall furnish the Fund with office facilities and with
clerical, bookkeeping and recordkeeping services at such office facilities and,
subject to Section 1 hereof, the Adviser shall manage the investment operations
of the Trust and the composition of the Fund's portfolio, including the
purchase, retention and disposition thereof, in accordance with the Fund's
investment objective, policies and restrictions as stated in the Prospectus
(hereinafter defined) and subject to the following understandings:
(a) The Adviser shall provide supervision of the Fund's
investments and determine from time to time what investments or
securities will be purchased, retained, sold or loaned by the Fund, and
what portion of the assets will be invested or held uninvested as cash.
(b) The Adviser, in the performance of its duties and
obligations under this Agreement, shall act in conformity with the
Declaration of Trust and By-Laws of the Trust and the Prospectus
(hereinafter defined) of the Fund and with the instructions and
<PAGE> 2
directions of the Board of Trustees of the Trust and will conform to
and comply with the requirements of the 1940 Act and all other
applicable federal and state laws and regulations.
(c) The Adviser shall determine the securities and futures
contracts to be purchased or sold by the Fund and will place orders
pursuant to its determinations with or through such persons, brokers,
dealers or futures commission merchants (including but not limited to
an affiliate of the Adviser) in conformity with the policy with respect
to brokerage as set forth in the Trust's Registration Statement and the
Fund's Prospectus (hereinafter defined) or as the Board of Trustees may
direct from time to time. In providing the Fund with investment
supervision, it is recognized that the Adviser will give primary
consideration to securing the most favorable price and efficient
execution. Consistent with this policy, the Adviser may consider the
financial responsibility, research and investment information and other
services provided by brokers, dealers or futures commission merchants
who may effect or be a party to any such transaction or other
transactions to which other clients of the Adviser may be a party. [It
is understood that __________________________________ may be used as
principal broker for securities transactions but that no formula has
been adopted for allocation of the Fund's investment transaction
business.] It is also understood that it is desirable for the Trust
that the Adviser have access to supplemental investment and market
research and security and economic analysis provided by brokers or
futures commission merchants and that such brokers may execute
brokerage transactions at a higher cost to the Fund than may result
when allocating brokerage to other brokers or futures commission
merchants on the basis of seeking the most favorable price and
efficient execution. Therefore, the Adviser is authorized to pay higher
brokerage commissions for the purchase and sale of securities and
futures contracts for the Fund to brokers or futures commission
merchants who provide such research and analysis, subject to review by
the Trust's Board of Trustees from time to time with respect to the
extent and continuation of this practice. It is understood that the
services provided by such broker or futures commission merchant may be
useful to the Adviser in connection with its services to other clients.
On occasions when the Adviser deems the purchase or sale of a
security or a futures contract to be in the best interest of the Fund
as well as other clients of the Adviser, the Adviser, to the extent
permitted by applicable laws and regulations, may, but shall be under
no obligation to, aggregate the securities or futures contracts to be
so sold or purchased in order to obtain the most favorable price or
lower brokerage commissions and efficient execution. In such event,
allocation of the securities or futures contracts so purchased or sold,
as well as the expenses incurred in the transaction, will be made by
the Adviser in the manner it considers to be the most equitable and
consistent with its fiduciary obligations to the Fund and to such other
clients.
(d) The Adviser shall maintain all books and records with
respect to the Fund's portfolio transactions and shall render to the
Trust's Board of Trustees such periodic and special reports as the
Board may reasonably request. The Adviser may delegate this
responsibility to another entity.
2
<PAGE> 3
(e) The Adviser shall be responsible for the financial and
accounting records to be maintained by the Fund (including those being
maintained by the Trust's Custodian).
(f) The Adviser shall provide the Trust's Custodian on each
business day with information relating to all transactions concerning
the Fund's assets.
(g) The investment management services of the Adviser to the
Fund under this Agreement are not to be deemed exclusive, and the
Adviser shall be free to render similar services to others.
3. The Trust has delivered to the Adviser copies of each of the
following documents and will deliver to it all future amendments and
supplements, if any:
(a) Agreement and Declaration of Trust, as registered pursuant
to a Certificate of Business Trust filed with the Secretary of State of
Delaware (such a Declaration of Trust, as in effect on the date hereof
and as amended from time to time, is herein called the "Declaration of
Trust");
(b) By-Laws of the Trust (such By-Laws, as in effect on the
date hereof and as amended from time to time, are herein called the
"By-Laws");
(c) Resolutions of the Board of Trustees of the Trust
authorizing the appointment of the Adviser and approving the form of
this agreement;
(d) Registration Statement under the 1940 Act and the
Securities Act of 1933, as amended, on Form N-IA (the Registration
Statement), as filed with the Securities and Exchange Commission (the
Commission) relating to the Trust and its shares of beneficial interest
and all amendments thereto;
(e) Notification of Registration of the Trust under the 1940
Act on Form N-8A as filed with the Commission and all amendments
thereto; and
(f) Prospectus of the Fund (such Prospectus and Statement of
Additional Information, as currently in effect and as amended or
supplemented from time to time, being herein called the "Prospectus").
4. The Adviser shall authorize and permit any of its officers and
employees who may be elected as trustees or officers of the Trust to serve in
the capacities in which they are elected. All services to be furnished by the
Adviser under this Agreement may be furnished through the medium of any such
officers or employees of the Adviser.
5. The Adviser shall keep the Trust's books and records required to be
maintained by it pursuant to paragraph 2 hereof, including all books and records
prescribed by Rule 31a-1 under the 1940 Act other than those books and records
maintained by the Trust or its other service providers. The Adviser agrees that
all records that it maintains for the Trust are the property of the Trust and it
will surrender promptly to the Trust any such records upon the
3
<PAGE> 4
Trust's request, provided however that the Adviser may retain a copy of such
records. The Adviser further agrees to preserve for the periods prescribed by
Rule 31a-2 under the 1940 Act any such records as are required to be maintained
by the Adviser pursuant to Paragraph 2 hereof.
6. During the term of this Agreement, the Adviser shall pay the
following expenses:
(a) the salaries and expenses of all personnel of the Trust
and the Adviser except the fees and expenses of trustees who are not
affiliated persons of the Adviser, and
(b) all expenses incurred by the Adviser or by the Fund in
connection with managing the ordinary course of the Fund's business
other than those assumed by the Fund herein.
The Fund assumes and will pay the expenses described below:
(a) the fees and expenses incurred by the Fund in connection
with the management of the investment and reinvestment of the Fund's
assets,
(b) the fees and expenses of trustees who are not affiliated
persons of the Adviser,
(c) the fees and expenses of the Custodian that relate to (i)
the custodial function and the recordkeeping connected therewith, (ii)
preparing and maintaining the general accounting records of the Fund
and the providing of any such records to the Adviser useful to the
Adviser in connection with the Adviser's responsibility for the
accounting records of the Fund pursuant to Section 31 of the 1940 Act
and the rules promulgated thereunder, (iii) the pricing of the shares
of the Fund, including the cost of any pricing service or services
which may be retained pursuant to the authorization of the Board of
Trustees of the Trust, and (iv) for both mail and wire orders, the
cashiering function in connection with the issuance and redemption of
the Fund's securities,
(d) the fees and expenses of the Trust's Transfer Agent that
relate to the maintenance of each shareholder account,
(e) the fees and expenses of the Trust's Administrator,
(f) the charges and expenses of legal Counsel and independent
accountants for the Trust,
(g) brokers' commissions and any issue or transfer taxes
chargeable to the Fund in connection with its securities and futures
transactions,
(h) all taxes and corporate fees payable by the Fund to
federal, state or other governmental agencies,
(i) the fees of any trade associations of which the Trust may
be a member,
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(j) the cost of share certificates representing, and/or
non-negotiable share deposit receipts evidencing, shares of the Fund,
(k) the cost of fidelity, trustees and officers and errors and
omissions insurance,
(l) the fees and expenses involved in registering and
maintaining registration of the Trust and of its shares with the
Securities and Exchange Commission, registering the Trust as a broker
or dealer and paying notice filings under state securities laws,
including the preparation and printing of the Trust's registration
statements, prospectuses and statements of additional information for
filing under federal and state securities laws for such purposes,
(m) allocable communications expenses with respect to investor
services and expenses of shareholders' and trustees' meetings and of
preparing, printing and mailing reports to shareholders in the amount
necessary for distribution to the shareholders,
(n) litigation and indemnification expenses and other
extraordinary expenses not incurred in the ordinary course of the
Fund's business, and
(o) any expenses assumed by the Fund pursuant to a Plan of
Distribution adopted in conformity with Rule 12b-1 under the 1940 Act.
7. For the services provided and the expenses assumed pursuant to this
Agreement, the Fund will pay to the Adviser as full compensation therefor a fee
at an annual rate of .40% of the Fund's average daily net assets. This fee will
be computed daily and will be paid to the Adviser monthly. Any reduction in the
fee payable and any payment by the Adviser to the Fund pursuant to paragraph 7
shall be made monthly. Any such reductions or payments are subject to
readjustment during the year.
8. The Adviser shall not be liable for any error of judgment or for any
loss suffered by the Trust or the Fund in connection with the matters to which
this Agreement relates, except a loss resulting from a breach of fiduciary duty
with respect to the receipt of compensation for services (in which case any
award of damages shall be limited to the period and the amount set forth in
Section 36(b)(3) of the 1940 Act) or loss resulting from willful misfeasance,
bad faith or gross negligence on its part in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement.
9. The Adviser may voluntarily reduce any portion of the compensation
or reimbursement of expenses due it pursuant to this Agreement and may agree to
make payments to limit expenses that are the responsibility of the Fund under
this Agreement. Any such reduction or payment shall be applicable only to such
specific reduction or payment and shall not constitute an agreement to reduce
any future compensation or reimbursement due to Adviser hereunder or to continue
future payments. Any such reduction will be agreed upon prior to accrual of the
related expense or fee and will be estimated daily. Any fee withheld shall be
voluntarily reduced and any Fund expense paid by the Adviser voluntarily or
pursuant to an
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<PAGE> 6
agreed expense limitation shall be reimbursed by the Fund to the Adviser in the
first, second, or third (or any combination thereof) fiscal year next succeeding
the fiscal year of the withholding, reduction, or payment to the extent
permitted by applicable law if the aggregate expenses for the next succeeding
fiscal year, second fiscal year of third succeeding fiscal year do not exceed
any limitation to with the Adviser has agreed.
10. This Agreement shall continue in effect for a period of more than
two years from the date hereof only so long as such continuance is specifically
approved at least annually in conformity with the requirements of the 1940 Act;
provided, however, that this Agreement may be terminated by the Trust at any
time, without the payment of any penalty, by the Board of Trustees of the Trust
or by vote of a majority of the outstanding voting securities (as defined in the
1940 Act) of the Fund, or by the Adviser at any time, without the payment of any
penalty, on not more than 60 days' or less than 30 days' written notice to the
other party. This Agreement shall terminate automatically in the event of its
assignment (as defined in the 1940 Act).
11. Nothing in this Agreement shall limit or restrict the right of any
officer or employee of the Adviser who may also be a trustee, officer or
employee of the Trust to engage in any other business or to devote his or her
time and attention in part to the management or other aspects of any business,
whether of a similar or dissimilar nature, nor limit or restrict the right of
the Adviser to engage in any other business or to render services of any kind to
any other corporation, firm, individual or association.
12. Except as otherwise provided herein or authorized by the Board of
Trustees of the Trust from time to time, the Adviser shall for all purposes
herein be deemed to be an independent contractor and shall have no authority to
act for or represent the Trust in any way or otherwise be deemed an agent of the
Trust.
13. This Agreement may be amended by mutual consent, but the consent of
the Trust must be obtained in conformity with the requirements of the 1940 Act.
14. Any notice or other communication required to be given pursuant to
this Agreement shall be deemed duly given if delivered or mailed by registered
mail, postage prepaid, (1) to the Adviser at 400 Montgomery Street, 3rd Floor,
San Francisco, California 94104, Attention: President; or (2) to the Trust at
400 Montgomery Street, 3rd Floor, San Francisco, California 94104, Attention:
President.
15. This Agreement shall be governed by and construed in accordance
with the laws of the State of Delaware.
16. The Trust may use the name "e-harmon Funds" or any name including
the word "e-harmon" or "Harmon" only for so long as this Agreement or any
extension, renewal or amendment hereof remains in effect, including any similar
agreement with any organization which shall have succeeded to the Adviser's
business as Adviser or any extension, renewal or amendment thereof remain in
effect. At such time as such an agreement shall no longer be in effect, the
Trust will (to the extent that it lawfully can) cease to use such a name or any
other name indicating that it is advised by, managed by or otherwise connected
with the Adviser, or
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any organization which shall have so succeeded to such businesses. In no event
shall the Trust use the name "e-harmon Funds" or any name including the word
"e-harmon" or "Harmon" if the Adviser's function is transferred or assigned to a
company of which e-harmon.com, Inc. does not have control. In addition, these
same provisions apply to the use of the name "Net30 Index."
IN WITNESS WHEREOF, the parties hereto have caused this instrument to
be executed by their officers designated below as of the day and year first
above written.
e-harmon Funds
By:
--------------------------------------
Joseph N. Van Remortel
President
e-harmon Capital Management LLC
By:
--------------------------------------
James Hartmann
President
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<PAGE> 1
EXHIBIT (e)(1)
DISTRIBUTION AGREEMENT
THIS AGREEMENT is made as of this 23rd day of April, 2000, by and
between e-harmon Funds, a Delaware business trust (the "Trust") and Sunstone
Distribution Services, LLC, a Wisconsin limited liability company (the
"Distributor").
WHEREAS, the Trust is an open-end investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act") and is
authorized to issue shares of beneficial interest in separate series with each
such series representing interests in a separate portfolio of securities and
other assets;
WHEREAS, the Distributor is registered as a broker-dealer under the
Securities Exchange Act of 1934, as amended (the "1934 Act"), and is a member of
the National Association of Securities Dealers, Inc. (the "NASD"); and
WHEREAS, the Trust and Distributor desire to enter into an agreement
pursuant to which Distributor shall be the distributor of the shares of the
Trust representing the investment portfolios described on Schedule A hereto and
any additional shares and/or investment portfolios the Trust and Distributor may
agree upon and include on Schedule A as such Schedule may be amended from time
to time (such shares and any additional shares are referred to as the "Shares"
and such investment portfolios and any additional investment portfolios are
individually referred to as a "Fund" and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. APPOINTMENT OF THE DISTRIBUTOR.
The Trust hereby appoints the Distributor as agent for the distribution
of the Shares, on the terms and for the period set forth in this Agreement.
Distributor hereby accepts such appointment as agent for the distribution of the
Shares on the terms and for the period set forth in this Agreement.
2. SERVICES AND DUTIES OF THE DISTRIBUTOR.
2.1 Distributor will act as agent for the distribution of Shares in
accordance with the instructions of the Trust's Board of Trustees and the
registration statement and prospectuses then in effect with respect to the Funds
under the Securities Act of 1933, as amended (the "1933 Act").
2.2 Distributor may incur expenses for appropriate distribution
activities which it deems reasonable which are primarily intended to result in
the sale of Shares, including, but not limited to, advertising, the printing and
mailing of prospectuses to other than current shareholders, and the
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<PAGE> 2
printing and mailing of sales literature. At the direction of the Trust,
Distributor 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, and if it so chooses Distributor will act as principal. The Distributor
shall not be obligated to incur any specific expenses nor sell any certain
number of Shares of any Fund.
2.3 All Shares of the Funds offered for sale by Distributor shall be
offered for sale to the public at a price per share (the "offering price")
provided in the Funds' then current prospectus. The Distributor shall have no
liability for the payment of the purchase price of the Shares sold pursuant to
this Agreement or with respect to redemptions or repurchases of Shares. The
price the Funds shall receive for any Shares purchased by investors shall be the
net asset value used in determining the public offering price applicable to the
sale of such Shares, as calculated in the manner set forth in the Funds'
Registration Statement (as hereinafter defined). The Distributor may reallocate
any portion of any front-end sales charge that is imposed on such sales to
selected dealers as set forth in the Registration Statement, subject to
applicable NASD rules. Any portion of the front-end sales charge that is not so
reallocated, as well as any back-end or deferred sales charge or load not
otherwise to be retained by the Fund, shall be retained by the Distributor as a
commission for its services hereunder. Notwithstanding anything herein to the
contrary, Distributor shall not be required to finance the payment to any dealer
or other organization of any sales charges or fees.
2.4 If any shares sold by the Funds are redeemed or repurchased by the
Funds, or by Distributor as agent, or are tendered for redemption, within seven
business days after the date of confirmation of the original purchase of said
Shares, Distributor shall forfeit the amount above the net asset value received
by Distributor in respect of such Shares, provided that the portion, if any, of
such amount re-allowed, by Distributor to broker/dealers or other persons shall
be repayable to the Funds only to the extent recovered by Distributor from the
broker/dealer or other person concerned. Distributor shall include in the forms
of agreement with such broker/dealers and other persons a corresponding
provision for the forfeiture by them of their concession with respect to Shares
sold by them or their principals and redeemed or repurchased by the Funds or by
Distributor as agent (or tendered for redemption) within seven business days
after the date of confirmation of such initial purchases.
2.5 Distributor shall act as distributor of the Shares in compliance in
all material respects with all applicable laws, rules and regulations,
including, without limitation, all rules and regulations made or adopted
pursuant to the 1940 Act, by the Securities and Exchange Commission (the
"Commission") and the NASD.
2.6 Distributor shall not utilize any materials in connection with the
sales or offering of Shares except the Trust's prospectus and statement of
additional information and such other materials as the Trust shall provide or
approve. The Distributor agrees to provide compliance review of all sales
literature and marketing materials prepared for use by or on behalf of the Trust
in advance of the use of such materials. The Fund agrees to incorporate such
changes to such materials as the Distributor shall request. The Distributor will
file the materials as may be required with the NASD, SEC or state securities
commissioners. The Trust represents that it will not use or authorize the use of
any advertising or sales material unless and until such materials have been
approved and authorized for use by the Distributor.
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2.7 As compensation for the services performed hereunder and the
expenses incurred by Distributor, the Distributor shall be entitled to the fees
and be reimbursed the expenses as provided in Exhibit B hereto.
3. DUTIES AND REPRESENTATIONS OF THE TRUST.
3.1 The Trust represents that it is registered as an open-end
management investment company under the 1940 Act and that it has and will
continue to act in conformity with its Declaration of Trust, By-Laws, its
registration statement as may be amended from time to time and resolutions and
other instructions of its Board of Trustees, and has and will continue to comply
with all applicable laws, rules and regulations including without limitation the
1933 Act, the 1934 Act, the 1940 Act, the laws of the states in which shares of
the Funds are offered and sold, and the rules and regulations thereunder.
3.2 The Trust or its designee shall take or cause to be taken all
necessary action to register and maintain the registration of the Shares under
the 1933 Act for sale as herein contemplated and shall pay all costs and
expenses in connection with the registration of Shares under the 1933 Act, and
be responsible for all expenses in connection with maintaining facilities for
the issue and transfer of Shares and for supplying information, prices and other
data to be furnished by the Trust hereunder.
3.3 The Trust shall execute any and all documents and furnish any and
all information and otherwise take all actions which may be reasonably necessary
in the discretion of the Trust's officers in connection with the qualification
of the Shares for sale in such states as Distributor and the Trust may approve,
shall maintain the registration of a sufficient number or amount of shares
thereunder, and shall pay all costs and expenses in connection with such
qualification. The Trust or its designee shall notify the Distributor, or cause
it to be notified, of the states in which the Shares may be sold and shall
notify the Distributor of any change to the information.
3.4 The Trust shall, at its expense, keep the Distributor fully
informed with regard to its affairs. In addition, the Trust shall furnish
Distributor from time to time such information, documents and reports with
respect to the Trust and the Shares as Distributor may reasonably request, and
the Trust warrants that the statements contained in any such information shall
be true and correct and fairly represent what they purport to represent.
3.5 The Trust represents to Distributor that all registration
statements and prospectuses of the Trust filed or to be filed with the
Commission under the 1933 Act with respect to the Shares have been and will be
prepared in conformity with the requirements of the 1933 Act, the 1940 Act, and
the rules and regulations of the Commission thereunder. As used in this
Agreement the terms "registration statement" and "prospectus" shall mean any
registration statement and prospectus (together with the related statement of
additional information) at any time now or hereafter filed with the Commission
with respect to any of the Shares and any amendments and supplements thereto
which at any time shall have been or will be filed with said Commission. The
Trust represents and warrants to Distributor that any registration statement and
prospectus, when such registration statement becomes effective, will
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<PAGE> 4
contain all statements required to be stated therein in conformity with the 1933
Act, the 1940 Act and the rules and regulations of the Commission; that all
information contained in the registration statement and prospectus will be true
and correct in all material respects when such registration statement becomes
effective; and that neither the registration statement nor any prospectus when
such registration statement becomes effective will include an untrue statement
of a material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading. The Trust
agrees to file from time to time such amendments, supplements, reports and other
documents as may be necessary or required in order to comply with the 1933 Act
and the 1940 Act and in order that there may be no untrue statement of a
material fact in a registration statement or prospectus, or necessary or
required in order that there may be no omission to state a material fact in the
registration statement or prospectus which omission would make the statements
therein misleading. The Trust shall promptly notify the Distributor of any
advice given to it by counsel to the Trust regarding the necessity or
advisability of amending or supplementing the registration statement.
3.6 The Trust shall not file any amendment to the registration
statement or supplement to any prospectus without giving Distributor reasonable
notice thereof in advance and if the Distributor declines to assent to such
amendment (after a reasonable time), the Trust may terminate this Agreement
forthwith by written notice to the Distributor without payment of any penalty.
If the Trust shall not propose an amendment or amendments and/or supplement or
supplements promptly after receipt by the Trust of a written request in good
faith from Distributor to do so, Distributor may, at its option, immediately
terminate this Agreement. In addition, if, at any time during the term of this
Agreement, the Distributor requests the Trust to make any change in its
governing instruments or in its methods of doing business which are necessary in
order to comply with any requirement of applicable law or regulation, and the
Trust fails (after a reasonable time) to make any such change as requested, the
Distributor may terminate this Agreement forthwith by written notice to the
Trust without payment of any penalty. Nothing contained in this Agreement shall
in any way limit the Trust's right to file at any time any amendments to any
registration statement and/or supplements to any prospectus, of whatever
character, as the Trust may deem advisable, with advice of its counsel, such
right being in all respects absolute and unconditional.
3.7 Whenever in their judgment such action is warranted by market,
economic or political conditions, or by circumstances of any kind, the Trust may
decline to accept any orders for, or make any sales of, any Shares until such
time as it deems it advisable to accept such orders and to make such sales and
the Trust shall advise Distributor promptly of such determination.
3.8 The Trust agrees to advise the Distributor promptly in writing:
(i) of any correspondence or other communication by the
Commission or its staff relating to the Funds including requests by the
Commission for amendments to the registration statement or prospectuses;
(ii) in the event of the issuance by the Commission of any
stop order suspending the effectiveness of the registration statement or
prospectuses then in effect or the initiation of any proceeding for that
purpose;
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<PAGE> 5
(iii) of the happening of any event which makes untrue any
statement of a material fact made in the registration statement or prospectuses
or which requires the making of a change in such registration statement or
prospectuses in order to make the statements therein not materially misleading;
and
(iv) of all actions taken by the Commission with respect to
any amendments to any registration statement or prospectus which may from time
to time be filed with the Commission.
4. INDEMNIFICATION.
4.1(a) The Trust authorizes Distributor to use any prospectus or
statement of additional information, in the final form furnished to Distributor
from time to time, in connection with the sale of Shares. The Trust shall
indemnify, defend and hold the Distributor, and each of its present or former
directors, members, officers, employees, representatives and any person who
controls or previously controlled the Distributor within the meaning of Section
15 of the 1933 Act ("Distributor Indemnitees"), free and harmless (a) from and
against any and all losses, claims, demands, liabilities, damages, charges,
payments, costs and expenses (including the costs of investigating or defending
any alleged losses, claims, demands, liabilities, damages, charges, payments,
costs or expenses and any reasonable counsel fees incurred in connection
therewith) of any and every nature ("Losses") which Distributor and each of the
Distributor Indemnitees may incur under the 1933 Act, the 1934 Act, any other
statute (including Blue Sky laws) or any rule or regulation thereunder, or under
common law or otherwise, arising out of or based upon any untrue, or alleged
untrue statement, of a material fact contained in the registration statement or
any prospectus, an annual or interim report to shareholders or sales literature,
or any amendments or supplements thereto, or arising out of or based upon any
omission, or alleged omission, to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading;
provided, however, that the Trust's obligation to indemnify Distributor and any
of the foregoing indemnitees shall not be deemed to cover any Losses arising out
of any untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with information
relating to the Distributor and furnished to the Trust or its counsel by
Distributor in writing for the purpose of, and used in, the preparation thereof;
(b) from and against any and all Losses which Distributor and each of the
Distributor Indemnitees may incur in connection with this Agreement or the
Distributor's performance hereunder, except to the extent the Losses result from
the Distributor's willful misfeasance, bad faith or gross negligence in the
performance of its duties, or by reason of its reckless disregard of its
obligations and duties under this Agreement; or (c) from and against any and all
Losses which Distributor and each of the Distributor Indemnitees may incur when
acting in accordance with instructions from the Trust or its representatives.
Promptly after receipt by the Distributor of notice of the commencement of an
investigation, action, claim or proceeding, the Distributor shall, if a claim
for indemnification in respect thereof is to made under this section, notify the
Trust in writing of the commencement thereof, although the failure to do so
shall not prevent recovery by the Distributor or any Distributor Indemnitee.
4.1(b) The Trust shall be entitled to participate at its own expense in
the defense or, if it so elects, to assume the defense of any suit brought to
enforce any such loss, claim, demand, liability,
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<PAGE> 6
damage or expense, but if the Trust elects to assume the defense, such defense
shall be conducted by counsel chosen by the Trust and approved by the
Distributor, which approval shall not be unreasonably withheld. In the event the
Trust elects to assume the defense of any such suit and retain such counsel and
notifies the Distributor of such election, the indemnified defendant or
defendants in such suit shall bear the fees and expenses of any additional
counsel retained by them subsequent to the receipt of the Trust's election. If
the Trust does not elect to assume the defense of any such suit, or in case the
Distributor does not, in the exercise of reasonable judgment, approve of counsel
chosen by the Trust, or in case there is a conflict of interest between the
Trust and the Distributor or any of the Distributor Indemnitees, the Trust will
reimburse the indemnified person or persons named as defendant or defendants in
such suit, for the reasonable fees and expenses of any counsel retained by
Distributor and them. The Trust's indemnification agreement contained in this
Section 4.1 and the Trust's representations and warranties in this Agreement
shall remain operative and in full force and effect regardless of any
investigation made by or on behalf of the Distributor and each of the
Distributor Indemnitees, and shall survive the delivery of any Shares and the
termination of this Agreement. This agreement of indemnity will inure
exclusively to the Distributor's benefit, to the benefit of each of the
Distributor Indemnitees and their estates and successors. The Trust agrees
promptly to notify Distributor of the commencement of any litigation or
proceedings against the Trust or any of its officers or Trustees in connection
with the issue and sale of any of the Shares.
4.1(c) The Trust acknowledges and agrees that in the event the
Distributor, at the direction of the Trust, is required to give indemnification
to any entity selling Shares or providing shareholder services to shareholders
or others and such entity shall make a claim for indemnification against the
Distributor, the Distributor shall make a similar claim for indemnification
against the Trust and shall be entitled to such indemnification.
4.2(a) Distributor shall indemnify, defend and hold the Trust, and each
of its present or former, Trustees, officers, employees, representatives, and
any person who controls or previously controlled the Trust within the meaning of
Section 15 of the 1933 Act ("Trust Indemnitees"), free and harmless from and
against any and all Losses which the Trust, and each of the Trust Indemnitees,
may incur under the 1933 Act, the 1934 Act, any other statute (including Blue
Sky laws) or any rule or regulation thereunder, or under common law or
otherwise, (a) arising out of or based upon any untrue, or alleged untrue,
statement of a material fact contained in the Trust's registration statement or
any prospectus, annual or interim report to shareholders or sales literature, as
from time to time amended or supplemented, or the omission, or alleged omission,
to state therein a material fact required to be stated therein or necessary to
make the statements not misleading, but only if such statement or omission was
made in reliance upon, and in conformity with, information relating to the
Distributor and furnished in writing to the Trust or its counsel by the
Distributor for the purpose of, and used in, the preparation thereof, or (b) to
the extent any Losses arise out of or result from the Distributor's willful
misfeasance, bad faith or gross negligence in the performance of its duties, or
by reason of its reckless disregard of its obligations and duties under this
Agreement. Distributor's agreement to indemnify the Trust and any of the Trust
Indemnitees shall not be deemed to cover any Losses to the extent they arise out
of or result from the Trust's willful misfeasance, bad faith or negligence in
the performance of its duties, or by reason of its reckless disregard of its
obligations and duties, under this Agreement. Promptly after receipt by the
Trust of notice of the commencement of an investigation, action, claim or
proceeding, the Trust shall, if a claim for indemnification in respect thereof
is to made
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<PAGE> 7
under this section, notify the Distributor in writing of the commencement
thereof, although the failure to do so shall not prevent recovery by the Trust
or any Trust Indemnitee.
4.2(b) The Distributor shall be entitled to participate at its own
expense in the defense or, if it so elects, to assume the defense of any suit
brought to enforce any such loss, claim, demand, liability, damage or expense,
but if the Distributor elects to assume the defense, such defense shall be
conducted by counsel chosen by the Distributor and approved by the Trust, which
approval shall not be unreasonably withheld. In the event the Distributor elects
to assume the defense of any such suit and retain such counsel and notifies the
distributor of such election, the indemnified defendant or defendants in such
suit shall bear the fees and expenses of any additional counsel retained by them
subsequent to the receipt of the Distributor's election. If the Distributor does
not elect to assume the defense of any such suit, or in case the Trust does not,
in the exercise of reasonable judgment, approve of counsel chosen by the
Distributor, the Distributor will reimburse the indemnified person or persons
named as defendant or defendants in such suit, for the fees and expenses of any
counsel retained by the Trust and them. The Distributor's indemnification
agreement contained in this Section 4.2 and the Distributor's representations
and warranties in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of the Trust or any
of the Trust Indemnitees, and shall survive the delivery of any Shares and the
termination of this Agreement. This agreement of indemnity will inure
exclusively to the Trust's benefit, to the benefit of each of the Trust
Indemnitees and their estates and successors. The Distributor agrees promptly to
notify the Trust of the commencement of any litigation or proceedings against
the Distributor or any of its officers or members in connection with the issue
and sale of any of the Shares.
5. OFFERING OF SHARES.
No Shares shall be offered by either the Distributor or the Trust under
any of the provisions of this Agreement and no orders for the purchase or sale
of such Shares hereunder shall be accepted by the Trust if and so long as the
effectiveness of the registration statement then in effect or any necessary
amendments thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as the current prospectus as required by Section 10 of
the 1933 Act, as amended, is not on file with the Commission; provided, however,
that nothing contained in this paragraph 5 shall in any way restrict or have an
application to or bearing upon the Trust's obligation to repurchase Shares from
any shareholder in accordance with the provisions of the prospectus or
Declaration of Trust.
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6. LIMITATION OF LIABILITY
6.1 The Distributor shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Trust in connection with the
performance of its obligations and duties under this Agreement, except a loss
resulting from the Distributor's willful misfeasance, bad faith or gross
negligence in the performance of such duties and obligations, or by reason of
its reckless disregard thereof. Furthermore, notwithstanding anything herein to
the contrary, the Distributor shall not be liable for any action taken or
omitted to be taken in accordance with instructions received by the Distributor
from an officer or authorized representative of the Trust.
6.2 The Distributor assumes no responsibility hereunder, and shall not
be liable, for any default, damage, loss of data, errors, delay or any other
loss whatsoever caused by events beyond its reasonable control. The Distributor
will, however, take all reasonable steps to minimize service interruptions for
any period that such interruption continues beyond its control.
7. TERM.
7.1 This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date hereof and, with respect to each Fund
not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed. Unless sooner terminated as
provided herein, this Agreement shall continue in effect with respect to each
Fund until April 23, 2001. Thereafter, if not terminated, this Agreement shall
continue automatically in effect as to each Fund for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Trust's Board of Trustees or (ii) the vote of a majority (as defined in the 1940
Act and Rule 18f-2 thereunder) of the outstanding voting securities of a Fund,
and provided that in either event the continuance is also approved by the
Distributor and by a majority of the Trust's Board of Trustees who are not
"interested persons" (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the purpose of voting
on such approval.
7.2 This Agreement may be terminated without penalty with respect to a
particular Fund (1) through a failure to renew this Agreement at the end of a
term, (2) upon mutual consent of the parties, or (3) on no less than thirty (30)
days' written notice, by the Trust's Board of Trustees, by vote of a majority
(as defined with respect to voting securities in the 1940 Act and Rule 18f-2
thereunder) of the outstanding voting securities of a Fund, or by the
Distributor (which notice may be waived by the party entitled to such notice).
The terms of this Agreement shall not be waived, altered, modified, amended or
supplemented in any manner whatsoever except by a written instrument signed by
the Distributor and the Trust. This Agreement will also terminate automatically
in the event of its assignment (as defined in the 1940 Act).
7.3 In the event of termination of this Agreement, all reasonable
expenses associated with movement of records and materials and conversion
thereof shall be borne by the Funds.
8
<PAGE> 9
8. MISCELLANEOUS.
8.1 The services of the Distributor rendered to the Funds are not
deemed to be exclusive. The Distributor may render such services and any other
services to others, including other investment companies. The Trust recognizes
that from time to time members, officers, and employees of the Distributor may
serve as directors, members, trustees, officers and employees of other entities
(including other investment companies), that such other entities may include the
name of the Distributor as part of their name and that the Distributor or its
affiliates may enter into distribution, administration, fund accounting,
transfer agent or other agreements with such other entities.
8.2 Distributor agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records relative
to the Funds shareholders of the Trust, and not to use such records and
information for any purpose other than performance of its responsibilities and
duties hereunder, except after prior notification to and approval in writing by
the Trust, which approval may not be withheld where the Distributor may be
exposed to civil or criminal proceedings for failure to comply, when requested
to divulge such information by duly constituted authorities, when subject to
governmental or regulatory audit or investigation, or when so requested by the
Trust. Records and information which have become known to the public through no
wrongful act of the Distributor or any of its employees, agents or
representatives, and information which was already in the possession of the
Distributor prior to receipt thereof, shall not be subject to this paragraph.
8.3 This Agreement shall be governed by Wisconsin law, excluding the
laws on conflicts of laws. To the extent that the applicable laws of the State
of Wisconsin, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control, and nothing herein shall
be construed in a manner inconsistent with the 1940 Act or any rule or order of
the Commission thereunder. Any provision of this Agreement which may be
determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. In such case, the parties shall in good faith modify or
substitute such provision consistent with the original intent of the parties.
8.4 Any notice required or to be permitted to be given by either party
to the other shall be in writing and shall be deemed to have been given when
sent by registered or certified mail, postage prepaid, return receipt requested,
as follows: Notice to the Distributor shall be sent to Sunstone Distribution
Services, LLC, 207 East Buffalo Street, Suite 400, Milwaukee, WI, 53202,
Attention: Miriam M. Allison, and notice to the Trust shall be sent to e-harmon
Funds, 400 Montgomery Street, 3rd Floor, San Francisco, California 94104
Attention: Joe Van Remortel.
8.5 This Agreement may be executed in any number of counterparts, each
of which shall be deemed to be an original agreement but such counterparts shall
together constitute but one and the same instrument.
8.6 The captions of this Agreement are included for convenience of
reference only and in no way define or delimit any of the provisions hereof or
otherwise effect their construction or effect.
9
<PAGE> 10
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
E-HARMON FUNDS
(the "Trust")
By:
--------------------------------------
President
SUNSTONE DISTRIBUTION SERVICES, LLC
(the "Distributor")
By:
--------------------------------------
Miriam M. Allison
President
10
<PAGE> 11
SCHEDULE A
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
E-HARMON FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
NAME OF FUNDS
FUND EFFECTIVE DATE
e-harmon Internet Fund
e-harmon Net30 Index Fund
11
<PAGE> 12
SCHEDULE B
TO THE
DISTRIBUTION AGREEMENT
BY AND BETWEEN
E-HARMON FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
ASSET BASED FEES
As compensation for the services performed by the Distributor, the Trust shall
pay the Distributor a fee payable monthly in arrears, equal to the following:
<TABLE>
<CAPTION>
MINIMUM
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS ANNUAL FEE
- ------------ ------------------ ------------ -----------
<S> <C> <C> <C>
e-harmon Internet Fund Up to $250 Million 2.0 $25,000
Over $250 Million 1.0
</TABLE>
<TABLE>
<CAPTION>
MINIMUM
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS ANNUAL FEE
- ------------ ------------------ ------------ ----------
<S> <C> <C> <C>
e-harmon Net30 Index Fund Up to $250 Million 2.0 $25,000
Over $250 Million 1.0
</TABLE>
DISTRIBUTION EXPENSES
Expenses of marketing, promoting and distributing the Funds are in addition to
the fees set forth above, including, but not limited to, prospectus development
and printing; advertising; direct mail; public relations activities; trade show
attendance; call management and fulfillment and fees paid to broker/dealers.
ADVERTISING COMPLIANCE
In addition to the above fees, the Trust shall pay to the Distributor a fee
based on the actual time spent by representatives of the Distributor providing
compliance review of sales literature and marketing materials at the rate of
$150 per hour, plus filing fees. The hourly rate shall not apply for any sales
or marketing pieces prepared by the Distributor's affiliate, Sunstone 2XL.
OUT-OF-POCKET EXPENSES
In addition to the compensation payable to the Distributor, the Trust agrees to
reimburse, upon request (or pay directly at the Distributor's discretion), the
Distributor's out-of-pocket expenses in providing services hereunder including,
without limitation, amounts paid or to be paid by Distributor to dealers or
others entering into selling, servicing or related agreements with the
Distributor or the Trust. The Distributor is not required to finance any
activities and as such may, in its discretion,
12
<PAGE> 13
require prepayment of expenses and in such event will not be required to incur
any expense until payment is received.
PAYMENT OF FEES
The fees and expenses set forth on this Schedule B shall be paid to the
Distributor by the respective Fund pursuant to the Trust's Rule 12b-1 Plan. If
the Rule 12b-1 Plan payments are not sufficient to pay such fees and expenses
over an annual period, or if the Rule 12b-1 Plan is discontinued, or if the
Funds otherwise determine that Rule 12b-1 Plan fees may not be paid, in whole or
in part, to the Distributor, it is intended that the Fund's adviser(s) shall be
responsible for the payment of the amount of such fees not covered by Rule 12b-1
payments and that the adviser shall reimburse Distributor or pay directly at the
Distributor's discretion such amounts. Fees and expenses shall be payable
monthly, promptly after the receipt by the Trust of an invoice for such fees
and/or expenses.
MISCELLANEOUS
Notwithstanding the foregoing, any portion of the front-end sales charge that is
not so reallocated, as well as any back-end or deferred sales charge or load not
otherwise to be retained by the Fund, shall be retained by the Distributor as a
commission for its services hereunder.
13
<PAGE> 1
EXHIBIT (e)(2)
SUNSTONE DISTRIBUTION SERVICES, LLC
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
DEALER AGREEMENT FOR THE SALE OF SHARES
OF E-HARMON FUNDS
Gentlemen:
We have entered into a Distribution Agreement with e-harmon Funds (the "Trust"),
a business trust registered as a management investment company under the
Investment Company Act of 1940 (the "1940 Act"), in connection with its two
separate series, and such other series as may be added to the Trust in the
future (collectively the "Funds"), pursuant to which we have been appointed
distributor of shares of the Funds.
This Dealer Agreement (the "Agreement") has been adopted pursuant to Rule 12b-1
under the 1940 Act by the Trust on behalf of the Funds under a Distribution Plan
(the "Plan") adopted pursuant to said Rule. This Agreement, being made between
Sunstone Distribution Services, LLC (the "Distributor") and the undersigned
authorized dealer, relates to the services to be provided by the authorized
dealer and for which it is entitled to receive payments pursuant to the Plan.
1. To the extent that you provide distribution assistance and/or account
maintenance and personal services in accordance with the Plan and applicable
rules of the National Association of Securities Dealers, Inc. (the "NASD") to
those of your customers who may from time to time directly or beneficially own
shares of the Funds, you shall be entitled to a fee periodically pursuant to the
Plan.
2. The fee paid with respect to the Net30 Index Fund will be computed daily and
paid quarterly at an annual rate of up to 0.25% of the average net asset value
of the shares of the Net30 Index Fund purchased or acquired by your firm as
nominee for your customers, or are owned by those customers of your firm whose
records, as maintained by the Fund or its transfer agent, designate your firm as
the customers' dealer of record or holder of record. The fee paid with respect
to the classes of shares of the Internet Fund will be computed and paid
quarterly at annual rates of up to the percentages specified below of the
average net asset value of the shares of the Internet Fund purchased or acquired
by your firm as nominee for your customers, or are owned by those customers of
your firm whose records, as maintained by the Fund or its transfer agent,
designate your firm as the customers' dealer of record or holder of record
(collectively, the "Subject Shares"):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Class Distribution Services Shareholder Services
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
A 0.25% ---
- ----------------------------------------------------------------------------------------------------------------------
B 0.75% 0.25%
- ----------------------------------------------------------------------------------------------------------------------
C 0.75% 0.25%
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 2
For purposes of determining the fees payable under this Agreement, the average
daily net asset value of the Subject Shares will be computed in the manner
specified in the Funds' Registration Statement ("Registration Statement") (as
the same is in effect from time to time) in connection with the computation of
the net asset value of shares for purposes of purchases and redemptions.
3. The total of the fees calculated for each respective Fund for any period with
respect to which such calculations are made will be paid within 45 days after
the close of such period. We reserve the right at any time to impose minimum fee
payment requirements before any periodic payments will be made to you hereunder.
In the event payment due for a period is less than $10.00, such payment will not
be made but will be included with the next scheduled payment when the aggregate
due exceeds $10.00.
4. You shall furnish us and the Funds with such information as shall reasonably
be requested either by the Trustees of the Funds or by us with respect to the
services provided and the fees paid to you pursuant to this Agreement, including
but not limited to blue sky sales reports. We shall furnish the Trustees of the
Funds, for their review on a quarterly basis, a written report of the amounts
expended under the Plan by us and the purposes for which such expenditures were
made.
5. Orders shall be placed either directly with the Funds' Transfer Agent in
accordance with such procedures as may be established by us or the Transfer
Agent, or with the Transfer Agent through the facilities of the National
Securities Clearing Corporation ("NSCC"), if available, in accordance with the
rules of the NSCC. In addition, all orders are subject to acceptance or
rejection by us or the relevant Fund in the sole discretion of either. Purchase
orders shall be subject to receipt by the Trust's Transfer Agent of all required
documents in proper form and to the minimum initial and subsequent purchase
requirements set forth in the Registration Statement.
6. Settlement of transactions shall be in accordance with such procedures as may
be established by us, the Transfer Agent or, if applicable, the rules of the
NSCC. If payment is not so received, we and the Funds reserve the right
forthwith to cancel the sale, or at the option of us or the Funds to sell the
Shares at the then prevailing net asset value, in which in either case you agree
to be responsible for any loss resulting to the Funds and/or to us from your
failure to make payments as aforesaid.
7. You shall be allowed the concessions from the public offering price, if any,
as set forth in the then current prospectus of the Funds. Unless at the time of
transmitting an order you advise the Fund and its Transfer Agent to the
contrary, the Funds may consider the order to be the total holding of an
investor and assume that the investor is not entitled to any reduction in sales
price beyond that accorded to the amount of the purchase as determined by the
schedule set forth in the then current prospectus of the Funds.
8. If any shares sold to you are redeemed by the Funds or repurchased for the
account of the Fund or are tendered to the Funds for redemption or repurchase
within seven business days after the date of confirmation to you of your
original purchase order for said Shares, you agree to pay
<PAGE> 3
forthwith to us the full amount of any dealer concession allowed or commission
paid to you on the original sale, and we agree to pay the amount of any such
dealer concession to the Fund when received by us. Alternatively, we may, in our
discretion, withhold payment to you of such shares.
9. For all purposes of this Agreement you will be deemed to be an independent
contractor and neither you nor any of your employees or agents shall have any
authority to act in any matter or in any respect as agent for the Funds or for
the Distributor. Neither you nor any of your employees or agents are authorized
to make any representation concerning shares of the Funds except those contained
in the then current Prospectus for the Funds. By your written acceptance of this
Agreement, you agree to and do release, indemnify and hold us harmless from and
against any and all liabilities, losses, claims, demands, charges, costs and
expenses (including reasonable attorneys fees) resulting from requests,
directions, actions or inactions of or by you or your officers, employees or
agents or the purchase, redemption, transfer or registration of shares of the
Funds (or orders relating to the same) by you or your clients, or from your
breach of any of the terms of this agreement. In the event we or the Funds
determine to refund any amount paid by an investor by reason of any such
violation, you shall return to us or the Funds any commission previously paid or
discounts allowed with respect to the transaction for which the refund is made.
Notwithstanding anything herein to the contrary, the foregoing indemnity and
hold harmless agreement shall indefinitely survive the termination of this
Agreement.
10. We may enter into other similar agreements with any other person without
your consent.
11. You represent that you are a member of the NASD and agree to maintain
membership in the NASD. You agree to abide by all the rules and regulations of
the Securities and Exchange Commission and the NASD which are binding upon
underwriters and dealers in the distribution of the securities of open-end
investment companies, including without limitation, Section 2830 of the NASD
Conduct Rules, all of which are incorporated herein as if set forth in full. You
shall comply with all applicable laws including state and Federal laws and the
rules and regulations of authorized regulatory agencies. You will not sell or
offer for sale shares of any Fund in any state or jurisdiction where (i) you are
not qualified to act as a dealer or (ii) the shares are not qualified for sale,
including under the Blue Sky laws and regulations for such state, except for
jurisdictions in which they are exempt from qualification. You agree to notify
us immediately if your license or registration to act as a broker-dealer is
revoked or suspended by any Federal, self-regulatory or state agency. We do not
assume any responsibility in connection with your registration under the laws of
the various states or jurisdictions or under federal law or your qualification
under any applicable law or regulation to offer or sell shares.
12. You agree to maintain all records required by law relating to transactions
involving the shares, and upon the request of us, or the Trust, promptly make
such of these records available to us or the Trust's agents as are requested. In
addition you hereby agree to establish appropriate procedures and reporting
forms and/or mechanisms and schedules in conjunction with us and the Trust's
administrator, to enable the Trust to identify the location, type of, and sales
to all accounts opened and maintained by your customers or by you on behalf of
your customers.
13. This Agreement may be terminated with respect to any Fund at any time
without payment of any penalty, upon notice to the other party, by the
Distributor or the vote of a majority of the
<PAGE> 4
Trustees of such Fund who are not interested persons of that Fund and have no
direct or indirect financial interest in the operation of the plan or any
agreements relating to the Plan (the "Independent Trustees") or by a vote of a
majority of the Fund's outstanding shares. It will be terminated, without
notice, by any act which terminates either the Distribution Agreement with us or
the Plan, upon your expulsion or suspension from the NASD, and in any event, it
shall terminate automatically in the event of its assignment as that term is
defined in the 1940 Act. We may in our sole discretion modify or amend this
Agreement upon written notice to you of such modification or amendment, which
shall be effective on the date stated in such notice.
14. The provisions of the Plan and the Distribution Agreement, insofar as they
relate to our obligations and the payment of fees hereunder, are incorporated
herein by reference. This Agreement shall become effective upon acceptance and
execution by us. Unless sooner terminated as provided herein, this Agreement
shall continue in full force and effect as long as the continuance of the Plan
and this related Agreement are approved at least annually by a vote of the
Trustees, including a majority of the Independent Trustees, cast in person at a
meeting called for the purpose of voting thereon. All communications to us
should be sent to the address shown on the first page of this Agreement. Any
notice to you shall be duly given if mailed or telegraphed to you at the address
specified by you below.
16. This Agreement shall be construed in accordance with the laws of the State
of Wisconsin, excluding the laws on conflicts of laws.
- ---------------------------------------- SUNSTONE DISTRIBUTION SERVICES, LLC
Name of Dealer (Please Print or Type)* 207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
- ----------------------------------------
Address of Dealer
By: By:
------------------------------------- --------------------------------
Authorized Officer Authorized Officer
------------------------------------- --------------------------------
Print Name Print Name
Date: Date:
----------------------------------- -----------------------------
Phone:
----------------------------------
*NOTE: Please sign and return both copies of this Agreement to Sunstone
Distribution Services, LLC, Attention: Andrew Chipman. Upon acceptance,
one countersigned copy will be returned to you for your files.
<PAGE> 1
EXHIBIT(e)(3)
NSCC AGREEMENT
BY AND BETWEEN
SUNSTONE DISTRIBUTION SERVICES, LLC
AND
E-HARMON FUNDS
THIS AGREEMENT is made as of this 23rd day of April, 2000, by and
between e-harmon Funds, a Delaware business trust (the "Trust") and Sunstone
Distribution Services, LLC, a Wisconsin limited liability company ("Sunstone").
WHEREAS, the Trust is a registered open-end management investment
company and Sunstone and its affiliates act in various capacities including
distributor, administrator, fund accountant and transfer agent;
WHEREAS, the Trust desires that its shares be permitted to be traded
through Fund/SERV and participate in the Networking System ("Networking") and
any other relevant programs or services offered by the National Securities
Clearing Corporation ("NSCC") now and in the future; and
WHEREAS, Sunstone is currently a member of NSCC and at the request of
the Trust, desires to assist the Trust with expediting its trading in Fund/SERV
and its participation in Networking.
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. PROCEDURES
(a) Sunstone agrees to permit the Trust's trading through
Fund/SERV and participation in Networking through Sunstone's NSCC membership,
and such other programs and services as may be offered by NSCC as the parties
may mutually agree, subject to the terms and conditions herein.
(b) Sunstone shall enter into a Fund Member Additional Number
Agreement with NSCC pursuant to which an additional number will be issued in
conjunction with Sunstone's NSCC activities on behalf of the Trust. Sunstone
shall in no way be deemed to act as a distributor or underwriter for the Trust
solely through its sponsorship of the Trust. Sunstone Financial Group, Inc., in
its role as transfer agent for the Trust, shall act as agent for the purposes of
mutual fund settlement and Networking pursuant to the terms of the Transfer
Agency Agreement by and between the Trust and Sunstone Financial Group, Inc. The
Trust shall arrange for a settling bank who will perform all functions required
of settling banks under applicable rules of the NSCC.
(c) Upon the request of the Trust and in reliance on the terms
hereof, and in order to expedite the trading of the shares of the Trust through
NSCC and participation in Networking and any other relevant programs and
services offered by NSCC as agreed to by the parties, Sunstone has agreed to
guarantee the payment to NSCC of any and all fees and charges imposed by NSCC
from time to time relating to the Trust's transactions with NSCC, and has
assumed responsibility with respect to NSCC for all transactions in and all
obligations and liabilities relating to the Trust's clearing number and
participation in Networking.
<PAGE> 2
(d) This Agreement shall be effective as of the date hereof
and shall continue in effect as long as Sunstone acts as Fund Member for the
Trust with the exception of Section 2 which will survive indefinitely the
termination of Sunstone's participation in NSCC on behalf of the Trust. It is
understood that Sunstone may, in its sole discretion, and at any time, terminate
any or all of its participation in NSCC on behalf of the Trust. In the event
Sunstone elects to cease these services, it will provide prompt notice to the
Trust.
2. PAYMENT OF CHARGES, EXPENSES, OBLIGATIONS; LIABILITY
(a) As consideration for Sunstone's NSCC activities on behalf
of the Trust, the Trust agrees, to the extent permitted under applicable rules
and regulations, to pay or cause to be paid any and all fees, charges, and
obligations (including settling transactions) imposed by NSCC from time to time
relating to the Trust, and the Trust assumes sole responsibility for all
transactions in and all obligations and liabilities relating to the Trust, as if
the Trust and not Sunstone were the Trust Member. Sunstone shall not finance any
such expenses or charges.
(c) The Trust shall indemnify, defend and hold harmless
Sunstone and its affiliates from and against any and all actions, suits, claims,
demands, losses, expenses, charges and liabilities whether with or without basis
in fact or law (including the costs of investigating or defending any alleged
actions, suits, claims, demands, losses, expenses, charges and liabilities)
(collectively "Losses") of any and every nature which Sunstone or its affiliates
may sustain or incur or which may be asserted against Sunstone or its affiliates
by any person arising directly or indirectly out of, resulting from, or in
conjunction with Sunstone's participation in Fund/SERV, Networking and any other
relevant programs or services offered by the NSCC, now and in the future, on
behalf of the Trust; provided, however, that Sunstone shall not be indemnified
against any Losses to the extent arising out of Sunstone's willful misfeasance,
gross negligence or reckless disregard of its duties and obligations in
participating in the foregoing on behalf of the Trust.
(d) Sunstone shall indemnify, defend and hold harmless the
Trust and its affiliates from and against any and all Losses of any and every
nature which the Trust or its affiliates may sustain or incur or which may be
asserted against the Trust or its affiliates by any person to the extent such
Losses arise out of Sunstone's willful misfeasance, gross negligence or reckless
disregard of its duties and obligations under this Agreement.
(e) The Trust shall take all such actions as may reasonably be
requested by Sunstone to implement the understandings described herein with
respect to Sunstone's activities with NSCC on behalf of the Trust.
E-HARMON FUNDS SUNSTONE DISTRIBUTION SERVICES, LLC
(the "Trust') ("Sunstone")
By: By:
---------------------------- -------------------------------------
President Vice President
2
<PAGE> 1
EXHIBIT (g)(1)
CUSTODY AGREEMENT
DATED ______________, 1999
BETWEEN
UMB BANK, N.A.
AND
[FAMILY OF MUTUAL FUNDS]
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
------- ----
<S> <C>
1. Appointment of Custodian 1
2. Definitions 1
(a) Securities 1
(b) Assets 1
(c) Instructions and Special Instructions 1
3. Delivery of Corporate Documents 2
4. Powers and Duties of Custodian and Domestic Subcustodian 2
(a) Safekeeping 3
(b) Manner of Holding Securities 3
(c) Free Delivery of Assets 4
(d) Exchange of Securities 4
(e) Purchases of Assets 4
(f) Sales of Assets 5
(g) Options 5
(h) Futures Contracts 6
(i) Segregated Accounts 6
(j) Depositary Receipts 6
(k) Corporate Actions, Put Bonds, Called Bonds, Etc. 6
(l) Interest Bearing Deposits 7
(m) Foreign Exchange Transactions 7
(n) Pledges or Loans of Securities 8
(o) Stock Dividends, Rights, Etc. 8
(p) Routine Dealings 8
(q) Collections 8
(r) Bank Accounts 9
(s) Dividends, Distributions and Redemptions 9
(t) Proceeds from Shares Sold 9
(u) Proxies and Notices; Compliance with the Shareholders
Communication Act of 1985 9
(v) Books and Records 9
(w) Opinion of Fund's Independent Certified Public Accountants 10
(x) Reports by Independent Certified Public Accountants 10
(y) Bills and Others Disbursements 10
5. Subcustodians 10
(a) Domestic Subcustodians 10
(b) Foreign Subcustodians 10
(c) Interim Subcustodians 11
(d) Special Subcustodians 11
(e) Termination of a Subcustodian 11
(f) Certification Regarding Foreign Subcustodians 11
6. Standard of Care 12
(a) General Standard of Care 12
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's Control, Armed 12
Conflict, Sovereign Risk, etc.
</TABLE>
<PAGE> 3
<TABLE>
<S> <C>
(c) Liability for Past Records 12
(d) Advice of Counsel 12
(e) Advice of the Fund and Others 12
(f) Instructions Appearing to be Genuine 13
(g) Exceptions from Liability 13
7. Liability of the Custodian for Actions of Others 13
(a) Domestic Subcustodians 13
(b) Liability for Acts and Omissions of Foreign Subcustodians 13
(c) Securities Systems, Interim Subcustodians, Special Subcustodians, Securities 13
Depositories and Clearing Agencies
(d) Defaults or Insolvency's of Brokers, Banks, Etc. 14
(e) Reimbursement of Expenses 14
8. Indemnification 14
(a) Indemnification by Fund 14
(b) Indemnification by Custodian 14
9. Advances 14
10. Liens 15
11. Compensation 15
12. Powers of Attorney 15
13. Termination and Assignment 15
14. Additional Funds 15
15. Notices 16
16. Miscellaneous 16
</TABLE>
<PAGE> 4
CUSTODY AGREEMENT
This agreement made as of this day of , 1999, between UMB Bank,
n.a., a national banking association with its principal place of business
located at Kansas City, Missouri (hereinafter "Custodian"), and each of the
Funds listed on Appendix B hereof, together with such additional Funds which
shall be made parties to this Agreement by the execution of Appendix B hereto
(individually, a "Fund" and collectively, the "Funds").
WITNESSETH:
WHEREAS, each Fund is registered as an open-end management investment
company under the Investment Company Act of 1940, as amended; and
WHEREAS, each Fund desires to appoint Custodian as its custodian for
the custody of Assets (as hereinafter defined) owned by such Fund which Assets
are to be held in such accounts as such Fund may establish from time to time;
and
WHEREAS, Custodian is willing to accept such appointment on the terms
and conditions hereof.
NOW, THEREFORE, in consideration of the mutual promises contained
herein, the parties hereto, intending to be legally bound, mutually covenant and
agree as follows:
1. APPOINTMENT OF CUSTODIAN.
Each Fund hereby constitutes and appoints the Custodian as custodian of
Assets belonging to each such Fund which have been or may be from time to time
deposited with the Custodian. Custodian accepts such appointment as a custodian
and agrees to perform the duties and responsibilities of Custodian as set forth
herein on the conditions set forth herein.
2. DEFINITIONS.
For purposes of this Agreement, the following terms shall have the
meanings so indicated:
(a) "Security" or "Securities" shall mean stocks, bonds, bills, rights,
script, warrants, interim certificates and all negotiable or nonnegotiable paper
commonly known as Securities and other instruments or obligations.
(b) "Assets" shall mean Securities, monies and other property held by
the Custodian for the benefit of a Fund.
(c)(1) "Instructions", as used herein, shall mean: (i) a tested telex,
a written (including, without limitation, facsimile transmission) request,
direction, instruction or certification signed or initialed by or on behalf of a
Fund by an Authorized Person; (ii) a telephonic or other oral communication from
a person the Custodian reasonably believes to be an Authorized Person; or (iii)
a communication effected directly between an electro-mechanical or electronic
device or system (including, without limitation, computers) on behalf of a Fund.
Instructions in the form of oral communications shall be confirmed by the
appropriate Fund by tested telex or in writing in the manner set forth in clause
(i) above, but the lack of such confirmation shall in no way affect any action
taken by the Custodian in reliance upon such oral Instructions prior to the
Custodian's receipt of such confirmation. Each Fund authorizes the Custodian to
record any and all telephonic or other oral Instructions communicated to the
Custodian.
(c)(2) "Special Instructions", as used herein, shall mean Instructions
countersigned or confirmed in writing by the Treasurer or any Assistant
Treasurer of a Fund or any other person designated by the Treasurer of
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such Fund in writing, which countersignature or confirmation shall be included
on the same instrument containing the Instructions or on a separate instrument
relating thereto.
(c)(3) Instructions and Special Instructions shall be delivered to the
Custodian at the address and/or telephone, facsimile transmission or telex
number agreed upon from time to time by the Custodian and each Fund.
(c)(4) Where appropriate, Instructions and Special Instructions shall
be continuing instructions.
3. DELIVERY OF CORPORATE DOCUMENTS.
Each of the parties to this Agreement represents that its execution
does not violate any of the provisions of its respective charter, articles of
incorporation, articles of association or bylaws and all required corporate
action to authorize the execution and delivery of this Agreement has been taken.
Each Fund has furnished the Custodian with copies, properly certified
or authenticated, with all amendments or supplements thereto, of the following
documents:
(a) Certificate of Incorporation (or equivalent document) of the Fund
as in effect on the date hereof;
(b) By-Laws of the Fund as in effect on the date hereof;
(c) Resolutions of the Board of Directors of the Fund appointing the
Custodian and approving the form of this Agreement; and
(d) The Fund's current prospectus and statements of additional
information.
Each Fund shall promptly furnish the Custodian with copies of any
updates, amendments or supplements to the foregoing documents.
In addition, each Fund has delivered or will promptly deliver to the
Custodian, copies of the Resolution(s) of its Board of Directors or Trustees and
all amendments or supplements thereto, properly certified or authenticated,
designating certain officers or employees of each such Fund who will have
continuing authority to certify to the Custodian: (a) the names, titles,
signatures and scope of authority of all persons authorized to give Instructions
or any other notice, request, direction, instruction, certificate or instrument
on behalf of each Fund, and (b) the names, titles and signatures of those
persons authorized to countersign or confirm Special Instructions on behalf of
each Fund (in both cases collectively, the "Authorized Persons" and
individually, an "Authorized Person"). Such Resolutions and certificates may be
accepted and relied upon by the Custodian as conclusive evidence of the facts
set forth therein and shall be considered to be in full force and effect until
delivery to the Custodian of a similar Resolution or certificate to the
contrary. Upon delivery of a certificate which deletes or does not include the
name(s) of a person previously authorized to give Instructions or to countersign
or confirm Special Instructions, such persons shall no longer be considered an
Authorized Person authorized to give Instructions or to countersign or confirm
Special Instructions. Unless the certificate specifically requires that the
approval of anyone else will first have been obtained, the Custodian will be
under no obligation to inquire into the right of the person giving such
Instructions or Special Instructions to do so. Notwithstanding any of the
foregoing, no Instructions or Special Instructions received by the Custodian
from a Fund will be deemed to authorize or permit any director, trustee,
officer, employee, or agent of such Fund to withdraw any of the Assets of such
Fund upon the mere receipt of such authorization, Special Instructions or
Instructions from such director, trustee, officer, employee or agent.
4. POWERS AND DUTIES OF CUSTODIAN AND DOMESTIC SUBCUSTODIAN.
Except for Assets held by any Subcustodian appointed pursuant to
Sections 5(b), (c), or (d) of this Agreement, the Custodian shall have and
perform the powers and duties hereinafter set forth in this Section 4. For
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purposes of this Section 4 all references to powers and duties of the
"Custodian" shall also refer to any Domestic Subcustodian appointed pursuant to
Section 5(a).
(a) Safekeeping.
The Custodian will keep safely the Assets of each Fund which are
delivered to it from time to time. The Custodian shall not be responsible for
any property of a Fund held or received by such Fund and not delivered to the
Custodian.
(b) Manner of Holding Securities.
(1) The Custodian shall at all times hold Securities of each Fund
either: (i) by physical possession of the share certificates or other
instruments representing such Securities in registered or bearer form; or (ii)
in book-entry form by a Securities System (as hereinafter defined) in accordance
with the provisions of sub-paragraph (3) below.
(2) The Custodian may hold registrable portfolio Securities which
have been delivered to it in physical form, by registering the same in the name
of the appropriate Fund or its nominee, or in the name of the Custodian or its
nominee, for whose actions such Fund and Custodian, respectively, shall be fully
responsible. Upon the receipt of Instructions, the Custodian shall hold such
Securities in street certificate form, so called, with or without any indication
of fiduciary capacity. However, unless it receives Instructions to the contrary,
the Custodian will register all such portfolio Securities in the name of the
Custodian's authorized nominee. All such Securities shall be held in an account
of the Custodian containing only assets of the appropriate Fund or only assets
held by the Custodian as a fiduciary, provided that the records of the Custodian
shall indicate at all times the Fund or other customer for which such Securities
are held in such accounts and the respective interests therein.
(3) The Custodian may deposit and/or maintain domestic Securities
owned by a Fund in, and each Fund hereby approves use of: (a) The Depository
Trust Company; (b) The Participants Trust Company; and (c) any book-entry system
as provided in (i) Subpart O of Treasury Circular No. 300, 31 CFR 306.115, (ii)
Subpart B of Treasury Circular Public Debt Series No. 27-76, 31 CFR 350.2, or
(iii) the book-entry regulations of federal agencies substantially in the form
of 31 CFR 306.115. Upon the receipt of Special Instructions, the Custodian may
deposit and/or maintain domestic Securities owned by a Fund in any other
domestic clearing agency registered with the Securities and Exchange Commission
("SEC") under Section 17A of the Securities Exchange Act of 1934 (or as may
otherwise be authorized by the SEC to serve in the capacity of depository or
clearing agent for the Securities or other assets of investment companies) which
acts as a Securities depository. Each of the foregoing shall be referred to in
this Agreement as a "Securities System", and all such Securities Systems shall
be listed on the attached Appendix A. Use of a Securities System shall be in
accordance with applicable Federal Reserve Board and SEC rules and regulations,
if any, and subject to the following provisions:
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(i) The Custodian may deposit the Securities directly or
through one or more agents or Subcustodians which are also qualified to act as
custodians for investment companies.
(ii) The Custodian shall deposit and/or maintain the
Securities in a Securities System, provided that such Securities are represented
in an account ("Account") of the Custodian in the Securities System that
includes only assets held by the Custodian as a fiduciary, custodian or
otherwise for customers.
(iii) The books and records of the Custodian shall at all
times identify those Securities belonging to any one or more Funds which are
maintained in a Securities System.
(iv) The Custodian shall pay for Securities purchased for the
account of a Fund only upon (a) receipt of advice from the Securities System
that such Securities have been transferred to the Account of the Custodian in
accordance with the rules of the Securities System, and (b) the making of an
entry on the records of the Custodian to reflect such payment and transfer for
the account of such Fund. The Custodian shall transfer Securities sold for the
account of a Fund only upon (a) receipt of advice from the Securities System
that payment for such Securities has been transferred to the Account of the
Custodian in accordance with the rules of the Securities System, and (b) the
making of an entry on the records of the Custodian to reflect such transfer and
payment for the account of such Fund. Copies of all advices from the Securities
System relating to transfers of Securities for the account of a Fund shall be
maintained for such Fund by the Custodian. The Custodian shall deliver to a Fund
on the next succeeding business day daily transaction reports that shall include
each day's transactions in the Securities System for the account of such Fund.
Such transaction reports shall be delivered to such Fund or any agent designated
by such Fund pursuant to Instructions, by computer or in such other manner as
such Fund and Custodian may agree.
(v) The Custodian shall, if requested by a Fund pursuant to
Instructions, provide such Fund with reports obtained by the Custodian or any
Subcustodian with respect to a Securities System's accounting system, internal
accounting control and procedures for safeguarding Securities deposited in the
Securities System.
(vi) Upon receipt of Special Instructions, the Custodian shall
terminate the use of any Securities System on behalf of a Fund as promptly as
practicable and shall take all actions reasonably practicable to safeguard the
Securities of such Fund maintained with such Securities System.
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(c) Free Delivery of Assets.
Notwithstanding any other provision of this Agreement and except as
provided in Section 3 hereof, the Custodian, upon receipt of Special
Instructions, will undertake to make free delivery of Assets, provided such
Assets are on hand and available, in connection with a Fund's transactions and
to transfer such Assets to such broker, dealer, Subcustodian, bank, agent,
Securities System or otherwise as specified in such Special Instructions.
(d) Exchange of Securities.
Upon receipt of Instructions, the Custodian will exchange portfolio
Securities held by it for a Fund for other Securities or cash paid in connection
with any reorganization, recapitalization, merger, consolidation, or conversion
of convertible Securities, and will deposit any such Securities in accordance
with the terms of any reorganization or protective plan.
Without Instructions, the Custodian is authorized to exchange Securities
held by it in temporary form for Securities in definitive form, to surrender
Securities for transfer into a name or nominee name as permitted in Section
4(b)(2), to effect an exchange of shares in a stock split or when the par value
of the stock is changed, to sell any fractional shares, and, upon receiving
payment therefor, to surrender bonds or other Securities held by it at maturity
or call.
(e) Purchases of Assets.
(1) Securities Purchases. In accordance with Instructions, the
Custodian shall, with respect to a purchase of Securities, pay for such
Securities out of monies held for a Fund's account for which the purchase was
made, but only insofar as monies are available therein for such purpose, and
receive the portfolio Securities so purchased. Unless the Custodian has received
Special Instructions to the contrary, such payment will be made only upon
receipt of Securities by the Custodian, a clearing corporation of a national
Securities exchange of which the Custodian is a member, or a Securities System
in accordance with the provisions of Section 4(b)(3) hereof. Notwithstanding the
foregoing, upon receipt of Instructions: (i) in connection with a repurchase
agreement, the Custodian may release funds to a Securities System prior to the
receipt of advice from the Securities System that the Securities underlying such
repurchase agreement have been transferred by book-entry into the Account
maintained with such Securities System by the Custodian, provided that the
Custodian's instructions to the Securities System require that the Securities
System may make payment of such funds to the other party to the repurchase
agreement only upon transfer by book-entry of the Securities underlying the
repurchase agreement into such Account; (ii) in the case of Interest Bearing
Deposits, currency deposits, and other deposits, foreign exchange transactions,
futures contracts or options, pursuant to Sections 4(g), 4(h), 4(l), and 4(m)
hereof, the Custodian may make payment therefor before receipt of an advice of
transaction; and (iii) in the case of Securities as to which payment for the
Security and receipt of the instrument evidencing the Security are under
generally accepted trade practice or the terms of the instrument representing
the Security expected to take place in different locations or through separate
parties, such as commercial paper which is indexed to foreign currency exchange
rates, derivatives and similar Securities, the Custodian may make payment for
such Securities prior to delivery thereof in accordance with such generally
accepted trade practice or the terms of the instrument representing such
Security.
(2) Other Assets Purchased. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall pay for and receive other Assets
for the account of a Fund as provided in Instructions.
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(f) Sales of Assets.
(1) Securities Sold. In accordance with Instructions, the Custodian
will, with respect to a sale, deliver or cause to be delivered the Securities
thus designated as sold to the broker or other person specified in the
Instructions relating to such sale. Unless the Custodian has received Special
Instructions to the contrary, such delivery shall be made only upon receipt of
payment therefor in the form of: (a) cash, certified check, bank cashier's
check, bank credit, or bank wire transfer; (b) credit to the account of the
Custodian with a clearing corporation of a national Securities exchange of which
the Custodian is a member; or (c) credit to the Account of the Custodian with a
Securities System, in accordance with the provisions of Section 4(b)(3) hereof.
Notwithstanding the foregoing, Securities held in physical form may be delivered
and paid for in accordance with "street delivery custom" to a broker or its
clearing agent, against delivery to the Custodian of a receipt for such
Securities, provided that the Custodian shall have taken reasonable steps to
ensure prompt collection of the payment for, or return of, such Securities by
the broker or its clearing agent, and provided further that the Custodian shall
not be responsible for the selection of or the failure or inability to perform
of such broker or its clearing agent or for any related loss arising from
delivery or custody of such Securities prior to receiving payment therefor.
(2) Other Assets Sold. Upon receipt of Instructions and except as
otherwise provided herein, the Custodian shall receive payment for and deliver
other Assets for the account of a Fund as provided in Instructions.
(g) Options.
(1) Upon receipt of Instructions relating to the purchase of an option
or sale of a covered call option, the Custodian shall: (a) receive and retain
confirmations or other documents, if any, evidencing the purchase or writing of
the option by a Fund; (b) if the transaction involves the sale of a covered call
option, deposit and maintain in a segregated account the Securities (either
physically or by book-entry in a Securities System) subject to the covered call
option written on behalf of such Fund; and (c) pay, release and/or transfer such
Securities, cash or other Assets in accordance with any notices or other
communications evidencing the expiration, termination or exercise of such
options which are furnished to the Custodian by the Options Clearing Corporation
(the "OCC"), the securities or options exchanges on which such options were
traded, or such other organization as may be responsible for handling such
option transactions.
(2) Upon receipt of Instructions relating to the sale of a naked option
(including stock index and commodity options), the Custodian, the appropriate
Fund and the broker-dealer shall enter into an agreement to comply with the
rules of the OCC or of any registered national securities exchange or similar
organizations(s). Pursuant to that agreement and such Fund's Instructions, the
Custodian shall: (a) receive and retain confirmations or other documents, if
any, evidencing the writing of the option; (b) deposit and maintain in a
segregated account, Securities (either physically or by book-entry in a
Securities System), cash and/or other Assets; and (c) pay, release and/or
transfer such Securities, cash or other Assets in accordance with any such
agreement and with any notices or other communications evidencing the
expiration, termination or exercise of such option which are furnished to the
Custodian by the OCC, the securities or options exchanges on which such options
were traded, or such other organization as may be responsible for handling such
option transactions. The appropriate Fund and the broker-dealer shall be
responsible for determining the quality and quantity of assets held in any
segregated account established in compliance with applicable margin maintenance
requirements and the performance of other terms of any option contract.
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(h) Futures Contracts.
Upon receipt of Instructions, the Custodian shall enter into a futures
margin procedural agreement among the appropriate Fund, the Custodian and the
designated futures commission merchant (a "Procedural Agreement"). Under the
Procedural Agreement the Custodian shall: (a) receive and retain confirmations,
if any, evidencing the purchase or sale of a futures contract or an option on a
futures contract by such Fund; (b) deposit and maintain in a segregated account
cash, Securities and/or other Assets designated as initial, maintenance or
variation "margin" deposits intended to secure such Fund's performance of its
obligations under any futures contracts purchased or sold, or any options on
futures contracts written by such Fund, in accordance with the provisions of any
Procedural Agreement designed to comply with the provisions of the Commodity
Futures Trading Commission and/or any commodity exchange or contract market
(such as the Chicago Board of Trade), or any similar organization(s), regarding
such margin deposits; and (c) release Assets from and/or transfer Assets into
such margin accounts only in accordance with any such Procedural Agreements. The
appropriate Fund and such futures commission merchant shall be responsible for
determining the type and amount of Assets held in the segregated account or paid
to the broker-dealer in compliance with applicable margin maintenance
requirements and the performance of any futures contract or option on a futures
contract in accordance with its terms.
(i) Segregated Accounts.
Upon receipt of Instructions, the Custodian shall establish and maintain
on its books a segregated account or accounts for and on behalf of a Fund, into
which account or accounts may be transferred Assets of such Fund, including
Securities maintained by the Custodian in a Securities System pursuant to
Paragraph (b)(3) of this Section 4, said account or accounts to be maintained
(i) for the purposes set forth in Sections 4(g), 4(h) and 4(n) and (ii) for the
purpose of compliance by such Fund with the procedures required by the SEC
Investment Company Act Release Number 10666 or any subsequent release or
releases relating to the maintenance of segregated accounts by registered
investment companies, or (iii) for such other purposes as may be set forth, from
time to time, in Special Instructions. The Custodian shall not be responsible
for the determination of the type or amount of Assets to be held in any
segregated account referred to in this paragraph, or for compliance by the Fund
with required procedures noted in (ii) above.
(j) Depositary Receipts.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered Securities to the depositary used for such Securities by an issuer
of American Depositary Receipts or International Depositary Receipts
(hereinafter referred to, collectively, as "ADRs"), against a written receipt
therefor adequately describing such Securities and written evidence satisfactory
to the organization surrendering the same that the depositary has acknowledged
receipt of instructions to issue ADRs with respect to such Securities in the
name of the Custodian or a nominee of the Custodian, for delivery in accordance
with such instructions.
Upon receipt of Instructions, the Custodian shall surrender or cause to be
surrendered ADRs to the issuer thereof, against a written receipt therefor
adequately describing the ADRs surrendered and written evidence satisfactory to
the organization surrendering the same that the issuer of the ADRs has
acknowledged receipt of instructions to cause its depository to deliver the
Securities underlying such ADRs in accordance with such instructions.
(k) Corporate Actions, Put Bonds, Called Bonds, Etc.
Upon receipt of Instructions, the Custodian shall: (a) deliver warrants,
puts, calls, rights or similar Securities to the issuer or trustee thereof (or
to the agent of such issuer or trustee) for the purpose of exercise or sale,
provided that the new Securities, cash or other Assets, if any, acquired as a
result of such actions are to be delivered to the Custodian; and (b) deposit
Securities upon invitations for tenders thereof, provided that the consideration
for such Securities is to be paid or delivered to the Custodian, or the tendered
Securities are to be returned to the Custodian.
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Notwithstanding any provision of this Agreement to the contrary, the
Custodian shall take all necessary action, unless otherwise directed to the
contrary in Instructions, to comply with the terms of all mandatory or
compulsory exchanges, calls, tenders, redemptions, or similar rights of security
ownership, and shall notify the appropriate Fund of such action in writing by
facsimile transmission or in such other manner as such Fund and Custodian may
agree in writing.
The Fund agrees that if it gives an Instruction for the performance of an
act on the last permissible date of a period established by any optional offer
or on the last permissible date for the performance of such act, the Fund shall
hold the Bank harmless from any adverse consequences in connection with acting
upon or failing to act upon such Instructions.
(l) Interest Bearing Deposits.
Upon receipt of Instructions directing the Custodian to purchase interest
bearing fixed term and call deposits (hereinafter referred to, collectively, as
"Interest Bearing Deposits") for the account of a Fund, the Custodian shall
purchase such Interest Bearing Deposits in the name of such Fund with such banks
or trust companies, including the Custodian, any Subcustodian or any subsidiary
or affiliate of the Custodian (hereinafter referred to as "Banking
Institutions"), and in such amounts as such Fund may direct pursuant to
Instructions. Such Interest Bearing Deposits may be denominated in U.S. dollars
or other currencies, as such Fund may determine and direct pursuant to
Instructions. The responsibilities of the Custodian to a Fund for Interest
Bearing Deposits issued by the Custodian shall be that of a U.S. bank for a
similar deposit. With respect to Interest Bearing Deposits other than those
issued by the Custodian, (a) the Custodian shall be responsible for the
collection of income and the transmission of cash to and from such accounts; and
(b) the Custodian shall have no duty with respect to the selection of the
Banking Institution or for the failure of such Banking Institution to pay upon
demand.
(m) Foreign Exchange Transactions.
(l) Each Fund hereby appoints the Custodian as its agent in the
execution of all currency exchange transactions. The Custodian agrees to provide
exchange rate and U.S. Dollar information, in writing, to the Funds. Such
information shall be supplied by the Custodian at least by the business day
prior to the value date of the foreign exchange transaction, provided that the
Custodian receives the request for such information at least two business days
prior to the value date of the transaction.
(2) Upon receipt of Instructions, the Custodian shall settle foreign
exchange contracts or options to purchase and sell foreign currencies for spot
and future delivery on behalf of and for the account of a Fund with such
currency brokers or Banking Institutions as such Fund may determine and direct
pursuant to Instructions. If, in its Instructions, a Fund does not direct the
Custodian to utilize a particular currency broker or Banking Institution, the
Custodian is authorized to select such currency broker or Banking Institution as
it deems appropriate to execute the Fund's foreign currency transaction.
(3) Each Fund accepts full responsibility for its use of third party
foreign exchange brokers and for execution of said foreign exchange contracts
and understands that the Fund shall be responsible for any and all costs and
interest charges which may be incurred as a result of the failure or delay of
its third party broker to deliver foreign exchange. The Custodian shall have no
responsibility or liability with respect to the selection of the currency
brokers or Banking Institutions with which a Fund deals or the performance of
such brokers or Banking Institutions.
(4) Notwithstanding anything to the contrary contained herein, upon
receipt of Instructions the Custodian may, in connection with a foreign exchange
contract, make free outgoing payments of cash in the form of U.S. Dollars or
foreign currency prior to receipt of confirmation of such foreign exchange
contract or confirmation that the countervalue currency completing such contract
has been delivered or received.
(5) The Custodian shall not be obligated to enter into foreign exchange
transactions as principal. However, if the Custodian has made available to a
Fund its services as a principal in foreign exchange transactions
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and subject to any separate agreement between the parties relating to such
transactions, the Custodian shall enter into foreign exchange contracts or
options to purchase and sell foreign currencies for spot and future delivery on
behalf of and for the account of the Fund, with the Custodian as principal.
(n) Pledges or Loans of Securities.
(1) Upon receipt of Instructions from a Fund, the Custodian will
release or cause to be released Securities held in custody to the pledgees
designated in such Instructions by way of pledge or hypothecation to secure
loans incurred by such Fund with various lenders including but not limited to
UMB Bank, n.a.; provided, however, that the Securities shall be released only
upon payment to the Custodian of the monies borrowed, except that in cases where
additional collateral is required to secure existing borrowings, further
Securities may be released or delivered, or caused to be released or delivered
for that purpose upon receipt of Instructions. Upon receipt of Instructions, the
Custodian will pay, but only from funds available for such purpose, any such
loan upon re-delivery to it of the Securities pledged or hypothecated therefor
and upon surrender of the note or notes evidencing such loan. In lieu of
delivering collateral to a pledgee, the Custodian, on the receipt of
Instructions, shall transfer the pledged Securities to a segregated account for
the benefit of the pledgee.
(2) Upon receipt of Special Instructions, and execution of a separate
Securities Lending Agreement, the Custodian will release Securities held in
custody to the borrower designated in such Instructions and may, except as
otherwise provided below, deliver such Securities prior to the receipt of
collateral, if any, for such borrowing, provided that, in case of loans of
Securities held by a Securities System that are secured by cash collateral, the
Custodian's instructions to the Securities System shall require that the
Securities System deliver the Securities of the appropriate Fund to the borrower
thereof only upon receipt of the collateral for such borrowing. The Custodian
shall have no responsibility or liability for any loss arising from the delivery
of Securities prior to the receipt of collateral. Upon receipt of Instructions
and the loaned Securities, the Custodian will release the collateral to the
borrower.
(o) Stock Dividends, Rights, Etc.
The Custodian shall receive and collect all stock dividends, rights, and
other items of like nature and, upon receipt of Instructions, take action with
respect to the same as directed in such Instructions.
(p) Routine Dealings.
The Custodian will, in general, attend to all routine and mechanical
matters in accordance with industry standards in connection with the sale,
exchange, substitution, purchase, transfer, or other dealings with Securities or
other property of each Fund except as may be otherwise provided in this
Agreement or directed from time to time by Instructions from any particular
Fund. The Custodian may also make payments to itself or others from the Assets
for disbursements and out-of-pocket expenses incidental to handling Securities
or other similar items relating to its duties under this Agreement, provided
that all such payments shall be accounted for to the appropriate Fund.
(q) Collections.
The Custodian shall (a) collect amounts due and payable to each Fund with
respect to portfolio Securities and other Assets; (b) promptly credit to the
account of each Fund all income and other payments relating to portfolio
Securities and other Assets held by the Custodian hereunder upon Custodian's
receipt of such income or payments or as otherwise agreed in writing by the
Custodian and any particular Fund; (c) promptly endorse and deliver any
instruments required to effect such collection; and (d) promptly execute
ownership and other certificates and affidavits for all federal, state, local
and foreign tax purposes in connection with receipt of income or other payments
with respect to portfolio Securities and other Assets, or in connection with the
transfer of such Securities or other Assets; provided, however, that with
respect to portfolio Securities registered in so-called street name, or physical
Securities with variable interest rates, the Custodian shall use its best
efforts to collect amounts due and payable to any such Fund. The Custodian shall
notify a Fund in writing by facsimile transmission or in such other
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manner as such Fund and Custodian may agree in writing if any amount payable
with respect to portfolio Securities or other Assets is not received by the
Custodian when due. The Custodian shall not be responsible for the collection of
amounts due and payable with respect to portfolio Securities or other Assets
that are in default.
(r) Bank Accounts.
Upon Instructions, the Custodian shall open and operate a bank account or
accounts on the books of the Custodian; provided that such bank account(s) shall
be in the name of the Custodian or a nominee thereof, for the account of one or
more Funds, and shall be subject only to draft or order of the Custodian. The
responsibilities of the Custodian to any one or more such Funds for deposits
accepted on the Custodian's books shall be that of a U.S. bank for a similar
deposit.
(s) Dividends, Distributions and Redemptions.
To enable each Fund to pay dividends or other distributions to
shareholders of each such Fund and to make payment to shareholders who have
requested repurchase or redemption of their shares of each such Fund
(collectively, the "Shares"), the Custodian shall release cash or Securities
insofar as available. In the case of cash, the Custodian shall, upon the receipt
of Instructions, transfer such funds by check or wire transfer to any account at
any bank or trust company designated by each such Fund in such Instructions. In
the case of Securities, the Custodian shall, upon the receipt of Special
Instructions, make such transfer to any entity or account designated by each
such Fund in such Special Instructions.
(t) Proceeds from Shares Sold.
The Custodian shall receive funds representing cash payments received for
shares issued or sold from time to time by each Fund, and shall credit such
funds to the account of the appropriate Fund. The Custodian shall notify the
appropriate Fund of Custodian's receipt of cash in payment for shares issued by
such Fund by facsimile transmission or in such other manner as such Fund and the
Custodian shall agree. Upon receipt of Instructions, the Custodian shall: (a)
deliver all federal funds received by the Custodian in payment for shares as may
be set forth in such Instructions and at a time agreed upon between the
Custodian and such Fund; and (b) make federal funds available to a Fund as of
specified times agreed upon from time to time by such Fund and the Custodian, in
the amount of checks received in payment for shares which are deposited to the
accounts of such Fund.
(u) Proxies and Notices; Compliance with the Shareholders Communication
Act of 1985.
The Custodian shall deliver or cause to be delivered to the appropriate
Fund all forms of proxies, all notices of meetings, and any other notices or
announcements affecting or relating to Securities owned by such Fund that are
received by the Custodian, any Subcustodian, or any nominee of either of them,
and, upon receipt of Instructions, the Custodian shall execute and deliver, or
cause such Subcustodian or nominee to execute and deliver, such proxies or other
authorizations as may be required. Except as directed pursuant to Instructions,
neither the Custodian nor any Subcustodian or nominee shall vote upon any such
Securities, or execute any proxy to vote thereon, or give any consent or take
any other action with respect thereto.
The Custodian will not release the identity of any Fund to an issuer which
requests such information pursuant to the Shareholder Communications Act of 1985
for the specific purpose of direct communications between such issuer and any
such Fund unless a particular Fund directs the Custodian otherwise in writing.
(v) Books and Records.
The Custodian shall maintain such records relating to its activities under
this Agreement as are required to be maintained by Rule 31a-1 under the
Investment Company Act of 1940 ("the 1940 Act") and to preserve them for the
periods prescribed in Rule 31a-2 under the 1940 Act. These records shall be open
for inspection by duly authorized officers, employees or agents (including
independent public accountants) of the appropriate Fund during normal business
hours of the Custodian.
10
<PAGE> 14
The Custodian shall provide accountings relating to its activities under
this Agreement as shall be agreed upon by each Fund and the Custodian.
(w) Opinion of Fund's Independent Certified Public Accountants.
The Custodian shall take all reasonable action as each Fund may request to
obtain from year to year favorable opinions from each such Fund's independent
certified public accountants with respect to the Custodian's activities
hereunder and in connection with the preparation of each such Fund's periodic
reports to the SEC and with respect to any other requirements of the SEC.
(x) Reports by Independent Certified Public Accountants.
At the request of a Fund, the Custodian shall deliver to such Fund a
written report prepared by the Custodian's independent certified public
accountants with respect to the services provided by the Custodian under this
Agreement, including, without limitation, the Custodian's accounting system,
internal accounting control and procedures for safeguarding cash, Securities and
other Assets, including cash, Securities and other Assets deposited and/or
maintained in a Securities System or with a Subcustodian. Such report shall be
of sufficient scope and in sufficient detail as may reasonably be required by
such Fund and as may reasonably be obtained by the Custodian.
(y) Bills and Other Disbursements.
Upon receipt of Instructions, the Custodian shall pay, or cause to be
paid, all bills, statements, or other obligations of a Fund.
5. SUBCUSTODIANS.
From time to time, in accordance with the relevant provisions of this
Agreement, the Custodian may appoint one or more Domestic Subcustodians, Foreign
Subcustodians, Special Subcustodians, or Interim Subcustodians (as each are
hereinafter defined) to act on behalf of any one or more Funds. A Domestic
Subcustodian, in accordance with the provisions of this Agreement, may also
appoint a Foreign Subcustodian, Special Subcustodian, or Interim Subcustodian to
act on behalf of any one or more Funds. For purposes of this Agreement, all
Domestic Subcustodians, Foreign Subcustodians, Special Subcustodians and Interim
Subcustodians shall be referred to collectively as "Subcustodians".
(a) Domestic Subcustodians.
The Custodian may, at any time and from time to time, appoint any bank as
defined in Section 2(a)(5) of the 1940 Act or any trust company or other entity,
any of which meet the requirements of a custodian under Section 17(f) of the
1940 Act and the rules and regulations thereunder, to act for the Custodian on
behalf of any one or more Funds as a subcustodian for purposes of holding Assets
of such Fund(s) and performing other functions of the Custodian within the
United States (a "Domestic Subcustodian"). Each Fund shall approve in writing
the appointment of the proposed Domestic Subcustodian; and the Custodian's
appointment of any such Domestic Subcustodian shall not be effective without
such prior written approval of the Fund(s). Each such duly approved Domestic
Subcustodian shall be listed on Appendix A attached hereto, as it may be
amended, from time to time.
(b) Foreign Subcustodians.
The Custodian may at any time appoint, or cause a Domestic Subcustodian to
appoint, any bank, trust company or other entity meeting the requirements of an
"eligible foreign custodian" under Section 17(f) of the 1940 Act and the rules
and regulations thereunder to act for the Custodian on behalf of any one or more
Funds as a subcustodian or sub-subcustodian (if appointed by a Domestic
Subcustodian) for purposes of holding Assets of the Fund(s) and performing other
functions of the Custodian in countries other than the United States of America
11
<PAGE> 15
(hereinafter referred to as a "Foreign Subcustodian" in the context of either a
subcustodian or a sub-subcustodian); provided that the Custodian shall have
obtained written confirmation from each Fund of the approval of the Board of
Directors or other governing body of each such Fund (which approval may be
withheld in the sole discretion of such Board of Directors or other governing
body or entity) with respect to (i) the identity of any proposed Foreign
Subcustodian (including branch designation), (ii) the country or countries in
which, and the securities depositories or clearing agencies (hereinafter
"Securities Depositories and Clearing Agencies"), if any, through which, the
Custodian or any proposed Foreign Subcustodian is authorized to hold Securities
and other Assets of each such Fund, and (iii) the form and terms of the
subcustodian agreement to be entered into with such proposed Foreign
Subcustodian. Each such duly approved Foreign Subcustodian and the countries
where and the Securities Depositories and Clearing Agencies through which they
may hold Securities and other Assets of the Fund(s) shall be listed on Appendix
A attached hereto, as it may be amended, from time to time. Each Fund shall be
responsible for informing the Custodian sufficiently in advance of a proposed
investment which is to be held in a country in which no Foreign Subcustodian is
authorized to act, in order that there shall be sufficient time for the
Custodian, or any Domestic Subcustodian, to effect the appropriate arrangements
with a proposed Foreign Subcustodian, including obtaining approval as provided
in this Section 5(b). In connection with the appointment of any Foreign
Subcustodian, the Custodian shall, or shall cause the Domestic Subcustodian to,
enter into a subcustodian agreement with the Foreign Subcustodian in form and
substance approved by each such Fund. The Custodian shall not consent to the
amendment of, and shall cause any Domestic Subcustodian not to consent to the
amendment of, any agreement entered into with a Foreign Subcustodian, which
materially affects any Fund's rights under such agreement, except upon prior
written approval of such Fund pursuant to Special Instructions.
(c) Interim Subcustodians.
Notwithstanding the foregoing, in the event that a Fund shall invest in an
Asset to be held in a country in which no Foreign Subcustodian is authorized to
act, the Custodian shall notify such Fund in writing by facsimile transmission
or in such other manner as such Fund and the Custodian shall agree in writing of
the unavailability of an approved Foreign Subcustodian in such country; and upon
the receipt of Special Instructions from such Fund, the Custodian shall, or
shall cause its Domestic Subcustodian to, appoint or approve an entity (referred
to herein as an "Interim Subcustodian") designated in such Special Instructions
to hold such Security or other Asset.
(d) Special Subcustodians.
Upon receipt of Special Instructions, the Custodian shall, on behalf of a
Fund, appoint one or more banks, trust companies or other entities designated in
such Special Instructions to act for the Custodian on behalf of such Fund as a
subcustodian for purposes of: (i) effecting third-party repurchase transactions
with banks, brokers, dealers or other entities through the use of a common
custodian or subcustodian; (ii) providing depository and clearing agency
services with respect to certain variable rate demand note Securities, (iii)
providing depository and clearing agency services with respect to dollar
denominated Securities, and (iv) effecting any other transactions designated by
such Fund in such Special Instructions. Each such designated subcustodian
(hereinafter referred to as a "Special Subcustodian") shall be listed on
Appendix A attached hereto, as it may be amended from time to time. In
connection with the appointment of any Special Subcustodian, the Custodian shall
enter into a subcustodian agreement with the Special Subcustodian in form and
substance approved by the appropriate Fund in Special Instructions. The
Custodian shall not amend any subcustodian agreement entered into with a Special
Subcustodian, or waive any rights under such agreement, except upon prior
approval pursuant to Special Instructions.
(e) Termination of a Subcustodian.
The Custodian may, at any time in its discretion upon notification to the
appropriate Fund(s), terminate any Subcustodian of such Fund(s) in accordance
with the termination provisions under the applicable subcustodian agreement, and
upon the receipt of Special Instructions, the Custodian will terminate any
Subcustodian in accordance with the termination provisions under the applicable
subcustodian agreement.
(f) Certification Regarding Foreign Subcustodians.
12
<PAGE> 16
Upon request of a Fund, the Custodian shall deliver to such Fund a
certificate stating: (i) the identity of each Foreign Subcustodian then acting
on behalf of the Custodian; (ii) the countries in which and the Securities
Depositories and Clearing Agencies through which each such Foreign Subcustodian
is then holding cash, Securities and other Assets of such Fund; and (iii) such
other information as may be requested by such Fund, and as the Custodian shall
be reasonably able to obtain, to evidence compliance with rules and regulations
under the 1940 Act.
6. STANDARD OF CARE.
(a) General Standard of Care.
The Custodian shall be liable to a Fund for all losses, damages and
reasonable costs and expenses suffered or incurred by such Fund resulting from
the negligence or willful misfeasance of the Custodian; provided, however, in no
event shall the Custodian be liable for special, indirect or consequential
damages arising under or in connection with this Agreement.
(b) Actions Prohibited by Applicable Law, Events Beyond Custodian's
Control, Sovereign Risk, Etc.
In no event shall the Custodian or any Domestic Subcustodian incur
liability hereunder (i) if the Custodian or any Subcustodian or Securities
System, or any subcustodian, Securities System, Securities Depository or
Clearing Agency utilized by the Custodian or any such Subcustodian, or any
nominee of the Custodian or any Subcustodian (individually, a "Person") is
prevented, forbidden or delayed from performing, or omits to perform, any act or
thing which this Agreement provides shall be performed or omitted to be
performed, by reason of: (a) any provision of any present or future law or
regulation or order of the United States of America, or any state thereof, or of
any foreign country, or political subdivision thereof or of any court of
competent jurisdiction (and neither the Custodian nor any other Person shall be
obligated to take any action contrary thereto); or (b) any event beyond the
control of the Custodian or other Person such as armed conflict, riots, strikes,
lockouts, labor disputes, equipment or transmission failures, natural disasters,
or failure of the mails, transportation, communications or power supply; or (ii)
for any loss, damage, cost or expense resulting from "Sovereign Risk." A
"Sovereign Risk" shall mean nationalization, expropriation, currency
devaluation, revaluation or fluctuation, confiscation, seizure, cancellation,
destruction or similar action by any governmental authority, de facto or de
jure; or enactment, promulgation, imposition or enforcement by any such
governmental authority of currency restrictions, exchange controls, taxes,
levies or other charges affecting a Fund's Assets; or acts of armed conflict,
terrorism, insurrection or revolution; or any other act or event beyond the
Custodian's or such other Person's control.
(c) Liability for Past Records.
Neither the Custodian nor any Domestic Subcustodian shall have any
liability in respect of any loss, damage or expense suffered by a Fund, insofar
as such loss, damage or expense arises from the performance of the Custodian or
any Domestic Subcustodian in reliance upon records that were maintained for such
Fund by entities other than the Custodian or any Domestic Subcustodian prior to
the Custodian's employment hereunder.
(d) Advice of Counsel.
The Custodian and all Domestic Subcustodians shall be entitled to receive
and act upon advice of counsel of its own choosing on all matters. The Custodian
and all Domestic Subcustodians shall be without liability for any actions taken
or omitted in good faith pursuant to the advice of counsel.
(e) Advice of the Fund and Others.
The Custodian and any Domestic Subcustodian may rely upon the advice of
any Fund and upon statements of such Fund's accountants and other persons
believed by it in good faith to be expert in matters upon which they are
consulted, and neither the Custodian nor any Domestic Subcustodian shall be
liable for any actions taken or omitted, in good faith, pursuant to such advice
or statements.
13
<PAGE> 17
(f) Instructions Appearing to be Genuine.
The Custodian and all Domestic Subcustodians shall be fully protected and
indemnified in acting as a custodian hereunder upon any Resolutions of the Board
of Directors or Trustees, Instructions, Special Instructions, advice, notice,
request, consent, certificate, instrument or paper appearing to it to be genuine
and to have been properly executed and shall, unless otherwise specifically
provided herein, be entitled to receive as conclusive proof of any fact or
matter required to be ascertained from any Fund hereunder a certificate signed
by any officer of such Fund authorized to countersign or confirm Special
Instructions.
(g) Exceptions from Liability.
Without limiting the generality of any other provisions hereof, neither
the Custodian nor any Domestic Subcustodian shall be under any duty or
obligation to inquire into, nor be liable for:
(i) the validity of the issue of any Securities purchased by or for
any Fund, the legality of the purchase thereof or evidence of ownership required
to be received by any such Fund, or the propriety of the decision to purchase or
amount paid therefor;
(ii) the legality of the sale of any Securities by or for any Fund,
or the propriety of the amount for which the same were sold; or
(iii) any other expenditures, encumbrances of Securities, borrowings
or similar actions with respect to any Fund's Assets;
and may, until notified to the contrary, presume that all Instructions or
Special Instructions received by it are not in conflict with or in any way
contrary to any provisions of any such Fund's Declaration of Trust, Partnership
Agreement, Articles of Incorporation or By-Laws or votes or proceedings of the
shareholders, trustees, partners or directors of any such Fund, or any such
Fund's currently effective Registration Statement on file with the SEC.
7. LIABILITY OF THE CUSTODIAN FOR ACTIONS OF OTHERS.
(a) Domestic Subcustodians
The Custodian shall be liable for the acts or omissions of any Domestic
Subcustodian to the same extent as if such actions or omissions were performed
by the Custodian itself.
(b) Liability for Acts and Omissions of Foreign Subcustodians.
The Custodian shall be liable to a Fund for any loss or damage to such
Fund caused by or resulting from the acts or omissions of any Foreign
Subcustodian to the extent that, under the terms set forth in the subcustodian
agreement between the Custodian or a Domestic Subcustodian and such Foreign
Subcustodian, the Foreign Subcustodian has failed to perform in accordance with
the standard of conduct imposed under such subcustodian agreement and the
Custodian or Domestic Subcustodian recovers from the Foreign Subcustodian under
the applicable subcustodian agreement.
(c) Securities Systems, Interim Subcustodians, Special Subcustodians,
Securities Depositories and Clearing Agencies.
The Custodian shall not be liable to any Fund for any loss, damage or
expense suffered or incurred by such Fund resulting from or occasioned by the
actions or omissions of a Securities System, Interim Subcustodian, Special
Subcustodian, or Securities Depository and Clearing Agency unless such loss,
damage or expense is caused by, or results from, the negligence or willful
misfeasance of the Custodian.
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<PAGE> 18
(d) Defaults or Insolvency's of Brokers, Banks, Etc.
The Custodian shall not be liable for any loss, damage or expense suffered
or incurred by any Fund resulting from or occasioned by the actions, omissions,
neglects, defaults or insolvency of any broker, bank, trust company or any other
person with whom the Custodian may deal (other than any of such entities acting
as a Subcustodian, Securities System or Securities Depository and Clearing
Agency, for whose actions the liability of the Custodian is set out elsewhere in
this Agreement) unless such loss, damage or expense is caused by, or results
from, the negligence or willful misfeasance of the Custodian.
(e) Reimbursement of Expenses.
Each Fund agrees to reimburse the Custodian for all out-of-pocket expenses
incurred by the Custodian in connection with this Agreement, but excluding
salaries and usual overhead expenses.
8. INDEMNIFICATION.
(a) Indemnification by Fund.
Subject to the limitations set forth in this Agreement, each Fund agrees
to indemnify and hold harmless the Custodian and its nominees from all losses,
damages and expenses (including attorneys' fees) suffered or incurred by the
Custodian or its nominee caused by or arising from actions taken by the
Custodian, its employees or agents in the performance of its duties and
obligations under this Agreement, including, but not limited to, any
indemnification obligations undertaken by the Custodian under any relevant
subcustodian agreement; provided, however, that such indemnity shall not apply
to the extent the Custodian is liable under Sections 6 or 7 hereof.
If any Fund requires the Custodian to take any action with respect to
Securities, which action involves the payment of money or which may, in the
opinion of the Custodian, result in the Custodian or its nominee assigned to
such Fund being liable for the payment of money or incurring liability of some
other form, such Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
(b) Indemnification by Custodian.
Subject to the limitations set forth in this Agreement and in addition to
the obligations provided in Sections 6 and 7, the Custodian agrees to indemnify
and hold harmless each Fund from all losses, damages and expenses suffered or
incurred by each such Fund caused by the negligence or willful misfeasance of
the Custodian.
9. ADVANCES.
In the event that, pursuant to Instructions, the Custodian or any
Subcustodian, Securities System, or Securities Depository or Clearing Agency
acting either directly or indirectly under agreement with the Custodian (each of
which for purposes of this Section 9 shall be referred to as "Custodian"), makes
any payment or transfer of funds on behalf of any Fund as to which there would
be, at the close of business on the date of such payment or transfer,
insufficient funds held by the Custodian on behalf of any such Fund, the
Custodian may, in its discretion without further Instructions, provide an
advance ("Advance") to any such Fund in an amount sufficient to allow the
completion of the transaction by reason of which such payment or transfer of
funds is to be made. In addition, in the event the Custodian is directed by
Instructions to make any payment or transfer of funds on behalf of any Fund as
to which it is subsequently determined that such Fund has overdrawn its cash
account with the Custodian as of the close of business on the date of such
payment or transfer, said overdraft shall constitute an Advance. Any Advance
shall be payable by the Fund on behalf of which the Advance was made on demand
by Custodian, unless otherwise agreed by such Fund and the Custodian, and shall
accrue interest from the date of the Advance to the date of payment by such Fund
to the Custodian at a rate agreed upon in writing from time to time by the
Custodian and such Fund. It is understood that any transaction in respect of
which the Custodian shall have made an
15
<PAGE> 19
Advance, including but not limited to a foreign exchange contract or transaction
in respect of which the Custodian is not acting as a principal, is for the
account of and at the risk of the Fund on behalf of which the Advance was made,
and not, by reason of such Advance, deemed to be a transaction undertaken by the
Custodian for its own account and risk. The Custodian and each of the Funds
which are parties to this Agreement acknowledge that the purpose of Advances is
to finance temporarily the purchase or sale of Securities for prompt delivery in
accordance with the settlement terms of such transactions or to meet emergency
expenses not reasonably foreseeable by a Fund. The Custodian shall promptly
notify the appropriate Fund of any Advance. Such notification shall be sent by
facsimile transmission or in such other manner as such Fund and the Custodian
may agree.
10. LIENS.
The Bank shall have a lien on the Property in the Custody Account to
secure payment of fees and expenses for the services rendered under this
Agreement. If the Bank advances cash or securities to the Fund for any purpose
or in the event that the Bank or its nominee shall incur or be assessed any
taxes, charges, expenses, assessments, claims or liabilities in connection with
the performance of its duties hereunder, except such as may arise from its or
its nominee's negligent action, negligent failure to act or willful misconduct,
any Property at any time held for the Custody Account shall be security therefor
and the Fund hereby grants a security interest therein to the Bank. The Fund
shall promptly reimburse the Bank for any such advance of cash or securities or
any such taxes, charges, expenses, assessments, claims or liabilities upon
request for payment, but should the Fund fail to so reimburse the Bank, the Bank
shall be entitled to dispose of such Property to the extent necessary to obtain
reimbursement. The Bank shall be entitled to debit any account of the Fund with
the Bank including, without limitation, the Custody Account, in connection with
any such advance and any interest on such advance as the Bank deems reasonable.
11. COMPENSATION.
Each Fund will pay to the Custodian such compensation as is agreed to in
writing by the Custodian and each such Fund from time to time. Such
compensation, together with all amounts for which the Custodian is to be
reimbursed in accordance with Section 7(e), shall be billed to each such Fund
and paid in cash to the Custodian.
12. POWERS OF ATTORNEY.
Upon request, each Fund shall deliver to the Custodian such proxies,
powers of attorney or other instruments as may be reasonable and necessary or
desirable in connection with the performance by the Custodian or any
Subcustodian of their respective obligations under this Agreement or any
applicable subcustodian agreement.
13. TERMINATION AND ASSIGNMENT.
Any Fund or the Custodian may terminate this Agreement by notice in
writing, delivered or mailed, postage prepaid (certified mail, return receipt
requested) to the other not less than 90 days prior to the date upon which such
termination shall take effect. Upon termination of this Agreement, the
appropriate Fund shall pay to the Custodian such fees as may be due the
Custodian hereunder as well as its reimbursable disbursements, costs and
expenses paid or incurred. Upon termination of this Agreement, the Custodian
shall deliver, at the terminating party's expense, all Assets held by it
hereunder to the appropriate Fund or as otherwise designated by such Fund by
Special Instructions. Upon such delivery, the Custodian shall have no further
obligations or liabilities under this Agreement except as to the final
resolution of matters relating to activity occurring prior to the effective date
of termination.
This Agreement may not be assigned by the Custodian or any Fund without
the respective consent of the other, duly authorized by a resolution by its
Board of Directors or Trustees.
14. ADDITIONAL FUNDS.
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<PAGE> 20
An additional Fund or Funds may become a party to this Agreement after the
date hereof by an instrument in writing to such effect signed by such Fund or
Funds and the Custodian. If this Agreement is terminated as to one or more of
the Funds (but less than all of the Funds) or if an additional Fund or Funds
shall become a party to this Agreement, there shall be delivered to each party
an Appendix B or an amended Appendix B, signed by each of the additional Funds
(if any) and each of the remaining Funds as well as the Custodian, deleting or
adding such Fund or Funds, as the case may be. The termination of this Agreement
as to less than all of the Funds shall not affect the obligations of the
Custodian and the remaining Funds hereunder as set forth on the signature page
hereto and in Appendix B as revised from time to time.
15. NOTICES.
As to each Fund, notices, requests, instructions and other writings
delivered to [INSERT FUND COMPLEX ADDRESS], postage prepaid, or to such other
address as any particular Fund may have designated to the Custodian in writing,
shall be deemed to have been properly delivered or given to a Fund.
Notices, requests, instructions and other writings delivered to the
Securities Administration department of the Custodian at its office at 928 Grand
Blvd., 10th Floor, Attn: Bonnie Johnson, Kansas City, Missouri 64106, or mailed
postage prepaid, to the Custodian's Securities Administration department, Post
Office Box 226, Attn: Bonnie Johnson, Kansas City, Missouri 64141, or to such
other addresses as the Custodian may have designated to each Fund in writing,
shall be deemed to have been properly delivered or given to the Custodian
hereunder; provided, however, that procedures for the delivery of Instructions
and Special Instructions shall be governed by Section 2(c) hereof.
16. MISCELLANEOUS.
(a) This Agreement is executed and delivered in the State of Missouri and
shall be governed by the laws of such state.
(b) All of the terms and provisions of this Agreement shall be binding
upon, and inure to the benefit of, and be enforceable by the respective
successors and assigns of the parties hereto.
(c) No provisions of this Agreement may be amended, modified or waived, in
any manner except in writing, properly executed by both parties hereto;
provided, however, Appendix A may be amended from time to time as Domestic
Subcustodians, Foreign Subcustodians, Special Subcustodians, and Securities
Depositories and Clearing Agencies are approved or terminated according to the
terms of this Agreement.
(d) The captions in this Agreement are included for convenience of
reference only, and in no way define or delimit any of the provisions hereof or
otherwise affect their construction or effect.
(e) This Agreement shall be effective as of the date of execution hereof.
(f) This Agreement may be executed simultaneously in two or more
counterparts, each of which will be deemed an original, but all of which
together will constitute one and the same instrument.
(g) The following terms are defined terms within the meaning of this
Agreement, and the definitions thereof are found in the following sections of
the Agreement:
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Account 4(b)(3)(ii)
ADR'S 4(j)
Advance 9
Assets 2(b)
Authorized Person 3
</TABLE>
17
<PAGE> 21
<TABLE>
<CAPTION>
Term Section
- ---- -------
<S> <C>
Banking Institution 4(1)
Domestic Subcustodian 5(a)
Foreign Subcustodian 5(b)
Instruction 2(c)(1)
Interim Subcustodian 5(c)
Interest Bearing Deposit 4(1)
Liens 10
OCC 4(g)(1)
Person 6(b)
Procedural Agreement 4(h)
SEC 4(b)(3)
Securities 2(a)
Securities Depositories and Clearing Agencies 5(b)
Securities System 4(b)(3)
Shares 4(s)
Sovereign Risk 6(b)
Special Instruction 2(c)(2)
Special Subcustodian 5(d)
Subcustodian 5
1940 Act 4(v)
</TABLE>
(h) If any part, term or provision of this Agreement is held to be
illegal, in conflict with any law or otherwise invalid by any court of competent
jurisdiction, the remaining portion or portions shall be considered severable
and shall not be affected, and the rights and obligations of the parties shall
be construed and enforced as if this Agreement did not contain the particular
part, term or provision held to be illegal or invalid.
(i) This Agreement constitutes the entire understanding and agreement
of the parties hereto with respect to the subject matter hereof, and accordingly
supersedes, as of the effective date of this Agreement, any custodian agreement
heretofore in effect between the Fund and the Custodian.
IN WITNESS WHEREOF, the parties hereto have caused this Custody
Agreement to be executed by their respective duly authorized officers.
<TABLE>
<CAPTION>
[INSERT MUTUAL FUND COMPLEX]
<S> <C>
Attest: By:
- ------------------------------------------------------
---------------------------------------------------
Name:
---------------------------------------------------
Title:
---------------------------------------------------
Date:
---------------------------------------------------
UMB BANK, N.A.
Attest: By:
- ------------------------------------------------------
---------------------------------------------------
Name: Ralph R. Santoro
---------------------------------------------------
Title: Senior Vice President
---------------------------------------------------
Date:
---------------------------------------------------
</TABLE>
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<PAGE> 22
APPENDIX A
CUSTODY AGREEMENT
DOMESTIC SUBCUSTODIANS:
Brown Brothers Harriman & Co. (Foreign Securities Only)
SECURITIES SYSTEMS:
Federal Book Entry
Depository Trust Company
Participant Trust Company
SPECIAL SUBCUSTODIANS:
SECURITIES DEPOSITORIES
COUNTRIES FOREIGN SUBCUSTODIANS CLEARING AGENCIES
- --------- --------------------- -----------------
Euroclear
<TABLE>
<CAPTION>
[INSERT MUTUAL FUND COMPLEX] UMB BANK, N.A.
<S> <C>
By: By:
- ------------------------------------------------------ ---------------------------------------------------
Name: Name: Ralph R. Santoro
- ------------------------------------------------------ ---------------------------------------------------
Title: Title: Senior Vice President
- ------------------------------------------------------ ---------------------------------------------------
Date: Date:
- ------------------------------------------------------ ---------------------------------------------------
</TABLE>
19
<PAGE> 23
APPENDIX B
CUSTODY AGREEMENT
The following open-end management investment companies ("Funds") are
hereby made parties to the Custody Agreement dated , 199 , with UMB
Bank, n.a. ("Custodian") and , and agree to be bound by all the terms and
conditions contained in said Agreement:
[LIST THE FUNDS]
----------------
<TABLE>
<CAPTION>
[INSERT MUTUAL FUND COMPLEX]
<S> <C>
Attest: By:
- ------------------------------------------------------
---------------------------------------------------
Name:
---------------------------------------------------
Title:
---------------------------------------------------
Date:
---------------------------------------------------
UMB BANK, N.A.
Attest: By:
- ------------------------------------------------------ ---------------------------------------------------
Name: Ralph R. Santoro
---------------------------------------------------
Title: Senior Vice President
---------------------------------------------------
Date:
---------------------------------------------------
</TABLE>
20
<PAGE> 1
EXHIBIT g(2)
CUSTODY, RECORDKEEPING AND ADMINISTRATIVE SERVICES
AGREEMENT
THIS AGREEMENT is made this 23rd day of April, 2000, by and between UMB
BANK, N.A., a national banking association, having its principal office and
place of business at 1010 Grand Avenue, Kansas City, Missouri 64141 (the
"Bank"), SUNSTONE FINANCIAL GROUP, INC., a Wisconsin corporation, having its
principal office and place of business at 207 East Buffalo Street, Suite 400,
Milwaukee, Wisconsin 53202 ("Sunstone"), and E-HARMON FUNDS, a Delaware business
trust, having its principal office and place of business at 400 Montgomery
Street, 3rd Floor, San Francisco, California 94104 (the "Fund").
WHEREAS, the Fund offers or intends to offer to its shareholders and
potential shareholders one or more retirement or similar plans described in
Appendix A hereto and as such is the sponsor of custodial accounts ("Accounts")
pursuant to Custodial Agreements (the "Account Agreements");
WHEREAS, the Fund wishes to appoint the Bank as the custodian for the
Accounts, and the Bank is willing to accept appointment as custodian for the
Accounts, on the terms and conditions set forth herein; and
WHEREAS, the Fund and the Bank desire Sunstone to perform, in its
capacity as transfer agent for the Fund, certain administrative and
recordkeeping duties relative to the Accounts.
NOW, THEREFORE, the parties to this Agreement agree to the following:
1. The Bank represents to the Fund and Sunstone that it is, and as
long as the Accounts and this Agreement are in effect will be,
qualified to act as custodian under all applicable provisions of
the Internal Revenue Code of 1986, as amended (the "Code") and all
other applicable laws, rules and regulations.
2. The Fund hereby appoints the Bank and the Bank hereby accepts
appointment as custodian for the Accounts. The Bank agrees to act
as custodian for the Accounts subject to the terms hereof, and of
each of the Account Agreements.
a. The Bank understands and agrees that from time to time the
Fund may propose amendments to the Account Agreements,
whether to comply with then-current provisions of the Code
or otherwise, and such amendments shall take effect subject
to the provisions of the Account Agreements and subject to
the Bank's rights thereunder. The rights of the Fund to
propose amendments from time to time shall not affect the
Bank's responsibilities as provided herein.
b. The appointment of the Bank as custodian hereunder is
subject to (i) the terms of the respective Account
Agreements; (ii) this Agreement (which shall govern in case
of any inconsistency between the terms of this Agreement and
any of the Account Agreements or to the extent the
respective Account Agreements do not
<PAGE> 2
apply) and the right of the Fund hereunder to terminate the
appointment of the Bank as custodian under the Account
Agreements and to name a successor custodian at any time
and from time to time on written notice to the Bank; and
(iii) the rights of the Bank and of the Fund to terminate
such custodianship in accordance with the terms of the
Account Agreements and this Agreement.
3. Sunstone hereby agrees to diligently perform the administrative
and recordkeeping services described in Appendix B with respect to
the Accounts. It is understood that it is not the responsibility
of any party hereunder to perform tests and/or monitor and enforce
any contribution or benefit limitations or distribution
requirements imposed by the Code, such responsibility being that
of the party adopting the Account Agreement.
4. The parties acknowledge and agree that Sunstone and the Bank will
not serve as "plan administrator" (as defined by the Employee
Retirement Income Security Act of 1974, as amended) of any Account
or in any other administrative capacity or other capacity except
as transfer agent and custodian, respectively, thereof.
5. The responsibilities for preparing and keeping current the
documents related to the Account Agreements shall be as follows:
a. The Fund shall provide Sunstone with final forms of (i)
Account Agreements, disclosure statements and similar
documents ("Account Documents") and (ii) application forms,
transfer forms, beneficiary designation forms and similar
documents ("Related Documents"), and shall keep such Account
Documents and Related Documents current by providing timely
any necessary amendments, modifications and supplements
thereto. The use of any Account Documents and Related
Documents shall be subject to the advance approval of
Sunstone and the Bank, which approval shall not be
unreasonably withheld.
b. Any approvals by Sunstone or the Bank under Section 5(a)
shall constitute only Sunstone's or the Bank's consent to
use any such materials and not the approval of the contents
or the effect thereof. The Fund shall bear full
responsibility for the Account Documents and the Related
Documents and the compliance thereof with all applicable
laws, rules and regulations, as amended from time to time,
and shall fully protect, indemnify and hold harmless the
Bank and Sunstone against any losses arising out of its or
their reliance thereon.
6. Sunstone is hereby authorized to sign any Account Agreement or
application for an account by and on behalf of the Bank as
custodian, or endorse any check or draft or other item payable to
the Bank by and on behalf of the Bank as custodian, and to
designate an employee or employees of Sunstone as authorized
persons to execute such signatures and endorsements. The Bank
shall promptly transmit, properly endorsed, to Sunstone any
monies, checks or other property received by the Bank as custodian
for investment for the Accounts.
<PAGE> 3
7. Sunstone shall collect all fees charged to the Accounts. Sunstone
shall remit to the Bank a portion (as specified in Appendix C
hereto) of the fees described in Appendix C hereto which are
collected by Sunstone as compensation for its services hereunder.
Sunstone shall retain the balance as compensation for its services
performed under this Agreement. Sunstone may from time to time,
after receipt of approval from the Fund, change such fee schedule;
provided, however, no such revision may reduce the compensation to
be remitted to the Bank without the Bank's prior approval. The
Bank authorizes the distribution on its behalf of any revised fee
schedule to existing and prospective Account holders. In the event
the Fund determines to waive all or a portion of any related
Account fees, the Fund shall continue to be responsible for
arranging for payment of all Account related fees to Sunstone and
the Bank.
8. Sunstone shall furnish to the Bank a quarterly report consisting
of the number of Accounts and their aggregate market value as of
the end of each quarter. Sunstone shall also provide the Bank with
a shareholder list from time to time as the Bank may reasonably
request and the Fund hereby authorizes Sunstone to furnish such
reports.
9. The Bank and Sunstone acknowledge the proprietary and confidential
nature of the Fund's list of shareholders, and hereby agree not to
disclose to any other person the names of such shareholders
without prior written permission from the Fund, except where such
disclosure is required by the Code or other law or where the Bank
or Sunstone may be exposed to civil or criminal proceedings for
failure to comply, when requested to divulge such information by
duly constituted authorities, or when subject to governmental or
regulatory audit or investigation.
10. Sunstone and the Fund agree to fully protect the Bank in relying
upon the respective duties and responsibilities of Sunstone and
the Fund under the Account Agreements and this Agreement, and
agree that each will fully indemnify the Bank and save and hold
the Bank harmless from and against any and all claims, damages
(including reasonable attorneys' fees), costs, expenses, losses,
judgments, taxes (including penalties and interest thereon), or
liabilities of any nature whatsoever resulting from or arising out
of their respective duties and responsibilities under the Account
Agreements and this Agreement; provided however, neither Sunstone
nor the Fund is required to protect, indemnify or hold the Bank
harmless for any claims, damages (including reasonable attorneys'
fees), costs, expenses, losses, judgments, taxes or liabilities
arising out of, resulting from, or in connection with the
negligence, bad faith or willful misconduct of the Bank. The Bank
may reasonably rely on the actions or inactions of Sunstone or the
Fund in performing their respective duties under this Agreement
and such reasonable reliance shall not be deemed negligence on
part of the Bank.
11. The Bank agrees to fully protect the Fund and Sunstone in relying
upon the Bank's duties and responsibilities with respect to the
Account Agreements and this Agreement, and agrees that it will
fully indemnify the Fund and Sunstone and save and hold each
harmless from and against any and all claims, damages (including
reasonable
<PAGE> 4
attorneys' fees), costs, expenses, losses, judgments, taxes
(including penalties and interest thereon), or liabilities of any
nature whatsoever resulting from or arising out of its duties and
responsibilities under the Account Agreements and this Agreement;
provided however, the Bank is not required to protect, indemnify
or hold the Fund or Sunstone harmless for any claims, damages
(including reasonable attorneys' fees), costs, expenses, losses,
judgments, taxes or liabilities arising out of, resulting from, or
in connection with (i) the respective negligence, bad faith or
willful misconduct of the Fund or Sunstone, or (ii) the
preparation and keeping current of the Account Documents or the
Related Documents. The Fund and Sunstone may reasonably rely on
the actions or inactions of the Bank in performing its duties
under this Agreement and such reasonable reliance shall not be
deemed negligence on the part of the Fund or Sunstone.
12. No provision of this Agreement shall modify or supersede any
provision of the Transfer Agency Agreements executed by Sunstone
and the Fund.
13. This Agreement may be terminated at any time by mutual consent of
the Bank, Sunstone, and the Fund, or upon sixty (60) days' written
notice to each of the other parties by any party. Upon
termination, the Bank and Sunstone shall transfer the records of
the Account as directed by the Fund. In the absence of such
designation by the Fund, the Fund shall upon the date specified in
the notice of termination of this Agreement and delivery of the
records maintained hereunder, assume full responsibility hereunder
and Sunstone and the Bank shall thereby be relieved of all duties
and responsibilities pursuant to this Agreement. Anything herein
to the contrary notwithstanding, the protective covenants and
indemnities provided by this Agreement shall survive the
termination of the Agreement and shall continue in effect with
respect to any and all matters arising (or alleged by any third
party to have occurred, whether by way of act or default) during
the existence of the Agreement.
14. No modification or amendment of this Agreement shall be valid or
binding on the parties unless made in writing and signed on behalf
of each of the parties by their respective duly authorized
officers or representatives.
15. Notices shall be communicated by first class mail, or by such
other means as the parties may agree, to the persons and addresses
specified below or to such other persons and addresses as the
parties may specify in writing.
If to Bank: UMB Bank, N.A.
P.O. Box 419692
Kansas City, Missouri 64141
Attn: William A. Hann
If to Sunstone: Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
Attn: General Counsel
<PAGE> 5
If to Fund: e-harmon Funds
400 Montgomery Street, 3rd Floor
San Francisco, California 94104
Attn: Joe Van Remortel
16. This Agreement shall be governed by the laws of the State of
Wisconsin.
17. This Agreement may be executed in any number of counterparts, and
by the parties hereto on separate counterparts, each of which when
so executed shall be deemed an original and all of which when
taken together shall constitute one and the same agreement.
IN WITNESS WHEREOF, the parties hereto have caused this instrument to be
executed by their duly authorized officers under authority of their respective
Boards as of the day and year first above written.
UMB BANK, N.A.,
By:
------------------------------------
Title:
---------------------------------
Attest:
-----------------------------
Secretary
SUNSTONE FINANCIAL GROUP, INC.
By:
------------------------------------
Title:
---------------------------------
Attest:
-----------------------------
Secretary
E-HARMON FUNDS
By:
------------------------------------
Title:
---------------------------------
Attest:
-----------------------------
Secretary
<PAGE> 6
APPENDIX A
PLANS
Individual Retirement Accounts that are offered by the Fund under the
provisions of Sections 408, 403(b) and/or 530 of the Code, and the regulations
promulgated thereunder.
<PAGE> 7
APPENDIX B
SERVICES
Pursuant to the Agreement, Sunstone shall:
a. Receive, allocate to the appropriate Account, and invest
pursuant to the governing Account Agreement, all
contributions made thereunder, in accordance with the
written instructions of the duly authorized directing
authority;
b. Reinvest for each Account all dividends and capital gains
or other distributions payable on the shares credited
thereto;
c. Maintain and reconcile Account records and investment
transaction records;
d. Furnish to each Account grantor (with respect to each
grantor's individual Account), promptly after the end of
each calendar year, a statement of such grantor's account
showing:
i. The net asset value of all full and fractional
shares as of the first and last business days of the
calendar year,
ii. Contributions to and distributions from the account
during the calendar year, and
iii. Earnings reinvested in the account during the
calendar year.
e. Furnish to each Account grantor (with respect to each
grantor's individual Account) a confirmation of each
transaction in accordance with the terms of the Fund's then
current prospectus;
f. Make distributions from Accounts, including withholding and
remittance of federal tax, in accordance with the
provisions of the Account Agreements and relevant
provisions of the Code;
g. Furnish information returns and reports to each Account
grantor (with respect to each grantor's individual Account)
and to the Internal Revenue Service as may be required by
the Code; and
h. Other such functions as all of the parties may agree to
from time to time.
<PAGE> 8
APPENDIX C
FEES
Individual Retirement Accounts that are offered by the Fund under the
provisions of Sections 408, 403(b) and/or 530 of the Code, and the
regulations promulgated thereunder:
FEES: Annual maintenance fee: $12.50 per account. The annual
maintenance fee will be deducted from shareholder accounts unless
otherwise paid by or on behalf of the shareholder typically during the
fourth quarter of each calendar year.
PERCENTAGE TO BANK: 25% of the foregoing fees collected by Sunstone.
<PAGE> 1
EXHIBIT (h)(1)
TRANSFER AGENCY AGREEMENT
THIS TRANSFER AGENCY AGREEMENT is made as of the 23rd day of April,
2000, by and between e-harmon Funds, a Delaware business trust (the "Trust"),
and Sunstone Financial Group, Inc., a Wisconsin corporation, its successors and
assigns ("Sunstone").
R E C I T A L S:
WHEREAS, the Trust is registered under the 1940 Act as an open-end
management investment company; and
WHEREAS, the Trust desires to retain Sunstone to render certain
transfer agency and dividend disbursement services, and Sunstone is willing to
render such services, all in accordance with the terms of this Agreement.
A G R E E M E N T S:
NOW, THEREFORE, in consideration of the mutual promises and agreements
contained herein and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
ARTICLE I
DEFINITIONS
In addition to any terms defined in the body of this Agreement, the
following capitalized terms shall have the meanings set forth hereinafter
whenever they appear in this Agreement:
1.01 1940 ACT shall mean the Investment Company Act of 1940, as amended
from time to time.
1.02 AUTHORIZED PERSON shall mean any individual who is authorized to
provide Sunstone with Instructions and requests on behalf of the Trust, whose
name shall be certified to Sunstone from time to time pursuant to Section 7.01
of this Agreement.
1.03 BOARD OF TRUSTEES shall mean the Board of Trustees of the Trust.
1.04 CUSTODIAN shall mean the financial institution appointed as
custodian under the terms and conditions of the custody agreement between the
financial institution and the Trust, or its successor.
1.05 DECLARATION OF TRUST shall mean the Declaration of Trust or other
similar operational document of the Trust, as the case may be, as the same may
be amended from time to time.
1.06 EXCHANGE ACT shall mean the Securities Exchange Act of 1934, as
amended from time to time.
1
<PAGE> 2
1.07 FUND shall mean each separate series of Shares offered by the
Trust representing interests in a separate portfolio of securities and other
assets for which the Trust has appointed Sunstone as transfer agent and dividend
disbursing agent under this Agreement.
1.08 FUND BUSINESS DAY shall mean each day on which the New York Stock
Exchange, Inc. is open for trading.
1.09 INSTRUCTIONS shall mean an oral communication from an Authorized
Person or a written communication signed by an Authorized Person and actually
received by Sunstone. Instructions shall include manually executed originals,
telefacsimile transmissions of manually executed originals or electronic
communications.
1.10 PROSPECTUS shall mean the current Prospectus and Statement of
Additional Information with respect to a Fund (including any applicable
supplement) actually received by Sunstone from the Trust with respect to which
the Trust has indicated a registration statement has become effective under the
Securities Act and the 1940 Act.
1.11 SECURITIES ACT shall mean the Securities Act of 1933, as amended
from time to time.
1.12 SHARES shall mean such shares of beneficial interest, or class
thereof, of each respective Fund of the Trust as may be issued from time to
time.
1.13 SHAREHOLDER shall mean a record owner of Shares of each respective
Fund of the Trust.
ARTICLE II
APPOINTMENT OF TRANSFER AGENT
2.01 APPOINTMENT. The Trust hereby appoints Sunstone as transfer agent
and dividend disbursing agent of all the Shares of the Trust during the term of
this Agreement with respect to each Fund listed on Schedule A hereto, and any
additional Fund the Trust and Sunstone may agree to include on any amended
Schedule A. Sunstone hereby accepts such appointment as transfer agent and
dividend disbursing agent and agrees to perform the duties thereof as
hereinafter set forth.
2
<PAGE> 3
2.02 DUTIES.
A. Sunstone shall perform the transfer agent and dividend
disbursement services described on Schedule B hereto and such additional
services as may be agreed to by the parties from time to time and set forth in
an amendment to Schedule B (collectively, the "Services"). Sunstone shall have
no duties or responsibilities other than those specifically set forth in this
Agreement, and no covenant or obligation to carry out any other duties or
responsibilities shall be implied in this Agreement against Sunstone.
B. Sunstone may, in its discretion, appoint other parties to carry
out some or all of its responsibilities under this Agreement; provided, however,
that unless the Trust shall enter into a written agreement with any such party,
the party shall be the agent of Sunstone and not the agent of the Trust. In such
event, Sunstone shall be fully responsible for the acts or omissions of such
party and shall not be relieved of any of its responsibilities hereunder by the
appointment of such party.
2.03 DELIVERIES.
A. In connection with Sunstone's appointment as transfer agent and
dividend disbursing agent, the Trust shall deliver or cause the following
documents to be delivered to Sunstone:
(1) A copy of the Declaration of Trust and By-laws of the
Trust and all amendments thereto, certified by the Secretary of the Trust;
(2) A certificate signed by the President and Secretary of the
Trust specifying the number of authorized Shares and the number of such
authorized Shares issued and currently outstanding, if any;
(3) A certified copy of the resolutions of the Board of
Trustees of the Trust appointing Sunstone as transfer agent and dividend
disbursing agent and authorizing the execution of this Transfer Agency Agreement
on behalf of the Trust;
(4) Copies of the Trust's Registration Statement, as amended
to date, and the most recently filed Post-Effective Amendment thereto, filed by
the Trust with the Securities and Exchange Commission under the Securities Act
and the 1940 Act, together with any applications filed in connection therewith;
(5) An opinion of counsel for the Trust with respect to the
Trust's organization and existence under the laws of its state of organization,
the validity of the authorized and outstanding Shares, whether such Shares are
fully paid and non-assessable and the status of such Shares under the Securities
Act and any other applicable federal law or regulation (i.e., if subject to
registration, that they have been registered and that the Registration Statement
has become effective, or if exempt, the specific grounds therefor); and
(6) The certificate required by Section 7.01 of this
Agreement, signed by an officer of the Trust and designating the names of the
Trust's initial Authorized Persons.
3
<PAGE> 4
B. The Trust agrees to deliver or to cause to be delivered to
Sunstone in Milwaukee, Wisconsin, at the Trust's expense, all of its Shareholder
account records in a format acceptable to Sunstone, as well as all other
documents, records and information that Sunstone may reasonably request in order
for Sunstone to perform the Services hereunder.
ARTICLE III
COMPENSATION & EXPENSES
3.01 COMPENSATION. As compensation for the performance of the Services,
the Trust agrees to pay Sunstone the fees set forth on Schedule C attached
hereto. The parties may amend Schedule C to include fees for any additional
services requested by the Trust, or to add Funds for which Sunstone has been
retained. The Trust agrees to pay Sunstone's then current rate for any Services
added to Schedule C after the execution of this Agreement.
3.02 EXPENSES. The Trust also agrees to promptly reimburse Sunstone for
all out-of-pocket expenses or disbursements incurred by Sunstone in connection
with the performance of Services under this Agreement. Out-of-pocket expense
shall include, but not be limited to, those items specified on Schedule C
hereto. If requested by Sunstone, out-of-pocket expenses are payable in advance.
Payment of postage expenses, if prepayment is requested, is due at least seven
days prior to the anticipated mail date. In the event Sunstone requests advance
payment, Sunstone shall not be obligated to incur such expenses or perform the
related Service(s) until payment is received.
3.03 PAYMENT PROCEDURES.
A. The Trust agrees to pay all amounts due hereunder within
fifteen days of the date reflected on the statement for such Services (the "Due
Date"). Sunstone shall bill Service fees monthly, and out-of-pocket expenses as
incurred (unless prepayment is requested by Sunstone). Sunstone may, at its
option, arrange to have various service providers submit invoices directly to
the Trust for payment of reimbursable out-of-pocket expenses.
B. The Trust is aware that its failure to remit to Sunstone all
amounts due on or before the Due Date will cause Sunstone to incur costs not
contemplated by this Agreement, including, but not limited to carrying,
processing and accounting charges. Accordingly, in the event that Sunstone does
not receive any amounts due hereunder by the Due Date, the Trust agrees to pay a
late charge on the overdue amount equal to one and one-half percent (1.5%) per
month or the maximum amount permitted by law, whichever is less. In addition,
the Trust shall pay Sunstone's reasonable attorney's fees and court costs if any
amounts due Sunstone are collected by or through an attorney. The parties hereby
agree that such late charge represents a fair and reasonable computation of the
costs incurred by reason of the Trust's late payment. Acceptance of such late
charge shall in no event constitute a waiver by Sunstone of the Trust's default
or prevent Sunstone from exercising any other rights and remedies available to
it.
3.04 ALLOCATION OF RISK. The Trust acknowledges that the fees charged
by Sunstone under this Agreement reflect the allocation of risk between the
parties, including the exclusion of remedies and limitations on liability in
Article VIII. Modifying the allocation of risk from what is stated herein would
4
<PAGE> 5
affect the fees that Sunstone charges. Accordingly, in consideration of those
fees, the Trust agrees to the stated allocation of risk.
ARTICLE IV
PROCESSING AND PROCEDURES
4.01 ISSUANCE, REDEMPTION AND TRANSFER OF SHARES
A. Sunstone agrees to accept purchase orders and redemption
requests with respect to the Shares of each Fund on each Fund Business Day in
accordance with such Fund's Prospectus; provided, however, that Sunstone shall
only accept purchase orders from states in which the Shares are registered, as
indicated from time to time by the Trust. Sunstone shall, as of the time at
which the net asset value of each Fund is computed on each Fund Business Day,
issue to and redeem from the accounts specified in a purchase order or
redemption request in proper form and accepted by the Fund the appropriate
number of full and fractional Shares based on the net asset value per Share of
the respective Fund specified in an advice received on such Fund Business Day
from or on behalf of the Fund. Sunstone shall not be responsible for the payment
of any original issue or other taxes required to be paid by the Trust in
connection with the issuance of any Shares in accordance with this Agreement.
Sunstone shall not be required to issue any Shares after it has received from an
Authorized Person or from an appropriate federal or state authority written
notification that the sale of Shares has been suspended or discontinued, and
Sunstone shall be entitled to rely upon such written notification.
B. Upon receipt of a redemption request and monies paid to it by
the Custodian in connection with a redemption of Shares, Sunstone shall cancel
the redeemed Shares and after making appropriate deduction for any withholding
of taxes required of it by applicable federal law, make payment in accordance
with the Fund's redemption and payment procedures described in the Prospectus.
C. Except as otherwise provided in this paragraph, Sunstone will
transfer or redeem Shares upon presentation to Sunstone of instructions endorsed
for exchange, transfer or redemption, accompanied by such documents as Sunstone
deems necessary to evidence the authority of the person making such transfer or
redemption. Sunstone reserves the right to refuse to transfer or redeem Shares
until it is satisfied that the endorsement or instructions are valid and
genuine. For that purpose, it will require, unless otherwise instructed by an
Authorized Person or except as otherwise provided in this paragraph, a guarantee
of signature by an "Eligible Guarantor Institution" as that term is defined by
SEC Rule 17Ad-15. Sunstone also reserves the right to refuse to transfer or
redeem Shares until it is satisfied that the requested transfer or redemption is
legally authorized, and it shall incur no liability for the refusal, in good
faith, to make transfers or redemptions which Sunstone, in its judgment, deems
improper or unauthorized, or until it is satisfied that there is no reasonable
basis to any claims adverse to such transfer or redemption. Sunstone may, in
effecting transfers and redemptions of Shares, rely upon those provisions of the
Uniform Act for the Simplification of Fiduciary Security Transfers (or such
other statutes which protect it and the Trust in not requiring complete
fiduciary documentation) and shall not be responsible for any act done or
omitted by it in good faith in reliance upon such laws. Notwithstanding the
foregoing or any other provision contained in this Agreement to the contrary,
Sunstone shall be fully protected by each Fund in not requiring any instruments,
documents, assurances, endorsements or guarantees, including, without
limitation, any signature guarantees, in connection with a
5
<PAGE> 6
redemption, exchange or transfer of Shares whenever Sunstone reasonably believes
that requiring the same would be inconsistent with the transfer and redemption
procedures described in the Prospectus.
D. Notwithstanding any provision contained in this Agreement to
the contrary, Sunstone shall not be required or expected to require, as a
condition to any transfer or redemption of any Shares pursuant to a computer
tape or electronic data transmission, any documents to evidence the authority of
the person requesting the transfer or redemption and/or the payment of any stock
transfer taxes, and shall be fully protected in acting in accordance with the
applicable provisions of this Article.
E. In connection with each purchase and each redemption of Shares,
Sunstone shall send such statements as are prescribed by the Federal securities
laws applicable to transfer agents or as described in the Prospectus. It is
understood that certificates for Shares have not been and will not be offered by
the Trust or available to investors.
F. Sunstone and the Trust shall establish procedures for effecting
purchase, redemption or transfer transactions accepted from investors by
telephone or other methods consistent with the terms of the Prospectus. Sunstone
may establish such additional procedures, rules and regulations governing the
purchase, redemption or transfer of Shares, as it may deem advisable and
consistent with the Prospectus and industry practice. Sunstone shall not be
liable, and shall be held harmless by the Trust, for its actions or omissions
which are consistent with the foregoing procedures.
G. The Trust agrees to provide Sunstone with prior notice of any
increase or decrease in the total number of Shares authorized to be issued, or
the issuance of any additional Shares of a Fund pursuant to stock dividends,
stock splits, recapitalizations, capital adjustments or similar transactions,
and to deliver to Sunstone such documents, certificates, reports and legal
opinions as Sunstone may reasonably request.
4.02 DIVIDENDS AND DISTRIBUTIONS.
A. The Trust shall give or cause to be given to Sunstone a copy of
a resolution of its Board of Trustees, that either:
(i) sets forth the date of the declaration of a dividend or
distribution, the date of accrual or payment, as the case may be, thereof, the
record date as of which Shareholders entitled to payment or accrual, as the case
may be, shall be determined, the amount per Share of such dividend or
distribution, the payment date on which all previously accrued and unpaid
dividends are to be paid, and the total amount, if any, payable to Sunstone on
such payment date, or
(ii) authorizes the declaration of dividends and distributions
on a daily or other periodic basis and further authorizes Sunstone to rely on a
certificate of an Authorized Person setting forth the information described in
subsection (i) of this paragraph.
B. In connection with a reinvestment of a dividend or distribution
of Shares of a Fund, Sunstone shall as of each Fund Business Day, as specified
in a certificate or resolution described in paragraph A, issue Shares of the
Fund based on the net asset value per Share of such Fund specified in an advice
received from or on behalf of the Fund on such Fund Business Day.
6
<PAGE> 7
C. Upon the mail date specified in such certificate or resolution,
as the case may be, the Trust shall, in the case of a cash dividend or
distribution, cause the Custodian to deposit in an account in the name of
Sunstone on behalf of a Fund, an amount of cash sufficient for Sunstone to make
the payment, as of the mail date specified in such certificate or resolution, as
the case may be, to the Shareholders who were of record on the record date.
Sunstone will, upon receipt of any such cash, make payment of such cash
dividends or distributions to the Shareholders as of the record date. Sunstone
shall not be liable for any improper payments made in accordance with a
certificate or resolution described in the preceding paragraph. If Sunstone
shall not receive from the Custodian sufficient cash to make payments of any
cash dividend or distribution to all Shareholders of a Fund as of the record
date, Sunstone shall, upon notifying the Trust, withhold payment to such
Shareholders until sufficient cash is provided to Sunstone.
D. It is understood that Sunstone in its capacity as transfer
agent and dividend disbursing agent shall in no way be responsible for the
determination of the rate or form of dividends or capital gain distributions due
to the Shareholders pursuant to the terms of this Agreement. It is further
understood that Sunstone shall file with the Internal Revenue Service and
Shareholders such appropriate federal tax forms concerning the payment of
dividend and capital gain distributions but shall in no way be responsible for
the collection or withholding of taxes due on such dividends or distributions
due to shareholders, except and only to the extent, required by applicable
federal law.
4.03 RECORDS.
A. Sunstone shall keep those records specified in Schedule D
hereto in the form and manner, and for such period, as it may deem advisable but
not inconsistent with the rules and regulations of appropriate government
authorities, in particular Rules 31a-2 and 31a-3 under the 1940 Act. Sunstone
may deliver to the Trust from time to time at Sunstone's discretion, for
safekeeping or disposition by the Trust in accordance with law, such records,
papers and documents accumulated in the execution of its duties as transfer
agent, as Sunstone may deem expedient, other than those which Sunstone is itself
required to maintain pursuant to applicable laws and regulations. The Trust
shall assume all responsibility for any failure thereafter to produce any
record, paper, or other document so returned, if and when required. To the
extent required by Section 31 of the 1940 Act and the rules and regulations
thereunder, the records specified in Schedule D hereto maintained by Sunstone,
which have not been previously delivered to the Trust pursuant to the foregoing
provisions of this paragraph, shall be considered to be the property of the
Trust, shall be made available upon request for inspection by the officers,
employees, and auditors of the Trust, and shall be delivered to the Trust
promptly upon request and in any event upon the date of termination of this
Agreement, in the form and manner kept by Sunstone on such date of termination
or such earlier date as may be requested by the Trust. Notwithstanding anything
contained herein to the contrary, Sunstone shall be permitted to maintain copies
of any such records, papers and documents to the extent necessary to comply with
the recordkeeping requirements of federal and state securities laws, tax laws
and other applicable laws.
B. Sunstone agrees to keep all records and other information
relative to the Trust's Shareholders confidential, except when requested to
divulge such information by duly-constituted authorities or court process, or
when requested by a Shareholder or Shareholder's agent with respect to
information concerning an account as to which such Shareholder has either a
legal or beneficial interest,
7
<PAGE> 8
or when requested by the Trust, the Shareholder, the Shareholder's agent or the
dealer of record with respect to such account. In case of any requests or
demands for the inspection of the Shareholder records of the Trust, Sunstone
will endeavor to notify the Trust promptly and to secure instructions from an
Authorized Person as to such inspection. Sunstone reserves the right, however,
to exhibit the Shareholder records to any person whenever it believes there is a
reasonable likelihood that Sunstone will be held liable for the failure to
exhibit the Shareholder records to such person; provided, however, that in
connection with any such disclosure Sunstone shall promptly notify the Trust
that such disclosure has been made or is to be made. Records and information
which have become known to the public through no wrongful act of Sunstone or any
of its employees, agents or representatives, and information which was already
in the possession of Sunstone prior to receipt thereof, shall not be subject to
this paragraph.
ARTICLE V
REPRESENTATION AND WARRANTIES
5.01 REPRESENTATIONS OF TRUST. The Trust represents and warrants to
Sunstone that:
A. It is a business trust duly organized and existing under the
laws of the State of Delaware; it is empowered under applicable laws and by its
Declaration of Trust and By-laws to enter into and perform this Agreement; and
all requisite corporate proceedings have been taken to authorize it to enter
into and perform this Agreement.
B. Any officer of the Trust has the authority to appoint
additional Authorized Persons, to limit or revoke the authority of any
previously designated Authorized Person, and to certify to Sunstone the names of
such Authorized Persons.
C. It is duly registered as an investment company under the 1940
Act.
D. A registration statement under the Securities Act is currently
effective and will remain effective, and appropriate state securities laws
filings have been made and will continue to be made, with respect to Shares of
the Trust being offered for sale (the parties acknowledge that the Trust has
entered into an agreement with Sunstone pursuant to which Sunstone, in its
capacity as administrator, will make the appropriate state securities laws
filings).
E. All outstanding Shares are validly issued, fully paid and
non-assessable and when Shares are hereafter issued in accordance with the terms
of the Trust's Declaration of Trust and its Prospectus with respect to each
Fund, such Shares shall be validly issued, fully paid and non-assessable.
5.02 REPRESENTATIONS OF SUNSTONE. Sunstone represents and warrants to
the Trust that:
A. It is a corporation duly organized and existing under the laws
of the State of Wisconsin; it is empowered under applicable law and by its
Articles of Incorporation and By-laws to enter into and perform this Agreement;
and all requisite proceedings have been taken to authorize it to enter into and
perform this Agreement.
8
<PAGE> 9
B. It is duly registered as a transfer agent under Section 17A of
the 1934 Act to the extent required.
C. It has received a copy of each Fund's Prospectus which
describes how sales and redemptions of Shares shall be made.
ARTICLE VI
ADDITIONAL COVENANTS AND AGREEMENTS
6.01 INFORMATION UPDATES. During the term of this Agreement the Trust
shall have the ongoing obligation to provide Sunstone with the following
documents as soon as they become effective: (i) certified copies of all
amendments to its Declaration of Trust and By-laws made after the date of this
Agreement; and (ii) a copy of each Fund's currently effective Prospectus. For
purposes of this Agreement, Sunstone shall not be deemed to have notice of any
information contained in any such Prospectus until three business days after it
is actually received by Sunstone.
6.02 SHARE REGISTRATION. The Trust agrees to take or cause to be taken
all requisite steps to register the Shares for sale in all states in which the
Shares shall at the time be offered for sale and require registration. If the
Trust receives notice of any stop order or other proceeding in any such state
affecting such registration or the sale of Shares, or of any stop order or other
proceeding under the federal securities laws affecting the sale of Shares, the
Trust will give prompt notice thereof to Sunstone.
6.03 COMPLIANCE WITH LAWS. The Trust will comply with all applicable
requirements of the Securities Act, the Exchange Act, the 1940 Act, blue sky
laws, and any other applicable laws, rules and regulations.
6.04 ADDITIONAL DUTIES. The Trust agrees that it shall advise Sunstone
at least 30 days prior to effecting any change in the Prospectus which would
increase or alter the duties and obligations of Sunstone hereunder, and shall
proceed with such change only if it shall have received the written consent of
Sunstone thereto.
6.05 TRANSFER AGENT SYSTEM.
A. Sunstone shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats, interactive
design techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, trade secrets, trademarks and other
related legal rights utilized by Sunstone in connection with the Services
provided by Sunstone to the Trust herein (the "Sunstone System").
B. Sunstone hereby grants the Trust a limited license to use the
Sunstone System for the sole and limited purpose of having Sunstone provide the
Services contemplated hereunder. Nothing contained in this Agreement should be
construed or interpreted otherwise, and such license shall immediately terminate
upon the termination of this Agreement.
9
<PAGE> 10
6.06 INTERNET SERVICES.
A. In the event Schedule B reflects any Services in the Sunstone
4.netSM category, the Trust agrees to provide, at its cost, all computers,
telecommunications equipment and other equipment and software necessary to
develop and maintain its web site, to design and develop the web site
functionality necessary to facilitate and maintain hypertext links between its
web site and Sunstone's web site, and to provide Sunstone with such Instructions
as it may request from time to time in connection with the performance of
Sunstone's obligations hereunder.
B. Sunstone shall retain title to and ownership of any and all
data bases, computer programs, screen formats, report formats, interactive
design techniques, derivative works, inventions, discoveries, patentable or
copyrightable matters, concepts, expertise, trade secrets, trademarks and other
related legal rights utilized by Sunstone in connection with the Sunstone
4.netSM services provided by Sunstone to the Trust pursuant to this Agreement
(the "Sunstone 4.netSM System"). The Sunstone 4.netSM System is licensed, not
sold. Sunstone hereby grants the Trust a nonexclusive, limited license to use
the Sunstone 4.netSM System for the sole and limited purpose of having Sunstone
provide the services to the Trust. Such license shall immediately terminate upon
the termination of the Agreement. The Trust agrees that it will not mask, delete
or otherwise alter any disclaimers, trademark or service mark notifications
embedded in or describing the Sunstone 4.netSM System.
C. Sunstone is providing the Sunstone 4.netSM System to the TRUST
on an "AS IS" basis, and specifically disclaims all representations and
warranties, express or implied, regarding the Sunstone 4.netSM System and the
services to be provided hereunder RELATING THERETO, including any implied
warranty of merchantability or fitness for a particular purpose, or that the
operation of the Sunstone 4.netSM System will be error free or will not be
interrupted from time to time by reason of a defect therein. The parties
acknowledge that Sunstone's ability to provide the Sunstone 4.netSM services
described herein depends upon a number of factors beyond Sunstone's control,
including, but not limited to, the Internet and equipment, software, data and
services provided by telecommunications carriers and unrelated vendors and third
parties. Sunstone shall not be liable for its failure to perform any of the
services or for the delay or interruption of any such services, if the failure,
delay or interruption in caused by circumstances beyond Sunstone's reasonable
control. The terms and conditions of this Section shall supercede and control
any conflicting provisions in this Agreement.
ARTICLE VII
TRUST INSTRUCTIONS
7.01 AUTHORIZED PERSONS. Upon the execution of this Agreement, the
Trust shall provide Sunstone with a certificate containing the names of the
initial Authorized Persons in a form acceptable to Sunstone. Any officer of the
Trust has the authority to appoint additional Authorized Persons, to limit or
revoke the authority of any previously designated Authorized Person, and to
certify to Sunstone the names of the Authorized Persons from time to time. The
Trust shall provide Sunstone with an updated certificate evidencing the
appointment, removal or change of authority of any Authorized Person, it being
10
<PAGE> 11
understood Sunstone shall not be held to have notice of any change in the
authority of any Authorized Person until receipt of written notice thereof from
the Trust.
7.02 ACCEPTANCE OF INSTRUCTIONS. Sunstone, its officers, agents or
employees shall accept Instructions given to them by any person representing or
acting on behalf of the Trust only if such representative is an Authorized
Person. The Trust agrees that when oral Instructions are given, it shall, upon
the request of Sunstone, confirm such Instructions in writing.
7.03 REQUEST FOR INSTRUCTIONS. At any time, Sunstone may request
Instructions from the Trust with respect to any matter arising in connection
with this Agreement. If such Instructions are not received within a reasonable
time, then Sunstone may seek advice from legal counsel for the Trust, or its own
legal counsel at the expense of the Trust, and it shall not be liable for any
action taken or not taken by it in good faith in accordance with such
Instructions or in accordance with advice of counsel.
7.04 RELIANCE ON INSTRUCTIONS. Sunstone shall not be liable for acting
upon any written Instructions reasonably believed by it to be genuine and to
have been signed or made by an Authorized Person or oral Instructions which the
individual receiving the instructions on behalf of Sunstone reasonably believes
to have been given by an Authorized Person.
ARTICLE VIII
LIMITATION OF LIABILITY; INDEMNIFICATION
8.01 LIMITATION OF LIABILITY. Notwithstanding anything contained in
this Agreement to the contrary, Sunstone shall not be liable for any loss
suffered by the Trust or the Funds in connection with the matters to which this
Agreement relates, except for a loss resulting from Sunstone's willful
misfeasance, bad faith or gross negligence in the performance of its duties or
from reckless disregard by it of its obligations and duties under this
Agreement. Furthermore, Sunstone shall not be liable for any action taken or
omitted to be taken in accordance with instructions received by it from an
officer or representative of the Trust.
8.02 INDEMNIFICATION. The Trust agrees to indemnify and hold harmless
Sunstone, its employees, agents, officers, directors and nominees from and
against any and all claims, demands, actions and suits, and from and against any
and all judgments, liabilities, losses, damages, costs, charges, reasonable
counsel fees and other expenses of every nature and character which may be
asserted against Sunstone or for which Sunstone may be held liable (a "Claim")
arising out of or in any way relating to any of the following:
(a) any action of Sunstone required to be taken, or omitted to
be taken, pursuant to the Agreement, unless a Claim resulted from Sunstone's
willful misfeasance, bad faith, gross negligence in the performance of its
duties or from reckless disregard by it of its obligations and duties hereunder;
(b) Sunstone's reliance on, or use of information, data,
records and documents received by Sunstone from the Trust, or any third party
acting on behalf of the Trust, in the performance of Sunstone's duties and
obligations hereunder;
11
<PAGE> 12
(c) the reliance on, or the implementation of, any
Instructions or any other requests of the Trust on behalf of the applicable
Fund;
(d) Sunstone's acting upon telephone or electronic
instructions relating to the purchase, exchange or redemption of Shares received
by Sunstone in accordance with procedures established by Sunstone and the Trust;
(e) the offer or sale of Shares in violation of any
requirement under the securities laws or regulations of any state that such
Shares be registered in such state or in violation of any stop order or
determination or ruling by any state with respect to the offer or sale of such
Shares in such state; or
(f) the Trust's refusal or failure to comply with the terms of
the Agreement, or any Claim that arises out of the Trust's negligence or
misconduct or breach of any representation or warranty of the Trust made herein.
8.03 INDEMNIFICATION PROCEDURES. Sunstone will notify the Trust
promptly after identifying any situation which it believes presents or appears
likely to present a Claim for which the Trust may be required to indemnify or
hold Sunstone harmless hereunder. In such event, the Trust shall have the option
to defend Sunstone against any Claim, and, in the event that the Trust so
elects, such defense shall be conducted by counsel chosen by the Trust and
approved by Sunstone in its reasonable discretion. Sunstone shall not confess
any Claim or make any compromise in any case in which the Trust will be asked to
provide indemnification, except with the Trust's prior written consent. The
obligations of the parties under the Sections 8.02 and 8.03 shall survive the
termination of this Agreement.
8.04 FORCE MAJURE. Sunstone assumes no responsibility hereunder, and
shall not be liable, for any damage, loss of data, errors, delay or any other
loss whatsoever caused by events beyond its reasonable control. Sunstone will,
however, take all reasonable steps to minimize service interruptions for any
period that such interruption continues beyond Sunstone's control.
8.05 CONSEQUENTIAL DAMAGES. In no event and under no circumstances
shall Sunstone, its affiliates or any of its or their officers, directors,
agents or employees be liable to anyone, including, without limitation, the
other party, under any theory of tort, contract, strict liability or other legal
or equitable theory for lost profits, exemplary, punitive, special, indirect or
consequential damages for any act or failure to act under any provision of this
Agreement regardless of whether such damages were foreseeable and even if
advised of the possibility thereof.
8.06 ADDITIONAL LIMITATIONS AND EXCLUSIONS. Notwithstanding any other
provision of this Agreement, Sunstone shall have no duty or obligation under
this Agreement to inquire into, and shall not be liable for:
(a) The legality of the issue or sale of any Shares, the
sufficiency of the amount to be received therefor, or the authority of the
Trust, as the case may be, to request such sale or issuance;
12
<PAGE> 13
(b) The legality of a transfer of Shares or of a purchase or
redemption of any Shares, the propriety of the amount to be paid therefor, or
the authority of the Trust, as the case may be, to request such transfer or
redemption;
(c) The legality of the declaration of any dividend by the
Trust, or the legality of the issue of any Shares in payment of any stock
dividend; or
(d) The legality of any recapitalization or readjustment of
Shares.
ARTICLE IX
TERM AND TERMINATION
9.01 TERM. This Agreement shall remain in full force and effect until
April 23, 2002, (the "Initial Term") and thereafter shall automatically extend
for additional, successive twelve (12) month terms unless earlier terminated as
provided below.
9.02 TERMINATION. Either party may terminate this Agreement at any time
after the Initial Term by giving the other party a written notice specifying the
date of such termination (the "Termination Date"), which shall be not less than
sixty (60) days after the date notice is deemed given in accordance with Section
10.01. In the event such notice is given by the Trust, it shall be accompanied
by a copy of a resolution of the Board of Trustees of the Trust, certified by
the Secretary or any Assistant Secretary, electing to terminate this Agreement
and designating the successor transfer agent or transfer agents. In the event
such notice is given by Sunstone, the Trust shall on or before the Termination
Date, deliver to Sunstone a copy of a resolution of its Board of Trustees
certified by the Secretary or any Assistant Secretary designating a successor
transfer agent or transfer agents. In the absence of such designation by the
Trust, the Trust shall be deemed to be its own transfer agent as of the
Termination Date and Sunstone shall thereby be relieved of all duties and
responsibilities pursuant to this Agreement. Fees and out-of-pocket expenses
incurred by Sunstone, but unpaid by the Trust upon such termination, shall be
immediately due and payable upon and notwithstanding such termination.
9.03 EFFECT OF TERMINATION. Upon the termination of the Agreement as
provided herein, Sunstone, upon the written request of the Trust, shall deliver
the records of the Trust to the Trust or its successor transfer agent in the
form maintained by Sunstone at the expense of the Trust. The Trust shall be
responsible to Sunstone for all out-of-pocket expenses and for the costs and
expenses associated with the preparation and delivery of such media, including,
but not limited to: (a) any custom programming requested by Trust in connection
with the preparation of such media and agreed upon by Sunstone; (b)
transportation of forms and other materials used in connection with the
processing of Trust transactions by Sunstone; and (c) transportation of records
and files in the possession of Sunstone. In addition, Sunstone shall be entitled
to such compensation as the parties may mutually agree for any services
requested by the Trust in connection with the termination of this Agreement or
the liquidation or merger of the Trust. Sunstone shall not reduce the level of
service provided to the Trust prior to termination following notice of
termination by the Trust.
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<PAGE> 14
ARTICLE X
MISCELLANEOUS
10.01 NOTICES. Any notice required or permitted to be given by either
party to the other under this Agreement shall be in writing and shall be deemed
to have been given when sent by either an overnight delivery service or by
registered or certified mail, postage prepaid, return receipt requested, to the
addresses listed below, or to such other location as either party may from time
to time designate in writing:
If to Sunstone: Sunstone Financial Group, Inc.
207 East Buffalo Street, Suite 400
Milwaukee, Wisconsin 53202
Attention: President
If to the Trust: e-harmon Funds
400 Montgomery Street, 3rd Floor
San Francisco, California 94104,
Attention: Joe Van Remortel
10.02 AMENDMENTS/ASSIGNMENTS.
A. This Agreement may not be amended or modified in any manner
except by a written agreement executed by both parties with the formality of
this Agreement.
B. This Agreement shall extend to and shall be binding upon the
parties hereto, and their respective successors and assigns. This Agreement
shall not be assignable by either party without the written consent of the other
party, except that Sunstone may assign this Agreement to an affiliate with
advance written notice to the Trust.
10.03 GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of Wisconsin, without regard to its
conflict of law provisions.
10.04 SEVERABILITY. If any part, term or provision of this Agreement is
determined by the courts or any regulatory authority having jurisdiction over
the issue to be illegal, in conflict with any law or otherwise invalid, the
remaining portion or portions shall be considered severable and not be affected,
and the rights and obligations of the parties shall be construed and enforced as
if the Agreement did not contain the particular part, term or provision held to
be illegal or invalid.
10.05 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original; but such
counterparts shall, together, constitute only one instrument.
10.06 NON-EXCLUSIVITY; OTHER AGREEMENTS. The services of Sunstone
hereunder are not deemed exclusive and Sunstone shall be free to render similar
and other services to others. Except as specifically provided herein, this
Agreement does not in any way affect any other agreements entered into
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<PAGE> 15
among the parties hereto and any actions taken or omitted by any party hereunder
shall not affect any rights or obligations of any other party hereunder.
10.07 CAPTIONS. The captions in the Agreement are included for
convenience of reference only, and in no way define or limit any of the
provisions hereof or otherwise affect their construction or effect.
10.08 TRUST LIMITATIONS. This Agreement is executed by the Trust with
respect to each of the Funds and the obligations hereunder are not binding upon
any of the trustees, officers or shareholders of the Trust individually but are
binding only upon the Fund to which such obligations pertain and the assets and
property of such Fund. All obligations of the Trust under this Agreement shall
apply only on a Fund-by-Fund basis, and the assets of one Fund shall not be
liable for the obligations of another Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
SUNSTONE FINANCIAL GROUP, INC. E-HARMON FUNDS
By: By:
------------------------------ --------------------------------
(Signature) (Signature)
------------------------------ --------------------------------
(Name) (Name)
------------------------------ --------------------------------
(Title) (Title)
------------------------------ --------------------------------
(Date Signed) (Date Signed)
15
<PAGE> 16
SCHEDULE A
TO THE
TRANSFER AGENT AGREEMENT
BY AND BETWEEN
E-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
NAME OF FUNDS
e-harmon Internet Fund
e-harmon Net30 Index Fund
<PAGE> 17
SCHEDULE B
TO THE
TRANSFER AGENT AGREEMENT
BY AND BETWEEN
E-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
SERVICE SCHEDULE
SERVICES
o Set up and maintain shareholder accounts and records, including IRAs and
other retirement accounts
o Store account documents electronically
o Receive and respond to investor account inquiries by telephone, mail, or
e-mail, if desired
o Process purchase and redemption orders, transfers, and exchanges, including
automatic purchases and redemptions
o Process dividend payments by check, wire or ACH, or reinvest dividends
o Issue daily transaction confirmations and monthly or quarterly statements
o Mail prospectus, annual and semiannual reports, and other shareholder
communications to existing shareholders
o File IRS Forms 1099, 5498, 1042, 1042-S and 945 with shareholders and/or
the IRS
o Handle load and multi-class processing, including rights of accumulation
and purchases by letters of intent
o Calculate 12b-1 plan fees
o Provide standards to structure forms and applications for efficient
processing
<PAGE> 18
OPTIONAL SERVICES
The Funds may contract with Sunstone to provide one or more of the following
optional services. Additional fees apply.
o Personal follow-up calls to prospects who return incomplete applications
o Comprehensive clerical confirmation statements for maintenance transactions
o 4.NET SERVICES, Sunstone's array of Internet services, including Adviser
Services, RIA/Broker Services, Shareholder Services, NAV Services and email
services.
o 4.PROMPT SERVICES, Sunstone's telephone and voice response unit delivering
several tiers of optional services.
o Average cost calculations and cost basis statements
o Shareholder "welcome" packages with initial confirmation
o Access to Sunstone's Tax and Retirement Group to answer questions and
coordinate retirement plan options
o Follow up on IRAs, soliciting beneficiary and other information and sending
required minimum distribution reminder letters
o Money market funds for short-term investment or exchanges
o Dedicated service representatives
o Weekend shareholder services
o Customized reorder form tracking
o Give dealers access through NSCC's Fund/SERV and Networking
o Customized forms and applications
<PAGE> 19
SCHEDULE C
TO THE
TRANSFER AGENT AGREEMENT
BY AND BETWEEN
E-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
FEE SCHEDULE
SERVICES
The following fees are charged for standard shareholder services:
<TABLE>
<S> <C>
BASE FEES
o Open account fee (per year)
o No load equity and non-daily accrual fixed income funds $ 8.50
o Additional for 12b-1 fee $ 0.75
Additional for front-end load $ 1.50
Additional for CDSC or back-end load $ 2.00
o Closed account fee (per year) $ 3.00
o Monthly base (per fund)
o One to three funds in fund family $ 1,500
o 4 or more funds in fund family $ 1,000
o Add for multiclass (per class) 25%
ACCOUNT MAINTENANCE FEES (PER OCCURRENCE)
o New account set up $ 3.00
o Financial transactions $ 1.50
o Maintenance transactions $ 1.00
o Research/correspondence $ 2.50
o Transfer on death (TOD) set-up $ 7.50
o Fund/SERV
o Initial set-up per fund family $ 3,500
o Set-up fee per subsequent CUSIP $ 1,000
o New account set-up $ 1.00
o Per transaction - no load fund $ 0.25
o Per transaction - load fund $ 0.35
o Adjustments and rebills $ 2.50
o Fund/SERV direct charges at cost
o Commission/SERV (per check) $ 0.25
</TABLE>
<PAGE> 20
<TABLE>
<S> <C>
o ACH/AIP/SWP/automatic exchanges
o Set-up $ 1.00
o Per transaction $ 0.25
o Withholding per eligible account per year $ 0.25
o Account transcripts older than 2 years
(may be charged to shareholders) $ 5.00
o Locating lost shareholders $ 8.00
o Tax ID number solicitation $ 2.50
o Postal clean per account $ 3.00
SHAREHOLDER SERVICING FEES
o Telephone calls (per call) $ 2.50
o Annual maintenance per omnibus account $ 150
TAX AND RETIREMENT FEES
o Retirement accounts (IRA/Roth/others)
o Annual maintenance per account (may be
o charged to shareholders) $ 12.50
o Account distribution (may be charged to shareholders) $ 12.50
o IRA transfer/rollover $ 7.50
DOCUMENT SERVICES
o Per statement, confirmation and check processing $ 0.25
o Per tax form processing $ 0.25
o Per label printing for proxy or marketing purposes $ 0.10
o Bulk mailings/insert handling charge
o 1 insert $ 0.06
o 2 - 3 inserts $ 0.08
o 4 or more inserts as quoted
o Production of ad hoc reports starting at $100
FORMS AND APPLICATIONS
o Standard applications and forms in electronic format no charge
o Customized forms as quoted
</TABLE>
REPROCESSINGS DUE TO NAV ERRORS
This charge applies when shareholder transactions are required to be reprocessed
as a result of NAV errors caused by other than the willful misconduct or gross
negligence of Sunstone.
<TABLE>
<S> <C>
o Base fee (per occurrence, per day, per fund) $ 750
o Transaction fee $ 1.00
</TABLE>
<PAGE> 21
FUND/SERV ACCESS
<TABLE>
<S> <C>
o Use of Sunstone Fund/SERV membership (per fund/per year)
o First three funds in fund family $ 2,000
o 4 or more funds $ 1,000
</TABLE>
CUSTOM PROGRAMMING
Additional fees at $150 per hour or quoted by project may apply for special
programming to meet your servicing requirements or to create custom reports.
OUT-OF-POCKET EXPENSES
<TABLE>
<S> <C>
DOCUMENT CHARGES
o Copying charges (per page) $ 0.15
o Facsimile charges (per fax) $ 1.25
o Inventory and records storage $ 20.00/pallet
SUPPLIES AND SERVICES
o Statement paper, check stock, envelopes, tax forms at cost
o Postage and express delivery charges at cost
o Tape/disk storage at cost
o Telephone and long distance at cost
o P.O. box rental at cost
o Toll-free number at cost
BANK CHARGES
o Bank account service fees and any other bank charges at cost
o Outgoing wire fee varies by bank
o Non-sufficient funds varies by bank
o Stopped check on money market funds $ 25.00
</TABLE>
OPTIONAL SERVICES
Certain premium services described on Exhibit B may be purchased on an as-needed
basis. Fees for premium services will be based on Sunstone's current rate at the
time services are purchased.
<PAGE> 1
Exhibit (h)(2)
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
THIS AGREEMENT is made as of this 23rd day of April, 2000, by and
between e-harmon Funds, a Delaware business trust (the "Trust"), and Sunstone
Financial Group, Inc., a Wisconsin corporation (the "Administrator").
WHEREAS, the Trust is an open-end investment company registered under
the Investment Company Act of 1940, as amended (the "1940 Act") and is
authorized to issue shares of beneficial interests (the "Shares") in separate
series with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Trust and the Administrator desire to enter into an
agreement pursuant to which the Administrator shall provide administration and
fund accounting services to such investment portfolios of the Trust as are
listed on Schedule A hereto and any additional investment portfolios the Trust
and Administrator may agree upon and include on Schedule A as such Schedule may
be amended from time to time (such investment portfolios and any additional
investment portfolios are individually referred to as a "Fund" and collectively
the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. APPOINTMENT
The Trust hereby appoints the Administrator as administrator and fund
accountant of the Funds for the period and on the terms set forth in this
Agreement. The Administrator accepts such appointment and agrees to render the
services herein set forth, for the compensation herein provided.
2. SERVICES AS ADMINISTRATOR
(a) Subject to the direction and control of the Trust's Board of
Trustees and utilizing information provided by the Trust and its agents, the
Administrator will provide the services listed on Schedule B hereto. The duties
of the Administrator shall be confined to those expressly set forth therein, and
no implied duties are assumed by or may be asserted against the Administrator
hereunder.
(b) The Trustees of the Trust shall cause the officers, investment
adviser, legal counsel, independent accountants, transfer agent, custodian and
other service providers for the Funds to cooperate with the Administrator and to
provide the Administrator with such information, documents and advice relating
to the Funds and the Trust as reasonably requested by the Administrator, in
order to enable the Administrator to perform its duties hereunder. In connection
with its duties hereunder, the Administrator shall be entitled to rely, and
shall be held harmless by the Trust when acting in reliance (without
1
<PAGE> 2
investigation or verification), upon the instruction, advice, information or any
documents relating to the Funds or the Trust provided to the Administrator by an
officer or representative of the Funds or by any of the aforementioned persons.
Fees charged by such persons shall be an expense of the Trust. The Administrator
shall be entitled to rely on any document that it reasonably believes to be
genuine and to have been signed or presented by the proper party. The
Administrator shall not be held to have notice of any change of authority of any
officer, agent, representative or employee of the Trust until receipt of written
notice thereof from the Trust.
(c) To the extent required by Rule 31a-3 under the 1940 Act, the
Administrator hereby agrees that all records which it maintains for the Trust
pursuant to its duties hereunder are the property of the Trust and further
agrees to surrender promptly to the Trust any of such records upon the Trust's
request. Subject to the terms of Section 6, and where applicable, the
Administrator further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records described in Schedule B which are
maintained by the Administrator for the Trust.
(d) It is understood that in determining security valuations, the
Administrator employs one or more pricing services to determine valuations of
portfolio securities for purposes of calculating net asset values of the Funds.
The Administrator shall identify to the Trust and the Board of Trustees any such
pricing service(s) utilized on behalf of the Trust. The Administrator is
authorized to rely on the prices provided by such service(s) or by the Funds'
investment adviser(s) or other authorized representatives of the Funds, and
shall act in accordance with pricing procedures approved by Sunstone and the
Board of the Trust. Sunstone shall not be liable for losses to the Trust, its
securityholders or otherwise as a result of its reliance on the valuations
provided by the approved pricing service(s) or representatives or its reliance
on security valuation procedures established by the Trust.
(e) The Trust's Board of Trustees and the Funds' investment adviser
have and retain primary responsibility for all compliance matters relating to
the Funds including but not limited to compliance with the 1940 Act, the
Internal Revenue Code of 1986, as amended, and the policies and limitations of
each Fund relating to the portfolio investments as set forth in the Prospectus
and Statement of Additional Information. Sunstone's monitoring and other
functions hereunder shall not relieve the Board and the investment adviser of
their primary day-to-day responsibility for assuring such compliance.
3. FEES; DELEGATION; EXPENSES
(a) In consideration of the services rendered pursuant to this
Agreement, the Trust will pay the Administrator a fee, computed daily and
payable monthly, plus out-of-pocket expenses, each as provided in Schedule C
hereto. The Trust shall also pay the Administrator for organizational start-up
services provided on behalf of the Funds as specified in Schedule B. Fees shall
be paid by each Fund at a rate that would aggregate at least the applicable
minimum fee for each Fund.
(b) For the purpose of determining fees payable to the Administrator,
net asset value shall be computed in accordance with the Trust's Prospectuses
and resolutions of the Trust's Board of Trustees. The fee for the period from
the day of the month this Agreement is entered into until the end of that month
shall be pro-rated according to the proportion that such period bears to the
full monthly period.
2
<PAGE> 3
Upon any termination of this Agreement before the end of any month, the fee for
such part of a month shall be pro-rated according to the proportion which such
period bears to the full monthly period and shall be payable upon the date of
termination of this Agreement. Should the Trust be liquidated, merged with or
acquired by another fund or investment company, any accrued fees shall be
immediately payable.
(c) The Administrator will bear all expenses incurred by it in
connection with the performance of its services under Section 2, except as
otherwise provided herein. The Administrator shall not be required to pay or
finance any costs and expenses incurred in the operation of the Funds,
including, but not limited to: taxes; interest; brokerage fees and commissions;
salaries, fees and expenses of officers and Trustees; Securities and Exchange
Commission (the "Commission") fees and state Blue Sky fees; advisory fees;
charges of custodians, transfer agents, dividend disbursing and accounting
services agents and other service providers; security pricing services;
insurance premiums; outside auditing and legal expenses; costs of organization
and maintenance of trust existence; taxes and fees payable to federal, state and
other governmental agencies; preparation, typesetting, printing, proofing and
mailing of prospectuses, statements of additional information, supplements,
notices, forms and applications and proxy materials for regulatory purposes and
for distribution to current shareholders; preparation, typesetting, printing,
proofing and mailing and other costs of shareholder reports; expenses in
connection with the electronic transmission of documents and information
including electronic filings with the Commission and the states; research and
statistical data services; expenses incidental to holding meetings of the Fund's
shareholders and Trustees; fees and expenses associated with internet, e-mail
and other related activities; and extraordinary expenses. Expenses incurred for
distribution of shares, including the typesetting, printing, proofing and
mailing of prospectuses for persons who are not shareholders of the Trust, will
be borne by the Funds' investment adviser, except for such expenses permitted to
be paid by the Trust under a distribution plan adopted in accordance with
applicable laws. Administrator shall not be required to pay any Blue Sky fees
unless and until it has received the amount of such fees from the Trust.
4. PROPRIETARY AND CONFIDENTIAL INFORMATION
The Administrator agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records relative
to the Funds' shareholders, and not to use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval by the Trust, which approval
shall not be unreasonably withheld and may not be withheld where the
Administrator may be exposed to civil or criminal proceedings for failure to
comply, when requested to divulge such information by duly constituted
authorities, when subject to governmental or regulatory audit or investigation,
or when so requested by the Trust. Records and information which have become
known to the public through no wrongful act of the Administrator or any of its
employees, agents or representatives, and information which was already in the
possession of the Administrator prior to receipt thereof, shall not be subject
to this paragraph.
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<PAGE> 4
5. LIMITATION OF LIABILITY
(a) The Administrator shall not be liable for any error of judgment or
mistake of law or for any loss suffered by the Funds in connection with the
matters to which this Agreement relates, except for a loss resulting from the
Administrator's willful misfeasance, bad faith or gross negligence in the
performance of its duties or from reckless disregard by it of its obligations
and duties under this Agreement. Furthermore, the Administrator shall not be
liable for any action taken or omitted to be taken in accordance with written or
oral instructions received by the Administrator from an officer or
representative of the Trust.
(b) The Administrator assumes no responsibility hereunder, and shall
not be liable, for any default, damage, loss of data, errors, delay or any other
loss whatsoever caused by events beyond its reasonable control. The
Administrator will, however, take all reasonable steps to minimize service
interruptions for any period that such interruption continues beyond its
control.
(c) In no event and under no circumstances shall the Administrator, its
affiliates or any of its or their officers, directors, members, agents or
employees be liable to anyone, including, without limitation, the other party,
under any theory of tort, contract, strict liability or other legal or equitable
theory for lost profits, exemplary, punitive, special, indirect or consequential
damages for any act or failure to act under any provision of this Agreement
regardless of whether such damages were foreseeable and even if advised of the
possibility thereof.
6. TERM
(a) This Agreement shall become effective with respect to each Fund
listed on Schedule A hereof as of the date hereof and, with respect to each Fund
not in existence on that date, on the date an amendment to Schedule A to this
Agreement relating to that Fund is executed. This Agreement shall continue in
effect with respect to each Fund until April 23, 2002 (the "Initial Term").
Thereafter, if not terminated, this Agreement shall continue automatically in
effect as to each Fund for successive annual periods, provided such continuance
is specifically approved at least annually by (i) the Trust's Board of Trustees,
and (ii) by the Administrator.
(b) This Agreement may be terminated with respect to any one or more
particular Funds without penalty after the Initial Term (i) upon mutual consent
of the parties, or (ii) by either party upon not less than ninety (90) days'
written notice to the other party (which notice may be waived by the party
entitled to the notice). The terms of this Agreement shall not be waived,
altered, modified, amended or supplemented in any manner whatsoever except by a
written instrument signed by the Administrator and the Trust.
(c) Notwithstanding anything herein to the contrary, upon the
termination of this Agreement or the liquidation of a Fund or the Trust, the
Administrator shall deliver the records of the Fund(s) and/or Trust as the case
may be to the Trust or person(s) designated by the Trust at the Trust's cost and
expense, and thereafter the Trust or its designee shall be solely responsible
for preserving the records for
4
<PAGE> 5
the periods required by all applicable laws, rules and regulations. In addition,
in the event of termination of this Agreement, or the proposed liquidation or
merger of the Trust or a Fund(s), and the Trust requests the Administrator to
provide services in connection therewith, the Administrator shall provide such
services and be entitled to such compensation as the parties may mutually agree.
7. NON-EXCLUSIVITY
The services of the Administrator rendered to the Trust are not deemed
to be exclusive. The Administrator may render such services and any other
services to others, including other investment companies. The Trust recognizes
that from time to time directors, officers and employees of the Administrator
may serve as trustees, directors, officers and employees of other entities
(including other investment companies), and that the Administrator or its
affiliates may enter into other agreements with such other entities.
8. GOVERNING LAW; INVALIDITY
This Agreement shall be governed by Wisconsin law, excluding the laws
on conflicts of laws. To the extent that the applicable laws of the State of
Wisconsin, or any of the provisions herein, conflict with the applicable
provisions of the 1940 Act, the latter shall control, and nothing herein shall
be construed in a manner inconsistent with the 1940 Act or any rule or order of
the Commission thereunder. Any provision of this Agreement which may be
determined by competent authority to be prohibited or unenforceable in any
jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. In such case, the parties shall in good faith modify or
substitute such provision consistent with the original intent of the parties.
9. NOTICES
Any notice required or permitted to be given by either party to the
other shall be in writing and shall be deemed to have been given when sent by
registered or certified mail, postage prepaid, return receipt requested, as
follows: Notice to the Administrator shall be sent to Sunstone Financial Group,
Inc., 207 East Buffalo Street, Suite 400, Milwaukee, WI, 53202, Attention:
Miriam M. Allison, with a copy to General Counsel, and notice to the Trust shall
be sent to e-harmon Funds, 400 Montgomery Street, 3rd Floor, San Francisco,
California 94104, Attention: Joe Van Remortel, with a copy to Maureen Miller,
Gardner, Carton & Douglas, 321 N. Clark Street, Suite 3400, Chicago, Illinois
60610-4795.
10. ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement of the parties hereto.
5
<PAGE> 6
11. TRUST LIMITATIONS
This Agreement is executed by the Trust with respect to each of the
Funds and the obligations hereunder are not binding upon any of the Trustees,
officers or shareholders of the Trust individually but are binding only upon the
Fund to which such obligations pertain and the assets and property of such Fund.
All obligations of the Trust under this Agreement shall apply only on a
Fund-by-Fund basis, and the assets of one Fund shall not be liable for the
obligations of another Fund.
12. COUNTERPARTS
This Agreement may be executed in any number of counterparts, each of
which shall be deemed to be an original agreement but such counterparts shall
together constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
E-HARMON FUNDS
(the "Trust")
By:
------------------------------------
President
SUNSTONE FINANCIAL GROUP, INC.
("Administrator")
By:
------------------------------------
President
6
<PAGE> 7
SCHEDULE A
TO THE
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
NAME OF FUNDS
e-harmon Internet Fund
e-harmon Net30 Index Fund
<PAGE> 8
SCHEDULE B
TO THE
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
SERVICES
Subject to the direction and control of the Trust's Board of Trustees and
utilizing information provided by the Trust and its agents, the Administrator
will:
o provide office space, facilities, equipment and personnel to carry out its
services hereunder
o compile data for and prepare with respect to the Funds timely Notices to the
Commission required pursuant to Rule 24f-2 under the 1940 Act and
Semi-Annual Reports on Form N-SAR;
o assist in the preparation for execution by the Trust and file all federal
income and excise tax returns and state income tax returns (and such other
required tax filings as may be agreed to by the parties) other than those
required to be made by the Trust's custodian or transfer agent, subject to
review and approval of the Trust and the Trust's independent accountants;
o prepare the financial statements for the Annual and Semi-Annual Reports
required pursuant to Section 30(d) under the 1940 Act;
o provide financial and Fund performance information for inclusion in the
Registration Statement for the Trust (on Form N-1A or any replacement
therefor) and any amendments thereto, and Fund performance information for
inclusion in Fund advertising materials;
o determine and periodically monitor each Fund's income and expense accruals
and cause all appropriate expenses to be paid from Trust assets on proper
authorization from the Trust;
o calculate daily net asset values and income factors of each Fund;
o maintain all general ledger accounts and related subledgers;
o perform security valuations using pricing services;
o assist in the acquisition of the Trust 's fidelity bond required by the 1940
Act, monitor the amount of the bond and make the necessary Commission
filings related thereto;
<PAGE> 9
o from time to time as the Administrator deems appropriate, check each Fund's
compliance with the policies and limitations of each Fund relating to the
portfolio investments as set forth in the Prospectus and Statement of
Additional Information and monitor each Fund's status as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986,
as amended (but these functions shall not relieve the Trust 's investment
adviser and sub-advisers, if any, of their primary day-to-day responsibility
for assuring such compliance);
o maintain, and/or coordinate with the other service providers the maintenance
of, the accounts, books and other documents required pursuant to Rule
31a-1(a) and (b) under the 1940 Act;
o prepare and/or file state securities registration compliance filings, with
the advice of the Trust's legal counsel, in accordance with instructions
from the Trust, which instructions will include the states to qualify in,
the amounts of Shares to initially and subsequently qualify and the warning
threshold to be maintained;
o develop with legal counsel and the secretary of the Trust an agenda for each
board meeting and, if requested by the Trustees, attend board meetings and
prepare minutes;
o prepare Form 1099s for Trustees and other fund vendors;
o calculate dividend and capital gains distributions subject to review and
approval by the Trust and its independent accountants; and
o generally assist in the Trust 's administrative operations as mutually
agreed to by the parties.
The duties of the Administrator shall be confined to those expressly set forth
herein, and no implied duties are assumed by or may be asserted against the
Administrator hereunder.
<PAGE> 10
SCHEDULE C
TO THE
ADMINISTRATION AND FUND ACCOUNTING AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE FINANCIAL GROUP, INC.
ASSET BASED FEES
<TABLE>
<CAPTION>
MINIMUM
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS* ANNUAL FEE*
- ------------ ------------------ ------------ -----------
<S> <C> <C> <C>
Net30 Index Fund Up to $50 Million 15.0 $70,000
$50 Million to $100 million 7.5
$100 Million to $250 Million 5.0
$250 Million to $500 Million 3.0
Over $500 Million 2.0
</TABLE>
<TABLE>
<CAPTION>
MINIMUM
NAME OF FUND AVERAGE NET ASSETS BASIS POINTS* ANNUAL FEE*
- ------------ ------------------ ------------ -----------
<S> <C> <C> <C>
Internet Fund Up to $50 Million 15.0 $70,000
$50 Million to $100 million 7.5
$100 Million to $250 Million 5.0
$250 Million to $500 Million 3.0
Over $500 Million 2.0
</TABLE>
The minimum annual fee is subject to an annual escalation of five percent (5%),
which escalation shall be effective commencing one year from the effective date
of each Fund and the corresponding date each year thereafter. No amendment of
this Schedule B shall be required with each escalation. The foregoing fee
schedule assumes one class of shares for the e-harmon Net30 Index Fund and one
class for the e-harmon Internet Fund. For each additional class, two basis
points are added for asset levels up to $250 million, and $5,000 per additional
class is added to each minimum fee. Additional fees shall apply when adding any
additional Fund(s) and/or classes as compensation for the Administrator's
services in connection with the organization of the new Fund(s) or classes. The
Administrator shall provide such services and be entitled to such compensation
as the parties may mutually agree in writing.
<PAGE> 11
OUT-OF-POCKET AND OTHER RELATED EXPENSES
The Trust shall also pay/reimburse the Administrator's out-of-pocket and other
related expenses. Out-of-pocket expenses include, but are not limited to,
travel, lodging and meals in connection with travel in connection with Board
meetings and otherwise on behalf of the Trust, programming and related expenses
(previously incurred or to be incurred by Administrator) in connection with
providing electronic transmission of data between the Administrator and the
Funds' other service providers, brokers, dealers and depositories, fees and
expenses of pricing services, fees of research services including Lexis/Nexis,
Morningstar and Lipper, NASDAQ and other service interface fees, EDGAR related
fees, long distance telephone charges, and photocopying, faxes, postage and
overnight delivery expenses.
EDGAR FILING PRODUCTION MANAGEMENT FEES
<TABLE>
<S> <C>
oo Annual Registration Statements (e.g., 485) $1,000
oo Follow-up 497 filings to Annual Registration Statements, $ 850
excluding 497J (see below)
oo Annual and Semiannual Reports (N30D) $ 650
oo Quarterly Reports (N30B-2) $ 400
oo Notice to Accompany SEC Registration Fees (24f-2) $ 300
oo Certification of No Change to Prospectus and/or SAI (497J) $ 300
oo Certificate of Accounting of Securities (N17f-2) $ 300
oo Ads and Sales Literature (482) $ 300
oo Correspondence $ 300
</TABLE>
SUNSTONE 4.NAVSM SERVICES (DAILY UPLOADS OF NAVS TO WEBSITE)
<TABLE>
<S> <C>
oo Set Up Fee (per fund family) $2,000
oo Monthly maintenance fee (perfund) $ 150
</TABLE>
<PAGE> 1
Exhibit (h)(3)
INBOUND CALL MANAGEMENT AND
FULFILLMENT SERVICES AGREEMENT
THIS AGREEMENT is made as of this 23rd day of April, 2000, by and
between e-harmon Funds, a Delaware business trust (the "Trust") and Sunstone
Distribution Services, LLC, a Wisconsin limited liability company ("Sunstone").
WHEREAS, the Trust is registered under the Investment Company Act of
1940, as amended (the "Act"), as an open-end management investment company which
is authorized to issue shares of beneficial interests in separate series with
each such series representing the interests in a separate portfolio of
securities and other assets;
WHEREAS, Sunstone offers various inbound call management and
fulfillment services to investment companies and others; and
WHEREAS, the Trust and Sunstone desire to enter into an agreement
pursuant to which Sunstone shall provide on behalf of the Trust certain inbound
call management and fulfillment services to such investment portfolios of the
Trust as are listed on Schedule A hereto and any additional investment
portfolios the Trust and Sunstone may agree upon and include on Schedule A as
such Schedule may be amended from time to time (such investment portfolios and
any additional investment portfolios are individually referred to as a "Fund"
and collectively the "Funds").
NOW, THEREFORE, in consideration of the mutual promises and agreements
herein contained and other good and valuable consideration, the receipt of which
is hereby acknowledged, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. APPOINTMENT AND SERVICES
(a) The Trust hereby retains and does hereby authorize Sunstone to
provide the inbound call management and fulfillment services described in
Schedule B hereto, and Sunstone agrees to provide such services, for the period
and compensation and upon the terms set forth in this Agreement.
(b) The Trust, at its cost, shall provide Sunstone with the necessary
scripts, instructions and all materials (including prospectuses, reports,
article reprints, stationery and envelopes) so that Sunstone may provide the
services described herein. Notwithstanding anything herein to the contrary,
Sunstone shall not be required to provide any services or information that it
believes, in its sole discretion, to represent dishonest, unethical or illegal
activity. In no event shall Sunstone provide any investment advice or
recommendations to any party in connection with its services hereunder. All risk
of loss for the materials being inventoried by Sunstone on the Trust's behalf
shall be the responsibility of the Trust, and Sunstone shall not be responsible
for any loss to this material except as such loss may be caused by Sunstone's
negligence. Sunstone agrees to use due care in the storage of such materials
prior to their distribution. The Trust shall provide Sunstone from time to time
at the earliest practicable date with such details as may reasonably be required
concerning media schedules, anticipated call volume and other related
information so as to facilitate preparation by Sunstone to provide the services
hereunder.
1
<PAGE> 2
2. FEES AND EXPENSES
In consideration of the services rendered pursuant to this Agreement, the Trust
shall, to the extent permissible under applicable law, pay Sunstone such fees,
charges and expenses as are set forth in Schedule C hereto. Sunstone may, at its
option, arrange to have various service providers submit invoices directly to
the Trust for payment of out of pocket expenses reimbursable hereunder. All
invoices rendered by Sunstone shall be paid within fifteen (15) days of the date
of invoice. At the option of Sunstone, unpaid invoices accrue a finance charge
of one and one-half percent (1 1/2%) per month, after the due date, unless
Sunstone receives notice from the Trust in writing prior to the due date of any
disputed items from a particular invoice. If requested by Sunstone,
out-of-pocket expenses are payable in advance. In the event Sunstone requests
advance payment, Sunstone shall not be obligated to incur such expenses or
perform the related Service(s) until payment is received.
3. TERM; AMENDMENTS; ASSIGNMENT
(a) This Agreement shall become effective with respect to each Fund
listed on Schedule A as of the date hereof and, with respect to each Fund not in
existence on that date, on the date an amendment to Schedule A to this Agreement
relating to that Fund is executed. Unless sooner terminated as provided herein,
this Agreement shall continue in effect with respect to each Fund until Aril 23,
2002 (the "Initial Term"). Thereafter, if not terminated, this Agreement shall
continue automatically in effect as to each Fund for successive annual periods,
provided such continuance is specifically approved at least annually by (i) the
Trust's Board of Trustees including a majority of the Trust's Board of Trustees
who are not "interested persons" (as defined in the 1940 Act) and who have no
direct or indirect financial interest in the operation of the Agreement, by vote
cast in person at a meeting called for the purpose of voting on such approval,
and (ii) by the Distributor.
(b)This Agreement may be terminated with respect to any one or more
particular Funds without penalty, after the Initial Term, upon not less than
thirty (30) days' written notice to the other party (which notice may be waived
by the party entitled to such notice), by (i) the Distributor, or (ii) by vote
of a majority of the members of the Trust's Board of Trustees who are not
"interested persons" (as defined in the 1940 Act) and who have no direct or
indirect financial interest in the operation of the Agreement or by vote of a
majority (as defined with respect to voting securities in the 1940 Act and Rule
18f-2 thereunder) of the outstanding voting securities of a Fund. This Agreement
shall also terminate automatically in the event of its assignment (as defined in
the 1940 Act). Upon termination of this Agreement, Sunstone shall promptly
return to the Trust all applicable materials that are the property of the Trust
at the Trust's expense. All amounts due and owing to Sunstone as of such
termination shall become immediately due and payable and the Trust shall pay
such amounts at the termination date.
(c)Except as expressly provided in this Agreement, the terms of this
Agreement shall not be waived, altered, modified, amended or supplemented in any
manner whatsoever except by a written instrument signed by Sunstone and the
Trust. Notwithstanding the above, Sunstone shall provide the Company with a copy
of its fee schedule as it is amended from time to time, and any such amendment
shall automatically be effective sixty (60) days after the date of amendment.
2
<PAGE> 3
4. NON-EXCLUSIVITY; CONFIDENTIALITY
(a)The services of Sunstone hereunder are not deemed to be exclusive.
Sunstone may render inbound call management and fulfillment services and any
other services to others, including other investment companies.
(b)Sunstone agrees on behalf of itself and its employees to treat
confidentially and as proprietary information of the Trust all records relative
to the Funds' shareholders acquired in connection with its services hereunder,
and not to use such records and information for any purpose other than the
performance of its responsibilities and duties hereunder, except after prior
notification to and approval by the Trust, which approval shall not be
unreasonably withheld and may not be withheld where Sunstone may be exposed to
civil or criminal proceedings for failure to comply, when requested to divulge
such information by duly constituted authorities, when subject to governmental
or regulatory audit or investigation, or when so requested by the Trust. Records
and information which have become known to the public through no wrongful act of
Sunstone or any of its employees or representatives, and information which was
already in the possession of the Sunstone prior to receipt thereof shall not be
subject to this paragraph.
5. LIMITATION OF LIABILITY
(a)In providing services hereunder, Sunstone shall not be liable for
any loss or damage, including counsel fees, resulting from its actions or
omissions to act or otherwise, in the absence of its willful misfeasance or
gross negligence in connection with its duties under this Agreement, or for any
loss or damage resulting from its actions or omissions in accordance with the
instructions, directions or requests of officers or authorized representatives
of the Trust.
(b)The Trust shall indemnify and hold harmless Sunstone from and
against any and all claims, actions, suits, demands, losses, expenses and
liabilities (including the costs of investigating or defending any alleged
claims, actions, suits, demands, losses, expenses and liabilities)
(collectively, "Losses") of any and every nature which Sunstone may sustain or
incur or which may be asserted against Sunstone by any person arising directly
or indirectly out of any action taken or omitted to be taken by Sunstone in
performing the services hereunder; provided that this indemnification shall not
apply to actions or omissions of Sunstone in cases of its own willful
misfeasance or gross negligence. As used in this Section 5(b), the term
"Sunstone" shall include past and present members, officers, employees,
representatives, authorized agents and assigns of Sunstone as well as Sunstone
and its affiliates themselves.
(c)Sunstone shall indemnify and hold harmless the Trust from and
against any and all Losses of any and every nature which the Trust may sustain
or incur or which may be asserted against the Trust by any person to the extent
such Losses arise out of Sunstone's willful misfeasance or gross negligence in
connection with its duties under this Agreement. As used in this Section 5(c),
the term "Trust" shall include past and present trustees, officers, employees,
representatives, authorized agents and assigns of the Trust as well as the Trust
and its affiliates themselves.
3
<PAGE> 4
(d) The Trust further agrees to indemnify, defend and hold harmless
Sunstone from and against any and all Losses which Sunstone may sustain or incur
or which may be asserted against Sunstone by any person arising out of or
resulting from the actions or omissions of Sunstone when acting in accordance
with the instructions, directions or requests of officers or representatives of
the Trust.
(e) Notwithstanding anything herein to the contrary, Sunstone will be
excused from its obligation to perform any act, service or obligation required
of it hereunder for the duration that such performance is prevented by events
beyond its reasonable control and it shall not be responsible for any damage,
loss of data, errors, delay or any other loss whatsoever caused thereby.
Sunstone will, however, take all reasonable steps to minimize service
interruptions for any period that such interruption continues beyond its
control. The indemnity and defense provisions set forth in this Section 5 shall
indefinitely survive the termination and/or assignment of this Agreement. Under
no circumstances shall Sunstone be liable for any incidental, consequential or
punitive damages, direct or indirect.
6. GOVERNING LAW; INVALIDITY
This Agreement shall be governed by Wisconsin law, excluding the laws on
conflicts of laws. To the extent that the applicable laws of the State of
Wisconsin, or any of the provisions herein, conflict with the applicable
provisions of the Act, the latter shall control, and nothing herein shall be
construed in a manner inconsistent with the Act or any rule or order of the
Securities and Exchange Commission thereunder. Any provision of this Agreement
which may be determined by competent authority to be prohibited or unenforceable
in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent
of such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction. In such case, the parties shall in good faith modify or
substitute such provision consistent with the original intent of the parties.
7. MISCELLANEOUS
This Agreement and the Schedules incorporated hereto constitute the full and
complete understanding and agreement of Sunstone and the Trust and supersedes
all prior negotiations, understandings and agreements.
4
<PAGE> 5
8. NOTICES
Any notice required or permitted to be given by either party to the other shall
be in writing and shall be deemed to be effective upon the date specified on the
return receipt when sent by registered or certified mail, postage prepaid,
return receipt requested, as follows: Notice to Sunstone shall be sent to
Sunstone Distribution Services, LLC, 207 East Buffalo Street, Suite 400,
Milwaukee, WI, 53202, Attention: Peter Hammond, and notice to the Trust shall be
sent to e-harmon Funds, 400 Montgomery Street, 3rd Floor, San Francisco,
California 94104, Attention: Joe Van Remortel.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by a duly authorized officer as of the day and year first above
written.
E-HARMON FUNDS
(the "Trust")
By:
---------------------------------
President
SUNSTONE DISTRIBUTION SERVICES, LLC
("Sunstone")
By:
---------------------------------
Peter Hammond
Vice President
5
<PAGE> 6
SCHEDULE A
TO THE
INBOUND CALL MANAGEMENT AND FULFILLMENT SERVICES AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
FUNDS
e-harmon Internet Fund
e-harmon Net30 Index Fund
<PAGE> 7
SCHEDULE B
TO THE
INBOUND CALL MANAGEMENT AND FULFILLMENT SERVICES AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
SERVICES
INBOUND CALL MANAGEMENT
o Standard business hours: 7 a.m. - 7 p.m. CST, Monday through Friday (except
major holidays)
o Qualify callers
o Provide detailed responses to fund inquiries (not scripted)
o Identify buyer/investment needs
o Automated voice response system
o Custom database maintenance
o Periodic activity reporting
o Names, addresses, telephone numbers and types of inquiries
o Call tracking, by:
o Fund
o Zip code or geographic region
o Source code
o Call switching
o Complex calls can be forwarded to fund, if desired
o Transfer calls to transfer agent
<PAGE> 8
FULFILLMENT
o Literature request standards
o Filled and mailed typically within 24 hours (but at least within 3 business
days with respect to all documents required by the SEC to be sent within
such timeframes).
o On-site inventory control
o Customized literature fulfillment
o Personalized letters developed by the Trust or by Sunstone (with prior
approval by the Trust)
o Customized investor kit assembly
o Fulfill literature requests downloaded from the Trust's Internet site
o Periodic reporting
o Kit report
o Advanced notice of need to order additional materials
MISCELLANEOUS
o Reference Manual maintenance and representative training.
<PAGE> 9
SCHEDULE C
TO THE
INBOUND CALL MANAGEMENT AND FULFILLMENT SERVICES AGREEMENT
BY AND BETWEEN
e-HARMON FUNDS
AND
SUNSTONE DISTRIBUTION SERVICES, LLC
FEE SCHEDULE
<TABLE>
<CAPTION>
<S> <C>
o Set-up $ 5,000
Sunstone set up includes the following activities:
o Programming the phone system
o Programming Sunstone's proprietary prospect database
o Coordinating the installation/rerouting of the 800 number
o Coordinating the installation of the voice response unit
o Creating the Fund Reference Manual
o Overseeing initial representative training
o Base Fee $ 5,000/month
o Inbound calls
Live Representative $ 1.50/minute
o Email Services
Set up No Charge
Maintenance No Charge
Auto reply No Charge
Management Fee $ 2,500/month
Correspondence $ 3.25/email
o Voice Response Unit
Service $ .85/minute
Monthly Maintenance No Charge
o Transfers to Toll Number $ .85/minute
o Transfers to 800 Number $ .70/minute
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
FULFILLMENT
<S> <C>
o Standard package for mailing
Up to 3 pieces $ 0.85
Additional inserts $ 0.05 each
Personalized letter $ 1.00 each
o Follow-up letter $ 1.00 each
OTHER EXPENSES
Postage At cost
Bulk mailings Priced by project
Third party automated call processor At cost
Stickers/supplements $ 0.05 each
Bar coding $ 0.05 each
Conversion Tracking $ .10/record
Internet fulfillment requests $ .25/record
Facsimile (per sheet) $ 1.50
Photocopies $ 0.25
Express Deliveries At cost
Phone surcharges At cost
Customized monthly reports $150.00 each
Ad Hoc reports $150.00 and up
Customized programming $150.00/hour
Storage (per skid) $20.00/month
Special projects Priced by project
Long distance At cost
</TABLE>
<PAGE> 1
EXHIBIT (i)
[LETTERHEAD OF MORRIS, NICHOLS, ARSHT & TUNNELL]
April 19, 2000
e-harmon Funds
400 Montgomery Street, 3rd Floor
San Francisco, California 94104
Re: e-harmon Funds
Ladies and Gentlemen:
We have acted as special Delaware counsel to e-harmon Funds, a
Delaware business trust (the "Trust"), in connection with the formation of the
Trust and certain matters relating to the proposed issuance of Shares of the
Trust. Capitalized terms used herein and not otherwise herein defined are used
as defined in the Agreement and Declaration of Trust of the Trust dated as of
December 21, 1999 (the "Governing Instrument").
In rendering this opinion, we have examined copies of the
following documents, each in the form provided to us: the Certificate of Trust
of the Trust as filed in the Office of the Secretary of State of the State of
Delaware (the "State Office") on December 22, 1999 (the "Certificate"); the
Governing Instrument; the By-laws of the Trust; a Unanimous Written Consent of
the Board of Trustees of the Trust dated as of December 22, 1999 (the
"Consent"); certain resolutions of the Trustees of the Trust prepared for
adoption at the meeting of the Board of Trustees held on March 24, 2000 (the
"Resolutions") pursuant to which, inter alia, the Board established as Series of
the Trust the e-harmon Internet Fund (the "Internet Fund") and the e-harmon
Net30 Index Fund (the "Index Fund" and, collectively with the Internet Fund, the
"Funds") and established Class A, Class B and Class C Shares of the Internet
Fund and Investor Class Shares of the Index Fund; the Notification of
Registration Filed Pursuant to Section 8(a) of the Investment Company Act of
1940 on Form N-8A of the Trust filed with the Securities and Exchange Commission
(the "Commission") on January 18, 2000; the Registration Statement on Form N-1A
of the Trust filed with the Commission on January 18, 2000, as amended by
Pre-Effective Amendment No. 1 filed with the Commission on March 23, 2000 and
Pre-Effective Amendment No. 2 filed with the Commission on or about the date
hereof (as amended, the "Registration Statement" and, together with the
Governing Instrument, the By-laws of the Trust, the Consent and the Resolutions,
the "Operative Documents"); and a certification of good standing of the Trust
obtained as of a recent date from the State Office. In such examinations,
<PAGE> 2
e-harmon Funds
April 19, 2000
Page 2
we have assumed the genuineness of all signatures, the conformity to original
documents of all documents submitted to us as copies or drafts of documents to
be executed, and the legal capacity of natural persons to complete the execution
of documents. We have further assumed for the purpose of this opinion: (i) the
due adoption, authorization, execution and delivery by, or on behalf of, each of
the parties thereto of the above-referenced resolutions, instruments,
certificates and other documents, and of all documents contemplated by the
Operative Documents to be executed by investors acquiring Shares; (ii) the
payment of consideration for Shares, and the application of such consideration,
as provided in the Operative Documents, and compliance with the other terms,
conditions and restrictions set forth in the Operative Documents in connection
with the issuance of Shares; (iii) that appropriate notation of the names and
addresses of, the number of Shares held by, and the consideration paid by,
Shareholders will be maintained in the appropriate registers and other books and
records of the Trust in connection with the issuance, redemption or transfer of
Shares; (iv) that no event has occurred subsequent to the filing of the
Certificate that would cause a termination or reorganization of the Trust under
Section 2 or Section 3 of Article VIII of the Governing Instrument; (v) that the
activities of the Trust have been and will be conducted in accordance with the
terms of the Governing Instrument and the Delaware Business Trust Act, 12 Del.
C. Sections 3801 et seq. (the "Delaware Act"); and (vi) that each of the
documents examined by us is in full force and effect, expresses the entire
understanding of the parties thereto with respect to the subject matter thereof
and has not been amended, supplemented or otherwise modified, except as herein
referenced. No opinion is expressed herein with respect to the requirements of,
or compliance with, federal or state securities or blue sky laws. Further, we
have not participated in the preparation of the Registration Statement or any
other offering documentation relating to the Trust or the Shares and we assume
no responsibility for their contents. As to any facts material to our opinion,
other than those assumed, we have relied without independent investigation on
the above-referenced documents and on the accuracy, as of the date hereof, of
the matters therein contained.
Based on and subject to the foregoing, and limited in all
respects to matters of Delaware law, it is our opinion that:
1. The Trust is a duly formed and validly existing business
trust in good standing under the laws of the State of Delaware.
2. The issuance of Class A, Class B and Class C Shares of the
Internet Fund has been duly authorized on behalf of the Trust and such Shares,
upon issuance, will constitute legally issued, fully paid and non-assessable
Shares of beneficial interest in the Trust.
3. The issuance of Investor Class Shares of the Index Fund has
been duly authorized on behalf of the Trust and such Shares, upon issuance, will
constitute legally issued, fully paid and non-assessable Shares of beneficial
interest in the Trust.
4. Under the Delaware Act and the terms of the Governing
Instrument, each Shareholder of the Trust, in such capacity, will be entitled to
the same limitation of personal
<PAGE> 3
e-harmon Funds
April 19, 2000
Page 3
liability as that extended to stockholders of private corporations for profit
organized under the general corporation law of the State of Delaware; provided,
however, that we express no opinion with respect to the liability of any
Shareholder who is, was or becomes a named Trustee of the Trust. Neither the
existence nor exercise of the voting rights granted to Shareholders under the
Governing Instrument will, of itself, cause a Shareholder to be deemed a trustee
of the Trust under the Delaware Act. Notwithstanding the foregoing or the
opinions expressed in paragraphs 2 and 3 above, we note that, pursuant to
Section 5 of Article IV of the Governing Instrument, the Trustees have the power
to cause Shareholders, or Shareholders of a particular Series, to pay certain
custodian, transfer, servicing or similar agent charges by setting off the same
against declared but unpaid dividends or by reducing Share ownership (or by both
means).
We hereby consent to the filing of a copy of this opinion with
the Commission with the Registration Statement. In giving this consent, we do
not thereby admit that we come within the category of persons whose consent is
required under Section 7 of the Securities Act of 1933, as amended, or the rules
and regulations of the Commission thereunder. This opinion speaks only as of the
date hereof and is based on our understandings and assumptions as to present
facts and our review of the above referenced documents and the application of
Delaware law as the same exist on the date hereof, and we undertake no
obligation to update or supplement this opinion after the date hereof for the
benefit of any person or entity with respect to any facts or circumstances that
may hereafter come to our attention or any changes in facts or law that may
hereafter occur or take effect. Except as provided in this paragraph, the
opinion set forth above is expressed solely for the benefit of the addressee
hereof in connection with the matters contemplated hereby and may not be relied
upon for any other purpose or by any other person or entity without our prior
written consent.
Sincerely,
MORRIS, NICHOLS, ARSHT & TUNNELL
<PAGE> 1
EXHIBIT (j)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Pre-Effective Amendment No.2 to the
Registration Statement on Form N-1A of our report dated April 18, 2000, relating
to the financial statements of e-harmon Internet Fund, a series of e-harmon
Funds, which appear in such Registration Statement. We also consent to the
reference to us under the heading "Independent Accountants" in the Statement of
Additional Information.
/s/ Pricewaterhouse Coopers LLP
San Francisco, California
April 18, 2000
<PAGE> 1
EXHIBIT (l)
PURCHASE AGREEMENT
e-harmon Funds (the "Trust"), a Delaware business trust registered as
an open-end, diversified management investment company, and e-harmon Capital
Management LLC, a Delaware limited liability company, intending to be legally
bound, hereby agree as follows:
1. In order to provide the Trust with its initial capital, the Trust
hereby sells to e-harmon Capital Management LLC, and e-harmon Capital Management
LLC hereby purchases: 10,000 shares of beneficial interest of the Class A shares
of e-harmon Internet Fund (the "Shares"), at the net asset value per share of
$10.00. The Trust hereby acknowledges receipt from e-harmon Capital Management
LLC of funds in the amount of $100,000 in full payment for the Shares.
2. e-harmon Capital Management LLC represents and warrants to the Trust
that the Shares are being acquired for investment purposes and not with a view
to distribution thereof and that e-harmon Capital Management LLC has no present
intention to redeem and dispose of any of the Shares.
IN WITNESS WHEREOF, the parties have executed this agreement as of the
___ day of _________________, 2000.
E-HARMON FUNDS
By:
--------------------------------
Joseph Van Remortel
President
E-HARMON CAPITAL MANAGEMENT LLC
By:
--------------------------------
Name: James Hartmann
Title: President
<PAGE> 1
EXHIBIT (m)(1)
E-HARMON INTERNET FUND
A SERIES OF E-HARMON FUNDS
DISTRIBUTION PLAN
(CLASS A SHARES)
Distribution Plan (the "Plan") by and between e-harmon Funds (the
"Trust") for e-harmon Internet Fund (the "Fund") Class A shares (the "Class A
shares") and Sunstone Distribution Services, LLC (the "Distributor").
WITNESSETH:
WHEREAS, the Trust has entered into a distribution agreement with the
Distributor pursuant to which the Distributor will distribute shares of the Fund
issued by the Trust;
WHEREAS, the Trust desires to adopt this Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended ("Investment Company Act"),
pursuant to which the Fund will pay a distribution fee to, or at the direction
of, Sunstone in connection with the Class A shares of the Fund; and
WHEREAS, a majority of the Board of Trustees of the Trust, including a
majority who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the "Rule 12b-1
Trustees"), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its Class A shareholders.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Plan in accordance with Rule 12b-1 under the
Investment Company Act on the following terms and conditions:
1. Payment for Distribution Activities
The Fund shall pay to the Distributor a distribution fee not to exceed
.25 of 1% per annum of the average daily net assets of the Class A shares of the
Fund for the performance of Distribution Activities as described below. The Fund
shall calculate and accrue daily amounts payable by the Class A shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Trustees may determine. Amounts payable under the Plan shall be
subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Only distribution expenditures properly attributable to the sale of
Class A shares of the Fund will be used to justify any fee paid by the Trust
with respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Trustees of the Trust.
<PAGE> 2
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) compensating the Distributor under the Distribution Agreement;
(b) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the
Distributor for the sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution
Activities;
(c) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the Adviser
or the Fund for the sale of Class A shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution;
(d) costs of printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;
(e) services relating to the development, preparation, printing and
mailing of Fund advertisements, sales literature and other promotional
materials describing and/or relating to the Fund and including
materials intended for broker-dealer only use or retail;
(f) holding seminars and sales meetings designed to promote the
distribution of the Class A Shares of the Fund;
(g) obtaining information and providing explanations to prospective
shareholders regarding the investment objective and policies and other
information about the Fund, including the performance of the Fund;
(h) training sales personnel regarding the Trust and the Fund; and
(i) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of Class A
shares.
2. Quarterly Reports; Additional Information
The Distributor or an appropriate officer of the Trust will provide to
the Board of Trustees of the Trust for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for Distribution
Activities and the purposes for which such expenditures were made in compliance
with the requirements of Rule 12b-1. The Distributor will provide to the Board
of Trustees of the Trust such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
2
<PAGE> 3
3. Effectiveness; Continuation
If approved by a vote of a majority of the Board of Trustees and a
majority of the Rule 12b-1 Trustees, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter for
so long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Trust and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
4. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Fund.
5. Amendments
The Plan may not be amended to change the distribution expenses to be
paid as provided for in Section 1 hereof so as to increase materially the
amounts payable under this Plan unless such amendment shall be approved by the
vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Class A shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of Trustees
of the Trust and a majority of the Rule 12b-1 Trustees by votes cast in person
at a meeting called for the purpose of voting on the Plan.
6. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
7. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 2 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: March 24, 2000
3
<PAGE> 1
EXHIBIT (m)(2)
E-HARMON INTERNET FUND
A SERIES OF E-HARMON FUNDS
DISTRIBUTION AND SERVICE PLAN
(CLASS B SHARES)
Distribution and Service Plan (the "Plan") by and between e-harmon
Funds (the "Trust") for e-harmon Internet Fund (the "Fund") Class B shares (the
"Class B shares") and Sunstone Distribution Services, LLC (the "Distributor").
WITNESSETH:
WHEREAS, the Trust has entered into a distribution agreement with the
Distributor pursuant to which the Distributor will distribute shares of the Fund
issued by the Trust;
WHEREAS, the Trust desires to adopt this Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended ("Investment Company Act"),
pursuant to which the Fund will pay a distribution and service fee to, or at the
direction of, Sunstone in connection with the Class B shares of the Fund; and
WHEREAS, a majority of the Board of Trustees of the Trust, including a
majority who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the "Rule 12b-1
Trustees"), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its Class B shareholders.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Plan in accordance with Rule 12b-1 under the
Investment Company Act on the following terms and conditions:
1. Payment of Service Fee
The Fund shall pay to the Distributor for providing personal service
and/or maintaining shareholder accounts a service fee of .25 of 1% per annum of
the average daily net assets of the Class B shares (service fee) of the Fund.
The Fund shall calculate and accrue daily amounts payable by the Class B shares
of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine.
2. Payment for Distribution Activities
The Fund shall pay to the Distributor a distribution fee not to exceed
.75 of 1% per annum of the average daily net assets of the Class B shares of the
Fund for the performance of Distribution Activities as described below. The Fund
shall calculate and accrue daily amounts payable by the Class B shares of the
Fund hereunder and shall pay such amounts monthly or at such other intervals as
the Board of Trustees may determine. Amounts payable under the Plan
<PAGE> 2
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Only distribution expenditures properly attributable to the sale of
Class B shares of the Fund will be used to justify any fee paid by the Trust
with respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Trustees of the Trust.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) compensating the Distributor under the Distribution Agreement;
(b) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the
Distributor for the sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution
Activities;
(c) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the Adviser
or the Fund for the sale of Class B shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution;
(d) costs of printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;
(e) services relating to the development, preparation, printing and
mailing of Fund advertisements, sales literature and other promotional
materials describing and/or relating to the Fund and including
materials intended for broker-dealer only use or retail;
(f) holding seminars and sales meetings designed to promote the
distribution of the Class B shares of the Fund;
(g) obtaining information and providing explanations to prospective
shareholders regarding the investment objective and policies and other
information about the Fund, including the performance of the Fund;
(h) training sales personnel regarding the Trust and the Fund; and
(i) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of Class B
shares.
3. Quarterly Reports; Additional Information
The Distributor or an appropriate officer of the Trust will provide to
the Board of Trustees of the Trust for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for Distribution
Activities (including payment of the service fee) and the
2
<PAGE> 3
purposes for which such expenditures were made in compliance with the
requirements of Rule 12b-1. The Distributor will provide to the Board of
Trustees of the Trust such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
4. Effectiveness; Continuation
If approved by a vote of a majority of the Board of Trustees and a
majority of the Rule 12b-1 Trustees, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter for
so long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Trust and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
5. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund.
6. Amendments
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 1 and 2 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class B shares of
the Fund. All material amendments of the Plan shall be approved by a majority of
the Board of Trustees of the Trust and a majority of the Rule 12b-1 Trustees by
votes cast in person at a meeting called for the purpose of voting on the Plan.
7. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
8. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 3 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: March 24, 2000
3
<PAGE> 1
EXHIBIT (m)(3)
E-HARMON INTERNET FUND
A SERIES OF E-HARMON FUNDS
DISTRIBUTION AND SERVICE PLAN
(CLASS C SHARES)
Distribution and Service Plan (the "Plan") by and between e-harmon
Funds (the "Trust") for e-harmon Internet Fund (the "Fund") Class C shares (the
"Class C shares") and Sunstone Distribution Services, LLC (the "Distributor").
WITNESSETH:
WHEREAS, the Trust has entered into a distribution agreement with the
Distributor pursuant to which the Distributor will distribute shares of the Fund
issued by the Trust;
WHEREAS, the Trust desires to adopt this Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended ("Investment Company Act"),
pursuant to which the Fund will pay a distribution and service fee to, or at the
direction of, Sunstone in connection with the Class C shares of the Fund; and
WHEREAS, a majority of the Board of Trustees of the Trust, including a
majority who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the "Rule 12b-1
Trustees"), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its Class C shareholders.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Plan in accordance with Rule 12b-1 under the
Investment Company Act on the following terms and conditions:
1. Payment of Service Fee
----------------------
The Fund shall pay to the Distributor for providing personal service
and/or maintaining shareholder accounts a service fee of .25 of 1% per annum of
the average daily net assets of the Class C shares (service fee) of the Fund.
The Fund shall calculate and accrue daily amounts payable by the Class C shares
of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine.
2. Payment for Distribution Activities
-----------------------------------
The Fund shall pay to the Distributor a distribution fee not to exceed
.75 of 1% per annum of the average daily net assets of the Class C shares of the
Fund for the performance of Distribution Activities as described below. The Fund
shall calculate and accrue daily amounts
<PAGE> 2
payable by the Class C shares of the Fund hereunder and shall pay such amounts
monthly or at such other intervals as the Board of Trustees may determine.
Amounts payable under the Plan shall be subject to the limitations of Rule 2830
of the NASD Conduct Rules.
Only distribution expenditures properly attributable to the sale of
Class C shares of the Fund will be used to justify any fee paid by the Trust
with respect to that Fund pursuant to this Plan, and, to the extent that such
expenditures relate to more than one Fund, the expenditures will be allocated
between or among the affected Funds in a manner deemed appropriate by the Board
of Trustees of the Trust.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) compensating the Distributor under the Distribution Agreement;
(b) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the
Distributor for the sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution
Activities;
(c) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the Adviser
or the Fund for the sale of Class C shares of the Fund, including sales
commissions and trailer commissions paid to, or on account of, agents
and indirect and overhead costs associated with Distribution;
(d) costs of printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;
(e) services relating to the development, preparation, printing and
mailing of Fund advertisements, sales literature and other promotional
materials describing and/or relating to the Fund and including
materials intended for broker-dealer only use or retail;
(f) holding seminars and sales meetings designed to promote the
distribution of the Class C shares of the Fund;
(g) obtaining information and providing explanations to prospective
shareholders regarding the investment objective and policies and other
information about the Fund, including the performance of the Fund;
(h) training sales personnel regarding the Trust and the Fund; and
(i) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of Class C
shares.
3. Quarterly Reports; Additional Information
-----------------------------------------
The Distributor or an appropriate officer of the Trust will provide to the
Board of Trustees
2
<PAGE> 3
of the Trust for review, at least quarterly, a written report specifying in
reasonable detail the amounts expended for Distribution Activities (including
payment of the service fee) and the purposes for which such expenditures were
made in compliance with the requirements of Rule 12b-1. The Distributor will
provide to the Board of Trustees of the Trust such additional information as
they shall from time to time reasonably request, including information about
Distribution Activities undertaken or to be undertaken by the Distributor.
4. Effectiveness; Continuation
---------------------------
If approved by a vote of a majority of the Board of Trustees and a
majority of the Rule 12b-1 Trustees, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter for
so long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Trust and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
5. Termination
-----------
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund.
6. Amendments
----------
The Plan may not be amended to change the combined service and
distribution expenses to be paid as provided for in Sections 1 and 2 hereof so
as to increase materially the amounts payable under this Plan unless such
amendment shall be approved by the vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class C shares of
the Fund. All material amendments of the Plan shall be approved by a majority of
the Board of Trustees of the Trust and a majority of the Rule 12b-1 Trustees by
votes cast in person at a meeting called for the purpose of voting on the Plan.
7. Rule 12b-1 Trustees
-------------------
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
8. Records
-------
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 3 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: March 24, 2000
3
<PAGE> 1
EXHIBIT (m)(4)
E-HARMON NET30 INDEX FUND
A SERIES OF E-HARMON FUNDS
DISTRIBUTION PLAN
(INVESTOR CLASS SHARES)
Distribution Plan (the "Plan") by and between e-harmon Funds (the
"Trust") for e-harmon Net30 Index Fund (the "Fund") Investor Class shares (the
"Investor Class shares") and Sunstone Distribution Services, LLC (the
"Distributor").
WITNESSETH:
WHEREAS, the Trust has entered into a distribution agreement with the
Distributor pursuant to which the Distributor will distribute shares of the Fund
issued by the Trust;
WHEREAS, the Trust desires to adopt this Plan pursuant to Rule 12b-1
under the Investment Company Act of 1940, as amended ("Investment Company Act"),
pursuant to which the Fund will pay a distribution fee to, or at the direction
of, Sunstone in connection with the Investor Class shares of the Fund; and
WHEREAS, a majority of the Board of Trustees of the Trust, including a
majority who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any agreements related to it (the "Rule 12b-1
Trustees"), have determined by votes cast in person at a meeting called for the
purpose of voting on this Plan that there is a reasonable likelihood that
adoption of this Plan will benefit the Fund and its Investor Class shareholders.
NOW, THEREFORE, the Trust hereby adopts, and the Distributor hereby
agrees to the terms of, this Distribution Plan in accordance with Rule 12b-1
under the Investment Company Act on the following terms and conditions:
1. Payment for Distribution Activities
The Fund shall pay to the Distributor a distribution fee not to exceed
.25 of 1% per annum of the average daily net assets of the Investor Class shares
of the Fund for the performance of Distribution Activities as described below.
The Fund shall calculate and accrue daily amounts payable by the Investor Class
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Board of Trustees may determine. Amounts payable under the Plan
shall be subject to the limitations of Rule 2830 of the NASD Conduct Rules.
Only distribution expenditures properly attributable to the sale of
Investor Class shares of the Fund will be used to justify any fee paid by the
Trust with respect to that Fund pursuant to this Plan, and, to the extent that
such expenditures relate to more than one Fund, the expenditures
<PAGE> 2
will be allocated between or among the affected Funds in a manner deemed
appropriate by the Board of Trustees of the Trust.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) compensating the Distributor under the Distribution Agreement;
(b) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the
Distributor for the sale of Investor Class shares of the Fund,
including sales commissions and trailer commissions paid to, or on
account of, agents and indirect and overhead costs associated with
Distribution Activities;
(c) amounts paid to broker-dealers or other financial institutions for
performing services under a selected dealer agreement with the Adviser
or the Fund for the sale of Investor Class shares of the Fund,
including sales commissions and trailer commissions paid to, or on
account of, agents and indirect and overhead costs associated with
Distribution;
(d) costs of printing and mailing of Fund prospectuses, statements of
additional information, any supplements thereto and shareholder reports
for prospective Fund shareholders;
(e) services relating to the development, preparation, printing and
mailing of Fund advertisements, sales literature and other promotional
materials describing and/or relating to the Fund and including
materials intended for broker-dealer only use or retail;
(f) holding seminars and sales meetings designed to promote the
distribution of the Investor Class shares of the Fund;
(g) obtaining information and providing explanations to prospective
shareholders regarding the investment objective and policies and other
information about the Fund, including the performance of the Fund;
(h) training sales personnel regarding the Trust and the Fund; and
(i) financing any other activity that the Trust's Board of Trustees
determines is primarily intended to result in the sale of Investor
Class shares.
2. Quarterly Reports; Additional Information
The Distributor or an appropriate officer of the Trust will provide to
the Board of Trustees of the Trust for review, at least quarterly, a written
report specifying in reasonable detail the amounts expended for Distribution
Activities and the purposes for which such expenditures were made in compliance
with the requirements of Rule 12b-1. The Distributor will provide to the Board
of Trustees of the Trust such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
2
<PAGE> 3
3. Effectiveness; Continuation
If approved by a vote of a majority of the Board of Trustees and a
majority of the Rule 12b-1 Trustees, the Plan shall, unless earlier terminated
in accordance with its terms, continue in full force and effect thereafter for
so long as such continuance is specifically approved at least annually by a
majority of the Board of Trustees of the Trust and a majority of the Rule 12b-1
Trustees by votes cast in person at a meeting called for the purpose of voting
on the continuation of the Plan.
4. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-1 Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Investor Class
shares of the Fund.
5. Amendments
The Plan may not be amended to change the distribution expenses to be
paid as provided for in Section 1 hereof so as to increase materially the
amounts payable under this Plan unless such amendment shall be approved by the
vote of a majority of the outstanding voting securities (as defined in the
Investment Company Act) of the Investor Class shares of the Fund. All material
amendments of the Plan shall be approved by a majority of the Board of Trustees
of the Trust and a majority of the Rule 12b-1 Trustees by votes cast in person
at a meeting called for the purpose of voting on the Plan.
6. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
7. Records
The Trust shall preserve copies of the Plan and any related agreements
and all reports made pursuant to Section 2 hereof, for a period of not less than
six years from the date of effectiveness of the Plan, such agreements or
reports, and for at least the first two years in an easily accessible place.
Dated: March 24, 2000
3
<PAGE> 1
EXHIBIT (n)
E-HARMON FUNDS
--------------
(the Trust)
PLAN PURSUANT TO RULE 18F-3
The Trust hereby adopts this plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940, as amended (the "1940 Act"), setting forth the
separate arrangement and expense allocation of each class of shares in each
investment portfolio (each a "Fund"). Any material amendment to this plan is
subject to prior approval of the Board of Trustees, including a majority of the
independent Trustees.
CLASS CHARACTERISTICS
E-HARMON INTERNET FUND
CLASS A SHARES Class A shares are subject to a initial sales charge
of 5.75% and to a distribution fee pursuant to Rule
12b-1 under the 1940 Act not to exceed .25 of 1% per
annum of the average daily net assets of the class.
Class A shares are not subject to a contingent
deferred sales charge. The initial sales charge is
waived or reduced for certain eligible investors.
CLASS B SHARES: Class B shares are not subject to an initial sales
charge but are subject to a contingent deferred sales
charge of 5.00% (declining from 5% to zero over a 6
year period) which will be imposed on certain
redemptions and a distribution fee pursuant to Rule
12b-1 not to exceed 0.75% per annum and a service fee
of 0.25% per annum, each based on the average daily
net assets of the class. The contingent deferred
sales charge is waived for certain eligible
investors. Class B shares automatically convert to
Class A shares approximately six years after
purchase.
CLASS C SHARES: Class C shares are not subject to an initial sales
charge but are subject to a contingent deferred sales
charge of 1% which will be imposed on certain
redemptions within the first twelve months after
purchase and a distribution fee pursuant to Rule
12b-1 not to exceed 0.75% per annum and a service fee
of 0.25% per annum, each based on the average daily
net assets of the class.
E-HARMON NET30 INDEX FUND
INVESTOR CLASS Investor Class shares are subject to a distribution
SHARES: fee not to exceed 0.25% per annum of the average
daily net assets of the class. Investor Class shares
are not subject to either an initial sales charge or
a contingent deferred sales charge.
<PAGE> 2
INCOME AND EXPENSE ALLOCATIONS
Income, any realized and unrealized capital gains and losses, and
expenses not allocated to a particular class of a Fund will be
allocated to each class of such Fund on the basis of the net asset
value of that class in relation to the net asset value of the Fund.
DIVIDENDS AND DISTRIBUTIONS
Dividends and other distributions paid by each Fund to each class of
shares, to the extent paid, will be paid on the same day and at the
same time, and will be determined in the same manner and will be in the
same amount, except that the amount of the dividends and other
distributions declared and paid by a particular class of the Fund may
be different from that paid by another class of the Fund because of
distribution and/or service fees and other expenses borne exclusively
by that class.
CONVERSION FEATURES
Class B shares will automatically convert to Class A shares on a
quarterly basis approximately six years after purchase. Conversions
will be effected at relative net asset value without the imposition of
any additional sales charge.
GENERAL
A. Each class of shares shall have exclusive voting rights on any matter
submitted to shareholders that relates solely to its arrangement and
shall have separate voting rights on any matter submitted to
shareholders in which the interests of one class differ from the
interests of any other class.
B. On an ongoing basis, the Trustees, pursuant to their fiduciary
responsibilities under the 1940 Act and otherwise, will monitor the
Trust for the existence of any material conflicts among the interests
of its several classes. The Trustees, including a majority of the
independent Trustees, shall take such action as is reasonably necessary
to eliminate any such conflicts that may develop. e-harmon Capital
Management LLC, the Trust's Adviser, will be responsible for reporting
any potential or existing conflicts to the Trustees.
Dated: March 24, 2000
2
<PAGE> 1
EXHIBIT (p)
CODE OF ETHICS
e-harmon Capital Management LLC
e-harmon.com, Inc.
e-harmon Funds
I. INTRODUCTION
A. This Code of Ethics (the "Code") is based on the principle that you, as
officers and employees of e-harmon Capital Management LLC and its parent,
e-harmon.com, Inc. (together, "e-harmon"), and as officers and trustees of the
e-harmon Funds ("Funds"), owe a fiduciary duty to, among others, the
shareholders of the Funds and other Advisory Clients. Accordingly, you must
avoid activities, interests, and relationships that might interfere or appear to
interfere with making decisions in the best interests of the Funds and other
Advisory Clients of e-harmon. Each Employee is under a duty to exercise his or
her authority and responsibility for the benefit of e-harmon, the Funds and
other Advisory Clients and may not participate in any activities that may
conflict with the interests of e-harmon, the Funds or other Advisory Clients.
For purposes of this Code, Advisory Client includes any client (including Funds,
closed-end funds, venture funds and managed accounts) for which e-harmon serves
as investment adviser, renders investment advice, or makes investment decisions.
At all times, you must:
1. Place the interests of Advisory Clients first. In other words, as a
fiduciary you must scrupulously avoid serving your own personal
interests ahead of the interests of e-harmon's Advisory Clients. You
may not cause an Advisory Client to take action, or not to take
action, for your personal benefit rather than the benefit of the
Advisory Client. For example, you would violate this Code by causing
an Advisory Client to purchase a Security you owned for the purpose of
increasing the price of that Security. Another example would be if you
invested in a Security that was appropriate for your Advisory Clients
without first considering that investment for your Advisory Clients.
2. Avoid taking inappropriate advantage of your position. The receipt of
investment opportunities, perquisites, or gifts from persons seeking
business with the Funds or with e-harmon could call into question the
exercise of your independent judgment. Accordingly, you may accept
such items only in accordance with the limitations in this Code. In
addition, you may not use the knowledge of client portfolio
transactions to profit by the market effect of those transactions.
3. Conduct all personal Securities Transactions in full compliance with
this Code, including all preauthorization and reporting requirements,
and comply fully with e-harmon's Policies and Procedures Regarding
Inside Information and the Chinese Wall.
Page 1
<PAGE> 2
While e-harmon encourages you and your families to develop personal
investment programs, you must not take any action that could cause even the
appearance that an unfair or improper action has been taken. Accordingly, you
must follow the policies set forth below with respect to trading in any Employee
or Related Account. Doubtful situations should be resolved in favor of Advisory
Clients. Any questions concerning this Code should be addressed to the General
Counsel of e-harmon or the Chief Compliance Officer (see Appendix 2).
The Code applies to every Employee of e-harmon. In addition, e-harmon's
Policies and Procedures Regarding Inside Information and the Chinese Wall also
apply to every Employee. To the extent the provisions of this Code are more
restrictive, they apply.
B. Appendices to the Code. The appendices to this Code are attached to and
are a part of the Code. The appendices include the following:
1. Definitions (capitalized terms in this Code are defined in Appendix
1);
2. Contact Persons and Investment Committee Members (Appendix 2);
3. Personal Securities Holdings Report (Appendix 3);
4. Trade Authorization Request Form (Appendix 4);
5. Employee Certification of Receipt of the Code (Appendix 5);
6. Employee Annual Certification of Compliance with the Code (Appendix
6).
7. Gift and Entertainment Master Log (Appendix 7)
C. Application of the Code to Independent Fund Trustees. Independent Fund
Trustees are subject only to the reporting requirements in Section II.H of the
Code and Appendices 5 and 6. Independent Fund Trustees are not subject to the
other provisions of the Code but are subject to the independent requirements of
the federal and state laws, such as the requirement not to trade while in
possession of material nonpublic information and fiduciary duty to shareholders.
Page 2
<PAGE> 3
II. PERSONAL SECURITIES TRANSACTIONS
A. Annual Disclosure of Personal Holdings. In addition to the trade
reporting requirements discussed below in Section II.H, you must disclose on the
Personal Securities Holdings Form (Appendix 3) all Securities in any Employee or
Related Account and any Securities in any other non-client accounts over which
you have investment discretion or influence. Such disclosure must be made
initially (no later than 10 days after the commencement of employment), and
annually thereafter during the month of January. Each such report must be
current as of a date no more than 30 days before the report is submitted.
Although the terms are defined in Appendix 1, in general, Employee Accounts are
accounts in which you have a Beneficial Interest or a direct or indirect power
to make investment decisions. Related Accounts are accounts of a member of an
Employee's Immediate Household. Immediate Household includes an Employee's
spouse, children, relatives or others living with an Employee, whose investment
holdings and accounts the Employee controls or derives a financial benefit.
B. Trade Preauthorization Requirements.
1. General Requirement. All Securities Transactions in an Employee
Account or Related Account must be preauthorized except for Securities
Transactions set forth in the following Section II.B.2.
2. Exempt Transactions. The following Securities Transactions are exempt
from the preauthorization requirements set forth in Section II.B.I of this Code.
a. Mutual Funds. Transactions in Securities issued by any registered
open-end Mutual Fund;
b. Transactions in Direct Obligations of the U.S Government;
c. Money Market Instruments. Any transaction in the following:
i. bankers' acceptances;
ii. bank certificates of deposit;
iii. commercial paper; and
iv. high quality short-term debt instruments, including
repurchase agreements.
d. Certain Corporate Actions. Any acquisition of Securities through
stock dividends, dividend reinvestments, stock splits, reverse
stock splits, mergers, consolidations, spin-offs, or other similar
corporate reorganizations or distributions generally applicable to
all holders of the same class of Securities.
Page 3
<PAGE> 4
e. No Direct or Indirect Influence or Control. Any transaction
effected in any Employee or Related Account over which you do not
have any direct or indirect influence or control.
f. Miscellaneous. Other categories of Securities Transactions as may
from time to time be designated in writing by the General Counsel
or Chief Compliance Officer on the grounds that the risk of abuse
is minimal or non-existent.
C. Preauthorization Requests.
1. Trade Authorization Request Form. Prior to entering an order for a
Securities Transaction in an Employee Account or Related Account, you must
complete, in writing, a Trade Authorization Request Form (set forth in Appendix
4) and submit the completed Form to the Chief Compliance Officer (or his or her
designee) (see Appendix 2). The Trade Authorization Request Form requires you to
provide certain information and to make certain representations.
2. Review of the Form. After receiving the completed Trade Authorization
Request Form, the Chief Compliance Officer (or designee) will review the
information and, as soon as practicable (generally within 24 hours), determine
whether to authorize the proposed Securities Transaction. The authorization and
date and time of the authorization must be reflected on the Trade Authorization
Request Form. The Chief Compliance Officer (or designee) will keep the completed
form, and return a copy to the Employee.
NO ORDER FOR A SECURITIES TRANSACTION FOR WHICH PREAUTHORIZATION IS SOUGHT
MAY BE PLACED PRIOR TO THE RECEIPT OF WRITTEN AUTHORIZATION OF THE TRANSACTION
SHOWING THE DATE AND TIME OF THE AUTHORIZATION BY THE CHIEF COMPLIANCE OFFICER
(OR DESIGNEE). VERBAL APPROVALS ARE NOT PERMITTED.
D. Prohibited Transactions. The following Securities Transactions in
Employee Accounts and Related Accounts are Prohibited Transactions and will not
be authorized absent extraordinary circumstances:
1. Inside Information. Securities Transactions by any person while in
possession of material nonpublic information regarding the Security or the
issuer of the Security.
2. Market Manipulation. Transactions intended to raise, lower, or
maintain the price of any Security or to create a false appearance of active
trading.
3. Restricted List Securities. Transactions in Securities that appear on
the e-harmon restricted list, except under limited circumstances specified on
those lists.
Page 4
<PAGE> 5
4. Seven-Day Blackout. Securities Transactions within seven calendar
days either before or after a purchase or sale of the same Securities (or
Equivalent Securities) by an Advisory Client. For example, if an Advisory Client
trades a Security on day one, day eight is the first day an Employee may trade
that Security for an account in which he or she has a Beneficial Interest.
5. Intention to Buy or Sell for Advisory Client. Securities Transactions
at a time when you intend, or know of another's intention, to purchase or sell
that Security (or an Equivalent Security) on behalf of an Advisory Client are
prohibited. This prohibition applies whether the Securities Transaction is in
the same (e.g., two purchases) or the opposite (a purchase and sale) direction
of the transaction of the Advisory Client. When monitoring this prohibition, the
Chief Compliance Officer (or designee) will refer to e-harmon's "buy" or "sell"
list of Securities (updated periodically) to ascertain whether a Security was
being actively considered for investment purposes.
6. Initial Public Offerings. Acquisition of Securities in an initial
public offering.
7. Others. Any other Securities Transactions deemed by the Chief
Compliance Officer to involve a conflict of interest, possible diversion of a
corporate or Advisory Client opportunity, or the appearance of impropriety.
E. Treatment of Private Placements.
Absent prior written approval by the Chief Compliance Officer, in
consultation with the Investment Committee (see Appendix 2), the acquisition of
Securities in private placements is prohibited.(1) This approval will not be
granted unless the Employee can clearly demonstrate that: a) the investment is
not presently appropriate for any Advisory Client, b) it is highly unlikely that
the investment will be appropriate for any Advisory Client in the future, and c)
the investment is not being offered to the Employee because of his or her
position with e-harmon. The sale of a Security acquired in a private placement
is similarly restricted. Written documentation shall be maintained to
demonstrate the rationale supporting any approval of a private placement.
If, after receiving the required approval, you acquire Securities in a
private placement, you must immediately disclose that investment to the Chief
Compliance Officer if you begin to play a part in any consideration of an
investment in the issuer by any Advisory Client. The decision to purchase
Securities of the issuer by an Advisory Client must be independently reviewed
and authorized by the Investment Committee.
- --------
(1) The approval process for private placements is not applicable to an Employee
or Related Account's investment in Zero Gravity Venture Partners LP or any
similar fund organized for investment by affiliated persons of Zero Gravity
Venture Partners LP; provided however, that an Employee or Related Account's
investment in Zero Gravity Venture Partners LP or any similar fund shall be
subject to all other provisions of this Code including preauthorization and
reporting requirements.
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<PAGE> 6
F. Sixty-Day Holding Period.
Short-term trading activity (that is purchases and sales (or sales and
purchases) of the same (or equivalent) Securities by any Employee within a
60-day period) is prohibited under this Code. e-harmon encourages investment
rather than short-term trading by Employees. Accordingly, all Employee and
Related Accounts will be subject to monitoring. Exceptions to this prohibition
on short-term trading must be pre-cleared by the Chief Compliance Officer (or
designee).
NO EXPLANATION IS REQUIRED FOR REFUSALS. IN SOME CASES, TRADES MAY BE
REJECTED FOR A REASON THAT IS CONFIDENTIAL. THE CHIEF COMPLIANCE OFFICER IS NOT
REQUIRED TO GIVE ANY EXPLANATION FOR REFUSING TO AUTHORIZE A SECURITIES
TRANSACTION.
G. Length of Trade Authorization Approval. The authorization provided by
the Chief Compliance Officer (or designee) is effective, unless revoked, until
the earlier of (l) the close of business on the day on which the authorization
is granted or (2) your discovery that the information in the Trade Authorization
Request Form is no longer accurate. If the Securities Transaction is not placed
within that period, a new authorization must be obtained before the Securities
Transaction is placed. If the Securities Transaction is placed but has not been
executed within three trading days after the authorization is granted (as, for
example, in the case of a limit order), a new authorization is unnecessary,
unless the person placing the original order for the Securities Transaction
amends it in any way.
H. Trade Reporting Requirements.
1. Reporting Requirement. Employees must arrange for the Chief
Compliance Officer (or designee) to receive directly from the executing broker,
dealer, or bank duplicate copies of each confirmation and monthly statements for
each Securities Transaction in an Employee Account or Related Account. If
Employees are not able to arrange for duplicate confirmations and monthly
account statements to be sent, they must immediately notify the Chief Compliance
Officer.
Independent Fund Trustees and members of their Immediate Household are
required to report the information specified below with respect to any
Securities Transaction if the trustee knew, or in the ordinary course of
fulfilling his or her official duties as a trustee of a Fund should have known,
that during the 15 days immediately preceding or following the date of his or
her transaction, such Security was purchased or sold by a Fund or such purchase
or sale was considered for the Fund. Such reports must be filed with the Chief
Compliance Officer (or designee) within 10 days following the end of the
calendar quarter in which the reported trade took place.
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<PAGE> 7
Each report must include the following information:
a. the date of the transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the principal amount of
each security;
b. the nature of the transaction (i.e. purchase, sale or any other
type of acquisition or disposition);
c. the price at which the transaction was effected;
d. the amount of commission, if any; and
e. the name of the broker, dealer or bank with or through whom the
transaction was effected.
2. Exemption from Reporting Requirements. The following Securities
Transactions are exempt from the above reporting requirements:
a. Mutual Funds. Securities issued by any registered open-end Mutual
Fund;
b. Direct Obligations of the U.S Government;
c. Money Market Instruments. Any transaction in the following:
i. bankers' acceptances;
ii. bank certificates of deposit;
iii. commercial paper; and
iv. high quality short-term debt instruments, including
repurchase agreements.
3. Review and Availability. All information supplied under this Code,
including transaction and holdings reports (initial, monthly and annual
reports), will be subject to review by the Chief Compliance Officer (or
designee) listed in Appendix 2. All information supplied will be available for
inspection by the Chief Executive Officer or General Counsel of e-harmon,
e-harmon's or the Fund's outside counsel, any party to which any investigation
is referred by any of the foregoing, your supervisor, the Securities and
Exchange Commission, any self-regulatory organization of which e-harmon is a
member, and any state securities commission.
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<PAGE> 8
III. FIDUCIARY DUTIES
A. Confidentiality. You may not reveal any information relating to the
investment intentions, activities or portfolios of Advisory Clients or
Securities that are being considered for purchase or sale, except to persons at
e-harmon who need to know that information in order to carry out their duties.
Communication of confidential information between departments is subject to
e-harmon's "Chinese Wall" procedures.
B. Gifts and Entertainment
1. Accepting Gifts and Entertainment. On occasion, because of your
position with e-harmon, you may be offered, or may receive, gifts from clients,
brokers, vendors, or other persons not affiliated with e-harmon. Extraordinary
or extravagant gifts are not permissible and must be declined or returned,
absent approval by the Chief Compliance Officer (or designee). Gifts of a
nominal value (i.e., gifts whose reasonable value is no more than $100 annually
from a single giver), and customary business lunches, dinners, entertainment
(e.g., sporting events), and promotional items (e.g., pens, mugs) with a value
that does not exceed $100 may be accepted.
If you receive any gift or entertainment that might be prohibited under
this Code, you must inform your supervisor, who will, if necessary, seek the
guidance of the Chief Compliance Officer.
2. Giving Gifts and Providing Entertainment. You may not give any gift
with a value in excess of $100 per year to persons associated with securities or
financial organizations, including exchanges, other member organizations,
commodity firms, news media, or clients of the firm. You may provide reasonable
entertainment to persons associated with securities or financial organizations
provided that both you and the recipient are present, and the value of such
entertainment does not exceed $100.
3. Master Log for Reporting and Approval. All gifts and entertainment
given or accepted by an Employee (other than those valued at less than $100)
must be recorded on e-harmon's Gift and Entertainment Master Log maintained by
the Chief Compliance Officer (or designee). You are required to submit the
information on the form attached as Appendix 7. In any event, the giving or
receipt of any gift or entertainment of a value exceeding $100 must be approved
by the Chief Compliance Officer (or designee).
4. Solicitation of Gifts. All solicitation of gifts or gratuities is
unprofessional and is strictly prohibited.
5. Embarrassing Situations. You must never accept or give any gift or
entertainment that would cause you or e-harmon embarrassment if it were ever
made public.
6. Client Complaints. You may not make any payments or other account
adjustments to Advisory Clients in order to resolve any type of Advisory Client
complaint. All
Page 8
<PAGE> 9
such matters must be handled by the General Counsel or Chief Compliance Officer.
C. Corporate and Advisory Client Opportunities. You may not take personal
advantage of any opportunity properly belonging to e-harmon or any Advisory
Client. This includes, but is not limited to, acquiring Securities for your own
account that would otherwise be an appropriate investment for e-harmon.com, Inc.
or an Advisory Client.
Under certain limited circumstances, and only with the prior written
approval of the Chief Compliance Officer, an Employee may participate in certain
opportunities that are deemed by the Chief Compliance Officer not to have an
adverse affect on any Advisory Client. In making his or her determination, the
Chief Compliance Officer will consider the following factors: (i) whether any
Advisory Client was legally and financially able to take advantage of this
opportunity; (ii) whether any Advisory Client would be disadvantaged in any
manner; (iii) whether the opportunity is de minimis; and (iv) whether the
opportunity is clearly not related economically to the Securities to be
purchased, sold or held by any Advisory Client. Employee or Related Accounts
shall not be deemed to have violated this section by virtue of an investment in
Zero Gravity Venture Partners LP or any similar fund.
Nor may an Employee usurp a corporate opportunity by making for his or her
own account, or a Related Account, an investment that would be appropriate for
e-harmon.com, Inc. unless, in the course of the preclearance of the transaction,
the Chief Compliance Officer determines that the proposed investment is either
inappropriate or undesirable for e-harmon.com, Inc. or, that e-harmon.com, Inc.
would also be able to participate in the investment on a no less advantageous
basis.
D. Undue Influence. You may not cause or attempt to cause any Advisory
Client to purchase, sell or hold any Security for the purpose of creating any
personal benefit for you, an Employee Account, or Related Account.
If you or a Related Account stand to benefit materially from an investment
decision for an Advisory Client that you are recommending or participating in,
you must disclose that interest to a member of the portfolio management team
that does not stand to benefit materially from the investment decision or, if
there is no such person, to the Chief Compliance Officer. The disclosure must be
made before the investment decision and should be documented and provided to the
Chief Compliance Officer. Based on the information given, a decision will be
made on whether or not to restrict your participation in causing an Advisory
Client to purchase or sell a Security in which you have an interest.
E. Service as a Director. You may not serve on the board of directors (or
in any similar capacity) of another company (other than a company affiliated
with e-harmon) without prior written authorization of your supervisor and the
General Counsel or the Chief Compliance Officer. If approval is granted for
service on the board of directors of a publicly-traded company, it will normally
require that the director be insulated, through "Chinese Wall" or other
procedures, from those making investment decisions regarding securities issued
by the company on whose board the director sits.
Page 9
<PAGE> 10
F. Outside Business Activities. You may not engage in any of the following
outside business activities without the prior written consent of your supervisor
and the General Counsel or Chief Compliance Officer:
1. Be engaged in any other business;
2. Be employed or compensated by any other person for
business-related activities;
3. Serve as an employee of another organization;
4. Invest in limited or general partnerships; or
5. Engage in Securities Transactions to such an extent that diverts
your attention from and impairs the performance of your duties in relation to
the business of e-harmon and its Advisory Clients.
Page 10
<PAGE> 11
IV. ENFORCEMENT OF THE CODE
A. Investigating Violations of the Code. The Chief Compliance Officer (or
designee) will investigate any reported or suspected violation of the Code,
recommend sanctions, and report to the Chief Executive Officer of e-harmon and
the Board of Trustees of the Funds on compliance with this Code.
B. Annual Reports. The General Counsel and Chief Compliance Officer will
review the Code at least once a year by January 30, in light of legal and
business developments and experience in implementing the Code. The General
Counsel and Chief Compliance Officer will prepare an annual written report to
the Chief Executive Officer of e-harmon and the Boards of Trustees of each Fund
that:
1. Summarizes existing procedures concerning personal investing and any
changes in the procedures made during the past year. If material
changes to the Code are made during the year, the General Counsel and
Chief Compliance Officer will report such changes to the Boards of
Trustees of each Fund at the next regularly scheduled Board meeting.
The Boards of Trustees of each Fund must approve any material changes
within six months of the date of such changes.
2. Identifies any violations requiring significant remedial action
during the past year.
3. Identifies any recommended changes in existing restrictions or
procedures based on the experience under the Code, evolving industry
practices, or developments in applicable laws or regulations.
4. Certifies that e-harmon has adopted procedures reasonably necessary
to prevent its Employees from violating the Code.
C. Remedies. If the General Counsel or Chief Compliance Officer determine
that an Employee has violated this Code, sanctions may be imposed and other
actions taken as deemed appropriate, including a letter of caution or warning,
suspension of personal trading rights, suspension of employment (with or without
compensation), fine, civil referral to the SEC. criminal referral, and
termination of employment for cause.
AS PART OF ANY SANCTION, THE GENERAL COUNSEL OR CHIEF COMPLIANCE OFFICER
MAY REQUIRE THE EMPLOYEE TO REVERSE ANY TRADE(S) IN QUESTION AND FORFEIT ANY
PROFIT OR ABSORB ANY LOSS FROM THE TRADE.
D. Review. Whenever the General Counsel or Chief Compliance Officer
determines that an officer, trustee or Employee of any Fund has committed a
violation of the Code meriting
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<PAGE> 12
significant remedial action, he or she will report to the Board of Trustees of
all Funds for which the person serves as an officer, trustee or Employee,
information relating to the investigation of the violation, including any
sanctions imposed. The Board of Trustees of any Fund shall have the power to
modify or increase the sanction as it deems appropriate, and may direct the
reversal of any trade affecting the Fund. In performing this function, the Board
of Trustees of a Fund shall have access to all information considered by the
General Counsel or Chief Compliance Officer in relation to the case.
E. Compliance Certification. At least once a year, you will be required to
certify on the Employee Certification Form set forth in Appendix 6 that you have
read and understand this Code, that you have complied with the requirements of
the Code, and that you have disclosed or reported all personal Securities
Transactions required to be disclosed or reported on the forms appended to this
Code.
F. Inquiries Regarding the Code. Please call the General Counsel or Chief
Compliance Officer if you have any questions about this Code or any other
compliance-related matters.
G. Exceptions to the Code. Although exceptions to the Code will rarely, if
ever, be granted, the General Counsel or Chief Compliance Officer of e-harmon
may make exceptions, on a case-by-case basis, to any of the provisions of this
Code upon a determination that the conduct at issue involves at most a
negligible opportunity for abuse or otherwise merits an exception to the Code.
Approval of all such exceptions must be in writing. If the exception involves an
officer, trustee, or Employee of any Fund, the General Counsel or Chief
Compliance Officer shall report the exception to the Board of Trustees of the
Funds at the next regularly scheduled Board meeting.
Page 12
<PAGE> 13
Appendix 1
DEFINITIONS
"Advisory Client" means any client (including Funds, closed-end funds,
venture funds and managed accounts) for which e-harmon serves as an investment
adviser, renders investment advice, or makes investment decisions.
"Beneficial Interest" means the sole or shared power to vote or to direct
the voting, or to dispose of or to direct the disposition of Securities or the
sole or shared right to receive or the power to direct the receipt of dividends,
income or proceeds from the sale of Securities; provided, however, that any
interest in an Employee or Related Account over which you do not have any direct
or indirect influence or control over investments shall not be deemed a
beneficial interest and that, the General Partner's carried interest in Zero
Gravity Venture Partners LP, and any other investment by an Employee or Related
Account in Zero Gravity Venture Partners LP, shall not be deemed a beneficial
interest in the underlying securities held by Zero Gravity Venture Partners LP.
"Employee" means any officer, trustee (excluding Independent Fund
Trustees), or employee of e-harmon Capital Management LLC, e-harmon.com, Inc. or
a Fund.
"Employee Account" means the following Securities accounts: any personal
account of an Employee; any joint or tenant-in-common account in which the
Employee has an interest or is a participant; any account for which the Employee
acts as trustee, executor, or custodian; any account over which the Employee has
investment discretion or otherwise can exercise control (other than non-related
clients' accounts over which the Employee has investment discretion), including
the accounts of entities controlled directly or indirectly by the Employee; and
any other account in which the Employee has a direct or indirect Beneficial
Interest (other than such accounts over which the Employee has no investment
discretion and cannot otherwise exercise control).
"Equivalent Security" means any Security issued by the same entity as the
issuer of a Security, and all derivative instruments, such as options and
warrants.
"Fund" means an investment company for which e-harmon serves as an adviser.
"Immediate Household" of an individual means the individual's spouse,
children, relatives, and others living with the individual, whose investment
holdings and accounts the individual exercises direct or indirect influence or
controls, or from whose investment holdings and accounts the individual derives
a financial benefit. An individual is presumed (i) to derive a financial benefit
from the holdings and accounts of a spouse living with him or her and (ii) to
control the investment holdings and accounts of any child under the age of 18
living with him or her.
"Independent Fund Trustee" means a disinterested trustee of an investment
company advised by e-harmon, as defined in section 2(a)(19) of the Investment
Company Act of 1940.
<PAGE> 14
Appendix 1 (cont.)
"Mutual Fund" means an open-end registered investment company.
"Related Account" means any Securities account of a member of the
Employee's Immediate Household.
"Security" includes stock, notes, bonds, debentures, and other evidences of
indebtedness (including loan participation and assignments), limited partnership
interests, investment contracts, all derivative instruments, such as options and
warrants, and any other instrument within the definition of the term "security"
in the Securities Act of 1933.
"Securities Transaction" means a purchase or sale of Securities.
<PAGE> 15
Appendix 2
CONTACT PERSONS
<TABLE>
<CAPTION>
INDIVIDUAL POSITION DESIGNEE
- ---------- -------- --------
<S> <C> <C>
Steve Harmon Chairman, Chief Executive Officer
& Chief Investment Officer James Hartmann
James Hartmann President, Chief Operations Officer
& Chief Compliance Officer Greg Hartmann
Greg Hartmann General Counsel Steve Harmon
</TABLE>
INVESTMENT COMMITTEE MEMBERS
<TABLE>
<CAPTION>
INDIVIDUAL POSITION
- ---------- --------
<S> <C>
Steve Harmon Chairman, Chief Executive Officer
& Chief Investment Officer
Lisa Cavallari Senior Portfolio Manager
Randy Chin Head of Equity Research
Patrick Wong Senior Investment Analyst
</TABLE>
<PAGE> 16
Appendix 3
PERSONAL SECURITIES HOLDINGS REPORT
In accordance with Section II.A of the Code of Ethics, please provide a
list of all non-exempt Securities in which you or a Related Account has a
Beneficial Interest and all Securities in non-client accounts for which you make
investment decisions. This includes not only securities held by brokers, but
also securities held at home, in safe deposit boxes, or by an issuer.
(1) Name of Employee:
---------------------
(2) If different than #1, name of the person
in whose name the account is held:
---------------------
(3) Relationship of (2) to (1):
---------------------
(4) Broker at which Account is Maintained:
---------------------
(5) Account Number:
---------------------
(6) Phone Number of Broker:
---------------------
(7) For each account, attach your most recent account statement listing
securities in that account. If you own securities that are not listed in an
attached account statement, list them below:
<TABLE>
<CAPTION>
Name of Security Quantity Value Custodian
---------------- -------- ----- ---------
<S> <C> <C> <C>
1.
----------------------------------------------------------------------------
2.
----------------------------------------------------------------------------
3.
----------------------------------------------------------------------------
4.
----------------------------------------------------------------------------
5.
----------------------------------------------------------------------------
</TABLE>
(Attach separate sheet if necessary)
<PAGE> 17
Appendix 3 (cont.)
I certify that this form and the attached statements (if any) constitute
all of the Securities in my Employee Accounts and Related Accounts.
------------------------------------
Employee Signature
------------------------------------
Print Name
Dated:
--------------
<PAGE> 18
Appendix 4
TRADE AUTHORIZATION REQUEST FOR EMPLOYEE ACCOUNTS AND
RELATED ACCOUNTS
(1) Name of Employee requesting authorization, and
relevant account number: -----------------------
(2) If different than #1, name of the person
in whose account the trade will occur: -----------------------
(3) Relationship of (2) to (1): -----------------------
(4) Name of firm at which the
account is held: -----------------------
(5) Name of Security: -----------------------
(6) Maximum number of shares or units to be
purchased or sold or amount of bond: -----------------------
(7) Check those that are applicable: Purchase Sale
--- ---
Market Order Limit Order (Price of Limit Order: )
---- ---- -----
(8) Do you possess material nonpublic information
regarding the security or the issuer of the security? Yes No
(9) To your knowledge, are there any outstanding purchase
or sell orders for this security or any equivalent security
on behalf of any e-harmon client, including but not limited
to any investment company managed by e-harmon? Yes No
(10) To your knowledge, has e-harmon purchased or sold
these securities or equivalent securities for any client within
the past seven calendar days or do you expect that e-harmon
will purchase or sell these securities or equivalent securities
on behalf of any client within the next seven calendar days? Yes No
(11) Are the securities being acquired in an initial public offering? Yes No
(12) Are the securities being acquired in a private placement? Yes No
(13) Have you or any Related Account covered by the preauthorization
provisions of the Code purchased or sold these securities
within the past 60 days? Yes No
<PAGE> 19
Appendix 4 (cont.)
I have read the Code of Ethics for e-harmon within the prior 12 months and
believe that the proposed trade fully complies with the requirements of the
Code.
------------------------------------
Employee Signature
------------------------------------
Print Name
------------------------------------
Date Submitted
Authorized by:
--------------------
Date:
-----------------------------
<PAGE> 20
Appendix 5
ACKNOWLEDGMENT OF RECEIPT OF CODE OF ETHICS
I acknowledge that I have received the Code of Ethics of e-harmon, dated as
of XXXXXXXX, and represent that:
1. In accordance with Section II.A of the Code of Ethics, I will fully
disclose the securities holdings in my Employee Accounts and Related Accounts
(as defined in the Code of Ethics).*
2. In accordance with Section II.C of the Code of Ethics, I will obtain
prior authorization for all Securities Transactions in each of my Employee
Accounts and Related Accounts, except for transactions exempt from
preauthorization under Section II.C of the Code of Ethics.*
3. In accordance with Section II.H of the Code of Ethics, except for
transactions exempt from reporting under Section II.H(2) of the Code of Ethics,
I will arrange for the Chief Compliance Officer (or designee) to receive
duplicate copies of each confirmation and monthly statements for each Securities
Transaction of all Employee Accounts or Related Accounts (unless I am an
Independent Fund Trustee), and I will report all Securities Transactions in each
of my Employee Accounts and Related Accounts (if I am an Independent Fund
Trustee).
4. I will comply with the Code of Ethics in all respects.*
5. I agree to disgorge and forfeit any profits on Prohibited
Transactions in accordance with the requirements of the Code.*
------------------------------------
Employee Signature
------------------------------------
Print Name
Dated:
----------------------------
* Representations 1-2 and 4-5 do not apply to Independent Fund Trustees.
<PAGE> 21
Appendix 6
ANNUAL CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS
I certify that during the past year:
1. In accordance with Section II.A of the Code of Ethics, I have fully
disclosed the securities holdings in my Employee Accounts and Related Accounts
(as defined in the Code of Ethics).*
2. In accordance with Section II.C of the Code of Ethics, I have
obtained prior authorization for all Securities Transactions in each of my
Employee Accounts and Related Accounts, except for transactions exempt from
preauthorization under Section II.C of the Code of Ethics.*
3. In accordance with Section II.H of the Code of Ethics, except for
transactions exempt from the reporting under Section II.H(2) of the Code of
Ethics, I have arranged for the Chief Compliance Officer (or designee) to
receive duplicate copies of each confirmation and monthly statements for each
Securities Transaction of all Employee Accounts or Related Accounts (unless I am
an Independent Fund Trustee), and I have reported all Securities Transactions in
each of my Employee Accounts and Related Accounts (if I am an Independent Fund
Trustee).
4. I have complied with the Code of Ethics in all respects.*
------------------------------------
Employee Signature
------------------------------------
Print Name
Dated:
----------------------------
* Representations 1-2 and 4 do not apply to Independent Fund Trustees.
<PAGE> 22
Appendix 7
GIFT AND ENTERTAINMENT
MASTER LOG
Employee Name: Employee Signature:
----------------------- ---------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
THIRD PARTY PROVIDER/ ITEMS PROVIDED OR RELATIONSHIP WITH PROVIDER OR
RECIPIENT (E.G., RECEIVED (E.G., APPROXIMATE VALUE OF RECIPIENT: REASONS FOR GIVING
DATE BROKER OR DEALER) DINNER OR CONCERT) EACH ITEM ($) OR ACCEPTING
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
Approved by:
--------------------------
Date:
---------------------------------
