SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ----
Post-Effective Amendment No. 39
----
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 /x/
Amendment No. 39
----
(Check appropriate box or boxes.)
COUNTRYWIDE STRATEGIC TRUST
- -----------------------------
(Exact name of Registrant as Specified in Charter)
FILE NOS. 811-3651 and 2-80859
- ------------------------------
312 Walnut Street, 21st Floor, Cincinnati, Ohio 45202
- ------------------------------------------------------
(Address of Principal Executive Offices) Zip Code
Registrant's Telephone Number, including Area Code (513) 629-2000
- -----------------------------------------------------------------
Robert H. Leshner, 312 Walnut Street, 21st Floor,
- -------------------------------------------------
Cincinnati, Ohio 45202
- -----------------------
(Name and Address of Agent for Service)
It is proposed that this filing will become effective
(check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/ / on __________ pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)
/X/ on May 1, 2000 pursuant to paragraph (a) of Rule 485
Registrant registered an indefinite number of securities under
Rule 24f-2 by filing Registrant's initial registration statement
effective April 14, 1983. Pursuant to paragraph (b)(1) of Rule
24f-2, Registrant filed a Rule 24f-2 Notice for the fiscal year
ended March 31, 1999 on June 10, 1999.
TOTAL NUMBER OF PAGES:
EXHIBIT INDEX ON PAGE:
<PAGE>
COUNTRYWIDE STRATEGIC TRUST
------------------------
FORM N-1A
CROSS REFERENCE SHEET
----------------------
ITEM SECTION IN PROSPECTUS
- ---- ---------------------
1........................... Cover Page; For More Information
2........................... Emerging Growth Fund, International Equity Fund,
Value Plus Fund, Enhanced 30 Fund;
Investment Strategies and Risks
3........................... Emerging Growth Fund, International Equity Fund,
Value Plus Fund, Enhanced 30 Fund
4........................... Investment Strategies and Risks
5.......................... None
6........................... The Funds' Management
7........................... Investing with Countrywide, Distributions and
Taxes
8............................ Investing with Countrywide
9........................... None
SECTION IN STATEMENT OF
ITEM ADDITIONAL INFORMATION
- ---- -----------------------
10.......................... Cover Page, Table of Contents
11.......................... The Trust
12.......................... Definitions, Policies and Risk
Considerations, Investment Restrictions,
Portfolio Turnover, Appendix
13.......................... Trustees and Officers
14.......................... None
15.......................... The Investment Adviser and Sub-Advisors, The
Distributor, Distribution Plans,
Custodian, Auditors, Transfer, Accounting and
Administrative Agents, Choosing a Share Class
16.......................... Securities Transactions
17.......................... The Trust, Choosing a Share Class
18.......................... Calculation of Share Price and Public
Offering Price, Other Purchase
Information, Redemption in Kind
19.......................... Taxes
20.......................... The Distributor
21.......................... Historical Performance Information
22.......................... None
<PAGE>
COUNTRYWIDE FAMILY OF FUNDS
- ---------------------------
PROSPECTUS
MAY 1, 2000
COUNTRYWIDE STRATEGIC TRUST
o EMERGING GROWTH FUND
o INTERNATIONAL EQUITY FUND
o VALUE PLUS FUND
o ENHANCED 30 FUND
Neither the Securities and Exchange Commission nor any state securities
commission has approved the Funds' shares as an investment or determined whether
this prospectus is accurate or complete. Anyone who tells you otherwise is
committing a crime.
<PAGE>
COUNTRYWIDE FAMILY OF FUNDS
Each Fund is a series of Countrywide Strategic Trust (the "Trust"), a group of
eight equity mutual funds. The Trust is part of the Countrywide Family of Funds
which also consists of Countrywide Investment Trust, a group of six taxable bond
and money market mutual funds and Countrywide Tax-Free Trust, a group of six
tax-free bond and money market mutual funds. Each Fund has a different
investment goal and risk level. For further information about the Countrywide
Family of Funds, contact Touchstone Securities, Inc. at 800.669.2796.
2
<PAGE>
TABLE OF CONTENTS
Page
Emerging Growth Fund......................................................
International Equity Fund.................................................
Value Plus Fund...........................................................
Enhanced 30 Fund..........................................................
Investment Strategies And Risks...........................................
The Funds' Management.....................................................
Investing With Countrywide................................................
Distributions And Taxes...................................................
For More Information......................................................
3
<PAGE>
EMERGING GROWTH FUND
- --------------------
THE FUND'S INVESTMENT GOAL
The Emerging Growth Fund seeks to increase the value of Fund shares as a primary
goal and to earn income as a secondary goal.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 65% of total assets) in the common stocks
of smaller, rapidly growing (emerging growth) companies. In selecting its
investments, the portfolio managers focus on those companies they believe will
grow faster than the U.S. economy in general. They also choose companies they
believe are priced lower in the market than their true value.
When the portfolio managers believe the following securities offer a good
potential for capital growth or income, up to 35% of the Fund's assets may be
invested in:
o Larger company stocks
o Preferred stocks
o Convertible bonds
o Other debt securities, including: collateralized mortgage obligations
(CMOs), stripped U.S. government securities (STRIPS) and mortgage-
related securities, all of which will be rated investment grade
The Fund may also invest in:
o Securities of foreign companies traded mainly outside the U.S. (up to
20%)
o American Depository Receipts (ADRs) (up to 20%)
o Emerging market securities (up to 10%)
THE KEY RISKS
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
4
<PAGE>
o If the stock market as a whole goes down
o Because securities of small cap companies may be more thinly traded
and may have more frequent and larger price changes than securities of
larger cap companies
o If the market continually values the stocks in the Fund's portfolio
lower than the portfolio managers believe they should be valued
o If the stocks in the Fund's portfolio are not undervalued as expected
o If the companies in which the Fund invests do not grow as rapidly as
expected
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
o Because CMOs, Strips and mortgage-related securities may lose more
value due to changes in interest rates than other debt securities and
are subject to prepayment
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the U.S.
and economic or political changes may cause larger price changes in
emerging market securities than other foreign securities
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
THE FUND'S PERFORMANCE
The following bar chart indicates the risks of investing in the Emerging Growth
Fund. It shows changes in the performance of the Fund's Class A shares from year
to year since the Fund started. The chart does not reflect any sales charges.
Sales charges will reduce return.
5
<PAGE>
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for Class C shares offered by the Fund will differ from the Class A
returns shown in the bar chart, depending on the expenses of that class.
EMERGING GROWTH FUND -- CLASS A PERFORMANCE
YEARS TOTAL RETURN
1995 22.56%
1996 10.56%
1997 32.20%
1998 2.57%
1999 ____%
During the period shown in the bar chart, the highest quarterly return was
____% (for the quarter ended ____________) and the lowest quarterly return
was _____% (for the quarter ended _____________).
The following table shows how the Fund's average annual returns for the periods
shown compare to those of the Russell 2000 Index and to the Wiesenberger Small
Cap -- MF. The Russell 2000 Index is a widely recognized unmanaged index of
small cap stock performance. The Wiesenberger Small Cap -- MF is a composite
index of the annual returns of mutual funds that have an investment style
similar to that of the Emerging Growth Fund. The table shows the effect of the
Class A sales charge.
FOR THE PERIODS ENDED DECEMBER 31, 1999
Past 12 Since
Months Fund Started
Emerging Growth Fund -- Class A
------------------------------------------ -------- --------
Emerging Growth Fund -- Class C
------------------------------------------ -------- --------
Russell 2000 Index
------------------------------------------ -------- --------
Wiesenberger Small Cap -- MF
------------------------------------------ -------- --------
6
<PAGE>
THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%(1) 1.25%
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%(2)
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.80% 0.80%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses % %
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses % %
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) % %
- --------------------------------------------------------------------------------
Net Expenses 1.50% 2.25%
- --------------------------------------------------------------------------------
1 You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
2 The 1.00% is waived for benefits paid to you through a qualified
pension plan.
3 Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 2000
7
<PAGE>
The following example should help you compare the cost of investing in the
Emerging Growth Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
Class A Shares Class C Shares
1 Year $ 719 $ 228
3 Years $1,545 $1,246
5 Years $2,384 $2,265
10 Years $4,542 $4,816
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
8
<PAGE>
INTERNATIONAL EQUITY FUND
- -------------------------
THE FUND'S INVESTMENT GOAL
The International Equity Fund seeks to increase the value of Fund shares over
the long-term.
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 80% of total assets) in equity securities
of foreign companies and will invest in at least three countries outside the
United States. A large portion of those non-U.S. equity securities may be issued
by companies active in emerging market countries (up to 40% of total assets).
The Fund may also invest in certain debt securities issued by U.S. and non-U.S.
entities (up to 20%), including non-investment grade debt securities rated as
low as B.
The portfolio manager uses a growth-oriented style to choose investments for the
Fund. This includes the use of both qualitative and quantitative analysis to
identify markets and companies that offer solid growth prospects at reasonable
prices. The portfolio manager's investment process seeks to add value by making
good regional and country allocations as well as by selecting individual stocks
within a region.
THE KEY RISKS
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o Because investments in foreign securities may have more frequent and
larger price changes than U.S. securities and may lose value due to
changes in currency exchange rates and other factors
o Because emerging market securities involve unique risks, such as
exposure to economies less diverse and mature than that of the U.S.
and economic or political changes may cause larger price changes in
emerging market securities than other foreign securities
o If the stocks in the Fund's portfolio do not grow over the long term
as expected
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
9
<PAGE>
o Because issuers of non-investment grade securities held by the Fund
are more likely to be unable to make timely payments of interest or
principal
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund is most appropriate for you if you are an aggressive investor and are
willing to assume a relatively high amount of risk. You should be comfortable
with extreme levels of volatility, and safety of principal in the short term
should not be a high priority for you. This Fund's approach may be appropriate
for you if you are many years from retirement and are comfortable with wide
market fluctuations.
THE FUND'S PERFORMANCE
The bar chart shown below indicates the risks of investing in the International
Equity Fund. It shows changes in the performance of the Fund's Class A shares
from year to year since the Fund started. The chart does not reflect any sales
charges. Sales charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for Class C shares offered by the Fund will differ from the Class A
returns shown in the bar chart, depending on the expenses of that class.
INTERNATIONAL EQUITY FUND --
CLASS A PERFORMANCE
BAR CHART
YEARS TOTAL RETURN
1995 5.29%
1996 11.61%
1997 15.57%
1998 19.94%
1999
10
<PAGE>
During the period shown in the bar chart, the highest quarterly return was
____% (for the quarter ended ____________) and the lowest quarterly return
was _____% (for the quarter ended _____________).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the MSCI EAFE Index and the Wiesenberger Non-US Equity
- -- MF index. The MSCI EAFE Index is a Morgan Stanley index that includes stocks
traded on 16 exchanges in Europe, Australia and the Far East. The Wiesenberger
Non-US Equity -- MF is a composite index of the annual returns of mutual funds
that have an investment style similar to that of the International Equity Fund.
The table shows the effect of the Class A sales charge.
FOR THE PERIODS ENDED DECEMBER 31, 1999
Past 12 Since
Months Fund Started
International Equity Fund -- Class A
------------------------------------------ -------- --------
International Equity Fund -- Class C
------------------------------------------ -------- --------
MSCI EAFE Index
------------------------------------------ -------- --------
Wiesenberger Non-US Equity -- MF
------------------------------------------ -------- --------
THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (load) Imposed on
Purchases (as a percentage of offering price) 5.75%(1) 1.25%
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%(2)
- --------------------------------------------------------------------------------
11
<PAGE>
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.95% 0.95%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses % %
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses % %
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) % %
- --------------------------------------------------------------------------------
Net Expenses 1.60% 2.35%
- --------------------------------------------------------------------------------
(1) You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
(2) The 1.00% is waived for benefits paid to you through a qualified
pension plan.
(3) Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 2000.
The following example should help you compare the cost of investing in the
International Equity Fund with the cost of investing in other mutual funds. The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those periods. The
example also assumes that your investment has a 5% return each year and that the
Fund's operating expenses remain the same. Although your actual costs may be
higher or lower, based on these assumptions your costs would be:
12
<PAGE>
Class A Shares Class C Shares
1 Year $ 728 $ 238
- --------------------------------------------------------------------------------
3 Years $1,484 $1,182
- --------------------------------------------------------------------------------
5 Years $2,257 $2,135
- --------------------------------------------------------------------------------
10 Years $4,270 $4,550
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year periods is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
13
<PAGE>
VALUE PLUS FUND
- ---------------
THE FUND'S INVESTMENT GOAL
The Value Plus Fund seeks to increase the value of Fund shares over the
long-term.
As with any mutual fund, there is no guarantee that it will achieve its goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund invests primarily (at least 65% of total assets) in common stock of
larger companies that the portfolio manager believes are undervalued. In
choosing undervalued stocks, the portfolio manager looks for companies that have
proven management and unique features or advantages but are believed to be
priced lower than their true value. These companies may not pay dividends. The
Fund may also invest in common stocks of rapidly growing companies to enhance
the Fund's return and vary its investments to avoid having too much of the
Fund's assets subject to risks specific to undervalued stocks.
Approximately 70% of total assets will generally be invested in large cap
companies and approximately 30% will generally be invested in mid cap companies.
The Fund may invest in:
o Preferred stocks
o Investment grade debt securities
o Convertible securities
In addition, the Fund may invest in (up to 10%):
o Cash equivalent investments
o Short-term debt securities
THE KEY RISKS
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the market continually values the stocks in the Fund's portfolio
lower than the portfolio manager believes they should be valued
o If the stocks in the Fund's portfolio are not undervalued as expected
o If interest rates go up, causing the value of any debt securities held
by the Fund to decline
14
<PAGE>
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies And Risks later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund will be most appealing to you if you are a moderate or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation may be important to you, but you may not want to take extreme risks
in order to achieve it. This Fund's approach may be most appropriate for you if
you are many years from retirement and are comfortable with a moderate level of
risk.
THE FUND'S PERFORMANCE
The following bar chart indicates the risks of investing in the Value Plus Fund.
It shows changes in the performance of the Fund's Class A shares from year to
year since the Fund started. The chart does not reflect any sales charges. Sales
charges will reduce return.
The Fund's past performance does not necessarily indicate how it will perform in
the future.
The return for Class C shares offered by the Fund will differ from the Class A
returns shown in the bar chart, depending on the expenses of that class.
VALUE PLUS FUND -- CLASS A PERFORMANCE
YEAR TOTAL RETURN
1999 %
During the period shown in the bar chart, the highest quarterly return was ____%
(for the quarter ended ____________) and the lowest quarterly return was _____%
(for the quarter ended _____________).
The table below shows how the Fund's average annual returns for the periods
shown compare to those of the ________________________. The table shows the
effect of the Class A sales charge.
15
<PAGE>
FOR THE PERIODS ENDED DECEMBER 31, 1999
Past 12 Since
Months Fund Started
Value Plus Fund -- Class A
------------------------------------------ -------- --------
Value Plus Fund -- Class C
------------------------------------------ -------- --------
------------------------------------------ -------- --------
------------------------------------------ -------- --------
THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%(1) 1.25%
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%(2)
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.75% 0.75%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses % %
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses % %
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) % %
- --------------------------------------------------------------------------------
Net Expenses 1.30% 2.05%
- --------------------------------------------------------------------------------
(1) You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase. There is also no initial sales charge on
certain purchases in a Roth IRA, a Roth Conversion IRA or a qualified
retirement plan.
16
<PAGE>
(2) The 1.00% is waived for benefits paid to you through a qualified
pension plan.
(3) Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 2000.
The following examples should help you compare the cost of investing in the
Value Plus Fund with the cost of investing in other mutual funds. The example
assumes that you invest $10,000 in the Fund for the time periods indicated and
then sell all of your shares at the end of those periods. The example also
assumes that your investment has a 5% return each year and that the Fund's
operating expenses remain the same. Although your actual costs may be higher or
lower, based on these assumptions your costs would be:
Class A Shares Class C Shares
1 Year $ 700 $ 208
- --------------------------------------------------------------------------------
3 Years $1,130 $ 816
- --------------------------------------------------------------------------------
5 Years $1,585 $1,449
- --------------------------------------------------------------------------------
10 Years $2,843 $3,154
- --------------------------------------------------------------------------------
o The example for the 3, 5 and 10-year period is calculated using the
Total Fund Operating Expenses before the limits agreed to under the
Sponsor Agreement for periods after year 1.
17
<PAGE>
ENHANCED 30 FUND
- ----------------
THE FUND'S INVESTMENT GOAL
The Enhanced 30 Fund seeks to achieve a total return which is higher than the
total return of the Dow Jones Industrial Average (DJIA).
As with any mutual fund, there is no guarantee that the Fund will achieve its
goal.
ITS PRINCIPAL INVESTMENT STRATEGIES
The Fund's portfolio is based on the 30 stocks which comprise the DJIA. The
portfolio manager seeks to enhance the total return of the Fund by substituting
some rapidly growing companies for those companies in the DJIA that appear to
have slower growth. The portfolio manager uses a database of 4,000 stocks from
which to choose the companies that will be substituted in the enhanced portion
of the portfolio. A specific process is followed to assist the portfolio manager
in its selections:
o The 4,000 stocks are reduced to 1,400 by screening for quality and
market capitalization ($1 billion minimum).
o A dividend discount model is applied to the stocks to select those
most attractively priced. This model reduces the stock choices to
about 300 companies.
o The portfolio manager then searches for the companies that exhibit
characteristics that may help to unlock their earnings potential.
Examples of such characteristics are:
o Positive earnings momentum
o Restructuring announcements
o Changes in regulations
Stocks are sold when the portfolio manager believes they are overpriced or face
a significant reduction in earnings prospects. The portfolio is rebalanced
periodically or as needed due to changes in the DJIA or the other securities in
the portfolio.
The portfolio manager's selection process is expected to cause the Fund to
consist of securities that have some of the following characteristics:
o Attractive valuation
o Above-average earnings and dividend growth
o Above-average market capitalization ratio
o Dominant industry position
o Seasoned management
o Above-average quality
Unlike the DJIA, the Touchstone Enhanced 30 Fund is not price-weighted.
18
<PAGE>
THE KEY RISKS
The Fund's share price will fluctuate and you could lose money on your
investment in the Fund. The Fund could also return less than other investments:
o If the stock market as a whole goes down
o If the dividend discount model is not accurate in its stock screening
process
o If the stocks in the enhanced portion of the portfolio do not increase
the Fund's return as expected
o If the market continually values the stocks in the Fund's portfolio
lower than the portfolio manager believes they should be valued
o If the stocks in the Fund's portfolio are not undervalued as expected
An investment in the Fund is not a bank deposit and is not insured or guaranteed
by the FDIC or any other government entity.
You can find out more information about certain securities in which the Fund may
invest and a more detailed description of risks under the heading Investment
Strategies and Risks later in this Prospectus.
WHO MAY WANT TO INVEST
This Fund will be most appealing to you if you are a moderate, or risk tolerant
investor. You should be comfortable with a fair degree of volatility. Capital
appreciation may be important to you, but you may not want to take extreme risks
in order to achieve it. This Fund's approach may be most appropriate for you if
you are many years from retirement and are comfortable with a moderate level of
risk.
PERFORMANCE NOTE
Performance information is only shown for those Funds which have had a full
calendar year of operations. Since the Enhanced 30 Fund started on May 1, 2000,
there is no performance information included in this Prospectus.
19
<PAGE>
THE FUND'S FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold
shares of the Fund:
Shareholder Fees (fees paid
directly from your investment)
Class A Shares Class C Shares
Maximum Sales Charge (Load) Imposed on
Purchases (as a percentage of offering price) 5.75%(1) 1.25%
- --------------------------------------------------------------------------------
Maximum Deferred Sales Charge (Load)
(as a percentage of amount redeemed) None 1.00%(2)
- --------------------------------------------------------------------------------
Annual Fund Operating
Expenses (expenses that are
deducted from Fund assets)
Management Fees 0.65% 0.65%
- --------------------------------------------------------------------------------
Distribution (12b-1) Fees 0.25% 1.00%
- --------------------------------------------------------------------------------
Other Expenses % %
- --------------------------------------------------------------------------------
Total Annual Fund Operating Expenses % %
- --------------------------------------------------------------------------------
Fee Waiver and/or Expense Reimbursement(3) % %
- --------------------------------------------------------------------------------
Net Expenses(4) % %
- --------------------------------------------------------------------------------
(1) You may pay a reduced sales charge on very large purchases. There is
no sales charge at the time of purchase for purchases of $1 million or
more but a sales charge of 1.00% will be assessed on shares redeemed
within one year of purchase.
(2) The 1.00% is waived for benefits paid to you through a qualified
pension plan
(3) Touchstone Advisors has contractually agreed to waive or reimburse
certain of the Total Annual Fund Operating Expenses of each Class of
the Fund (the "Sponsor Agreement"). The Sponsor Agreement will remain
in place until at least December 31, 2000.
(4) Net expenses are based on estimated amounts for the current fiscal
year.
The following example should help you compare the cost of investing in the Fund
with the cost of investing in other mutual funds. The example assumes that you
invest $10,000
20
<PAGE>
in the Fund for the time periods indicated and then sell all of
your shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund's operating expenses
remain the same. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1 Year $
3 Years $
o The example for the 3 year period is calculated using the Total Fund
Operating Expenses before the limits agreed to under the Sponsor
Agreement.
21
<PAGE>
INVESTMENT STRATEGIES AND RISKS
- -------------------------------
CAN A FUND DEPART FROM ITS NORMAL STRATEGIES?
Each Fund may depart from its investment strategies by taking temporary
defensive positions in response to adverse market, economic or political
conditions. During these times, a Fund may not achieve its investment goals.
DO THE FUNDS ENGAGE IN ACTIVE TRADING OF SECURITIES?
The International Equity Fund may engage in active trading to achieve its
investment goals. This may cause the Fund to realize higher capital gains which
would be passed on to you. Higher capital gains could increase your tax
liability. Frequent trading also increases transaction costs, which would lower
the Fund's performance.
CAN A FUND CHANGE ITS INVESTMENT GOAL?
A Fund's investment goal(s) may be changed by a vote of the Board of Trustees
without shareholder approval. You would be notified at least 30 days before any
such change took effect.
THE FUNDS AT A GLANCE.
The following two tables can give you a quick basic understanding of the types
of securities a Fund tends to invest in and some of the risks associated with a
Fund's investments. You should read all of the information about a Fund and its
risks before deciding to invest.
22
<PAGE>
HOW CAN I TELL, AT A GLANCE, WHICH TYPES OF SECURITIES A FUND MIGHT INVEST IN?
The following table shows the main types of securities in which each Fund
generally will invest. Some of the Funds' investments are described in detail
below:
Emerging International Value Enhanced
Growth Equity Plus 30
Fund Fund Fund Fund
FINANCIAL INSTRUMENTS
- ---------------------
Invests in U.S. stocks o o o o
- --------------------------------------------------------------------------------
Invests in foreign stocks o o
- --------------------------------------------------------------------------------
Invests in investment grade
debt securities o o o
- --------------------------------------------------------------------------------
Invests in non-investment
grade debt securities o
- --------------------------------------------------------------------------------
Invests in mortgage-related
securities o
- --------------------------------------------------------------------------------
Invests in foreign debt
securities o
- --------------------------------------------------------------------------------
INVESTMENT TECHNIQUES
- ---------------------
Emphasizes securities of
small cap companies o
- --------------------------------------------------------------------------------
Emphasizes securities of mid
cap companies o
- --------------------------------------------------------------------------------
Emphasizes securities of
large cap companies o o
- --------------------------------------------------------------------------------
Emphasizes undervalued stocks o o
- --------------------------------------------------------------------------------
Invests in securities of
emerging market countries o o
- --------------------------------------------------------------------------------
Invests in short-term
debt securities o
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT FUND INVESTMENTS
FOREIGN COMPANIES. A foreign company is organized under the laws of a foreign
country and:
o Has the principal trading market for its stock in a foreign country
o Derives at least 50% of its revenues or profits from operations in
foreign countries or has at least 50% of its assets located in foreign
countries
AMERICAN DEPOSITORY RECEIPTS. American Depository Receipts (ADRs) are securities
that represent an ownership interest in a foreign security. They are generally
issued by a U.S. bank to U.S. buyers as a substitute for direct ownership of the
foreign security and are traded on U.S. exchanges.
INVESTMENT GRADE SECURITIES. Investment grade securities are generally rated BBB
or better by Standard & Poor's Rating Service (S&P) or Baa or better by Moody's
Investor Service, Inc. (Moody's).
23
<PAGE>
NON-INVESTMENT GRADE SECURITIES. Non-investment grade securities are higher
risk, lower quality securities, often referred to as "junk bonds", and are
considered speculative. They are rated by S&P as less than BBB or by Moody's as
less than Baa.
MORTGAGE-RELATED SECURITIES. Mortgage-related securities represent groups of
mortgage loans that are combined for sale to investors. The loans may be grouped
together by:
o The Government National Mortgage Association (GNMA)
o The Federal National Mortgage Association (FNMA)
o The Federal Home Loan Mortgage Corporation (FHLMC)
o Commercial banks
o Savings and loan institutions
o Mortgage bankers
o Private mortgage insurance companies
"LARGE CAP", "MID CAP" AND "SMALL CAP" COMPANIES. A large cap company has a
market capitalization of more than $5 billion. A mid cap company has a market
capitalization of between $1 billion and $5 billion. A small cap company has a
market capitalization of less than $1 billion.
EMERGING GROWTH COMPANIES. Emerging Growth companies are companies that have:
o A total market capitalization less than that of the average of the
companies in the Standard & Poor's Composite Index of 500 Stocks (S&P
500)
o Earnings that the portfolio managers believe may grow faster than the
U.S. economy in general due to new products, management changes at the
company or economic shocks such as high inflation or sudden increases
or decreases in interest rates
EMERGING MARKET SECURITIES. Emerging Market Securities are issued by a company
that:
o Is organized under the laws of an emerging market country (any country
other than Australia, Austria, Belgium, Canada, Denmark, Finland,
France, Germany, Holland, Italy, Japan, Luxembourg, New Zealand,
Norway, Spain, Sweden, Switzerland, the United Kingdom and the United
States)
o Has its principal trading market for its stock in an emerging market
country
o Derives at least 50% of its revenues or profits from operations within
emerging market countries or has at least 50% of its assets located in
emerging market countries
UNDERVALUED STOCKS. A stock is considered undervalued if the portfolio manager
believes it should be trading at a higher price than it is at the time of
purchase. Factors considered are:
24
<PAGE>
o Price relative to earnings
o Price relative to cash flow
o Price relative to financial strength
REPURCHASE AGREEMENTS. Repurchase Agreements are collateralized by obligations
issued or guaranteed as to both principal and interest by the U.S. Government,
its agencies, and instrumentalities. A repurchase agreement is a transaction in
which a security is purchased with a simultaneous commitment to sell it back to
the seller (a commercial bank or recognized securities dealer) at an agreed upon
price on an agreed upon date. This date is usually not more than seven days from
the date of purchase. The resale price reflects the purchase price plus an
agreed upon market rate of interest, which is unrelated to the coupon rate or
maturity of the purchased security.
HOW CAN I TELL, AT A GLANCE, A FUND'S KEY RISKS?
The following table shows some of the main risks to which each Fund is subject.
Each risk is described in detail below:
Emerging International Value Enhanced
Growth Equity Plus 30
Fund Fund Fund Fund
MARKET RISK o o o o
Emerging Growth Companies o
INTEREST RATE RISK o o o
Mortgage-Related Securities o
CREDIT RISK o o o
Non-Investment Grade Securities o
FOREIGN INVESTING RISK o o
Emerging Market Risk o o
Political Risk o
RISKS OF INVESTING IN THE FUNDS
MARKET RISK. A Fund that invests in common stocks is subject to stock market
risk. Stock prices in general may decline over short or even extended periods,
regardless of the success or failure of a particular company's operations. Stock
markets tend to run in cycles, with periods when stock prices generally go up
and periods when they generally go down. Common stock prices tend to go up and
down more than those of bonds.
o Emerging Growth Companies. Investment in Emerging Growth companies is
subject to enhanced risks because such companies generally have
limited product lines, markets or financial
25
<PAGE>
resources and often exhibit a lack of management depth. The securities
of such companies can be difficult to sell and are usually more
volatile than securities of larger, more established companies.
INTEREST RATE RISK. A Fund that invests in debt securities is subject to the
risk that the market value of the debt securities will decline because of rising
interest rates. The prices of debt securities are generally linked to the
prevailing market interest rates. In general, when interest rates rise, the
prices of debt securities fall, and when interest rates fall, the prices of debt
securities rise. The price volatility of a debt security also depends on its
maturity. Generally, the longer the maturity of a debt security, the greater its
sensitivity to changes in interest rates. To compensate investors for this
higher risk, debt securities with longer maturities generally offer higher
yields than debt securities with shorter maturities.
o Mortgage-Related Securities. Payments from the pool of loans
underlying a mortgage-related security may not be enough to meet the
monthly payments of the mortgage-related security. If this occurs, the
mortgage-related security will lose value. Also, prepayments of
mortgages or mortgage foreclosures will shorten the life of the pool
of mortgages underlying a mortgage-related security and will affect
the average life of the mortgage-related securities held by a Fund.
Mortgage prepayments vary based on several factors including the level
of interest rates, general economic conditions, the location and age
of the mortgage and other demographic conditions. In periods of
falling interest rates, there are usually more prepayments. The
reinvestment of cash received from prepayments will, therefore,
usually be at a lower interest rate than the original investment,
lowering a Fund's yield. Mortgage-related securities may be less
likely to increase in value during periods of falling interest rates
than other debt securities.
CREDIT RISK. The debt securities in a Fund's portfolio are subject to credit
risk. Credit risk is the possibility that an issuer will fail to make timely
payments of interest or principal. Securities rated in the lowest category of
investment grade securities have some risky characteristics and changes in
economic conditions are more likely to cause issuers of these securities to be
unable to make payments.
o Non-Investment Grade Securities. Non-investment grade securities are
sometimes referred to as "junk bonds" and are very risky with respect
to their issuers' ability to make payments of interest and principal.
There is a high risk that a Fund which invests in non-investment grade
securities could suffer a loss caused by the default of an issuer of
such securities. Part of the reason for this high risk is that, in the
event of a default or bankruptcy,
26
<PAGE>
holders of non-investment grade securities generally will not receive
payments until the holders of all other debt have been paid. In
addition, the market for non-investment grade securities has, in the
past, had more frequent and larger price changes than the markets for
other securities. Non-investment grade securities can also be more
difficult to sell for good value.
FOREIGN INVESTING. Investing in foreign securities poses unique risks such as
fluctuation in currency exchange rates, market illiquidity, price volatility,
high trading costs, difficulties in settlement, regulations on stock exchanges,
limits on foreign ownership, less stringent accounting, reporting and disclosure
requirements, and other considerations. In the past, equity and debt instruments
of foreign markets have had more frequent and larger price changes than those of
U.S. markets.
o Emerging Markets Risk. Investments in a country that is still
relatively underdeveloped involves exposure to economic structures
that are generally less diverse and mature than in the U.S. and to
political and legal systems which may be less stable. In the past,
markets of developing countries have had more frequent and larger
price changes than those of developed countries.
o Political Risk. Political risk includes a greater potential for
revolts, and the taking of assets by governments. For example, a Fund
may invest in Eastern Europe and former states of the Soviet Union.
These countries were under communist systems that took control of
private industry. This could occur again in this region or others in
which a Fund may invest, in which case the Fund may lose all or part
of its investment in that country's issuers.
27
<PAGE>
THE FUNDS' MANAGEMENT
- ---------------------
REORGANIZATION OF TOUCHSTONE SERIES TRUST
Under the terms of an Agreement and Plan of Reorganization, on May 1, 2000, each
of the Emerging Growth Fund, the International Equity Fund and the Value Plus
Fund will succeed to the assets and liabilities of another mutual fund of the
same name (the "Predecessor Fund"), which is a series of Touchstone Series
Trust. The investment goals and strategies of each Fund and its Predecessor Fund
are substantially identical.
INVESTMENT ADVISOR
Touchstone Advisors, Inc. (the Advisor or Touchstone Advisors) located at 311
Pike Street, Cincinnati, Ohio 45202, is the investment advisor for the Funds.
Touchstone Advisors has been registered as an investment advisor under the
Investment Advisers Act of 1940, as amended (the Advisers Act) since 1994. As of
December 31, 1999, Touchstone Advisors had approximately $_____ million in
assets under management.
Touchstone Advisors is responsible for selecting Fund Sub-Advisors, subject to
review by the Board of Trustees. Touchstone Advisors selects a Fund Sub-Advisor
that has shown good investment performance in its areas of expertise. Touchstone
Advisors considers various factors in evaluating Fund Sub-Advisors, including:
o Level of knowledge and skill
o Performance as compared to its peers or benchmark
o Consistency of performance over five years or more
o Level of compliance with investment rules and strategies
o Employees, facilities and financial strength o Quality of service
Touchstone Advisors will also continually monitor each Fund Sub-Advisor's
performance through various analyses and through in-person, telephone and
written consultations with the Fund Sub-Advisors.
Touchstone Advisors discusses its expectations for performance with each Fund
Sub-Advisor. Touchstone Advisors provides written evaluations and
recommendations to the Board of Trustees, including whether or not each Fund's
Sub-Advisor contract should be renewed, modified or terminated.
Touchstone Advisors is also responsible for running all of the operations of the
Funds, except for those that are subcontracted to the Fund Sub-Advisors,
custodian, transfer agent and administrator.
Two or more Fund Sub-Advisors may manage a Fund, with each managing a portion of
the Fund's assets. If a Fund has more than one Fund Sub-Advisor, Touchstone
Advisors allocates how much of a Fund's assets are managed by each Sub-Advisor.
Touchstone Advisors may change these allocations from time to time, often based
upon the results of the evaluations of the Fund Sub-Advisors.
Each Fund pays Touchstone Advisors a fee for its services. Out of this fee
Touchstone Advisors pays each Fund Sub-Advisor a fee for its services.
28
<PAGE>
The fee paid to Touchstone Advisors by each Fund is shown in the table below:
Fee to Touchstone
(as % of average
daily net assets)
Emerging Growth Fund 0.80%
-------------------------------------------
International Equity Fund 0.95%
-------------------------------------------
Value Plus Fund 0.75%
-------------------------------------------
Enhanced 30 Fund 0.65%
-------------------------------------------
FUND SUB-ADVISORS
The Fund Sub-Advisors make the day-to-day decisions regarding buying and selling
specific securities for a Fund. Each Fund Sub-Advisor manages the investments
held by the Fund it serves according to the applicable investment goals and
strategies.
FUND SUB-ADVISORS TO THE EMERGING GROWTH FUND
DAVID L. BABSON & COMPANY, INC. (BABSON)
One Memorial Drive, Cambridge, MA 02142-1300
Babson has been registered as an investment advisor under the Advisers Act since
1940. Babson provides investment advisory services to individual and
institutional clients. As of December 31, 1999, Babson and affiliates had assets
under management of $____ billion. Babson has been managing the Emerging Growth
Fund since the Fund's inception.
Dennis J. Scannell and Lance F. James have primary responsibility for the
day-to-day management of the Fund. Mr. Scannell has been with the firm since
1993, and Mr. James has been with the firm since 1986.
WESTFIELD CAPITAL MANAGEMENT COMPANY, INC. (WESTFIELD)
One Financial Center, Boston, MA 02111
Westfield has been registered as an investment advisor under the Advisers Act
since 1989. Westfield provides investment advisory services to individual and
institutional clients. As of December 31, 1999, Westfield had assets under
management of $___ billion. Westfield has been managing the Emerging Growth Fund
since the Fund's inception.
William A. Muggia has managed the portion of the Emerging Growth Fund's assets
allocated to Westfield by the Advisor since April 1999. Mr. Muggia has been with
Westfield since 1994.
29
<PAGE>
FUND SUB-ADVISOR TO THE INTERNATIONAL EQUITY FUND
CREDIT SUISSE ASSET MANAGEMENT (CREDIT SUISSE)
One Citicorp Center, 153 East 53rd Street, New York, NY 10022
Credit Suisse has been registered as an investment advisor under the Advisers
Act since 1968. Credit Suisse provides investment advisory services to
individual and institutional clients. As of December 31, 1999, Credit Suisse had
assets under management of $_____ billion. Credit Suisse has been managing the
International Equity Fund since the Fund's inception.
The Fund is managed by the Credit Suisse International Equity Management Team.
The team consists of Larry Smith, Steven D. Bleiberg, Richard Watt, Alan Zlater,
Emily Alejos and Robert B. Hrabchak.
FUND SUB-ADVISOR TO THE VALUE PLUS FUND
FORT WASHINGTON INVESTMENT ADVISORS, INC. (FORT WASHINGTON)
420 East Fourth Street, Cincinnati, OH 45202
Fort Washington has been registered as an investment advisor under the Advisers
Act since 1990. Fort Washington provides investment advisory services to
individual and institutional clients. As of December 31, 1999, Fort Washington
had assets under management of $___ billion. Fort Washington has been managing
the Fund since its inception.
John C. Holden has managed the Fund since May, 1998. Mr. Holden (CFA) joined
Fort Washington in 1997 and is Vice President and Senior Portfolio Manager. Mr.
Holden previously served as senior portfolio manager with Mellon Private Asset
Management in Pittsburgh, senior portfolio manager and investment analyst for
Star Bank's Stellar Performance Group in Cincinnati, and senior employee benefit
portfolio manager for First Kentucky Trust Company in Louisville.
Fort Washington is an affiliate of Touchstone Advisors. Therefore, Touchstone
Advisors may have a conflict of interest when making decisions to keep Fort
Washington as a Fund Sub-Advisor. The Board of Trustees reviews all of
Touchstone Advisor's decisions to reduce the possibility of a conflict of
interest situation.
FUND SUB-ADVISOR TO THE ENHANCED 30 FUND
TODD INVESTMENT ADVISORS, INC. (TODD)
3160 NATIONAL CITY TOWER, LOUISVILLE, KY 40202
Todd has been registered as an investment advisor under the Advisers Act since
1979. Todd provides investment advisory services to individual and institutional
clients. As of December 31, 1999, Todd had assets under management of $_____
billion.
30
<PAGE>
Curtiss M. Scott, Jr., CFA has primary responsibility for the day-to-day
management of the Fund. Mr. Scott joined Todd in 1996. He currently manages both
small cap and large cap products for Todd. He has 15 years of experience as a
small cap portfolio manager and 20 years of industry experience. Prior to
joining Todd, Mr. Scott was a partner with Executive Investment Advisors. He has
also held portfolio management positions at Lazard Freres Asset Management and
Oppenheimer Management, both in New York.
Todd is an affiliate of Touchstone Advisors. Therefore, Touchstone Advisors may
have a conflict of interest when making decisions to keep Todd as the Fund's
Sub-Advisor. The Board of Trustees reviews all of Touchstone Advisor's decisions
to reduce the possibility of a conflict of interest situation.
31
<PAGE>
INVESTING WITH COUNTRYWIDE
- --------------------------
CHOOSING THE APPROPRIATE INVESTMENTS TO MATCH YOUR GOALS. Investing well
requires a plan. We recommend that you meet with your financial advisor to plan
a strategy that will best meet your financial goals.
OPENING AN ACCOUNT
You can contact your financial advisor to purchase shares of the Funds. You may
also purchase shares of any Fund directly from Touchstone Securities, Inc. (the
"Distributor"). In any event, you must complete the Investment Application
included in this Prospectus. You may also obtain an Investment Application from
the Distributor or your financial advisor.
o Investor Alert: The Distributor may choose to refuse any purchase
order.
You should read this Prospectus carefully and then determine how much you want
to invest. Check below to find the minimum investment amount required to
purchase shares as well as to learn about the various ways you can purchase your
shares
Initial Additional
Investment Investment
---------- ----------
Regular Account $ 1,000 None
---------------
Accounts for Countrywide Affiliates $ 50 None
-----------------------------------
Retirement Plan Account or Custodial account under $ 250 None
a Uniform Gifts/Transfers to Minors Act ("UGTMA")
--------------------------------------------------
Investments through the Automatic Investment Plan $ 50 $ 50
-------------------------------------------------
o Investor Alert: The Distributor could change these initial and
additional investment minimums at any time.
PRICING OF FUND SHARES
Each Fund's share price, also called net asset value (NAV), is determined as of
the close of trading (normally 4:00 p.m. Eastern time) every day the New York
Stock Exchange (NYSE) is open. Each Fund calculates its NAV per share, generally
using market prices, by dividing the total value of its net assets by the number
of shares outstanding. Shares are purchased at the next offering price
determined after your purchase or sale order is received in proper form by the
Transfer Agent. The offering price is the NAV plus a sales charge, if
applicable.
32
<PAGE>
The Funds' investments are valued based on market value or, if no market value
is available, based on fair value as determined by the Board of Trustees (or
under their direction). All assets and liabilities initially expressed in
foreign currency values will be converted into U.S. dollar values. Some specific
pricing strategies follow:
o All short-term dollar-denominated investments that mature in 60 days
or less are valued on the basis of amortized cost which the Board of
Trustees has determined represents fair value.
o Securities mainly traded on a U.S. exchange are valued at the last
sale price on that exchange or, if no sales occurred during the day,
at the current quoted bid price.
o Securities mainly traded on a non-U.S. exchange are generally valued
according to the preceding closing values on that exchange. However,
if an event which may change the value of a security occurs after the
time that the closing value on the non-U.S. exchange was determined,
the Board of Trustees might decide to value the security based on fair
value. This may cause the value of the security on the books of the
Fund to be significantly different from the closing value on the
non-U.S. exchange and may affect the calculation of the NAV.
o Because portfolio securities that are primarily listed on a non-U.S.
exchange may trade on weekends or other days when a Fund does not
price its shares, a Fund's NAV may change on days when shareholders
will not be able to buy or sell shares.
CHOOSING A CLASS OF SHARES
Each of the Funds offers Class A shares and Class C shares. Each class of shares
charges different sales charges and distribution fees. The amount of sales
charges and distribution fees you pay will depend on which class of shares you
decide to purchase.
CLASS A SHARES
The offering price of Class A shares of each Fund is equal to its NAV plus a
front-end sales charge that you pay when you buy your shares. The front-end
sales charge is generally deducted from the amount of your investment.
The following table shows the amount of front-end sales charge you will pay on
purchases of Class A shares of each Fund as a percentage of (1) offering price
and (2) the net amount invested after the charge has been subtracted. Note that
the front-end sales charge gets lower as your investment amount gets larger.
33
<PAGE>
<TABLE>
<CAPTION>
Sales Charge as % of Sales Charge as % of
Amount of Your Investment Offering Price Net Amount Invested
- ------------------------- -------------- -------------------
<S> <C> <C>
Under $50,000 5.75% 6.10%
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 3.50% 3.63%
$250,000 but less than $500,000 2.95% 3.04%
$500,000 but less than $1 million 2.25% 2.30%
$1 million or more 0.00% 0.00%
</TABLE>
There is no front-end sales charge if you invest $1 million or more in a Fund.
This includes large total purchases made through programs such as Aggregation,
Concurrent Purchases, Letters of Intent and Rights of Accumulation. These
programs are described more fully in the Statement of Additional Information
("SAI"). In addition, there is no front-end sales charge on purchases by certain
persons related to the Funds or its service providers and certain other persons
listed in the SAI.
If you redeem shares that you purchased as part of the $1 million purchase
within one year, you will pay a contingent deferred sales charge (a sales charge
you pay when you redeem your shares) of 1% on the shares redeemed.
Each Fund has adopted a distribution plan under Rule 12b-1 of the Investment
Company Act of 1940, as amended (the "1940 Act") for its Class A shares. This
plan allows each Fund to pay distribution fees for the sale and distribution of
its Class A shares. Under the plan, each Fund pays an annual fee of up to 0.25%
of its average daily net assets that are attributable to Class A shares. Because
these fees are paid out of a Fund's assets on an ongoing basis, these fees will
increase the cost of your investment.
CLASS C SHARES
The offering price of Class C shares of the Funds is equal to its NAV plus a
1.25% front-end sales charge that you pay when you buy your shares. The
front-end sales charge is generally deducted from the amount of your investment.
A contingent deferred sales charge of 1% of the offering price will be charged
on Class C shares redeemed within one year after you purchased them.
No contingent deferred sales charge is applied if:
o The shares which you redeem were acquired through the reinvestment of
dividends or capital gains distributions
o The amount redeemed resulted from increases in the value of the
account above the amount of the total purchase payments
When we determine whether a contingent deferred sales charge is payable on a
redemption, we assume that:
o The redemption is made first from amounts free of any contingent
deferred sales charge; then
o From the earliest purchase payment(s) that remain invested in the Fund
34
<PAGE>
When we determine if amounts are available for redemption free of any contingent
deferred sales charge, we:
o Add together all of your original purchase payments
o Subtract any amounts previously withdrawn
o Check if there is any remaining amount free of any contingent deferred
sales charge that can be applied to the total of the current value of
the shares you have asked to redeem
There is no contingent deferred sales charge on purchases by certain persons
related to a Fund or its service providers and certain other parties.
The Fund has adopted a distribution plan under Rule 12b-1 of the 1940 Act for
its Class C shares. This plan allows each Fund to pay distribution and other
fees for the sale and distribution of its Class C shares and for services
provided to holders of Class C shares.
Under the plan, each Fund pays an annual fee of up to 1.00% of its average daily
net assets that are attributable to Class C shares. Because these fees are paid
out of the Funds' assets on an ongoing basis, these fees will increase the cost
of your investment and over time may cost you more than paying other types of
sales charges.
PURCHASING YOUR SHARES
For information about how to purchase shares, telephone Countrywide Fund
Services, Inc. (the "Transfer Agent")(Nationwide call toll-free 800-543-0407; in
Cincinnati call 629-2050).
35
<PAGE>
You can invest in the Funds in the following ways:
OPENING AN ACCOUNT
o Please make your check (in U.S. dollars) payable to the applicable
Fund.
o Send your check with the completed account application to Countrywide
Fund Services, Inc., P.O. Box 5354, Cincinnati, Ohio 45201-5354
Your application will be processed subject to your check clearing.
o You may also open an account through your financial advisor.
o We price direct purchases based upon the next determined public
offering price (NAV plus any applicable sales load) after your order
is received. Direct purchase orders received by the Transfer Agent by
4:00 p.m., Eastern time, are processed at that day's public offering
price. Direct investments received by the Transfer Agent after 4:00
p.m., Eastern time, are processed at the public offering price next
determined on the following business day. Purchase orders received by
financial advisors before 4:00 p.m., Eastern time, and transmitted to
the Distributor by 5:00 p.m., Eastern time, are processed at that
day's public offering price. Purchase orders received from financial
advisors after 5:00 p.m., Eastern time, are processed at the public
offering price next determined on the following business day.
BY MAIL OR
THROUGH YOUR
FINANCIAL ADVISOR
- --------------------------------------------------------------------------------
o You may exchange shares of the Funds for shares of the same class of
another Countrywide Fund at NAV. You may also exchange shares of the
Funds for shares of any money market fund.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may invest in the Funds through various retirement plans. The
Funds' shares are designed for use with certain types of tax qualified
retirement plans including defined benefit and defined contribution
plans.
o For further information about any of the plans, agreements,
applications and annual fees, contact the Transfer Agent or your
financial advisor
THROUGH
RETIREMENT
PLANS
- --------------------------------------------------------------------------------
ADDING TO YOUR ACCOUNT
o Complete the investment form provided at the bottom of a recent
account statement.
o Make your check payable to the applicable Fund. o Write your account
number and asset allocation model number, if applicable, on the check.
o Either: (1) Mail the check with the investment form in the envelope
provided with your account statement; or (2) Mail your check directly
to your financial advisor at the address printed on your account
statement. Your financial advisor is responsible for forwarding
payment promptly to the Distributor.
BY CHECK
- --------------------------------------------------------------------------------
36
<PAGE>
o Specify your name and account number. If the Transfer Agent receives a
properly executed wire by 4:00 p.m. Eastern time on a day when the
NYSE is open for regular trading, your order will be processed at that
day's public offering price.
BY WIRE
- --------------------------------------------------------------------------------
o You may exchange your shares by calling the Transfer Agent.
o You do not have to pay any exchange fee for these exchanges.
o You should review the disclosure provided in the Prospectus relating
to the exchanged-for shares carefully before making an exchange of
your Fund shares.
BY EXCHANGE
- --------------------------------------------------------------------------------
o You may add to your account in the Funds through various retirement
plans. For further information, contact the Transfer Agent or your
financial advisor.
THROUGH
RETIREMENT
PLANS
- --------------------------------------------------------------------------------
INFORMATION ABOUT WIRE TRANSFERS.
You may make additional purchases in the Funds directly by wire transfers.
Contact your bank and ask it to wire federal funds to the Transfer Agent. Banks
may charge a fee for handling wire transfers. You should contact the Transfer
Agent or your financial advisor for further instructions.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
For federal income tax purposes, an exchange of shares is treated as a sale of
the shares and a purchase of the shares you receive in exchange. Therefore, you
may incur a taxable gain or loss in connection with the exchange.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
To determine which type of retirement plan is appropriate for you, please
contact your tax advisor.
MORE INFORMATION ABOUT RETIREMENT PLANS.
Retirement Plans may include the following:
INDIVIDUAL RETIREMENT PLANS
o Traditional Individual Retirement Accounts (IRAs)
o Savings Incentive Match Plan for Employees (SIMPLE) IRAs
o Spousal IRAs
o Roth Individual Retirement Accounts (Roth IRAs)
37
<PAGE>
o Education Individual Retirement Accounts (Education IRAs)
o Simplified Employee Pension Plans (SEP IRAs)
o 403(b) Tax Sheltered Accounts that employ as custodian a bank
acceptable to the Underwriter
EMPLOYER SPONSORED RETIREMENT PLANS
o Defined benefit plans
o Defined contribution plans (including 401K plans, profit sharing plans
and money purchase plans)
o 457 plans
AUTOMATIC INVESTMENT OPTIONS
The various ways that you can invest in the Funds are outlined below. The
Transfer Agent does not charge any fees for these services.
AUTOMATIC INVESTMENT PLAN. You can pre-authorize monthly investments of $50 or
more in each Fund to be processed electronically from a checking or savings
account. You will need to complete the appropriate section in the Investment
Application to do this. For further details about this service call the Transfer
Agent at 1-800-543-0407; in Cincinnati, 629-2050.
REINVESTMENT/CROSS REINVESTMENT. Dividends and capital gains can be
automatically reinvested in the Fund that pays them or another Fund within the
same class of shares without a fee or sales charge. Dividends and capital gains
will be reinvested in the Fund that pays them, unless you indicate otherwise on
your account application. You may also choose to have your dividends or capital
gains paid to you in cash.
DIRECT DEPOSIT PURCHASE PLAN. You may automatically invest Social Security
checks, private payroll checks, pension pay outs or any other pre-authorized
government or private recurring payments in our Funds. This occurs on a monthly
basis and the minimum investment is $50.
DOLLAR COST AVERAGING. Our Dollar Cost Averaging program allows you to diversify
your investments by investing the same amount on a regular basis. You can set up
periodic automatic transfers of at least $50 from one Countrywide Fund to any
other. The applicable sales charge, if any, will be assessed.
PROCESSING ORGANIZATIONS. You may also purchase shares of the Funds through a
"processing organization", (e.g. a mutual fund supermarket) which is a
broker-dealer, bank or other financial institution that purchases shares for its
customers. Some of the Funds have authorized certain processing organizations to
receive purchase and sales orders on their behalf. Before investing in the Funds
through a processing organization, you should read any materials provided by the
processing organization in conjunction with this Prospectus.
38
<PAGE>
When shares are purchased this way, there may be various differences. The
processing organization may:
o Charge a fee for its services o Act as the shareholder of record of
the shares
o Set different minimum initial and additional investment requirements
o Impose other charges and restrictions
o Designate intermediaries to accept purchase and sales orders on the
Funds' behalf
The Transfer Agent considers a purchase or sales order as received when an
authorized processing organization, or its authorized designee, receives the
order in proper form. These orders will be priced based on the Fund's NAV next
computed after such order is received in proper form.
Shares held through a processing organization may be transferred into your name
following procedures established by your processing organization and the
Transfer Agent. Certain processing organizations may receive compensation from
the Funds, the Distributor, the Advisor or their affiliates.
39
<PAGE>
SELLING YOUR SHARES
You may sell some or all of your Fund shares on any day that the Fund calculates
its NAV. If your request is received in proper form before the close of regular
trading on the NYSE, you will receive a price based on that day's NAV for the
shares you sell. Otherwise, the price you receive will be based on the NAV that
is next calculated.
o You can sell or exchange your shares over the telephone, unless you
have specifically declined this option. If you do not wish to have
this ability, you must mark the appropriate section of the Investment
Application. You may only sell shares over the telephone if the amount
is less than $25,000.
o To sell your Fund shares by telephone, call the Transfer Agent,
Nationwide at 800-543-0407; in Cincinnati, 629-2050.
o IRA accounts cannot be sold by telephone
BY TELEPHONE
- --------------------------------------------------------------------------------
o Write to the Transfer Agent.
o Indicate the number of shares or dollar amount to be sold.
o Include your name and account number.
o Sign your request exactly as your name appears on your Account
Application.
BY MAIL
- --------------------------------------------------------------------------------
o Complete the appropriate information on the Account Application.
o If your proceeds are $1,000 or more, you may request that the Transfer
Agent wire them to your bank account.
o You will be charged a fee of $8.00.
o Redemption proceeds will only be wired to a commercial bank or
brokerage firm in the United States.
o Your redemption proceeds may be deposited without a charge directly
into your bank account through an ACH transaction. Contact the
Transfer Agent for more information.
BY WIRE
- --------------------------------------------------------------------------------
o You may also sell shares by contacting your financial advisor, who may
charge you a fee for this service. Shares held in street name must be
sold through your financial advisor or, if applicable, the processing
organization.
o Your financial advisor is responsible for making sure that sale
requests are transmitted to the Transfer Agent in proper form in a
timely manner.
THROUGH
YOUR FINANCIAL
ADVISOR
- --------------------------------------------------------------------------------
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Selling your shares may cause you to incur a taxable gain or loss.
o Investor Alert: Unless otherwise specified, proceeds will be sent to
the record owner at the address shown on the Transfer Agent's records.
40
<PAGE>
SIGNATURE GUARANTEES. Some circumstances require that the request for the sale
of shares have a signature guarantee. A signature guarantee helps protect you
against fraud. You can obtain one from most banks or securities dealers, but not
from a notary public. Some circumstances requiring a signature guarantee
include:
o Proceeds from the sale of shares that exceed $25,000
o Proceeds to be paid when the name or the address on the account has
been changed within 30 days of your sale request.
TELEPHONE SALES. If we receive your share sale request before 4:00 p.m. Eastern
time on a day when the NYSE is open for regular trading, the sale of your shares
will be processed at the next determined NAV on that day. Otherwise it will
occur on the next business day.
Interruptions in telephone service could prevent you from selling your shares in
this manner when you want to. When you have difficulty making telephone sales,
you should mail (or send by overnight delivery) a written request for sale of
your shares to the Transfer Agent.
In order to protect your investment assets, the Transfer Agent will only follow
instructions received by telephone that it reasonably believes to be genuine.
However, there is no guarantee that the instructions relied upon will always be
genuine and the Trust will not be liable, in those cases. The Trust has certain
procedures to confirm that telephone instructions are genuine. If it does not
follow such procedures in a particular case it may be liable for any losses due
to unauthorized or fraudulent instructions. Some of these procedures include:
o Requiring personal identification
o Making checks payable only to the owner(s) of the account shown on the
Trust's records
o Mailing checks only to the account address shown on the Trust's
records
o Directing wires only to the bank account shown on the Trust's records
o Providing written confirmation for transactions requested by telephone
o Tape recording instructions received by telephone
SYSTEMATIC WITHDRAWAL PLAN. You may elect to receive or send to a third party
monthly or quarterly withdrawals of $50 or more if your account value is at
least $5,000. There is no special fee for this service and no minimum amount is
required for retirement plans.
41
<PAGE>
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
If you exercise the Reinstatement Privilege, you should contact your tax
advisor.
ooo Special Tax
Consideration
- --------------------------------------------------------------------------------
Involuntary sales may result in the sale of your Fund shares at a loss or may
result in taxable investment gains.
REINSTATEMENT PRIVILEGE. You may reinvest proceeds from a sale of Fund shares or
a dividend or capital gain distribution on Fund shares without a sales charge in
any of the Countrywide Funds. You may do so by sending a written request and a
check to the Transfer Agent within 90 days after the date of the sale, dividend
or distribution. Reinvestment will be at the next NAV calculated after the
Transfer Agent receives your request.
LOW ACCOUNT BALANCES
The Transfer Agent may sell your Fund shares if your account balance falls below
$1,000 as a result of redemptions that you have made (as opposed to a reduction
from market changes). This involuntary sale does not apply to retirement
accounts or custodian accounts under the Uniform Gift to Minors Act (UGTMA). The
Transfer Agent will let you know that your shares are about to be sold and you
will have 30 days to increase your account balance to more than $1000.
RECEIVING SALE PROCEEDS
The Transfer Agent will forward the proceeds of your sale to you (or to your
financial advisor) within 7 business days (normally within 3 business days) from
the date of a proper request.
PROCEEDS SENT TO FINANCIAL ADVISORS
Proceeds which are sent to your financial advisor will not usually be
re-invested for you unless you provide specific instructions to do so.
Therefore, the financial advisor may benefit from the use of your money.
FUND SHARES PURCHASED BY CHECK
If you purchase Fund shares by personal check, the proceeds of a sale of those
shares will not be sent to you until the check has cleared, which may take up to
15 days. If you may need your money more quickly, you should purchase shares by
federal funds, bank wire, or with a certified or cashier's check.
42
<PAGE>
It is possible that the payments of your sale proceeds could be postponed or
your right to sell your shares could be suspended during certain circumstances.
These circumstances can occur:
o When the NYSE is closed for other than customary weekends and holidays
o When trading on the NYSE is restricted
o When an emergency situation causes a Fund Sub-Advisor to not be
reasonably able to dispose of certain securities or to fairly
determine the value of its net assets o During any other time when the
SEC, by order, permits.
43
<PAGE>
DISTRIBUTIONS AND TAXES
ooo Special Tax
Consideration
-------------
You should consult with your tax advisor to address your own tax situation.
Each Fund intends to distribute to its shareholders substantially all of its
income and capital gains. The table below outlines when dividends are declared
and paid for each Fund:
Dividends Declared Dividends Paid
Value Plus Fund Quarterly Quarterly
---------------------------------------------------------------------------
Emerging Growth Fund
and International Equity Fund Annually Annually
---------------------------------------------------------------------------
Enhanced 30 Fund
Distributions of any capital gains earned by a Fund will be made at least
annually.
TAX INFORMATION
DISTRIBUTIONS. Each Fund will make distributions that may be taxed as ordinary
income or capital gains (which may be taxed at different rates depending on the
length of time a Fund holds its assets). Each Fund's distributions may be
subject to federal income tax whether you reinvest such dividends in additional
shares of a Fund or choose to receive cash.
ORDINARY INCOME. Income and short-term capital gains that are distributed to you
are taxable as ordinary income for federal income tax purposes regardless of how
long you have held your Fund shares.
LONG-TERM CAPITAL GAINS. Long-term capital gains distributed to you are taxable
as long-term capital gains for federal income tax purposes regardless of how
long you have held your Fund shares.
STATEMENTS AND NOTICES. You will receive an annual statement outlining the tax
status of your distributions. You will also receive written notices of certain
foreign taxes paid by the Funds and certain distributions paid by the Funds
during the prior taxable year.
44
<PAGE>
FOR MORE INFORMATION
- --------------------
For investors who want more information about the Funds, the following documents
are available free upon request:
STATEMENT OF ADDITIONAL INFORMATION (SAI): The SAI provides more detailed
information about the Funds and is legally a part of this prospectus.
ANNUAL/SEMI-ANNUAL REPORTS: The Funds' annual and semi-annual reports provide
additional information about the Funds' investments. In each Fund's annual
report, you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund's performance during its last
fiscal year.
You can get free copies of the SAI, the reports, other information and answers
to your questions about the Funds by contacting your financial advisor, or the
Funds at:
Countrywide Family of Funds
311 Pike Street
Cincinnati, Ohio 45202
800.669.2796 (Press 3)
http://www.touchstonefunds.com
You can view the Funds' SAI and the reports at the Public Reference Room of the
Securities and Exchange Commission.
For a fee, you can get text-only copies by writing to the Public Reference Room
of the SEC, 450 Fifth Street N.W., Washington, D.C. 20549-0102 or by calling
the SEC at 1-202-942-8090. You can get information about the operation of the
Public Reference Room by calling the SEC at 1-202-942-8090.
You can also view the SAI and the reports free from the SEC's Internet website
at http://www.sec.gov. You can get information about the SEC's Internet website
by writing to the SEC at the above address or by e-mailing a request to: public
[email protected].
Investment Company Act file no. 811-3651
45
<PAGE>
COUNTRYWIDE STRATEGIC TRUST
o EMERGING
GROWTH FUND
o INTERNATIONAL
EQUITY FUND
o VALUE PLUS FUND
o ENHANCED 30 FUND
CLASS A AND CLASS C
SHARES ARE OFFERED BY
THIS PROSPECTUS
<PAGE>
COUNTRYWIDE STRATEGIC TRUST
---------------------------
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
May 1, 2000
Emerging Growth Fund
International Equity Fund
Value Plus Fund
Enhanced 30 Fund
This Statement of Additional Information is not a prospectus. It should be
read together with the Funds' Prospectus dated May 1, 2000. A copy of the Funds'
Prospectus can be obtained by writing the Trust at 312 Walnut Street, 21st
Floor, Cincinnati, Ohio 45202-4094, or by calling the Trust nationwide toll-free
800-543-0407, or in Cincinnati 629-2050.
-1-
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
-----------------------------------
Countrywide Strategic Trust
312 Walnut Street, 21st Floor
Cincinnati, Ohio 45202-4094
TABLE OF CONTENTS
-----------------
PAGE
----
THE TRUST...................................................................
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS...............................
INVESTMENT RESTRICTIONS....................................................
TRUSTEES AND OFFICERS.......................................................
THE INVESTMENT ADVISOR AND SUB-ADVISORS.....................................
THE DISTRIBUTOR.............................................................
DISTRIBUTION PLANS..........................................................
SECURITIES TRANSACTIONS.....................................................
PORTFOLIO TURNOVER..........................................................
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE........................
CHOOSING A SHARE CLASS......................................................
OTHER PURCHASE INFORMATION..................................................
TAXES.......................................................................
REDEMPTION IN KIND..........................................................
HISTORICAL PERFORMANCE INFORMATION..........................................
CUSTODIANS..................................................................
AUDITORS....................................................................
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENTS..............................
APPENDIX....................................................................
-2-
<PAGE>
THE TRUST
- ---------
Countrywide Strategic Trust (the "Trust"), an open-end, diversified management
investment company, was organized as a Massachusetts business trust on November
18, 1982. The Trust currently offers eight series of shares to investors: the
Utility Fund, the Equity Fund, the Growth/Value Fund, the Aggressive Growth
Fund, the Emerging Growth Fund, the International Equity Fund, the Value Plus
Fund and the Enhanced 30 Fund (referred to individually as a "Fund" and
collectively as the "Funds"). This Statement of Additional Information pertains
to the Emerging Growth Fund, the International Equity Fund, the Value Plus Fund
and the Enhanced 30 Fund. Information about the Utility Fund, the Equity Fund,
the Growth/Value Fund and the Aggressive Growth Fund is contained in a separate
Statement of Additional Information. Each Fund has its own investment goal(s)
and policies.
Pursuant to an Agreement and Plan of Reorganization, on May 1, 2000, each of the
Emerging Growth Fund, the International Equity Fund and the Value Plus Fund will
succeed to the assets and liabilities of another mutual fund of the same name
(the "Predecessor Fund"), which was an investment series of Touchstone Series
Trust. The investment goals, strategies policies and restrictions of each Fund
and its Predecessor Fund are substantially identical.
Shares of each Fund have equal voting rights and liquidation rights. Each Fund
shall vote separately on matters submitted to a vote of the shareholders except
in matters where a vote of all series of the Trust in the aggregate is required
by the Investment Company Act of 1940 or otherwise. When matters are submitted
to shareholders for a vote, each shareholder is entitled to one vote for each
full share owned and fractional votes for fractional shares owned. The Trust
does not normally hold annual meetings of shareholders. The Trustees shall
promptly call and give notice of a meeting of shareholders for the purpose of
voting upon the removal of any Trustee when requested to do so in writing by
shareholders holding 10% or more of the Trust's outstanding shares. The Trust
will comply with the provisions of Section 16(c) of the Investment Company Act
of 1940 in order to facilitate communications among shareholders.
Each share of a Fund represents an equal proportionate interest in the assets
and liabilities belonging to that Fund with each other share of that Fund and is
entitled to such dividends and distributions out of the income belonging to the
Fund as are declared by the Trustees. The shares do not have cumulative voting
rights or any preemptive or conversion rights, and the Trustees have the
authority from time to time to divide or combine the shares of any Fund into a
greater or lesser number of shares of that Fund so long as the proportionate
beneficial interest in the assets belonging to that Fund and the rights of
shares of any other Fund are in no way affected. In case of any liquidation of a
Fund, the holders of shares of the Fund being liquidated will be entitled to
receive as a class a distribution out of the assets, net of the liabilities,
belonging to that Fund. Expenses attributable to any Fund are borne by that
Fund. Any general expenses of the Trust not readily identifiable as belonging to
a particular Fund are allocated by or under the direction of the Trustees in
such manner as the Trustees determine to be fair and
-3-
<PAGE>
equitable. Generally, the Trustees allocate such expenses on the basis of
relative net assets or number of shareholders. No shareholder is liable to
further calls or to assessment by the Trust without his express consent.
Both Class A shares and Class C shares of the Funds represent an interest in the
same assets of such Fund, have the same rights and are identical in all material
respects except that (i) Class C shares bear the expenses of higher distribution
fees; (ii) certain other class specific expenses will be borne solely by the
class to which such expenses are attributable, including transfer agent fees
attributable to a specific class of shares, printing and postage expenses
related to preparing and distributing materials to current shareholders of a
specific class, registration fees incurred by a specific class of shares, the
expenses of administrative personnel and services required to support the
shareholders of a specific class, litigation or other legal expenses relating to
a class of shares, Trustees' fees or expenses incurred as a result of issues
relating to a specific class of shares and accounting fees and expenses relating
to a specific class of shares; and (iii) each class has exclusive voting rights
with respect to matters relating to its own distribution arrangements. The Board
of Trustees may classify and reclassify the shares of a Fund into additional
classes of shares at a future date.
Under Massachusetts law, under certain circumstances, shareholders of a
Massachusetts business trust could be deemed to have the same type of personal
liability for the obligations of the Trust as does a partner of a partnership.
However, numerous investment companies registered under the Investment Company
Act of 1940 have been formed as Massachusetts business trusts and the Trust is
not aware of an instance where such result has occurred. In addition, the Trust
Agreement disclaims shareholder liability for acts or obligations of the Trust
and requires that notice of such disclaimer be given in each agreement,
obligation or instrument entered into or executed by the Trust or the Trustees.
The Trust Agreement also provides for the indemnification out of the Trust
property for all losses and expenses of any shareholder held personally liable
for the obligations of the Trust. Moreover, it provides that the Trust will,
upon request, assume the defense of any claim made against any shareholder for
any act or obligation of the Trust and satisfy any judgment thereon. As a
result, and particularly because the Trust assets are readily marketable and
ordinarily substantially exceed liabilities, management believes that the risk
of shareholder liability is slight and limited to circumstances in which the
Trust itself would be unable to meet its obligations. Management believes that,
in view of the above, the risk of personal liability is remote.
-4-
<PAGE>
DEFINITIONS, POLICIES AND RISK CONSIDERATIONS
- ---------------------------------------------
Each Fund has its own investment goals, strategies and related risks. There can
be no assurance that a Fund's investment goals will be met. Each Fund's
investment goals and practices are nonfundamental policies which may be changed
by the Board of Trustees without shareholder approval, except in those instances
where shareholder approval is expressly required. If there is a change in a
Fund's investment goals, shareholders should consider whether the Fund remains
an appropriate investment in light of their then current financial position and
needs. The investment restrictions of the Funds are fundamental and can only be
changed by vote of a majority of the outstanding shares of the applicable Fund.
A more detailed discussion of some of the terms used and investment policies
described in the Prospectus (see "Investment Strategies and Risks") appears
below:
FIXED-INCOME AND OTHER DEBT INSTRUMENT SECURITIES. Fixed-income and other debt
instrument securities include all bonds, high yield or "junk" bonds, municipal
bonds, debentures, U.S. Government securities, mortgage-related securities
including government stripped mortgage-related securities, zero coupon
securities and custodial receipts. The market value of fixed-income obligations
of the Funds will be affected by general changes in interest rates which will
result in increases or decreases in the value of the obligations held by the
Funds. The market value of the obligations held by a Fund can be expected to
vary inversely to changes in prevailing interest rates. As a result,
shareholders should anticipate that the market value of the obligations held by
the Fund generally will increase when prevailing interest rates are declining
and generally will decrease when prevailing interest rates are rising.
Shareholders also should recognize that, in periods of declining interest rates,
a Fund's yield will tend to be somewhat higher than prevailing market rates and,
in periods of rising interest rates, a Fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to a
Fund from the continuous sale of its shares will tend to be invested in
instruments producing lower yields than the balance of its portfolio, thereby
reducing the Fund's current yield. In periods of rising interest rates, the
opposite can be expected to occur. In addition, securities in which a Fund may
invest may not yield as high a level of current income as might be achieved by
investing in securities with less liquidity, less creditworthiness or longer
maturities.
Ratings made available by Standard & Poor's Rating Service ("S&P"), Moody's
Investor Service, Inc. ("Moody's"), Duff & Phelps Bond Ratings, Fitch Investors
Service, Inc. and Thomson BankWatch are relative and subjective and are not
absolute standards of quality. Although these ratings are initial criteria for
selection of portfolio investments, a Fund Sub-Advisor also will make its own
evaluation of these securities. Among the factors that will be considered are
the long-term ability of the issuers to pay principal and interest and general
economic trends.
Fixed-income securities may be purchased on a when-issued or delayed-delivery
basis. See "When-Issued and Delayed-Delivery Securities" below.
-5-
<PAGE>
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1 to 270
days) unsecured promissory notes issued by corporations in order to finance
their current operations. A variable amount master demand note (which is a type
of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under a letter agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts. For a description of commercial paper
ratings, see the Appendix.
MEDIUM AND LOWER RATED AND UNRATED SECURITIES. Securities rated in the fourth
highest category by a rating organization, although considered investment
grade, may possess speculative characteristics, and changes in economic or
other conditions are more likely to impair the ability of issuers of these
securities to make interest and principal payments than is the case with
respect to issuers of higher grade bonds.
Generally, medium or lower-rated securities and unrated securities of comparable
quality, sometimes referred to as "junk bonds," offer a higher current yield
than is offered by higher rated securities, but also (i) will likely have some
quality and protective characteristics that, in the judgment of the rating
organizations, are outweighed by large uncertainties or major risk exposures to
adverse conditions and (ii) are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. The yield of junk bonds will fluctuate over time.
The market values of certain of these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher quality bonds. In addition, medium and lower rated securities and
comparable unrated securities generally present a higher degree of credit risk.
The risk of loss due to default by these issuers is significantly greater
because medium and lower-rated securities and unrated securities of comparable
quality generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. Since the risk of default is higher for lower
rated debt securities, the Fund Sub-Advisor's research and credit analysis are
an especially important part of managing securities of this type held by a Fund.
In light of these risks, the Board of Trustees of the Trust has instructed the
Fund Sub-Advisor, in evaluating the creditworthiness of an issue, whether rated
or unrated, to take various factors into consideration, which may include, as
applicable, the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of and the community support for
the facility financed by the issue, the ability of the issuer's management and
regulatory matters.
In addition, the market value of securities in lower-rated categories is more
volatile than that of higher quality securities, and the markets in which medium
and lower-rated or unrated securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets may
make it more difficult for the Funds to obtain accurate market quotations for
purposes of valuing their respective portfolios and calculating their respective
net asset values. Moreover, the lack of a liquid trading market
-6-
<PAGE>
may restrict the availability of securities for the Funds to purchase and may
also have the effect of limiting the ability of a Fund to sell securities at
their fair value either to meet redemption requests or to respond to changes in
the economy or the financial markets.
Lower-rated debt obligations also present risks based on payment expectations.
If an issuer calls the obligation for redemption, a Fund may have to replace the
security with a lower yielding security, resulting in a decreased return for
shareholders. Also, as the principal value of bonds moves inversely with
movements in interest rates, in the event of rising interest rates the value of
the securities held by a Fund may decline relatively proportionately more than a
portfolio consisting of higher rated securities. If a Fund experiences
unexpected net redemptions, it may be forced to sell its higher rated bonds,
resulting in a decline in the overall credit quality of the securities held by
the Fund and increasing the exposure of the Fund to the risks of lower rated
securities. Investments in zero coupon bonds may be more speculative and subject
to greater fluctuations in value due to changes in interest rates than bonds
that pay interest currently.
Subsequent to its purchase by a Fund, an issue of securities may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event will require sale of these securities by the Fund, but
the Fund Sub-Advisor will consider this event in its determination of whether
the Fund should continue to hold the securities.
LOWER-RATED DEBT SECURITIES. While the market for high yield corporate debt
securities has been in existence for many years and has weathered previous
economic downturns, the 1980's brought a dramatic increase in the use of such
securities to fund highly leveraged corporate acquisitions and restructuring.
Past experience may not provide an accurate indication of future performance of
the high yield bond market, especially during periods of economic recession. In
fact, from 1989 to 1991, the percentage of lower-rated debt securities that
defaulted rose significantly above prior levels.
The market for lower-rated debt securities may be thinner and less active than
that for higher rated debt securities, which can adversely affect the prices at
which the former are sold. If market quotations are not available, lower-rated
debt securities will be valued in accordance with procedures established by the
Board of Trustees, including the use of outside pricing services. Judgment plays
a greater role in valuing high yield corporate debt securities than is the case
for securities for which more external sources for quotations and last sale
information is available. Adverse publicity and changing investor perception may
affect the ability of outside pricing services to value lower-rated debt
securities and the ability to dispose of these securities.
-7-
<PAGE>
In considering investments for a Fund, the Fund Sub-Advisor will attempt to
identify those issuers of high yielding debt securities whose financial
condition is adequate to meet future obligations, has improved or is expected to
improve in the future. The Fund Sub-Advisor's analysis focuses on relative
values based on such factors as interest or dividend coverage, asset coverage,
earnings prospects and the experience and managerial strength of the issuer.
A Fund may choose, at its expense or in conjunction with others, to pursue
litigation or otherwise exercise its rights as a security holder to seek to
protect the interest of security holders if it determines this to be in the best
interest of the Fund.
ILLIQUID SECURITIES. Historically, illiquid securities have included securities
subject to contractual or legal restrictions on resale because they have not
been registered under the Securities Act of 1933, as amended (the "1933 Act"),
securities which are otherwise not readily marketable and repurchase agreements
having a maturity of longer than seven days. Securities which have not been
registered under the 1933 Act are referred to as "private placements" or
"restricted securities" and are purchased directly from the issuer or in the
secondary market. Investment companies do not typically hold a significant
amount of these restricted securities or other illiquid securities because of
the potential for delays on resale and uncertainty in valuation. Limitations on
resale may have an adverse effect on the marketability of portfolio securities
and an investment company might be unable to dispose of restricted or other
illiquid securities promptly or at reasonable prices and might thereby
experience difficulty satisfying redemptions within seven days. An investment
company might also have to register such restricted securities in order to
dispose of them, which would result in additional expense and delay. Adverse
market conditions could impede such a public offering of securities.
In recent years, however, a large institutional market has developed for certain
securities that are not registered under the 1933 Act, including repurchase
agreements, commercial paper, foreign securities, municipal securities and
corporate bonds and notes. Institutional investors depend on an efficient
institutional market in which the unregistered security can be readily resold or
on an issuer's ability to honor a demand for repayment. The fact that there are
contractual or legal restrictions on resale of such investments to the general
public or to certain institutions may not be indicative of their liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A, which
allows a broader institutional trading market for securities otherwise subject
to restriction on their resale to the general public. Rule 144A establishes a
"safe harbor" from the registration requirements of the 1933 Act on resales of
certain securities to qualified institutional buyers. The Advisor anticipates
that the market for certain restricted securities such as institutional
commercial paper will expand further as a result of this regulation and the
development of automated systems for the trading, clearance and settlement of
unregistered securities of domestic and foreign issuers, such as the PORTAL
System sponsored by the National Association of Securities Dealers, Inc.
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Each Fund Sub-Advisor will monitor the liquidity of Rule 144A securities in each
Fund's portfolio under the supervision of the Board of Trustees. In reaching
liquidity decisions, the Fund Sub-Advisor will consider, among other things, the
following factors: (1) the frequency of trades and quotes for the security; (2)
the number of dealers and other potential purchasers wishing to purchase or sell
the security; (3) dealer undertakings to make a market in the security and (4)
the nature of the security and of the marketplace trades (e.g., the time needed
to dispose of the security, the method of soliciting offers and the mechanics of
the transfer).
No Fund may invest more than 15% of its net assets in securities which are
illiquid or otherwise not readily marketable. The Trustees of the Trust have
adopted a policy that the International Equity Fund may not invest in illiquid
securities other than Rule 144A securities. If a security becomes illiquid after
purchase by the Fund, the Fund will normally sell the security unless it would
not be in the best interests of shareholders to do so.
Each Fund may purchase securities in the United States that are not registered
for sale under federal securities laws but which can be resold to institutions
under SEC Rule 144A or under an exemption from such laws. Provided that a dealer
or institutional trading market in such securities exists, these restricted
securities or Rule 144A securities are treated as exempt from the Fund's 15%
limit on illiquid securities. The Board of Trustees of the Trust, with advice
and information from the respective Fund Sub-Advisor, will determine the
liquidity of restricted securities or Rule 144A securities by looking at factors
such as trading activity and the availability of reliable price information and,
through reports from such Fund Sub-Advisor, the Board of Trustees of the Trust
will monitor trading activity in restricted securities. If institutional trading
in restricted securities or Rule 144A securities were to decline, a Fund's
illiquidity could be increased and the Fund could be adversely affected.
No Fund will invest more than 10% of its total assets in restricted securities
(excluding Rule 144A securities).
FOREIGN SECURITIES. Investing in securities issued by foreign companies and
governments involves considerations and potential risks not typically associated
with investing in obligations issued by the U.S. Government and domestic
corporations. Less information may be available about foreign companies than
about domestic companies and foreign companies generally are not subject to
uniform accounting, auditing and financial reporting standards or to other
regulatory practices and requirements comparable to those applicable to domestic
companies. The values of foreign investments are affected by changes in currency
rates or exchange control regulations, restrictions or prohibitions on the
repatriation of foreign currencies, application of foreign tax laws, including
withholding taxes, changes in governmental administration or economic or
monetary policy (in the United States or abroad) or changed circumstances in
dealings between nations. Costs are also incurred in connection with conversions
between various currencies. In addition, foreign brokerage commissions and
custody fees are generally higher than those charged in the United States, and
foreign securities markets may be less liquid, more volatile and less subject to
governmental supervision than in the United
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States. Investments in foreign countries could be affected by other factors not
present in the United States, including expropriation, confiscatory taxation,
lack of uniform accounting and auditing standards and potential difficulties in
enforcing contractual obligations and could be subject to extended clearance and
settlement periods.
EMERGING MARKET SECURITIES. Emerging Market Securities are securities that are
issued by a company that (i) is organized under the laws of an emerging market
country (any country other than Australia, Austria, Belgium, Canada, Denmark,
Finland, France, Germany, Holland, Italy, Japan, Luxembourg, New Zealand,
Norway, Spain, Sweden, Switzerland, the United Kingdom and the United States),
(ii) has its principal trading market for its stock in an emerging market
country, or (iii) derives at least 50% of its revenues or profits from
corporations within emerging market countries or has at least 50% of its assets
located in emerging market countries.
The Emerging Growth Fund may invest up to 10% of its total assets in Emerging
Market Securities and the International Equity Fund may invest up to 40% of its
total assets in Emerging Market Securities.
Investments in securities of issuers based in underdeveloped countries entail
all of the risks of investing in foreign issuers outlined in this section to a
heightened degree. These heightened risks include: (i) expropriation,
confiscatory taxation, nationalization, and less social, political and economic
stability; (ii) the smaller size of the market for such securities and a low or
nonexistent volume of trading, resulting in a lack of liquidity and in price
volatility; (iii) certain national policies which may restrict a Fund's
investment opportunities including restrictions on investing in issuers in
industries deemed sensitive to relevant national interests; and (iv) in the case
of Eastern Europe, the absence of developed capital markets and legal structures
governing private or foreign investment and private property and the possibility
that recent favorable economic and political developments could be slowed or
reversed by unanticipated events.
SPECIAL CONSIDERATIONS CONCERNING EASTERN EUROPE. Investments in companies
domiciled in Eastern European countries may be subject to potentially greater
risks than those of other foreign issuers. These risks include: (i) potentially
less social, political and economic stability; (ii) the small current size of
the markets for such securities and the low volume of trading, which result in
less liquidity and in greater price volatility; (iii) certain national policies
which may restrict the Funds' investment opportunities, including restrictions
on investment in issuers or industries deemed sensitive to national interests;
(iv) foreign taxation; (v) the absence of developed legal structures governing
private or foreign investment or allowing for judicial redress for injury to
private property; (vi) the absence, until recently in certain Eastern European
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in Eastern Europe
may be slowed or reversed by unanticipated political or social events in such
countries, or in the Commonwealth of Independent States (formerly the Union of
Soviet Socialist Republics).
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So long as the Communist Party continues to exercise a significant or, in some
cases, dominant role in Eastern European countries, investments in such
countries will involve risks of nationalization, expropriation and confiscatory
taxation. The Communist governments of a number of Eastern European countries
expropriated large amounts of private property in the past, in many cases
without adequate compensation, and there may be no assurance that such
expropriation will not occur in the future. In the event of such expropriation,
a Fund could lose a substantial portion of any investments it has made in the
affected countries. Further, no accounting standards exist in Eastern European
countries. Finally, even though certain Eastern European currencies may be
convertible into U.S. dollars, the conversion rates may be artificial in
relation to the actual market values and may be adverse to the interests of a
Fund's shareholders.
CURRENCY EXCHANGE RATES. A Fund's share value may change significantly when the
currencies, other than the U.S. dollar, in which the Fund's investments are
denominated strengthen or weaken against the U.S. dollar. Currency exchange
rates generally are determined by the forces of supply and demand in the foreign
exchange markets and the relative merits of investments in different countries
as seen from an international perspective. Currency exchange rates can also be
affected unpredictably by intervention by U.S. or foreign governments or central
banks or by currency controls or political developments in the United States or
abroad.
OPTIONS
OPTIONS ON SECURITIES. A Fund may write (sell), to a limited extent, only
covered call and put options ("covered options") in an attempt to increase
income. However, the Fund may forgo the benefits of appreciation on securities
sold or may pay more than the market price on securities acquired pursuant to
call and put options written by the Fund.
When a Fund writes a covered call option, it gives the purchaser of the option
the right to buy the underlying security at the price specified in the option
(the "exercise price") by exercising the option at any time during the option
period. If the option expires unexercised, the Fund will realize income in an
amount equal to the premium received for writing the option. If the option is
exercised, a decision over which the Fund has no control, the Fund must sell the
underlying security to the option holder at the exercise price. By writing a
covered call option, the Fund forgoes, in exchange for the premium less the
commission ("net premium"), the opportunity to profit during the option period
from an increase in the market value of the underlying security above the
exercise price.
When a Fund writes a covered put option, it gives the purchaser of the option
the right to sell the underlying security to the Fund at the specified exercise
price at any time during the option period. If the option expires unexercised,
the Fund will realize income in the amount of the premium received for writing
the option. If the put option is exercised, a decision over which the Fund has
no control, the Fund must purchase the underlying security from the option
holder at the exercise price. By writing a covered put option, the Fund, in
exchange for the net premium received, accepts the risk of a decline in the
market value of the underlying security below the exercise price.
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A Fund may terminate its obligation as the writer of a call or put option by
purchasing an option with the same exercise price and expiration date as the
option previously written. This transaction is called a "closing purchase
transaction." Where the Fund cannot effect a closing purchase transaction, it
may be forced to incur brokerage commissions or dealer spreads in selling
securities it receives or it may be forced to hold underlying securities until
an option is exercised or expires.
When a Fund writes an option, an amount equal to the net premium received by the
Fund is included in the liability section of the Fund's Statement of Assets and
Liabilities as a deferred credit. The amount of the deferred credit will be
subsequently marked to market to reflect the current market value of the option
written. The current market value of a traded option is the last sale price or,
in the absence of a sale, the mean between the closing bid and asked price. If
an option expires on its stipulated expiration date or if the Fund enters into a
closing purchase transaction, the Fund will realize a gain (or loss if the cost
of a closing purchase transaction exceeds the premium received when the option
was sold), and the deferred credit related to such option will be eliminated. If
a call option is exercised, the Fund will realize a gain or loss from the sale
of the underlying security and the proceeds of the sale will be increased by the
premium originally received. The writing of covered call options may be deemed
to involve the pledge of the securities against which the option is being
written.
When a Fund writes a call option, it will "cover" its obligation by segregating
the underlying security on the books of the Fund's custodian or by placing
liquid securities in a segregated account at the Fund's custodian. When a Fund
writes a put option, it will "cover" its obligation by placing liquid securities
in a segregated account at the Fund's custodian.
A Fund may purchase call and put options on any securities in which it may
invest. The Fund would normally purchase a call option in anticipation of an
increase in the market value of such securities. The purchase of a call option
would entitle the Fund, in exchange for the premium paid, to purchase a security
at a specified price during the option period. The Fund would ordinarily have a
gain if the value of the securities increased above the exercise price
sufficiently to cover the premium and would have a loss if the value of the
securities remained at or below the exercise price during the option period.
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A Fund would normally purchase put options in anticipation of a decline in the
market value of securities in its portfolio ("protective puts") or securities of
the type in which it is permitted to invest. The purchase of a put option would
entitle the Fund, in exchange for the premium paid, to sell a security, which
may or may not be held in the Fund's portfolio, at a specified price during the
option period. The purchase of protective puts is designed merely to offset or
hedge against a decline in the market value of the Fund's portfolio securities.
Put options also may be purchased by the Fund for the purpose of affirmatively
benefiting from a decline in the price of securities which the Fund does not
own. The Fund would ordinarily recognize a gain if the value of the securities
decreased below the exercise price sufficiently to cover the premium and would
recognize a loss if the value of the securities remained at or above the
exercise price. Gains and losses on the purchase of protective put options would
tend to be offset by countervailing changes in the value of underlying portfolio
securities.
The Funds have adopted certain other nonfundamental policies concerning option
transactions which are discussed below. A Fund's activities in options may
also be restricted by the requirements of the Internal Revenue Code of 1986, as
amended (the "Code"), for qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
A Fund may engage in over-the-counter options transactions with broker-dealers
who make markets in these options. At present, approximately ten broker-dealers,
including several of the largest primary dealers in U.S. Government securities,
make these markets. The ability to terminate over-the-counter option positions
is more limited than with exchange-traded option positions because the
predominant market is the issuing broker rather than an exchange, and may
involve the risk that broker-dealers participating in such transactions will not
fulfill their obligations. To reduce this risk, a Fund will purchase such
options only from broker-dealers who are primary government securities dealers
recognized by the Federal Reserve Bank of New York and who agree to (and are
expected to be capable of) entering into closing transactions, although there
can be no guarantee that any such option will be liquidated at a favorable price
prior to expiration. The Fund Sub-Advisor will monitor the creditworthiness of
dealers with whom a Fund enters into such options transactions under the general
supervision of the Board of Trustees.
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OPTIONS ON STOCKS. Each Fund which invests in equity securities may write or
purchase options on stocks. A call option gives the purchaser of the option the
right to buy, and obligates the writer to sell, the underlying stock at the
exercise price at any time during the option period. Similarly, a put option
gives the purchaser of the option the right to sell, and obligates the writer to
buy the underlying stock at the exercise price at any time during the option
period. A covered call option with respect to which a Fund owns the underlying
stock sold by the Fund exposes the Fund during the term of the option to
possible loss of opportunity to realize appreciation in the market price of the
underlying stock or to possible continued holding of a stock which might
otherwise have been sold to protect against depreciation in the market price of
the stock. A covered put option sold by a Fund exposes the Fund during the term
of the option to a decline in price of the underlying stock.
To close out a position when writing covered options, a Fund may make a "closing
purchase transaction" which involves purchasing an option on the same stock with
the same exercise price and expiration date as the option which it has
previously written on the stock. The Fund will realize a profit or loss for a
closing purchase transaction if the amount paid to purchase an option is less or
more, as the case may be, than the amount received from the sale thereof. To
close out a position as a purchaser of an option, the Fund may make a "closing
sale transaction" which involves liquidating the Fund's position by selling the
option previously purchased.
OPTIONS ON SECURITIES INDEXES. Such options give the holder the right to receive
a cash settlement during the term of the option based upon the difference
between the exercise price and the value of the index. Such options will be used
for the purposes described above under "Options on Securities" or, to the extent
allowed by law, as a substitute for investment in individual securities.
Options on securities indexes entail risks in addition to the risks of options
on securities. The absence of a liquid secondary market to close out options
positions on securities indexes is more likely to occur, although the Fund
generally will only purchase or write such an option if the Fund Sub-Advisor
believes the option can be closed out.
Use of options on securities indexes also entails the risk that trading in such
options may be interrupted if trading in certain securities included in the
index is interrupted. The Fund will not purchase such options unless the Advisor
and the respective Fund Sub-Advisor each believe the market is sufficiently
developed such that the risk of trading in such options is no greater than the
risk of trading in options on securities.
Price movements in a Fund's portfolio may not correlate precisely with movements
in the level of an index and, therefore, the use of options on indexes cannot
serve as a complete hedge. Because options on securities indexes require
settlement in cash, the Fund Sub-Advisor may be forced to liquidate portfolio
securities to meet settlement obligations.
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When a Fund writes a put or call option on a securities index it will cover the
position by placing liquid securities in a segregated asset account with the
Fund's custodian.
Options on securities indexes are generally similar to options on stock except
that the delivery requirements are different. Instead of giving the right to
take or make delivery of stock at a specified price, an option on a security
index gives the holders the right to receive a cash "exercise settlement amount"
equal to (a) the amount, if any, by which the fixed exercise price of the option
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying index on the date of the exercise, multiplied by
(b) a fixed "index multiplier." Receipt of this cash amount will depend upon the
closing level of the index upon which the option is based being greater than, in
the case of a call, or less than, in the case of a put, the exercise price of
the option. The amount of cash received will be equal to such difference between
the closing price of the index and the exercise price of the option expressed in
dollars or a foreign currency, as the case may be, times a specified multiple.
The writer of the option is obligated, in return for the premium received, to
make delivery of this amount. The writer may offset its position in securities
index options prior to expiration by entering into a closing transaction on an
exchange or the option may expire unexercised.
Because the value of an index option depends upon movements in the level of the
index rather than the price of a particular security, whether the Fund will
realize a gain or loss from the purchase or writing of options on an index
depends upon movements in the level of securities prices in the market generally
or, in the case of certain indexes, in an industry or market segment, rather
than movements in price of a particular security. Accordingly, successful use by
a Fund of options on security indexes will be subject to the Fund Sub-Advisor's
ability to predict correctly movement in the direction of that securities market
generally or of a particular industry. This requires different skills and
techniques than predicting changes in the price of individual securities.
RELATED INVESTMENT POLICIES. A Fund may purchase and write put and call
options on securities indexes listed on domestic and, in the case of those Funds
which may invest in foreign securities, on foreign exchanges. A securities index
fluctuates with changes in the market values of the securities included in the
index.
To the extent permitted by U.S. federal or state securities laws, the
International Equity Fund may invest in options on foreign stock indexes in lieu
of direct investment in foreign securities. The Fund may also use foreign stock
index options for hedging purposes.
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OPTIONS ON FOREIGN CURRENCIES. Options on foreign currencies are used for
hedging purposes in a manner similar to that in which futures contracts on
foreign currencies, or forward contracts, are utilized. For example, a decline
in the dollar value of a foreign currency in which portfolio securities are
denominated will reduce the dollar value of such securities, even if their value
in the foreign currency remains constant. In order to protect against such
diminutions in the value of portfolio securities, the Fund may purchase put
options on the foreign currency. If the value of the currency does decline, a
Fund will have the right to sell such currency for a fixed amount in dollars and
will thereby offset, in whole or in part, the adverse effect on its portfolio
which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which securities
to be acquired are denominated is projected, thereby increasing the cost of such
securities, the Fund may purchase call options thereon. The purchase of such
options could offset, at least partially, the effects of the adverse movements
in exchange rates. As in the case of other types of options, however, the
benefit to the Fund derived from purchases of foreign currency options will be
reduced by the amount of the premium and related transaction costs. In addition,
where currency exchange rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options which would require it to forego a portion or all of the benefits of
advantageous changes in such rates.
Options on foreign currencies may be written for the same types of hedging
purposes. For example, where a Fund anticipates a decline in the dollar value of
foreign currency denominated securities due to adverse fluctuations in exchange
rates, it could, instead of purchasing a put option, write a call option on the
relevant currency. If the expected decline occurs, the options will most likely
not be exercised, and the diminution in value of portfolio securities will be
offset by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against an anticipated
increase in the dollar cost of securities to be acquired, the Fund could write a
put option on the relevant currency which, if rates move in the manner
projected, will expire unexercised and allow the Fund to hedge such increased
cost up to the amount of the premium. As in the case of other types of options,
however, the writing of a foreign currency option will constitute only a partial
hedge up to the amount of the premium, and only if rates move in the expected
direction. If this does not occur, the option may be exercised and the Fund
would be required to purchase or sell the underlying currency at a loss which
may not be offset by the amount of the premium. Through the writing of Options
on foreign currencies, the Fund also may be required to forego all or a portion
of the benefits which might otherwise have been obtained from favorable
movements in exchange rates.
Certain Funds intend to write covered call options on foreign currencies. A call
option written on a foreign currency by a Fund is "covered" if the Fund owns the
underlying foreign currency covered by the call or has an absolute and immediate
right to acquire that foreign currency without additional cash consideration (or
for additional cash consideration held in a segregated account by its custodian)
upon conversion or exchange
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of other foreign currency held in its portfolio. A call option is also covered
if the Fund has a call on the same foreign currency and in the same principal
amount as the call written where the exercise price of the call held (a) is
equal to or less than the Exercise price of the call written or (b) is greater
than the exercise price of the call written if the difference is maintained by
the Fund in cash and liquid securities in a segregated account with its
custodian.
Certain Funds also intend to write call options on foreign currencies that are
not covered for cross-hedging purposes. A call option on a foreign currency is
for cross-hedging purposes if it is not covered, but is designed to provide a
hedge against a decline in the U.S. dollar value of a security which the Fund
owns or has the right to acquire and which is denominated in the currency
underlying the option due to an adverse change in the exchange rate. In such
circumstances, the Fund collateralizes the option by maintaining in a segregated
account with its custodian, cash or liquid securities in an amount not less than
the value of the underlying foreign currency in U.S. dollars marked to market
daily.
RELATED INVESTMENT POLICIES. Each Fund that may invest in foreign securities may
write covered put and call options and purchase put and call options on foreign
currencies for the purpose of protecting against declines in the dollar value of
portfolio securities and against increases in the dollar cost of securities to
be acquired. The Fund may use options on currency to cross-hedge, which involves
writing or purchasing options on one currency to hedge against changes in
exchange rates for a different, but related currency. As with other types of
options, however, the writing of an option on foreign currency will constitute
only a partial hedge up to the amount of the premium received, and the Fund
could be required to purchase or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may be used to hedge against fluctuations in exchange rates although,
in the event of exchange rate movements adverse to the Fund's position, it may
not forfeit the entire amount of the premium plus related transaction costs. In
addition, the Fund may purchase call options on currency when the Fund
Sub-Advisor anticipates that the currency will appreciate in value.
There is no assurance that a liquid secondary market on an options exchange will
exist for any particular option, or at any particular time. If the Fund is
unable to effect a closing purchase transaction with respect to covered options
it has written, the Fund will not be able to sell the underlying currency or
dispose of assets held in a segregated account until the options expire.
Similarly, if the Fund is unable to effect a closing sale transaction with
respect to options it has purchased, it would have to exercise the options in
order to realize any profit and will incur transaction costs upon the purchase
or sale of underlying currency. The Fund pays brokerage commissions or spreads
in connection with its options transactions.
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As in the case of forward contracts, certain options on foreign currencies are
traded over-the-counter and involve liquidity and credit risks which may not be
present in the case of exchange-traded currency options. The Fund's ability to
terminate over-the-counter options ("OTC Options") will be more limited than the
exchange-traded options. It is also possible that broker-dealers participating
in OTC Options transactions will not fulfill their obligations. Until such time
as the staff of the SEC changes its position, the Fund will treat purchased OTC
Options and assets used to cover written OTC Options as illiquid securities.
With respect to options written with primary dealers in U.S. Government
securities pursuant to an agreement requiring a closing purchase transaction at
a formula price, the amount of illiquid securities may be calculated with
reference to the repurchase formula.
FORWARD CURRENCY CONTRACTS. Because, when investing in foreign securities, a
Fund buys and sells securities denominated in currencies other than the U.S.
dollar and receives interest, dividends and sale proceeds in currencies other
than the U.S. dollar, such Funds from time to time may enter into forward
currency transactions to convert to and from different foreign currencies and to
convert foreign currencies to and from the U.S. dollar. A Fund either enters
into these transactions on a spot (i.e., cash) basis at the spot rate prevailing
in the foreign currency exchange market or uses forward currency contracts to
purchase or sell foreign currencies.
A forward currency contract is an obligation by a Fund to purchase or sell a
specific currency at a future date, which may be any fixed number of days from
the date of the contract. Forward currency contracts establish an exchange rate
at a future date. These contracts are transferable in the interbank market
conducted directly between currency traders (usually large commercial banks) and
their customers. A forward currency contract generally has no deposit
requirement and is traded at a net price without commission. Each Fund maintains
with its custodian a segregated account of liquid securities in an amount at
least equal to its obligations under each forward currency contract. Neither
spot transactions nor forward currency contracts eliminate fluctuations in the
prices of the Fund's securities or in foreign exchange rates, or prevent loss if
the prices of these securities should decline.
A Fund may enter into foreign currency hedging transactions in an attempt to
protect against changes in foreign currency exchange rates between the trade and
settlement dates of specific securities transactions or changes in foreign
currency exchange rates that would adversely affect a portfolio position or an
anticipated investment position. Since consideration of the prospect for
currency parities will be incorporated into a Fund Sub-Advisor's long-term
investment decisions, a Fund will not routinely enter into foreign currency
hedging transactions with respect to security transactions; however, the Fund
Sub-Advisors believe that it is important to have the flexibility to enter into
foreign currency hedging transactions when they determine that the transactions
would be in a Fund's best interest. Although these transactions tend to minimize
the risk of loss due to a decline in the value of the hedged currency, at the
same time they tend to limit any potential gain that might be realized should
the value of the hedged currency increase. The precise matching of the forward
currency contract amounts and the value of the
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securities involved will not generally be possible because the future value of
such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward currency
contract is entered into and the date it matures. The projection of currency
market movements is extremely difficult, and the successful execution of a
hedging strategy is highly uncertain.
While these contracts are not presently regulated by the CFTC, the CFTC may in
the future assert authority to regulate forward currency contracts. In such
event the Fund's ability to utilize forward currency contracts may be
restricted. Forward currency contracts may reduce the potential gain from a
positive change in the relationship between the U.S. dollar and foreign
currencies. Unanticipated changes in currency prices may result in poorer
overall performance for the Fund than if it had not entered into such
contracts. The use of forward currency contracts may not eliminate
fluctuations in the underlying U.S. dollar equivalent value of the prices of or
rates of return on a Fund's foreign currency denominated portfolio securities
and the use of such techniques will subject a Fund to certain risks.
The matching of the increase in value of a forward currency 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. In
addition, a Fund may not always be able to enter into forward currency contracts
at attractive prices and this will limit the Fund's ability to use such contract
to hedge or cross-hedge its assets. Also, with regard to a Fund's use of
cross-hedges, there can be no assurance that historical correlations between the
movement of certain foreign currencies relative to the U.S. dollar will
continue. Thus, at any time poor correlation may exist between movements in the
exchange rates of the foreign currencies underlying a Fund's cross-hedges and
the movements in the exchange rates of the foreign currencies in which the
Fund's assets that are the subject of such cross-hedges are denominated.
CERTIFICATES OF DEPOSIT AND BANKERS' ACCEPTANCES. Certificates of deposit are
receipts issued by a depository institution in exchange for the deposit of
funds. The issuer agrees to pay the amount deposited plus interest to the bearer
of the receipt on the date specified on the certificate. The certificate usually
can be traded in the secondary market prior to maturity. Bankers' acceptances
typically arise from short-term credit arrangements designed to enable
businesses to obtain funds to finance commercial transactions. Generally, an
acceptance is a time draft drawn on a bank by an exporter or an importer to
obtain a stated amount of funds to pay for specific merchandise. The draft is
then "accepted" by a bank that, in effect, unconditionally guarantees to pay the
face value of the instrument on its maturity date. The acceptance may then be
held by the accepting bank as an earning asset or it may be sold in the
secondary market at the going rate of discount for a specific maturity. Although
maturities for acceptances can be as long as 270 days, most acceptances have
maturities of six months or less.
LENDING OF FUND SECURITIES. By lending its securities, a Fund can increase its
income by continuing to receive interest on the loaned securities as well as by
either investing the cash collateral in short-term securities or obtaining yield
in the form of interest paid by
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the borrower when U.S. Government obligations are used as collateral. There may
be risks of delay in receiving additional collateral or risks of delay in
recovery of the securities or even loss of rights in the collateral should the
borrower of the securities fail financially. Each Fund will adhere to the
following conditions whenever its securities are loaned: (i) the Fund must
receive at least 100 percent cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the market
value of the securities including accrued interest rises above the level of the
collateral; (iii) the Fund must be able to terminate the loan at any time; (iv)
the Fund must receive reasonable interest on the loan, as well as any dividends,
interest or other distributions on the loaned securities, and any increase in
market value; (v) the Fund may pay only reasonable custodian fees in connection
with the loan; and (vi) voting rights on the loaned securities may pass to the
borrower; provided, however, that if a material event adversely affecting the
investment occurs, the Board of Trustees must terminate the loan and regain the
right to vote the securities.
DERIVATIVES
A Fund may invest in various instruments that are commonly known as derivatives.
Generally, a derivative is a financial arrangement, the value of which is based
on, or "derived" from, a traditional security, asset, or market index. Some
"derivatives" such as certain mortgage-related and other asset-backed securities
are in many respects like any other investment, although they may be more
volatile or less liquid than more traditional debt securities. There are, in
fact, many different types of derivatives and many different ways to use them.
There is a range of risks associated with those uses. Futures and options are
commonly used for traditional hedging purposes to attempt to protect a Fund from
exposure to changing interest rates, securities prices, or currency exchange
rates and as a low cost method of gaining exposure to a particular securities
market without investing directly in those securities. However, some derivatives
are used for leverage, which tends to magnify the effects of an instrument's
price changes as market conditions change. Leverage involves the use of a small
amount of money to control a large amount of financial assets, and can in some
circumstances, lead to significant losses. A Fund Sub-Advisor will use
derivatives only in circumstances where the Fund Sub-Advisor believes they offer
the most economic means of improving the risk/reward profile of the Fund.
Derivatives will not be used to increase portfolio risk above the level that
could be achieved using only traditional investment securities or to acquire
exposure to changes in the value of assets or indexes that by themselves would
not be purchased for the Fund. The use of derivatives for non-hedging purposes
may be considered speculative. A description of the derivatives that the Funds
may use and some of their associated risks is found below.
ADRs, EDRs AND CDRs. ADRs are U.S. dollar-denominated receipts typically issued
by domestic banks or trust companies that represent the deposit with those
entities of securities of a foreign issuer. ADRs are publicly traded on
exchanges or over-the-counter in the United States. European Depositary Receipts
("EDRs"), which are sometimes referred to as Continental Depositary Receipts
("CDRs"), may also be purchased by the Funds. EDRs and CDRs are generally issued
by foreign banks and evidence ownership of
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either foreign or domestic securities. Certain institutions issuing ADRs or EDRs
may not be sponsored by the issuer of the underlying foreign securities. A
non-sponsored depository may not provide the same shareholder information that a
sponsored depository is required to provide under its contractual arrangements
with the issuer of the underlying foreign securities.
U.S. GOVERNMENT SECURITIES. U.S. Government securities are obligations issued or
guaranteed by the U.S. Government, its agencies, authorities or
instrumentalities. Some U.S. Government securities, such as U.S. Treasury bills,
Treasury notes and Treasury bonds, which differ only in their interest rates,
maturities and times of issuance, are supported by the full faith and credit of
the United States. Others are supported by: (i) the right of the issuer to
borrow from the U.S. Treasury, such as securities of the Federal Home Loan
Banks; (ii) the discretionary authority of the U.S. Government to purchase the
agency's obligations, such as securities of the FNMA; or (iii) only the credit
of the issuer, such as securities of the Student Loan Marketing Association. No
assurance can be given that the U.S. Government will provide financial support
in the future to U.S. Government agencies, authorities or instrumentalities that
are not supported by the full faith and credit of the United States.
Securities guaranteed as to principal and interest by the U.S. Government, its
agencies, authorities or instrumentalities include: (i) securities for which the
payment of principal and interest is backed by an irrevocable letter of credit
issued by the U.S. Government or any of its agencies, authorities or
instrumentalities; and (ii) participation interests in loans made to foreign
governments or other entities that are so guaranteed. The secondary market for
certain of these participation interests is limited and, therefore, may be
regarded as illiquid.
MORTGAGE-RELATED SECURITIES. There are several risks associated with
mortgage-related securities generally. One is that the monthly cash inflow from
the underlying loans may not be sufficient to meet the monthly payment
requirements of the mortgage-related security.
Prepayment of principal by mortgagors or mortgage foreclosures will shorten the
term of the underlying mortgage pool for a mortgage-related security. Early
returns of principal will affect the average life of the mortgage-related
securities remaining in a Fund. The occurrence of mortgage prepayments is
affected by factors including the level of interest rates, general economic
conditions, the location and age of the mortgage and other social and
demographic conditions. In periods of rising interest rates, the rate of
prepayment tends to decrease, thereby lengthening the average life of a pool of
mortgage-related securities. Conversely, in periods of falling interest rates
the rate of prepayment tends to increase, thereby shortening the average life of
a pool. Reinvestment of prepayments may occur at higher or lower interest rates
than the original investment, thus affecting the yield of a Fund. Because
prepayments of principal generally occur when interest rates are declining, it
is likely that a Fund will have to reinvest the proceeds of prepayments at lower
interest rates than those at which the assets were previously invested. If this
occurs, a Fund's yield will correspondingly decline. Thus, mortgage-
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related securities may have less potential for capital appreciation in periods
of falling interest rates than other fixed-income securities of comparable
maturity, although these securities may have a comparable risk of decline in
market value in periods of rising interest rates. To the extent that a Fund
purchases mortgage-related securities at a premium, unscheduled prepayments,
which are made at par, will result in a loss equal to any unamortized premium.
CMOs are obligations fully collateralized by a portfolio of mortgages or
mortgage-related securities. Payments of principal and interest on the mortgages
are passed through to the holders of the CMOs on the same schedule as they are
received, although certain classes of CMOs have priority over others with
respect to the receipt of prepayments on the mortgages. Therefore, depending on
the type of CMOs in which a Fund invests, the investment may be subject to a
greater or lesser risk of prepayment than other types of mortgage-related
securities.
Mortgage-related securities may not be readily marketable. To the extent any of
these securities are not readily marketable in the judgment of the Fund
Sub-Advisor, the investment restriction limiting a Fund's investment in illiquid
instruments to not more than 15% of the value of its net assets will apply.
STRIPPED MORTGAGE-RELATED SECURITIES. These securities are either issued and
guaranteed, or privately-issued but collateralized by securities issued, by
GNMA, FNMA or FHLMC. These securities represent beneficial ownership interests
in either periodic principal distributions ("principal-only") or interest
distributions ("interest-only") on mortgage-related certificates issued by GNMA,
FNMA or FHLMC, as the case may be. The certificates underlying the stripped
mortgage-related securities represent all or part of the beneficial interest in
pools of mortgage loans. A Fund will invest in stripped mortgage-related
securities in order to enhance yield or to benefit from anticipated appreciation
in value of the securities at times when its Fund Sub-Advisor believes that
interest rates will remain stable or increase. In periods of rising interest
rates, the expected increase in the value of stripped mortgage-related
securities may offset all or a portion of any decline in value of the securities
held by the Fund.
Investing in stripped mortgage-related securities involves the risks normally
associated with investing in mortgage-related securities. See "Mortgage-Related
Securities" above. In addition, the yields on stripped mortgage- related
securities are extremely sensitive to the prepayment experience on the mortgage
loans underlying the certificates collateralizing the securities. If a decline
in the level of prevailing interest rates results in a rate of principal
prepayments higher than anticipated, distributions of principal will be
accelerated, thereby reducing the yield to maturity on interest-only stripped
mortgage-related securities and increasing the yield to maturity on
principal-only stripped mortgage-related securities. Sufficiently high
prepayment rates could result in a Fund not fully recovering its initial
investment in an interest-only stripped mortgage-related security. Under current
market conditions, the Fund expects that investments in stripped
mortgage-related securities will consist primarily of interest-only securities.
Stripped mortgage-related securities are currently traded in an over-the-counter
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market maintained by several large investment banking firms. There can be no
assurance that the Fund will be able to effect a trade of a stripped
mortgage-related security at a time when it wishes to do so. The Fund will
acquire stripped mortgage-related securities only if a secondary market for the
securities exists at the time of acquisition. Except for stripped
mortgage-related securities based on fixed rate FNMA and FHLMC mortgage
certificates that meet certain liquidity criteria established by the Board of
Trustees, a Fund will treat government stripped mortgage-related securities and
privately-issued mortgage-related securities as illiquid and will limit its
investments in these securities, together with other illiquid investments, to
not more than 15% of net assets.
ZERO COUPON SECURITIES. Zero coupon U.S. Government securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the security at
the time of issuance. Zero coupon securities do not require the periodic payment
of interest. These investments benefit the issuer by mitigating its need for
cash to meet debt service, but also require a higher rate of return to attract
investors who are willing to defer receipt of cash. These investments may
experience greater volatility in market value than U.S. Government securities
that make regular payments of interest. A Fund accrues income on these
investments for tax and accounting purposes, which is distributable to
shareholders and which, because no cash is received at the time of accrual, may
require the liquidation of other portfolio securities to satisfy the Fund's
distribution obligations, in which case the Fund will forego the purchase of
additional income producing assets with these funds. Zero coupon securities
include STRIPS, that is, securities underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or both
on certain notes or bonds issued by the U.S. Government, its agencies,
authorities or instrumentalities. They also include Coupons Under Book Entry
System ("CUBES"), which are component parts of U.S. Treasury bonds and represent
scheduled interest and principal payments on the bonds.
LOANS AND OTHER DIRECT DEBT INSTRUMENTS. These are instruments in amounts owed
by a corporate, governmental or other borrower to another party. They may
represent amounts owed to lenders or lending syndicates (loans and loan
participations), to suppliers of goods or services (trade claims or other
receivables) or to other parties. Direct debt instruments purchased by a Fund
may have a maturity of any number of days or years, may be secured or unsecured,
and may be of any credit quality. Direct debt instruments involve the risk of
loss in the case of default or insolvency of the borrower. Direct debt
instruments may offer less legal protection to a Fund in the event of fraud or
misrepresentation. In addition, loan participations involve a risk of insolvency
of the lending bank or other financial intermediary. Direct debt instruments
also may include standby financing commitments that obligate a Fund to supply
additional cash to the borrower on demand at a time when a Fund would not have
otherwise done so, even if the borrower's condition makes it unlikely that the
amount will ever be repaid.
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These instruments will be considered illiquid securities and so will be limited,
along with a Fund's other illiquid securities, to not more than 15% of the
Fund's net assets.
SWAP AGREEMENTS. To help enhance the value of its portfolio or manage its
exposure to different types of investments, the Funds may enter into interest
rate, currency and mortgage swap agreements and may purchase and sell interest
rate "caps," "floors" and "collars."
In a typical interest rate swap agreement, one party agrees to make regular
payments equal to a floating interest rate on a specified amount (the "notional
principal amount") in return for payments equal to a fixed interest rate on the
same amount for a specified period. If a swap agreement provides for payment in
different currencies, the parties may also agree to exchange the notional
principal amount. Mortgage swap agreements are similar to interest rate swap
agreements, except that notional principal amount is tied to a reference pool of
mortgages.
In a cap or floor, one party agrees, usually in return for a fee, to make
payments under particular circumstances. For example, the purchaser of an
interest rate cap has the right to receive payments to the extent a specified
interest rate exceeds an agreed level; the purchaser of an interest rate floor
has the right to receive payments to the extent a specified interest rate falls
below an agreed level. A collar entitles the purchaser to receive payments to
the extent a specified interest rate falls outside an agreed range.
Swap agreements may involve leverage and may be highly volatile; depending on
how they are used, they may have a considerable impact on a Fund's performance.
Swap agreements involve risks depending upon the other party's creditworthiness
and ability to perform, as judged by the Fund Sub-Advisor, as well as the Fund's
ability to terminate its swap agreements or reduce its exposure through
offsetting transactions.
All swap agreements are considered as illiquid securities and, therefore, will
be limited, along with all of a Fund's other illiquid securities, to 15% of that
Fund's net assets.
CUSTODIAL RECEIPTS. Custodial receipts or certificates, such as Certificates of
Accrual on Treasury Securities ("CATS"), Treasury Investors Growth Receipts
("TIGRs") and Financial Corporation certificates ("FICO Strips"), are securities
underwritten by securities dealers or banks that evidence ownership of future
interest payments, principal payments or both on certain notes or bonds issued
by the U.S. Government, its agencies, authorities or instrumentalities. The
underwriters of these certificates or receipts purchase a U.S. Government
security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government securities, described above. Although typically under the terms
of a custodial receipt a Fund is authorized to assert its rights directly
against the issuer of the underlying obligation, the
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Fund may be required to assert through the custodian bank such rights as may
exist against the underlying issuer. Thus, if the underlying issuer fails to pay
principal and/or interest when due, a Fund may be subject to delays, expenses
and risks that are greater than those that would have been involved if the Fund
had purchased a direct obligation of the issuer. In addition, if the trust or
custodial account in which the underlying security has been deposited is
determined to be an association taxable as a corporation, instead of a
non-taxable entity, the yield on the underlying security would be reduced in
respect of any taxes paid.
WHEN-ISSUED AND DELAYED-DELIVERY SECURITIES. To secure prices deemed
advantageous at a particular time, a Fund may purchase securities on a
when-issued or delayed-delivery basis, in which case delivery of the securities
occurs beyond the normal settlement period; payment for or delivery of the
securities would be made prior to the reciprocal delivery or payment by the
other party to the transaction. A Fund will enter into when-issued or
delayed-delivery transactions for the purpose of acquiring securities and not
for the purpose of leverage. When-issued securities purchased by a Fund may
include securities purchased on a "when, as and if issued" basis under which the
issuance of the securities depends on the occurrence of a subsequent event, such
as approval of a merger, corporate reorganization or debt restructuring.
Securities purchased on a when-issued or delayed-delivery basis may expose a
Fund to risk because the securities may experience fluctuations in value prior
to their actual delivery. The Fund does not accrue income with respect to a
when-issued or delayed-delivery security prior to its stated delivery date.
Purchasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
REPURCHASE AGREEMENTS. Under the terms of a typical repurchase agreement, a Fund
would acquire an underlying debt obligation for a relatively short period
(usually not more than one week) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. A Fund may enter into repurchase
agreements with respect to U.S. Government securities with member banks of the
Federal Reserve System and certain non-bank dealers approved by the Board of
Trustees. Under each repurchase agreement, the selling institution is required
to maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. The Fund Sub-Advisor, acting under the
supervision of the Advisor and the Board of Trustees, reviews on an ongoing
basis the value of the collateral and the creditworthiness of those non-bank
dealers with whom the Fund enters into repurchase agreements. In entering into a
repurchase agreement, a Fund bears a risk of loss in the event that the other
party to the transaction defaults on its obligations and the Fund is delayed or
prevented from exercising its rights to dispose of the underlying securities,
including the risk of a possible decline in the value of the underlying
securities during the period in which the Fund seeks to assert its rights to
them, the risk of incurring
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expenses associated with asserting those rights and the risk of losing all or a
part of the income from the agreement. Repurchase agreements are considered to
be collateralized loans under the Investment Company Act of 1940, as amended
(the "1940 Act").
REVERSE REPURCHASE AGREEMENTS AND FORWARD ROLL TRANSACTIONS. In a reverse
repurchase agreement the Fund agrees to sell portfolio securities to financial
institutions such as banks and broker-dealers and to repurchase them at a
mutually agreed date and price. Forward roll transactions are equivalent to
reverse repurchase agreements but involve mortgage-backed securities and involve
a repurchase of a substantially similar security. At the time the Fund enters
into a reverse repurchase agreement or forward roll transaction it will place in
a segregated custodial account cash or liquid securities having a value equal to
the repurchase price, including accrued interest. Reverse repurchase agreements
and forward roll transactions involve the risk that the market value of the
securities sold by the Fund may decline below the repurchase price of the
securities. Reverse repurchase agreements and forward roll transactions are
considered to be borrowings by a Fund for purposes of the limitations described
in "Investment Restrictions" below.
TEMPORARY INVESTMENTS. For temporary defensive purposes during periods when the
Fund Sub-Advisor of a Fund believes, in consultation with the Advisor, that
pursuing the Fund's basic investment strategy may be inconsistent with the best
interests of its shareholders, a Fund may invest its assets without limit in the
following money market instruments: securities issued or guaranteed by the U.S.
Government or its agencies or instrumentalities (including those purchased in
the form of custodial receipts), repurchase agreements, certificates of deposit,
master notes, time deposits and bankers' acceptances issued by banks or savings
and loan associations having assets of at least $500 million as of the end of
their most recent fiscal year and high quality commercial paper.
In addition, for the same purposes the Fund Sub-Advisor of the International
Equity Fund may invest without limit in obligations issued or guaranteed by
foreign governments or by any of their political subdivisions, authorities,
agencies or instrumentalities that are rated in the top two rting categories by
a national rating organization, or, if unrated, are determined by the Fund
Sub-Advisor to be of equivalent quality.
A Fund also may hold a portion of its assets in money market instruments or cash
in amounts designed to pay expenses, to meet anticipated redemptions or pending
investments in accordance with its objectives and policies. Any temporary
investments may be purchased on a when-issued basis.
CONVERTIBLE SECURITIES. Convertible securities may offer higher income than the
common stocks into which they are convertible and include fixed-income or zero
coupon debt securities, which may be converted or exchanged at a stated or
determinable exchange ratio into underlying shares of common stock. Prior to
their conversion, convertible securities may have characteristics similar to
both non-convertible debt securities and equity securities.
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While convertible securities generally offer lower yields than non-convertible
debt securities of similar quality, their prices may reflect changes in the
value of the underlying common stock. Convertible securities entail less credit
risk than the issuer's common stock.
ASSET COVERAGE. To assure that a Fund's use of futures and related options, as
well as when-issued and delayed-delivery transactions, forward currency
contracts and swap transactions, are not used to achieve investment leverage,
the Fund will cover such transactions, as required under applicable SEC
interpretations, either by owning the underlying securities or by establishing a
segregated account with the Trust's custodian containing liquid securities in an
amount at all times equal to or exceeding the Fund's commitment with respect to
these instruments or contracts.
RATING SERVICES
The ratings of nationally recognized statistical rating organizations represent
their opinions as to the quality of the securities that they undertake to rate.
It should be emphasized, however, that ratings are relative and subjective and
are not absolute standards of quality. Although these ratings are an initial
criterion for selection of portfolio investments, each Fund Sub-Advisor also
makes its own evaluation of these securities, subject to review by the Board of
Trustees of the Trust. After purchase by a Fund, an obligation may cease to be
rated or its rating may be reduced below the minimum required for purchase by
the Fund. Neither event would require a Fund to eliminate the obligation from
its portfolio, but a Fund Sub-Advisor will consider such an event in its
determination of whether a Fund should continue to hold the obligation. A
description of the ratings used herein and in the Funds' Prospectus is set forth
in the Appendix to this Statement of Additional Information.
INVESTMENT RESTRICTIONS
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The following investment restrictions are "fundamental policies" of each Fund
and may not be changed with respect to a Fund without the approval of a
"majority of the outstanding voting securities" of the Fund. "Majority of the
outstanding voting securities" under the 1940 Act and as used in this Statement
of Additional Information and the Prospectus, means, the lesser of (i) 67%
or more of the outstanding voting securities of a Fund present at a meeting if
the holders of more than 50% of the outstanding voting securities of the Fund
are present or represented by proxy or (ii) more than 50% of the outstanding
voting securities of the Fund.
As a matter of fundamental policy, no Fund may (except that no investment
restriction of a Fund shall prevent a Fund from investing all of its assets in
an open-end investment company with substantially the same investment
objectives):
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(1) borrow money or mortgage or hypothecate assets of the Fund , except
that in an amount not to exceed 1/3 of the current value of the Fund's
net assets, it may borrow money (including through reverse repurchase
agreements, forward roll transactions involving mortgage-backed
securities or other investment techniques entered into for the purpose
of leverage), and except that it may pledge, mortgage or hypothecate
not more than 1/3 of such assets to secure such borrowings, provided
that collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, are not
considered a pledge of assets for purposes of this restriction and
except that assets may be pledged to secure letters of credit solely
for the purpose of participating in a captive insurance company
sponsored by the Investment Company Institute; for additional related
restrictions, see clause (i) under the caption "Additional
Restrictions" below;
(2) underwrite securities issued by other persons except insofar as the
Funds may technically be deemed an underwriter under the 1933 Act in
selling a portfolio security;
(3) make loans to other persons except: (a) through the lending of the
Fund's portfolio securities and provided that any such loans not
exceed 30% of the Fund's total assets (taken at market value); (b)
through the use of repurchase agreements or the purchase of short-term
obligations; or (c) by purchasing a portion of an issue of debt
securities of types distributed publicly or privately;
(4) purchase or sell real estate (including limited partnership interests
but excluding securities secured by real estate or interests therein),
interests in oil, gas or mineral leases, commodities or commodity
contracts (except futures and option contracts) in the ordinary course
of business (except that the Fund may hold and sell, for the Fund's
portfolio, real estate acquired as a result of the Fund's ownership of
securities);
(5) concentrate its investments in any particular industry (excluding U.S.
Government securities), but if it is deemed appropriate for the
achievement of a Fund's investment objective(s), up to 25% of its
total assets may be invested in any one industry;
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(6) issue any senior security (as that term is defined in the 1940 Act) if
such issuance is specifically prohibited by the 1940 Act or the rules
and regulations promulgated thereunder, provided that collateral
arrangements with respect to options and futures, including deposits
of initial deposit and variation margin, are not considered to be the
issuance of a senior security for purposes of this restriction; and
(7) with respect to 75% of its total assets taken at market value, invest
in assets other than cash and cash items (including receivables), U.S.
Government securities, securities of other investment companies and
other securities for purposes of this calculation limited in respect
of any one issuer to an amount not greater in value than 5% of the
value of the total assets of the Fund and to not more than 10% of the
outstanding voting securities of such issuer.
ADDITIONAL RESTRICTIONS. Each Fund (or the Trust, on behalf of each Fund) will
not, as a matter of "operating policy" (changeable by the Board of Trustees
without a shareholder vote) (except that no operating policy shall prevent a
Fund from investing all of its assets in an open-end investment company with
substantially the same investment objectives):
(i) borrow money (including through reverse repurchase agreements or
forward roll transactions involving mortgage-backed securities or
similar investment techniques entered into for leveraging
purposes), except that the Fund may borrow for temporary or
emergency purposes up to 10% of its total assets; provided,
however, that no Fund may purchase any security while outstanding
borrowings exceed 5%;
(ii) pledge, mortgage or hypothecate for any purpose in excess of 10%
of the Fund's total assets (taken at market value), provided that
collateral arrangements with respect to options and futures,
including deposits of initial deposit and variation margin, and
reverse repurchase agreements are not considered a pledge of
assets for purposes of this restriction;
(iii)purchase any security or evidence of interest therein on margin,
except that such short-term credit as may be necessary for the
clearance of purchases and sales of securities may be obtained
and except that deposits of initial deposit and variation margin
may be made in connection with the purchase, ownership, holding
or sale of futures;
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(iv) sell any security which it does not own unless by virtue of its
ownership of other securities it has at the time of sale a right
to obtain securities, without payment of further consideration,
equivalent in kind and amount to the securities sold and provided
that if such right is conditional the sale is made upon the same
conditions;
(v) invest for the purpose of exercising control or management;
(vi) purchase securities issued by any investment company except by
purchase in the open market where no commission or profit to a
sponsor or dealer results from such purchase other than the
customary broker's commission, or except when such purchase,
though not made in the open market, is part of a plan of merger
or consolidation; provided, however, that securities of any
investment company will not be purchased for a Fund if such
purchase at the time thereof would cause: (a) more than 10% of
the Fund's total assets (taken at the greater of cost or market
value) to be invested in the securities of such issuers; (b) more
than 5% of the Fund's total assets (taken at the greater of cost
or market value) to be invested in any one investment company; or
(c) more than 3% of the outstanding voting securities of any such
issuer to be held for the Fund; provided further that, except in
the case of a merger or consolidation, the Fund shall not
purchase any securities of any open-end investment company unless
the Fund (1) waives the investment advisory fee, with respect to
assets invested in other open-end investment companies and (2)
incurs no sales charge in connection with the investment;
(vii)invest more than 15% of the Fund's net assets (taken at the
greater of cost or market value) in securities that are illiquid
or not readily marketable (defined as a security that cannot be
sold in the ordinary course of business within seven days at
approximately the value at which the Fund has valued the
security) not including (a) Rule 144A securities that have been
determined to be liquid by the Board of Trustees; and (b)
commercial paper that is sold under section 4(2) of the 1933 Act
which is not traded flat or in default as to interest or
principal and either (i) is rated in one of the two highest
categories by at least two nationally recognized statistical
rating organizations and the Fund's Board of Trustees has
determined the commercial paper to be liquid; or (ii) is rated in
one of the two highest categories by one nationally recognized
statistical rating agency and the Fund's Board of Trustees has
determined that the commercial paper is equivalent quality and is
liquid;
(viii)invest more than 10% of the Fund's total assets in securities
that are restricted from being sold to the public without
registration under the 1933 Act (other than Rule 144A Securities
deemed liquid by the Fund's Board of Trustees);
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(ix) purchase securities of any issuer if such purchase at the time
thereof would cause the Fund to hold more than 10% of any class
of securities of such issuer, for which purposes all indebtedness
of an issuer shall be deemed a single class and all preferred
stock of an issuer shall be deemed a single class, except that
futures or option contracts shall not be subject to this
restriction;
(x) make short sales of securities or maintain a short position,
unless at all times when a short position is open it owns an
equal amount of such securities or securities convertible into or
exchangeable, without payment of any further consideration, for
securities of the same issue and equal in amount to, the
securities sold short, and unless not more than 10% of the Fund's
net assets (taken at market value) is represented by such
securities, or securities convertible into or exchangeable for
such securities, at any one time (the Funds have no current
intention to engage in short selling);
(xi) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of the Fund's aggregate
investment in such classes of securities will exceed 5% of its
total assets;
(xii)write puts and calls on securities unless each of the following
conditions are met: (a) the security underlying the put or call
is within the investment policies of the Fund and the option is
issued by the OCC, except for put and call options issued by
non-U.S. entities or listed on non-U.S. securities or commodities
exchanges; (b) the aggregate value of the obligations underlying
the puts determined as of the date the options are sold shall not
exceed 50% of the Fund's net assets; (c) the securities subject
to the exercise of the call written by the Fund must
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be owned by the Fund at the time the call is sold and must
continue to be owned by the Fund until the call has been
exercised, has lapsed, or the Fund has purchased a closing call,
and such purchase has been confirmed, thereby extinguishing the
Fund's obligation to deliver securities pursuant to the call it
has sold; and (d) at the time a put is written, the Fund
establishes a segregated account with its custodian consisting of
cash or liquid securities equal in value to the amount the Fund
will be obligated to pay upon exercise of the put (this account
must be maintained until the put is exercised, has expired, or
the Fund has purchased a closing put, which is a put of the same
series as the one previously written); and
(xiii)buy and sell puts and calls on securities, stock index futures
or options on stock index futures, or financial futures or
options on financial futures unless such options are written by
other persons and: (a) the options or futures are offered through
the facilities of a national securities association or are listed
on a national securities or commodities exchange, except for put
and call options issued by non-U.S. entities or listed on
non-U.S. securities or commodities exchanges; (b) the aggregate
premiums paid on all such options which are held at any time do
not exceed 20% of the Fund's total net assets; and (c) the
aggregate margin deposits required on all such futures or options
thereon held at any time do not exceed 5% of the Fund's total
assets.
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<PAGE>
TRUSTEES AND OFFICERS
- ---------------------
The following is a list of the Trustees and executive officers of the
Trust, their compensation from the Trust and their aggregate compensation from
the Western-Southern complex of mutual funds for the fiscal year ended March 31,
1999. Messrs. Coleman, Cox, Schwab and Stautberg did not receive any
compensation from the Trust during the fiscal year since they did not begin
serving as Trustees until October 29, 1999. Each Trustee who is an "interested
person" of the Trust, as defined by the Investment Company Act of 1940, is
indicated by an asterisk. Each of the Trustees is also a Trustee of Countrywide
Tax-Free Trust and Countrywide Investment Trust.
AGGREGATE
COMPENSATION
FROM
COMPENSATION WESTERN-
POSITION FROM SOUTHERN
NAME AGE HELD TRUST COMPLEX(1)
- --------------------- --- ------- --------- ----------
William O. Coleman 70 Trustee $ 0 $_____
Phillip R. Cox 52 Trustee 0 _____
+H. Jerome Lerner 61 Trustee 4,000 0
*Robert H. Leshner 60 President/Trustee 0 0
*Jill T. McGruder 44 Trustee 0 0
+Oscar P. Robertson 60 Trustee 4,000 0
Nelson Schwab, Jr. 81 Trustee 0 _____
+Robert E. Stautberg 65 Trustee 0 _____
Joseph S. Stern, Jr. 81 Trustee 0 _____
Maryellen Peretzky 47 Vice President 0 0
Tina D. Hosking 31 Secretary 0 0
Theresa M. Samocki 30 Treasurer 0 0
(i) The Western-Southern complex of mutual funds consists of eight series of
the Trust, six series of Countrywide Tax-Free Trust and six series of
Countrywide Investment Trust.
* Ms. McGruder, as President and a director of Touchstone Advisors, Inc., the
Trust's investment advisor and Touchstone Securities, Inc., the Trust's
distributor, and Mr.Leshner, as an employee of Fort Washington Investment
Advisors, Inc., a Fund Sub-Advisor, are each an "interested person" of the
Trust within the meaning of Section 2(a)(19) of the Investment Company Act
of 1940.
+ Member of Audit Committee.
The principal occupations of the Trustees and executive officers of the Trust
during the past five years are set forth below:
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WILLIAM O. COLEMAN, 2 Noel Lane, Cincinnati, Ohio is a retired General
Sales Manager and Vice President of The Procter & Gamble Company and a trustee
of The Procter & Gamble Profit Sharing Plan and The Procter & Gamble Employee
Stock Ownership Plan. He is a director of LCA Vision (a laser vision correction
institute) and a trustee of Touchstone Variable Series Trust (a registered
investment company).
PHILLIP R. COX, 105 East Fourth Street, Cincinnati, Ohio is President and
Chief Executive Officer of Cox Financial Corp. (a financial services company).
He is a director of the Federal Reserve Bank of Cleveland, Cincinnati Bell Inc.,
PNC Bank N.A. and Cinergy Corporation. He is also a trustee of Touchstone
Variable Series Trust.
H. JEROME LERNER, 7149 Knoll Road, Cincinnati, Ohio is a principal of HJL
Enterprises and is Chairman of Crane Electronics, Inc. (a manufacturer of
electronic connectors). He is also a director of Slush Puppy Inc. (a
manufacturer of frozen beverages) and Peerless Manufacturing (a manufacturer of
bakery equipment).
ROBERT H. LESHNER, 312 Walnut Street, Cincinnati, Ohio is President and a
Trustee of Countrywide Investment Trust and Countrywide Tax-Free Trust,
registered investment companies. He is also President and a director of
Countrywide Investments, Inc. (an investment adviser and principal underwriter).
Until 1999, he was President and a director of Countrywide Financial Services,
Inc. (a financial services company and parent of Countrywide Investments, Inc.,
Countrywide Fund Services, Inc. and CW Fund Distributors, Inc.), Countrywide
Fund Services, Inc. (a registered transfer agent) and CW Fund Distributors, Inc.
(a registered broker-dealer).
JILL T. McGRUDER, 311 Pike Street, Cincinnati, Ohio is President, Chief
Executive Officer and a director of IFS Financial Services, Inc. (a holding
company), Touchstone Advisors, Inc. (the investment advisor to the Trust) and
Touchstone Securities, Inc. (the principal underwriter of the Trust). She is a
Senior Vice President of The Western-Southern Life Insurance Company and a
director of Capital Analysts Incorporated (a registered investment adviser and
broker-dealer), Countrywide Financial Services, Inc., Countrywide Investments,
Inc., CW Fund Distributors, Inc. and Countrywide Fund Services, Inc. She is also
President and a director of IFS Agency Services, Inc. and IFS Insurance Agency,
Inc. (insurance agencies). Until December 1996, she was National Marketing
Director of Metropolitan Life Insurance Co. From 1991 until 1996, she was Vice
President of Touchstone Advisors, Inc. and IFS Financial Services, Inc.
OSCAR P. ROBERTSON, 4293 Muhlhauser Road, Fairfield, Ohio is President of
Orchem Corp., a chemical specialties distributor, and Orpack Stone Corporation,
a corrugated box manufacturer.
NELSON SCHWAB, JR., 511 Walnut Street, Cincinnati, Ohio is Senior Counsel
of Graydon, Head & Ritchey (a law firm). He is a director of Rotex, Inc. (a
machine manufacturer), The Ralph J. Stolle Company and Security Rug Cleaning
Company. He is also a trustee of Touchstone Variable Series Trust.
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<PAGE>
ROBERT E. STAUTBERG, 4815 Drake Road, Cincinnati, Ohio is a retired partner
and director of KPMG Peat Marwick LLP. He is a trustee of Good Samaritan
Hospital, Bethesda Hospital and Tri Health. He is also a trustee of Touchstone
Variable Series Trust.
JOSEPH S. STERN, JR., 3 Grandin Place, Cincinnati, Ohio is a retired
Professor Emeritus of the University of Cincinnati College of Business. He is
also a Trustee of Touchstone Variable Series Trust.
TINA D. HOSKING, 312 Walnut Street, Cincinnati, Ohio is Vice President and
Associate General Counsel of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Secretary of Countrywide Tax-Free Trust and
Countrywide Investment Trust.
THERESA M. SAMOCKI, 312 Walnut Street, Cincinnati, Ohio is Vice
President-Fund Accounting of Countrywide Fund Services, Inc. and CW Fund
Distributors, Inc. She is also Treasurer of Countrywide Tax-Free Trust and
Countrywide Investment Trust.
Each Trustee, except for Mr. Leshner and Ms. McGruder, receives a quarterly
retainer of $1,500 and a fee of $1,500 for each Board meeting attended. Such
fees are split equally among the Trust, Countrywide Tax-Free Trust and
Countrywide Investment Trust.
THE INVESTMENT ADVISOR AND SUB-ADVISORS
- ---------------------------------------
THE INVESTMENT ADVISOR. Touchstone Advisors, Inc. (the "Advisor"), is the Funds'
investment manager. The Advisor is a wholly-owned subsidiary of IFS Financial
Services, Inc., which is a wholly-owned subsidiary of Western-Southern Life
Assurance Company. Western-Southern Life Assurance Company is a wholly-owned
subsidiary of The Western and Southern Life Insurance Company. Ms. McGruder may
be deemed to be an affiliate of the Advisor because of her position as President
and Director of the Advisor. Mr. Leshner may be deemed to be an affiliate
of the Advisor because of his employment with Fort Washington Investment
Advisors, Inc., a Sub-Advisor to the Trust. Ms. McGruder and Mr. Leshner, by
reason of such affiliations may directly or indirectly receive benefits from the
advisory fees paid to the Advisor.
Under the terms of the investment advisory agreement between the Trust and the
Advisor, the Advisor appoints and supervises each Fund's Sub-Advisor, reviews
and evaluates the performance of a Fund's Sub-Advisor and determines whether or
not the Fund's Sub-Advisor should be replaced. The Advisor furnishes at its own
expense all facilities and personnel necessary in connection with providing
these services. Each Fund pays the Advisor a fee computed and accrued daily and
paid monthly at an annual rate as shown below:
Emerging Growth Fund - 0.80%
International Equity Fund - 0.95%
Value Plus Fund - 0.75%
Enhanced 30 Fund - 0.65%
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<PAGE>
The Funds shall pay the expenses of their operation, including but not limited
to (i) charges and expenses for accounting, pricing and appraisal services and
related overhead, (ii) the charges and expenses of auditors; (iii) the charges
and expenses of any custodian, transfer agent, plan agent, dividend disbursing
agent and registrar appointed by the Trust with respect to the Funds; (iv)
brokers' commissions, and issue and transfer taxes chargeable to the Funds in
connection with securities transactions to which a Fund is a party; (v)
insurance premiums, interest charges, dues and fees for membership in trade
associations and all taxes and fees payable to federal, state or other
governmental agencies; (vi) fees and expenses involved in registering and
maintaining registrations of the Funds with the SEC, state or blue sky
securities agencies and foreign countries, including the preparation of
Prospectuses and Statements of Additional Information for filing with the SEC;
(vii) all expenses of meetings of Trustees and of shareholders of the Trust and
of preparing, printing and distributing prospectuses, notices, proxy statements
and all reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any. The compensation and expenses
of any officer, Trustee or employee of the Trust who are affiliated persons of
the Advisor are paid by the Advisor.
By its terms, the Funds' investment advisory agreement will remain in force
until May 1, 2002 and from year to year thereafter, subject to annual approval
by (a) the Board of Trustees or (b) a vote of the majority of a Fund's
outstanding voting securities; provided that in either event continuance is also
approved by a majority of the Trustees who are not interested persons of the
Trust, by a vote cast in person at a meeting called for the purpose of voting
such approval. The Funds' investment advisory agreement may be terminated at any
time, on sixty days' written notice, without the payment of any penalty, by the
Board of Trustees, by a vote of the majority of a Fund's outstanding voting
securities, or by the Advisor. The investment advisory agreement automatically
terminates in the event of its assignment, as defined by the 1940 Act and the
rules thereunder.
THE SUB-ADVISORS. The Advisor has retained one or more sub-advisors ("the
Sub-Advisor") to serve as the discretionary portfolio manager of each Fund. The
Sub-Advisor selects the portfolio securities for investment by a Fund, purchases
and sells securities of a Fund and places orders for the execution of such
portfolio transactions, subject to the general supervision of the Board of
Trustees and the Advisor. The Sub-Advisor receives a fee from the Advisor which
is paid monthly at an annual rate of a Fund's average daily net assets as set
forth below.
EMERGING GROWTH FUND
David L. Babson & Company, Inc. 0.50%
Westfield Capital Management Company, Inc. 0.45% on the first $10 million,
0.40% on the next $40 million,
0.35% thereafter
INTERNATIONAL EQUITY FUND
Credit Suisse Asset Management 0.85% on the first $30 million,
0.80% on the next $20 million,
0.70% on the next $20 million,
0.60% thereafter
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<PAGE>
VALUE PLUS FUND
Fort Washington Investment Advisors, Inc. 0.45%
ENHANCED 30 FUND
Todd Investment Advisors, Inc. 0.40%
The services provided by the Sub-Advisors are paid for wholly by the Advisor.
The compensation of any officer, director or employee of the Sub-Advisor who is
rendering services to a Fund is paid by the Sub-Advisor.
The employment of each Sub-Advisor will remain in force until May 1, 2001 and
from year to year thereafter, subject to annual approval by (a) the Board of
Trustees or (b) a vote of the majority of a Fund's outstanding voting
securities; provided that in either event continuance is also approved by a
majority of the Trustees who are not interested persons of the Trust, by a vote
cast in person at a meeting called for the purpose of voting such approval. The
employment of the Sub-Advisor may be terminated at any time, on sixty days'
written notice, without the payment of any penalty, by the Board of Trustees, by
a vote of a majority of a Fund's outstanding voting securities, by the Advisor,
or by the Sub-Advisor. Each Sub-Advisory Agreement will automatically terminate
in the event of its assignment, as defined by the 1940 Act and the rules
thereunder.
THE DISTRIBUTOR
- ---------------
Touchstone Securities, Inc. (the "Distirbutor") is the principal underwriter of
the Funds and, as such, the exclusive agent for distribution of shares of the
Funds. The Distributor is an affiliate of the Advisor by reason of common
ownership. The Distributor is obligated to sell the shares on a best efforts
basis only against purchase orders for the shares. Shares of the Funds are
offered to the public on a continuous basis.
The Distributor currently allows concessions to dealers who sell shares of the
Funds. The Distributor receives that portion of the sales load which is not
reallowed to the dealers who sell shares of a Fund. The Distributor retains the
entire sales load on all direct initial investments in a Fund and on all
investments in accounts with no designated dealer of record. The Distributor
retains the contingent deferred sales load on redemptions of shares of a Fund
which are subject to a contingent deferred sales load.
The Funds may compensate dealers, including the Distributor and its affiliates,
based on the average balance of all accounts in the Funds for which the dealer
is designated as the party responsible for the account. See "Distribution Plans"
below.
DISTRIBUTION PLANS
- ------------------
CLASS A SHARES -- The Funds have adopted a plan of distribution (the "Class A
Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 which
permits a Fund to pay for expenses incurred in the distribution and promotion of
its shares, including but not limited to, the
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<PAGE>
printing of prospectuses, statements of additional information and reports used
for sales purposes, advertisements, expenses of preparation and printing of
sales literature, promotion, marketing and sales expenses, and other
distribution-related expenses, including any distribution fees paid to
securities dealers or other firms who have executed a distribution or service
agreement with the Distributor. The Class A Plan expressly limits payment of the
distribution expenses listed above in any fiscal year to a maximum of .25% of
the average daily net assets of Class A shares of a Fund. Unreimbursed
expenses will not be carried over from year to year.
CLASS C SHARES -- The Funds have also adopted a plan of distribution (the "Class
C Plan") with respect to the Class C shares of a Fund. The Class C Plan provides
for two categories of payments. First, the Class C Plan provides for the payment
to the Distributor of an account maintenance fee, in an amount equal to an
annual rate of .25% of the average daily net assets of the Class C shares, which
may be paid to other dealers based on the average value of Class C shares owned
by clients of such dealers. In addition, a Fund may pay up to an additional .75%
per annum of the daily net assets of the Class C shares for expenses incurred in
the distribution and promotion of the shares, including prospectus costs for
prospective shareholders, costs of responding to prospective shareholder
inquiries, payments to brokers and dealers for selling and assisting in the
distribution of Class C shares, costs of advertising and promotion and any other
expenses related to the distribution of the Class C shares. Unreimbursed
expenditures will not be carried over from year to year. The Funds may make
payments to dealers and other persons in an amount up to .75% per annum of the
average value of Class C shares owned by their clients, in addition to the .25%
account maintenance fee described above.
GENERAL INFORMATION -- Agreements implementing the Plans (the "Implementation
Agreements"), including agreements with dealers wherein such dealers agree for a
fee to act as agents for the sale of the Funds' shares, are in writing and have
been approved by the Board of Trustees. All payments made pursuant to the Plans
are made in accordance with written agreements.
The continuance of the Plans and the Implementation Agreements must be
specifically approved at least annually by a vote of the Trust's Board of
Trustees and by a vote of the Trustees who are not interested persons of the
Trust and have no direct or indirect financial interest in the Plans or any
Implementation Agreement (the "Independent Trustees") at a meeting called for
the purpose of voting on such continuance. A Plan may be terminated at any time
by a vote of a majority of the Independent Trustees or by a vote of the holders
of a majority of the outstanding shares of a Fund or the applicable class of a
Fund. In the event a Plan is terminated in accordance with its terms, the
affected Fund (or class) will not be required to make any payments for expenses
incurred by the Distributor after the termination date. The Implementation
Agreement terminates automatically in the event of its assignment and may be
terminated at any time by a vote of a majority of the Independent Trustees or by
a vote of the holders of a majority of the outstanding shares of a Fund (or the
applicable class) on not more than 60 days' written notice to any other party to
the Implementation Agreement. The Plans may not be amended to increase
materially the amount to be spent for distribution without shareholder approval.
All material amendments to the Plans must be approved by a vote of the Trust's
Board of Trustees and by a vote of the Independent Trustees.
In approving the Plans, the Trustees determined, in the exercise of their
business judgment and in
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<PAGE>
light of their fiduciary duties as Trustees, that there is a reasonable
likelihood that the Plans will benefit the Funds and their shareholders. The
Board of Trustees believes that expenditure of the Funds' assets for
distribution expenses under the Plans should assist in the growth of the Funds
which will benefit each Fund and its shareholders through increased economies of
scale, greater investment flexibility, greater portfolio diversification and
less chance of disruption of planned investment strategies. The Plans will be
renewed only if the Trustees make a similar determination for each subsequent
year of the Plans. There can be no assurance that the benefits anticipated from
the expenditure of the Funds' assets for distribution will be realized. While
the Plans are in effect, all amounts spent by the Funds pursuant to the Plans
and the purposes for which such expenditures were made must be reported
quarterly to the Board of Trustees for its review. Distribution expenses
attributable to the sale of more than one class of shares of a Fund will be
allocated at least annually to each class of shares based upon the ratio in
which the sales of each class of shares bears to the sales of all the shares of
the Fund. In addition, the selection and nomination of those Trustees who are
not interested persons of the Trust are committed to the discretion of the
Independent Trustees during such period.
Jill T. McGruder and Robert H. Leshner, as interested persons of the Trust, may
be deemed to have a financial interest in the operation of the Plans and the
Implementation Agreements.
SECURITIES TRANSACTIONS
- -----------------------
Decisions to buy and sell securities for the Funds and the placing of the
Funds'securities transactions and negotiation of commission rates where
applicable are made by the Sub-Advisors and are subject to review by the Advisor
and the Board of Trustees. In the purchase and sale of portfolio securities, the
Sub-Advisor's primary objective will be to obtain the most favorable price and
execution for a Fund, taking into account such factors as the overall direct
net economic result to the Fund (including commissions, which may not be the
lowest available but ordinarily should not be higher than the generally
prevailing competitive range), the financial strength and stability of the
broker, the efficiency with which the transaction will be effected, the ability
to effect the transaction at all where a large block is involved and the
availability of the broker or dealer to stand ready to execute possibly
difficult transactions in the future.
Each Sub-Advisor is specifically authorized to pay a broker who provides
research services to the Sub-Advisor an amount of commission for effecting a
portfolio transaction in excess of the amount of commission another broker would
have charged for effecting such transaction, in recognition of such additional
research services rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in relation to
the value of the brokerage and research services provided by such broker or
dealer viewed in terms of the particular transaction or the Sub-Advisor's
overall responsibilities with respect to discretionary accounts that it manages,
and that the Fund derives or will derive a reasonably significant benefit from
such research services.
Research services include securities and economic analyses, reports on issuers'
financial conditions and future business prospects, newsletters and opinions
relating to interest trends, general advice on the relative merits of possible
investment securities for the Funds and statistical services and information
with respect to the availability of securities or purchasers or
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<PAGE>
sellers of securities. Although this information is useful to the Funds and the
Sub-Advisors, it is not possible to place a dollar value on it. Research
services furnished by brokers through whom a Fund effects securities
transactions may be used by the Sub-Advisor in servicing all of its accounts and
not all such services may be used by the Sub-Advisor in connection with a
Fund.
The Funds have no obligation to deal with any broker or dealer in the execution
of securities transactions. However, a Sub-Advisor may effect securities
transactions which are executed on a national securities exchange or
transactions in the over-the-counter market conducted on an agency basis with
affiliated broker-dealers. A Fund will not effect any brokerage transactions in
its portfolio securities with an affiliated broker if such transactions would
be unfair or unreasonable to its shareholders. Over-the-counter transactions
will be placed either directly with principal market makers or with broker-
dealers. Although the Funds do not anticipate any ongoing arrangements with
other brokerage firms, brokerage business may be transacted from time to
time with other firms. Affiliated broker-dealers of the Trust will not receive
reciprocal brokerage business as a result of the brokerage business transacted
by the Funds with other brokers.
Consistent with the Rules of Fair Practice of the National Association of
Securities Dealers, Inc., and such other policies as the Board of Trustees may
determine, the Fund Sub-Advisors may consider sales of shares of the Trust as a
factor in the selection of broker-dealers to execute portfolio transactions. The
Fund Sub-Advisor will make such allocations if commissions are comparable to
those charged by nonaffiliated, qualified broker-dealers for similar services.
In certain instances there may be securities which are suitable for a Fund as
well as for one or more of the respective Fund Sub-Advisor's other clients.
Investment decisions for a Fund and for the Fund Sub-Advisor's other clients are
made with a view to achieving their respective investment objectives. It may
develop that a particular security is bought or sold for only one client even
though it might be held by, or bought or sold for, other clients. Likewise, a
particular security may be bought for one or more clients when one or more
clients are selling that same security. Some simultaneous transactions are
inevitable when several clients receive investment advice from the same
investment advisor, particularly when the same security is suitable for the
investment objectives of more than one client. When two or more clients are
simultaneously engaged in the purchase or sale of the same security, the
securities are allocated among clients in a manner believed to be equitable to
each. It is recognized that in some cases this system could have a detrimental
effect on the price or volume of the security as far as a Fund is concerned.
However, it is believed that the ability of a Fund to participate in volume
transactions will produce better executions for the Fund.
CODE OF ETHICS. The Trust, [the Advisor, the Sub-Advisors and the Distributor]
have each adopted a Code of Ethics under Rule 17j-1 of the Investment Company
Act of 1940. The Code significantly restricts the personal investing activities
of all employees of the Advisor and the Sub-Advisor and, as described below,
imposes additional, more onerous, restrictions on investment personnel of the
Advisor and the Sub-Advisor. The Code requires that all employees of the Advisor
and the Sub-Advisor preclear any personal securities investment (with limited
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<PAGE>
exceptions, such as U.S. Government obligations). The preclearance requirement
and associated procedures are designed to identify any substantive prohibition
or limitation applicable to the proposed investment. In addition, no employee
may purchase or sell any security which at the time is being purchased or sold
(as the case may be), or to the knowledge of the employee is being considered
for purchase or sale, by a Fund. The substantive restrictions applicable to
investment personnel of the Advisor and the Sub-Advisor include a ban on
acquiring any securities in an initial public offering. Furthermore, the Code
provides for trading "blackout periods" which prohibit trading by investment
personnel of the Advisor and the Sub-Advisor within periods of trading by a Fund
in the same (or equivalent) security. The Code of Ethics adopted by the Trust
[and the __________] is on public file with, and is available from, the
Securities and Exchange Commission.
PORTFOLIO TURNOVER
- ------------------
A Fund's portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the fiscal year by the monthly
average of the value of the portfolio securities owned by the Fund during the
fiscal year. High portfolio turnover involves correspondingly greater brokerage
commissions and other transaction costs, which will be borne directly by the
Fund. High turnover may result in a Fund recognizing greater amounts of income
and capital gains, which would increase the amount of commissions. A 100%
turnover rate would occur if all of the Fund's portfolio securities were
replaced once within a one year period.
Generally each Fund (except the International Equity Fund) intends to invest for
long-term purposes. However, the rate of portfolio turnover will depend upon
market and other conditions, and it will not be a limiting factor when the
Sub-Advisor believes that portfolio changes are appropriate. The International
Equity Fund may engage in active trading to achieve its investment goals which
may result in substantial portfolio turnover.
CALCULATION OF SHARE PRICE AND PUBLIC OFFERING PRICE
- ----------------------------------------------------
The share price (net asset value) and the public offering price (net asset value
plus applicable sales load) of shares of the Funds are determined as of the
close of the regular session of trading on the New York Stock Exchange
(currently 4:00 p.m., Eastern time), on each day the Trust is open for business.
The Trust is open for business on every day except Saturdays, Sundays and the
following holidays: New Year's Day, Martin Luther King, Jr. Day, President's
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving and
Christmas. The Trust may also be open for business on other days in which there
is sufficient trading in a Fund's portfolio securities that its net asset value
might be materially affected. Securities held by a Fund may be primarily listed
on foreign exchanges or traded in foreign markets which are open on days (such
as Saturdays and U.S. holidays) when the New York Stock Exchange is not open for
business. As a result the net asset value of a Fund may be significantly
affected by trading on days when the Trust is not open for business. For a
description of the methods used to determine the share price and the public
offering price, see "Pricing of Fund Shares" in the Prospectus.
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<PAGE>
CHOOSING A SHARE CLASS
- ----------------------
Each Fund offers Class A and Class C shares. Each class represents an interest
in the same portfolio of investments and has the same rights, but differs
primarily in sales loads and distribution expense amounts. Before choosing a
class, you should consider the following factors, as well as any other relevant
facts and circumstances:
The decision as to which class of shares is more beneficial to you depends on
the amount of your investment, the intended length of your investment and the
quality and scope of the value-added services provided by financial advisors who
may work with a particular sales load structure as compensation for their
services. If you qualify for reduced sales loads or, in the case of purchases of
$1 million or more, no initial sales load, you may find Class A shares
attractive because similar sales load reductions are not available for Class C
shares. Moreover, Class A shares are subject to lower ongoing expenses than
Class C shares over the term of the investment. As an alternative, Class C
shares are sold with a lower initial sales load so more of the purchase price is
immediately invested in a Fund. If you do not plan to hold your shares in a Fund
for a long time (less than 5 years), it may be better to purchase Class C shares
so that more of your purchase is invested directly in the Fund, although you
will pay higher distribution fees. If you plan to hold your shares in a Fund for
more than 5 years, it may be better to purchase Class A shares, since after 5
years your accumulated distribution fees may be more than the sales load paid on
your purchase.
When determining which class of shares to purchase, you may want to consider the
services provided by your financial advisor and the compensation provided to
these financial advisors under each share class. The Distributor works with many
experienced and very qualified financial advisors throughout the country that
may provide valuable assistance to you through ongoing education, asset
allocation programs, personalized financial planning reviews or other services
vital to your long-term success. The Distributor believes that these value-added
services can greatly benefit you through market cycles and will work diligently
with your chosen financial advisor.
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<PAGE>
Set forth below is a chart comparing the sales loads and 12b-1 fees applicable
to each class of shares:
- --------------------------------------------------------------------------------
CLASS SALES LOAD 12b-1 FEE
- --------------------------------------------------------------------------------
A Maximum of 5.75% initial sales load 0.25%
reduced for purchases of $50,000
and over; shares sold without an initial
sales load may be subject to a 1.00%
contingent deferred sales load during
first year if a commission was paid to
a dealer
C 1.25% initial sales load; 1.00% contingent 1.00%
deferred sales load during first year
- --------------------------------------------------------------------------------
If you are investing $1 million or more, it is generally more beneficial for you
to buy Class A shares because there is no front-end sales load and the annual
expenses are lower.
Class A Shares
--------------
Class A shares are sold at net asset value ("NAV") plus an initial sales load.
In some cases, reduced initial sales loads for the purchase of Class A shares
may be available, as described below. Investments of $1 million or more are not
subject to a sales load at the time of purchase but may be subject to a
contingent deferred sales load of 1.00% on redemptions made within 1 year after
purchase if a commission was paid by the Distributor to a participating
unaffiliated dealer. Class A shares are also subject to an annual 12b-1
distribution fee of up to .25% of a Fund's average daily net assets allocable to
Class A shares.
The following table illustrates the initial sales load breakpoints for the
purchase of Class A shares:
SALES SALES DEALER
CHARGE AS CHARGE AS % REALLOWANCE
% OF OFFERING OF NET AMOUNT AS % OF NET
PRICE INVESTED AMOUNT INVESTED
------------- ------------- ---------------
LESS THAN $50,000 5.75% 6.10% 5.00%
$50,000 BUT LESS THAN $100,000 4.50% 4.71 3.75
$100,000 BUT LESS THAN $250,000 3.50 3.63 2.75
$250,000 BUT LESS THAN $500,000 2.95 3.04 2.25
$500,000 BUT LESS THAN $1,000,000 2.25 2.30 1.75
$1,000,000 OR MORE NONE NONE
Under certain circumstances, the Distributor may increase or decrease the
reallowance to selected dealers. In addition to the compensation otherwise paid
to securities dealers, the Distributor may
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from time to time pay from its own resources additional cash bonuses or other
incentives to selected dealers in connection with the sale of shares of the
Funds. On some occasions, such bonuses or incentives may be conditioned upon the
sale of a specified minimum dollar amount of the shares of a Fund and/or other
funds in the Western-Southern Family of Funds during a specific period of time.
Such bonuses or incentives may include financial assistance to dealers in
connection with conferences, sales or training programs for their employees,
seminars for the public, advertising, sales campaigns and other dealer-sponsored
programs or events.
For initial purchases of Class A shares of $1 million or more and subsequent
purchases further increasing the size of the account, participating unaffiliated
dealers will receive first year compensation of up to 1.00% of such purchases
from the Distributor. In determining a dealer's eligibility for such commission,
purchases of Class A shares of the Funds may be aggregated with concurrent
purchases of Class A shares of other funds in the Western-Southern Family of
Funds. Dealers should contact the Distributor for more information on the
calculation of the dealer's commission in the case of combined purchases.
An exchange from other Western-Southern Funds will not qualify for payment of
the dealer's commission unless the exchange is from a Western-Southern Fund with
assets as to which a dealer's commission or similar payment has not been
previously paid. No commission will be paid if the purchase represents the
reinvestment of a redemption from a Fund made during the previous twelve months.
Redemptions of Class A shares may result in the imposition of a contingent
deferred sales load if the dealer's commission described in this paragraph was
paid in connection with the purchase of such shares. See "Contingent Deferred
Sales Load for Certain Purchases of Class A Shares" below.
REDUCED SALES LOAD. You may use the Right of Accumulation to combine the cost or
current NAV (whichever is higher) of your existing Class A shares of any
Western-Southern Fund sold with a sales load with the amount of any current
purchases in order to take advantage of the reduced sales loads set forth in the
table above. Purchases made in any Western-Southern load fund under a Letter of
Intent may also be eligible for the reduced sales loads. The minimum initial
investment under a Letter of Intent is $10,000. You should contact the Transfer
Agent for information about the Right of Accumulation and Letter of Intent.
CONTINGENT DEFERRED SALES LOAD FOR CERTAIN PURCHASES OF CLASS A SHARES. A
contingent deferred sales load is imposed upon certain redemptions of Class A
shares of the Funds (or shares into which such Class A shares were exchanged)
purchased at NAV in amounts totaling $1 million or more, if the dealer's
commission described above was paid by the Distributor and the shares are
redeemed within one year from the date of purchase. The contingent deferred
sales load will be paid to the Distributor and will be equal to the commission
percentage paid at the time of purchase as applied to the lesser of (1) the NAV
at the time of purchase of the Class A shares being redeemed, or (2) the NAV of
such Class A shares at the time of redemption. If a purchase of Class A shares
is subject to the contingent deferred sales load, you will be notified on the
confirmation you receive for your purchase. Redemptions of such Class A shares
of the Funds held for at least one year will not be subject to the contingent
deferred sales load.
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Class C Shares
--------------
Class C shares are sold with an initial sales load of 1.25% and are subject to a
contingent deferred sales load of 1.00% on redemptions of Class C shares made
within one year of their purchase. The contingent deferred sales load will be a
percentage of the dollar amount of shares redeemed and will be assessed on an
amount equal to the lesser of (1) the NAV at the time of purchase of the Class C
shares being redeemed, or (2) the NAV of such Class C shares being redeemed. A
contingent deferred sales load will not be imposed upon redemptions of Class C
shares held for at least one year. Class C shares are subject to an annual 12b-1
fee of up to 1.00% of a Fund's average daily net assets allocable to Class C
shares. The Distributor intends to pay a commission of 2.00% of the purchase
amount to your broker at the time you purchase Class C shares.
Additional Information on the Contingent Deferred Sales Load
------------------------------------------------------------
The contingent deferred sales load is waived for any partial or complete
redemption following death or disability (as defined in the Internal Revenue
Code) of a shareholder (including one who owns the shares with his or her spouse
as a joint tenant with rights of survivorship) from an account in which the
deceased or disabled is named. The Distributor may require documentation prior
to waiver of the load, including death certificates, physicians' certificates,
etc.
All sales loads imposed on redemptions are paid to the Distributor. In
determining whether the contingent deferred sales load is payable, it is assumed
that shares not subject to the contingent deferred sales load are the first
redeemed followed by other shares held for the longest period of time. The
contingent deferred sales load will not be imposed upon shares representing
reinvested dividends or capital gains distributions, or upon amounts
representing share appreciation.
The following example will illustrate the operation of the contingent
deferred sales load. Assume that you open an account and purchase 1,000 shares
at $10 per share and that six months later the NAV per share is $12 and, during
such time, you have acquired 50 additional shares through reinvestment of
distributions. If at such time you should redeem 450 shares (proceeds of
$5,400), 50 shares will not be subject to the load because of dividend
reinvestment. With respect to the remaining 400 shares, the load is applied only
to the original cost of $10 per share and not to the increase in net asset value
of $2 per share. Therefore, $4,000 of the $5,400 redemption proceeds will be
charged the load. At the rate of 1.00%, the contingent deferred sales load would
be $40. In determining whether an amount is available for redemption without
incurring a deferred sales load, the purchase payments made for all Class C
shares in your account are aggregated.
OTHER PURCHASE INFORMATION
- --------------------------
Additional information with respect to certain types of purchases of Class A
shares of the Funds is set forth below.
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<PAGE>
AGGREGATION. Sales charge discounts are available for certain aggregated
investments. Investments which may be aggregated include those made by you, your
spouse and your children under the age of 21, if all parties are purchasing
shares for their own accounts, which may include purchases through employee
benefit plans such as an IRA, individual-type 403(b) plan or single-participant
Keogh-type plan or by a business solely controlled by these individuals (for
example, the individuals own the entire business) or by a trust (or other
fiduciary arrangement) solely for the benefit of these individuals. Individual
purchases by trustees or other fiduciaries may also be aggregated if the
investments are: (1) for a single trust estate or fiduciary account, including
an employee benefit plan other than those described above; (2) made for two or
more employee benefit plans of a single employer or of affiliated employers as
defined in the 1940 Act, other than employee benefit plans described above; or
(3) for a common trust fund or other pooled account not specifically formed for
the purpose of accumulating Fund shares. Purchases made for nominee or street
name accounts (securities held in the name of a Dealer or another nominee such
as a bank trust department instead of the customer) may not be aggregated with
those made for other accounts and may not be aggregated with other nominee or
street name accounts unless otherwise qualified as described above.
CONCURRENT PURCHASES. To qualify for a reduced sales charge, you may combine
concurrent purchases of shares of two or more Funds (other than a money market
fund). For example, if you concurrently invest $25,000 in one Fund and $25,000
in another Fund, the sales charge would be reduced to reflect a $50,000
purchase.
RIGHT OF ACCUMULATION. A purchaser of shares of a Fund has the right to combine
the cost or current net asset value (whichever is higher) of his existing shares
of the load funds distributed by the Distributor with the amount of his current
purchases in order to take advantage of the reduced sales loads set forth in the
table in the Prospectus. The purchaser or his dealer must notify the Transfer
Agent that an investment qualifies for a reduced sales load. The reduced load
will be granted upon confirmation of the purchaser's holdings by the Transfer
Agent. A purchaser includes an individual and his immediate family members,
purchasing shares for his or their own account; or a trustee or other fiduciary
purchasing shares for a single fiduciary account although more than one
beneficiary is involved; or employees of a common employer, provided that
economies of scale are realized through remittances from a single source and
quarterly confirmation of such purchases; or an organized group, provided that
the purchases are made through a central administration, or a single dealer, or
by other means which result in economy of sales effort or expense (the
"Purchaser").
LETTER OF INTENT. The reduced sales loads set forth in the tables in the
Prospectus may also be available to any Purchaser of shares of a Fund who
submits a Letter of Intent to the Transfer Agent. The Letter must state an
intention to invest within a thirteen month period in any load fund distributed
by the Distributor a specified amount which, if made at one time, would qualify
for a reduced sales load. A Letter of Intent may be submitted with a purchase at
the beginning of the thirteen month period or within ninety days of the first
purchase under the Letter of Intent. Upon acceptance of this Letter, the
Purchaser becomes eligible for the reduced sales load applicable to the level of
investment covered by such Letter of Intent as if the entire amount were
invested in a single transaction.
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<PAGE>
The Letter of Intent is not a binding obligation on the purchaser to purchase,
or the Trust to sell, the full amount indicated. During the term of a Letter of
Intent, shares representing 5% of the intended purchase will be held in escrow.
These shares will be released upon the completion of the intended investment. If
the Letter of Intent is not completed during the thirteen month period, the
applicable sales load will be adjusted by the redemption of sufficient shares
held in escrow, depending upon the amount actually purchased during the period.
The minimum initial investment under a Letter of Intent is $10,000.
A ninety-day backdating period can be used to include earlier purchases at the
purchaser's cost (without a retroactive downward adjustment of the sales
charge). The thirteen month period would then begin on the date of the first
purchase during the ninety-day period. No retroactive adjustment will be made if
purchases exceed the amount indicated in the Letter of Intent. The Purchaser or
his dealer must notify the Transfer Agent that an investment is being made
pursuant to an executed Letter of Intent.
WAIVER OF SALES CHARGE. Sales charges do not apply to shares of the Funds
purchased:
1. By registered representatives or other employees (and their immediate
family members) of broker/dealers, banks or other financial institutions
having agreements with the Distributor.
2. By any director, officer or other employee (and their immediate family
members) of The Western and Southern Life Insurance Company or any of its
affiliates or any portfolio advisor or service provider to the Trust.
3. By clients of any portfolio advisor who are referred to the Distributor by
a portfolio advisor.
4. In accounts as to which a broker-dealer charges an asset management fee,
provided the broker-dealer has an agreement with the Distributor.
5. As part of an employee benefit plan having more than 25 eligible employees
or a minimum of $250,000 invested in the Fund
6. As part of an employee benefit plan which is provided administrative
services by a third-party administrator that has entered into a special
service arrangement with the Distributor.
7. As part of certain promotional programs established by the Fund and/or
Distributor.
8. By one or more members of a group of persons engaged in a common business,
profession, civic or charitable endeavor or other activity and retirees and
immediate family members of such persons pursuant to a marketing program
between the Distributor and such group.
9. By banks, bank trust departments, savings and loan associations and federal
and state credit unions.
10. Through Processing Organizations described in the Prospectuses.
There is no initial sales charge on your purchase of shares in a Roth IRA or
Roth Conversion IRA if (1) you purchase the shares with the proceeds of a
redemption made within the previous 180 days from another mutual fund complex
and (2) you paid an initial sales charge or a contingent deferred sales charge
on your investment in the other mutual fund complex.
Immediate family members are defined as the spouse, parents, siblings, natural
or adopted children, mother-in-law, father-in-law, brother-in-law and
sister-in-law of a director, officer or employee. The term "employee" is deemed
to include current and retired employees.
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<PAGE>
Exemptions must be qualified in advance by the Distributor. Your financial
advisor should call the Distributor for more information.
OTHER INFORMATION. The Trust does not impose a front-end sales load or imposes a
reduced sales load in connection with purchases of shares of a Fund made under
the reinvestment privilege, purchases through exchanges and other purchases
which qualify for a reduced sales load as described herein because such
purchases require minimal sales effort by the Distributor. Purchases made at net
asset value may be made for investment only, and the shares may not be resold
except through redemption by or on behalf of the Trust.
TAXES
- -----
The Trust intends to qualify annually and to elect each Fund to be treated as a
regulated investment company under the Code.
To qualify as a regulated investment company, each Fund must, among other
things: (a) derive in each taxable year at least 90% of its gross income from
dividends, interest, payments with respect to securities loans and gains from
the sale or other disposition of stock, securities or foreign currencies or
other income derived with respect to its business of investing in such stock,
securities or currencies; (b) diversify its holdings so that, at the end of each
quarter of the taxable year, (i) at least 50% of the market value of the Fund's
assets is represented by cash and cash items (including receivables), U.S.
Government securities, the securities of other regulated investment companies
and other securities, with such other securities of any one issuer limited for
the purposes of this calculation to an amount not greater than 5% of the value
of the Fund's total assets and not greater than 10% of the outstanding voting
securities of such issuer and (ii) not more than 25% of the value of its total
assets is invested in the securities of any one issuer (other than U.S.
Government securities or the securities of other regulated investment
companies); and (c) distribute at least 90% of its investment company taxable
income (which includes, among other items, dividends, interest and net
short-term capital gains in excess of net long-term capital losses) and its net
tax-exempt interest income, if any, each taxable year.
As a regulated investment company, each Fund will not be subject to U.S. federal
income tax on its investment company taxable income and net capital gains (the
excess of net long-term capital gains over net short-term capital losses), if
any, that it distributes to shareholders. The Fund intends to distribute to its
shareholders, at least annually, substantially all of its investment company
taxable income and net capital gains. Amounts not distributed on a timely basis
in accordance with a calendar year distribution requirement are subject to a
nondeductible 4% excise tax. To prevent imposition of the excise tax, the Fund
must distribute during each calendar year an amount equal to the sum of: (1) at
least 98% of its ordinary income (not taking into account any capital gains or
losses) for the calendar year; (2) at least 98% of its capital gains in excess
of its capital losses (adjusted for certain ordinary losses, as prescribed by
the Code) for the one-year period ending on October 31 of the calendar year; and
(3) any ordinary income and capital gains for previous years that was not
distributed during those years. A distribution will be treated as paid on
December 31 of the current calendar year if it is declared by the Fund in
October, November or December with a record date in such a month and paid by the
Fund during January of the following calendar year. Such distributions will be
taxable to shareholders in the
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calendar year in which the distributions are declared, rather than the calendar
year in which the distributions are received. To prevent application of the
excise tax, the Fund intends to make its distributions in accordance with the
calendar year distribution requirement.
Each Fund shareholder will receive, if appropriate, various written notices at
the end of the calendar year as to the federal income status of his dividends
and distributions which were received from the Fund during the year.
Shareholders should consult their tax advisors as to any state and local taxes
that may apply to these dividends and distributions. The dollar amount of
dividends excluded from federal income taxation and the dollar amount subject to
such income taxation, if any, will vary for each shareholder depending upon the
size and duration of each shareholder's investment in the Fund. To the extent
that the Fund earns taxable net investment income, the Fund intends to designate
as taxable dividends the same percentage of each dividend as its taxable net
investment income bears to its total net investment income earned. Therefore,
the percentage of each dividend designated as taxable, if any, may vary.
FOREIGN TAXES. Tax conventions between certain countries and the United States
may reduce or eliminate such taxes. It is impossible to determine the effective
rate of foreign tax in advance since the amount of each applicable Fund's assets
to be invested in various countries will vary. If the Fund is liable for foreign
taxes, and if more than 50% of the value of the Fund's total assets at the close
of its taxable year consists of stocks or securities of foreign corporations, it
may make an election pursuant to which certain foreign taxes paid by it would be
treated as having been paid directly by shareholders of the entities, such as
the corresponding Fund, which have invested in the Fund. Pursuant to such
election, the amount of foreign taxes paid will be included in the income of the
corresponding Fund's shareholders, and such Fund shareholders (except tax-exempt
shareholders) may, subject to certain limitations, claim either a credit or
deduction for the taxes. Each such Fund shareholder will be notified after the
close of the Fund's taxable year whether the foreign taxes paid will "pass
through" for that year and, if so, such notification will designate (a) the
shareholder's portion of the foreign taxes paid to each such country and (b) the
portion which represents income derived from sources within each such country.
The amount of foreign taxes for which a shareholder may claim a credit in any
year will generally be subject to a separate limitation for "passive income,"
which includes, among other items of income, dividends, interest and certain
foreign currency gains. Because capital gains realized by the Fund on the sale
of foreign securities will be treated as U.S.-source income, the available
credit of foreign taxes paid with respect to such gains may be restricted by
this limitation.
DISTRIBUTIONS. Dividends paid out of the Fund's investment company taxable
income will be taxable to a U.S. shareholder as ordinary income. Distributions
of net capital gains, if any, designated as capital gain dividends are taxable
as long-term capital gains, regardless of how long the shareholder has held the
Fund's shares, and are not eligible for the dividends-received deduction.
Shareholders receiving distributions in the form of additional shares, rather
than cash, generally will have a cost basis in each such share equal to the net
asset value of a share of the Fund on the reinvestment date. Shareholders will
be notified annually as to the U.S. federal tax status of distributions.
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SALE OF SHARES. Any gain or loss realized by a shareholder upon the sale or
other disposition of any shares of a Fund, or upon receipt of a
distribution in complete liquidation of a Fund, generally will be a capital gain
or loss which will be long-term or short-term, generally depending upon the
shareholder's holding period for the shares. Any loss realized on a sale or
exchange will be disallowed to the extent the shares disposed of are replaced
(including shares acquired pursuant to a dividend reinvestment plan) within a
period of 61 days beginning 30 days before and ending 30 days after disposition
of the shares. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by a shareholder on a
disposition of Fund shares held by the shareholder for six months or less will
be treated as a long-term capital loss to the extent of any distributions of net
capital gains received by the shareholder with respect to such shares.
FOREIGN WITHHOLDING TAXES. Income received by a Fund from sources within foreign
countries may be subject to withholding and other taxes imposed by such
countries.
BACKUP WITHHOLDING. A Fund may be required to withhold U.S. federal income tax
at the rate of 31% of all taxable distributions payable to shareholders who fail
to provide the Fund with their correct taxpayer identification number or to make
required certifications, or who have been notified by the Internal Revenue
Service that they are subject to backup withholding. Corporate shareholders and
certain other shareholders specified in the Code generally are exempt from such
backup withholding. Backup withholding is not an additional tax. Any amounts
withheld may be credited against the shareholder's U.S. federal income tax
liability.
FOREIGN SHAREHOLDERS. The tax consequences to a foreign shareholder of an
investment in a Fund may be different from those described herein. Foreign
shareholders are advised to consult their own tax advisors with respect to the
particular tax consequences to them of an investment in a Fund.
OTHER TAXATION. Fund shareholders may be subject to state and local taxes on
their Fund distributions. Shareholders are advised to consult their own tax
advisors with respect to the particular tax consequences to them of an
investment in a Fund.
REDEMPTION IN KIND
- ------------------
Under unusual circumstances, when the Board of Trustees deems it in the best
interests of a Fund's shareholders, the Fund may make payment for shares
repurchased or redeemed in whole or in part in securities of the Fund taken at
current value. Should payment be made in securities, the redeeming shareholder
will generally incur brokerage costs in converting such securities to cash.
Portfolio securities which are issued in an in-kind redemption will be readily
marketable. The Trust has filed an irrevocable election with the SEC under Rul
18f-1 of the Investment Company Act of 1940 wherein the Funds are committed
to pay redemptions in cash, rather than in kind, to any shareholder of record
of a Fund who redeems during any ninety day period, the lesser of $250,000
or 1% of a Fund's net assets at the beginning of such period.
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HISTORICAL PERFORMANCE INFORMATION
- ----------------------------------
From time to time, the Funds may advertise average annual total return. Average
annual total return quotations will be computed by finding the average annual
compounded rates of return over 1, 5 and 10 year periods that would equate the
initial amount invested to the ending redeemable value, according to the
following formula:
n
P (1 + T) = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at the
beginning of the 1, 5 and 10 year periods at the end of the 1, 5 or 10
year periods (or fractional portion thereof)
The calculation of average annual total return assumes the reinvestment of all
dividends and distributions and the deduction of the current maximum sales load
from the initial $1,000 payment. If a Fund has been in existence less than one,
five or ten years, the time period since the date of the initial public offering
of shares will be substituted for the periods stated.
The Funds may also advertise total return (a "non-standardized quotation") which
is calculated differently from average annual total return. A nonstandardized
quotation of total return may be a cumulative return which measures the
percentage change in the value of an account between the beginning and end of a
period, assuming no activity in the account other than reinvestment of dividends
and capital gains distributions. This computation does not include the effect of
the applicable sales load which, if included, would reduce total return.
A nonstandardized quotation of total return will always be accompanied by the
Fund's average annual total return as described above.
From time to time, the Funds may advertise their yield. A yield quotation is
based on a 30-day (or one month) period and is computed by dividing the net
investment income per share earned during the period by the maximum offering
price per share on the last day of the period, according to the following
formula:
6
Yield = 2[(a-b/cd +1) -1]
Where:
a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period that
were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
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Solely for the purpose of computing yield, dividend income is recognized by
accruing 1/360 of the stated dividend rate of the security each day that a Fund
owns the security. Generally, interest earned (for the purpose of "a" above) on
debt obligations is computed by reference to the yield to maturity of each
obligation held based on the market value of the obligation (including actual
accrued interest) at the close of business on the last business day prior to the
start of the 30-day (or one month) period for which yield is being calculated,
or, with respect to obligations purchased during the month, the purchase price
(plus actual accrued interest). With respect to the treatment of discount and
premium on mortgage or other receivables-backed obligations which are expected
to be subject to monthly paydowns of principal and interest, gain or loss
attributable to actual monthly paydowns is accounted for as an increase or
decrease to interest income during the period and discount or premium on the
remaining security is not amortized.
Performance quotations are based on historical earnings and are not intended to
indicate future performance. Average annual total return and yield are computed
separately for Class A and Class C shares of the Funds. The yield of Class A
shares is expected to be higher than the yield of Class C shares due to the
higher distribution fees imposed on Class C shares.
To help investors better evaluate how an investment in a Fund might satisfy
their investment objective, advertisements regarding a Fund may discuss various
measures of Fund performance, including current performance ratings and/or
rankings appearing in financial magazines, newspapers and publications which
track mutual fund performance. Advertisements may also compare Fund performance
to performance as reported by other investments, indices and averages. When
advertising current ratings or rankings, the Funds may use the following
publications or indices to discuss or compare Fund performance:
Lipper Mutual Fund Performance Analysis measures total return and average
current yield for the mutual fund industry and ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of sales loads.
Wiesenberger ________________measures ______________________.
Morningstar, Inc., an independent rating service, is the publisher of the
bi-weekly Mutual Fund Values. Mutual Fund Values rates more than 1,000
NASDAQ-listed mutual funds of all types, according to their risk-adjusted
returns. The maximum rating is five stars and ratings are effective for two
weeks.
In addition, a Fund may also use comparative performance information of relevant
indices, including the following:
The Dow Jones Industrial Average, which is a measurement of general market price
movement for 30 widely held stocks listed on the New York Stock Exchange.
NASDAQ Composite Index is an unmanaged index of common stocks of companies
traded over-the-counter and offered through the National Association of
Securities Dealers Automated Quotations ("NASDAQ") system.
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Russell 2000 Index is an umanaged index of small cap performance.
MSCI EAFE Index is a Morgan Stanley index that includes stocks traded on 16
exchanges in Europe, Australia and the Far East.
In assessing such comparisons of performance an investor should keep in mind
that the composition of the investments in the reported indices and averages is
not identical to a Fund's portfolios, that the averages are generally unmanaged
and that the items included in the calculations of such averages may not be
identical to the formula used by the Funds to calculate their performance. In
addition, there can be no assurance that a Fund will continue this performance
as compared to such other averages.
CUSTODIAN
- ---------
Investors Bank & Trust Company, 200 Clarendon Street, Boston, Massachusetts is
the Custodian for the Funds. The Custodian acts as the Funds' depository,
safekeeps its portfolio securities, collect all income and other payments with
respect thereto, disburse funds as instructed and maintains records in
connection with its duties. As compensation, the Custodian receives from the
Funds _______________________.
AUDITORS
- --------
The firm of Ernst & Young LLP has been selected as independent auditors for the
Trust for the fiscal year ending March 31, 2001, subject to shareholder
approval. Ernst & Young will perform an annual audit of the Trust's financial
statements and advise the Trust as to certain accounting matters.
TRANSFER, ACCOUNTING AND ADMINISTRATIVE AGENTS
- ----------------------------------------------
The Trust's transfer agent, Countrywide Fund Services, Inc. ("CFS"), maintains
the records of each shareholder's account, answers shareholders' inquiries
concerning their accounts, processes purchases and redemptions of the Funds'
shares, acts as dividend and distribution disbursing agent and performs other
shareholder service functions. CFS is an affiliate of the Advisor by reason of
common ownership. CFS receives a fee for its services as transfer agent payable
monthly at an annual rate of $17 per account from each Fund; provided, however,
that the minimum fee is $1,000 per month for each class of shares of a Fund. In
addition, the Funds pays out-of-pocket expenses, including but not limited to,
postage, envelopes, checks, drafts, forms, reports, record storage and
communication lines.
Investors Bank & Trust Company provides accounting and pricing services to the
Emerging Growth Fund, the International Equity Fund and the Value Plus Fund.
Countrywide Fund Services, Inc. provides accounting and pricing services to the
Enhanced 30 Fund. These services include calculating daily net asset value per
share and maintaining all necessary books and records for the Funds. Investors
Bank & Trust Company receives an accounting and pricing fee
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of ________________________from each of the Emerging Growth Fund, the
International Equity Fund and the Value Plus Fund. Countrywide Fund Services
receives an accounting and pricing fee from the Enhanced 30 Fund in accordance
with the following schedule:
Asset Size of Fund Monthly Fee
--------------------------- -----------------
$ 0 - $ 50,000,000 $3,000
50,000,000 - 100,000,000 3,500
100,000,000 - 200,000,000 4,000
200,000,000 - 300,000,000 4,500
Over 300,000,000 5,500*
* Subject to an additional fee of .001% of average daily net assets in excess
of $300 million.
In addition, the Enhanced 30 Fund pays all costs of external pricing
services.
Investors Bank & Trust Company provides administrative services to the Emerging
Growth Fund, the International Equity Fund and the Value Plus Fund. Countrywide
Fund Services, Inc. provides administrative services to the Enhanced 30 Fund.
These services include supplying non-investment related statistical and research
data, internal regulatory compliance services and executive and administrative
services. Administrative services also include supervising the preparation of
tax returns, reports to shareholders of the Funds, reports to and filings with
the Securities and Exchange Commission and state securities commissions, and
materials for meetings of the Board of Trustees. For the performance of
administrative services to the Enhanced 30 Fund, Countrywide Fund Services, Inc.
receives a fee from the Advisor. The Advisor is solely responsible for the
payment of these administrative fees and Countrywide Fund Services, Inc. has
agreed to seek payment of these fees solely from the Advisor. For the
performance of administrative services to the Emerging Growth Fund, the
International Equity Fund and the Value Plus Fund, Investors Bank & Trust
Company receives a fee of _________.
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<PAGE>
APPENDIX
BOND AND COMMERCIAL PAPER RATINGS
Set forth below are descriptions of the ratings of Moody's and S&P, which
represent their opinions as to the quality of the securities which they
undertake to rate. It should be emphasized, however, that ratings are relative
and subjective and are not absolute standards of quality.
MOODY'S BOND RATINGS
Aaa. Bonds which are rated Aaa are judged to be the best quality. They carry the
smallest degree of investment risk and are generally referred to as "gilt
edged." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of such issues.
Aa. Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuations of
protective elements may be of greater amplitude or there may be other
elements present which make the long-term risks appear somewhat larger than
in Aaa securities.
A. Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa. Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any
great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba. Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B. Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance
of other terms of the contract over any long period of time may be small.
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<PAGE>
Caa. Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca. Bonds which are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C. Bonds which are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
S&P'S BOND RATINGS
AAA. Bonds rated AAA have the highest rating assigned by S&P. Capacity to pay
interest and repay principal is extremely strong.
AA. Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from higher rated issues only in a small degree.
A. Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than bonds in the highest
rated categories.
BBB. Bonds rated BBB are regarded as having an adequate capacity to pay interest
and repay principal. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than in higher rated categories.
BB, B, CCC, CC and C. Bonds rated BB, B, CCC, CC, and C are regarded, on
balance, as predominantly speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of this obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties of major risk
exposures to adverse conditions.
C1. The rating C1 is reserved for income bonds on which no interest is being
paid.
D. Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
Plus (+) or Minus (-). The ratings from "AA" to "CCC" may be modified by
the addition of a plus or minus sign to show relative standing within the major
rating categories.
NR. Indicates that no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
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<PAGE>
DUFF AND PHELP'S BOND RATINGS:
AAA - "Highest credit quality. The risk factors are negligible, being only
slightly more than for risk-free U.S. Treasury debt."
AA - "High credit quality. Protection factors are strong. Risk is modest
but may vary slightly from time to time because of economic conditions."
A - "Protection factors are average but adequate. However, risk factors are
more variable and greater in periods of economic stress."
BBB - "Below average protection factors but still considered sufficient for
prudent investment. Considerable variability in risk during economic cycles."
BB - "Below investment grade but deemed likely to meet obligations when
due. Present or prospective financial protection factors fluctuate according to
industry conditions or company fortunes. Overall quality may move up or down
frequently within this category."
B - "Below investment grade and possessing risk that obligations will not
be met when due. Financial protection factors will fluctuate widely according to
economic cycles, industry conditions and/or company fortunes. Potential exists
for frequent changes in the rating within this category or into a higher or
lower rating grade."
CCC - "Well below investment grade securities. Considerable uncertainty
exists as to timely payment of principal, interest or preferred dividends.
Protection factors are narrow and risk can be substantial with unfavorable
economic/industry conditions, and/or with unfavorable company developments."
DD - "Defaulted debt obligations. Issuer failed to meet scheduled principal
and/or interest payments."
FITCH INVESTORS SERVICE'S BOND RATINGS:
AAA - "AAA ratings denote the lowest expectation of credit risk. They are
assigned only in cases of exceptionally strong capacity for timely payment of
financial commitments. This capacity is highly unlikely to be adversely affected
by foreseeable events."
AA - "AA ratings denote a very low expectation of credit risk. They
indicate strong capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable events."
A - "A ratings denote a low expectation of credit risk. The capacity for
timely payment of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to changes in circumstances or in economic
conditions than is the case for higher ratings."
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<PAGE>
BBB - "BBB ratings indicate that there is currently a low expectation of
credit risk. Capacity for timely payment of financial commitments is considered
adequate, but adverse changes in circumstances and in economic conditions are
more likely to impair this capacity. This is the lowest investment grade
category."
BB - "BB ratings indicate that there is a possibility of credit risk
developing, particularly as the result of adverse economic change over time;
however, business or financial alternatives may be available to allow financial
commitments to be met. Securities rated in this category are not investment
grade."
B - "B ratings indicate that significant credit risk is present, but a
limited margin of safety remains. Financial commitments are currently being met;
however, capacity for continued payment is contingent upon a sustained,
favorable business and economic environment."
CCC, CC, C - "Default is a real possibility. Capacity for meeting financial
commitments is solely reliant upon sustained, favorable business or economic
developments. A 'CC' rating indicates that default of some kind appears
probable. 'C' ratings signal imminent default."
DDD, DD and D - "Securities are not meeting current obligations and are
extremely speculative. 'DDD' designates the highest potential for recovery of
amounts outstanding on any securities involved. For U.S. corporates, for
example, 'DD' indicates expected recovery of 50%-90% of such outstanding, and
'D' the lowest recovery potential, i.e. below 50%."
THOMSON BANKWATCH'S BOND RATINGS
AAA - "Indicates that the ability to repay principal and interest on a
timely basis is extremely high."
AA - "Indicates a very strong ability to repay principal and interest on a
timely basis, with limited incremental risk compared to issues rated in the
highest category."
A - "Indicates the ability to repay principal and interest is strong.
Issues rated A could be more vulnerable to adverse developments (both internal
and external) than obligations with higher ratings."
BBB - "The lowest investment-grade category; indicates an acceptable
capacity to repay principal and interest. BBB issues are more vulnerable to
adverse developments (both internal and external) than obligations with higher
ratings."
BB - "While not investment grade, the BB rating suggests that the
likelihood of default is considerably less than for lower-rated issues. However,
there are significant uncertainties that could affect the ability to adequately
service debt obligations."
B - "Issues rated B show a higher degree of uncertainty and therefore
greater likelihood of default than higher-rated issues. Adverse developments
could negatively affect the payment of interest and principal on a timely
basis."
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<PAGE>
CCC - "Issues rated CCC clearly have a high likelihood of default, with
little capacity to address further adverse changes in financial circumstances."
CC - "CC is applied to issues that are subordinate to other obligations
rated CCC and are afforded less protection in the event of bankruptcy or
reorganization."
D - "Default."
UNRATED. Where no rating has been assigned or where a rating has been suspended
or withdrawn, it may be for reasons unrelated to the quality of the issue.
Should no rating be assigned, the reason may be one of the following:
1. An application for rating was not received or accepted.
2. The issue or issuer belongs to a group of securities that are not
rated as a matter of policy.
3. There is a lack of essential data pertaining to the issue or issuer.
4. The issue was privately placed, in which case the rating is not
published in Moody's publications.
Suspension or withdrawal may occur if new and material circumstances arise,
the effect of which preclude satisfactory analysis; if there is no longer
available reasonable up-to-date data to permit a judgment to be formed; if a
bond is called for redemption; or for other reasons.
Note: Those bonds in the Aa, A, Baa, Ba and B groups which Moody's believes
possess the strongest investment attributes are designated by the symbols Aa-1,
A-1, Baa-1, Ba-1 and B-1.
S&P'S COMMERCIAL PAPER RATINGS
A is the highest commercial paper rating category utilized by S&P, which
uses the numbers 1+, 1, 2 and 3 to denote relative strength within it's A
classification. Commercial paper issues rated A by S&P have the following
characteristics: Liquidity ratios are better than industry average. Long-term
debt rating is A or better. The issuer has access to at least two additional
channels of borrowing. Basic earnings and cash flow are in an upward trend.
Typically, the issuer is a strong company in a well-established industry and has
superior management.
MOODY'S COMMERCIAL PAPER RATINGS
Issuers rated Prime-1 (or related supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1 repayment
capacity will normally be evidenced by the following characteristics: leading
market positions in well-established industries;
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<PAGE>
high rates of return on funds employed; conservative capitalization structures
with moderate reliance on debt and ample asset protection; broad margins in
earnings coverage of fixed financial charges and high internal cash generation;
well-established access to a range of financial markets and assured sources of
alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have a strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or related supporting institutions) have an
acceptable capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for relatively
high financial leverage. Adequate alternate liquidity is maintained.
MOODY'S CORPORATE NOTE RATINGS
MIG-1 "Notes which are rated MIG-1 are judged to be of the best quality.
There is present strong protection by established cash flows, superior
liquidity support or demonstrated broad-based access to the market for
refinancing."
MIG-2 "Notes which are rated MIG-2 are judged to be of high quality. Margins
of protection are ample although not so large as in the preceding
group."
S&P'S CORPORATE NOTE RATINGS
SP-1 "Debt rated SP-1 has very strong or strong capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation."
SP-2 "Debt rated SP-2 has satisfactory capacity to pay principal and
interest."
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PART C. OTHER INFORMATION
- ------ -----------------
Item 23. Exhibits
- ------- --------
(a) ARTICLES OF INCORPORATION
Registrant's Restated Agreement and
Declaration of Trust with Amendment No. 1,
dated May 24, 1994, Amendment No. 2, dated
February 28, 1997 and Amendment No. 3, dated
August 11, 1997, which were filed as Exhibits
to Registrant's Post-Effective Amendment No. 36,
are hereby incorporated by reference.
(b) BYLAWS
Registrant's Bylaws with Amendments
adopted July 17, 1984 and April 5, 1989, which were
filed as Exhibits to Registrant's Post-Effective
Amendment No. 36, are hereby incorporated by
reference.
(c) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS
Article IV Of Registrant's Restated Agreement and
Declaration of Trust provides the following rights for
security holders:
LIQUIDATION. In event of the liquidation or
dissolution of the Trust, the Shareholders of each
Series that has been established and designated shall
be entitled to receive, as a Series, when and as
declared by the Trustees, the excess of the assets
belonging to that Series over the liabilities belonging
to that Series. The assets so distributable to the
Shareholders of any particular Series shall be
distributed among such Shareholders in proportion to
the number of Shares of that Series held by them and
recorded on the books of the Trust.
VOTING. All shares of all Series shall have "equal
voting rights" as such term is defined in the Investment
Company Act of 1940 and except as otherwise provided by
that Act or rules, regulations or orders promulgated
thereunder. On each matter submitted to a vote of the
Shareholders, all shares of each Series shall vote as a
single class except as to any matter with respect to
which a vote of all Series voting as a single series is
required by the 1940 Act or rules and regulations
promulgated thereunder, or would be required under the
Massachusetts Business Corporation Law if the Trust were
a Massachusetts business corporation. As to any matter
which does not affect the interest of a particular Series,
only the holders of Shares of the one or more affected
Series shall be entitled to vote.
<PAGE>
REDEMPTION BY SHAREHOLDER. Each holder of Shares of a
particular Series shall have the right at such times as
may be permitted by the Trust, but no less frequently
than once each week, to require the Trust to redeem all
or any part of his Shares of that Series at a
redemption price equal to the net asset value per Share
of that Series next determined in accordance with
subsection (h) of this Section 4.2 after the Shares are
properly tendered for redemption.
Notwithstanding the foregoing, the Trust may postpone
payment of the redemption price and may suspend the right
of the holders of Shares of any Series to require the Trust
to redeem Shares of that Series during any period or at any
time when and to the extent permissible under the 1940 Act,
and such redemption is conditioned upon the Trust having
funds or property legally available therefor.
TRANSFER. All Shares of each particular Series shall
be transferable, but transfers of Shares of a
particular Series will be recorded on the Share
transfer records of the Trust applicable to that Series
only at such times as Shareholders shall have the right
to require the Trust to redeem Shares of that Series
and at such other times as may be permitted by the
Trustees.
Article V of Registrant's Restated Agreement and
Declaration of Trust provides the following rights
for security holders:
VOTING POWERS. The Shareholders shall have power
to vote only (i) for the election or removal of
Trustees as provided in Section 3.1, (ii)
with respect to any contract with a Contracting Party as
provided in Section 3.3 as to which Shareholder approval is
required by the 1940 Act, (iii) with respect to any
termination or reorganization of the Trust or any Series
to the extent and as provided in Sections 7.1 and 7.2,
(iv) with respect to any amendment of this Declaration
of Trust to the extent and as provided in Section 7.3,
(v) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not
a court action, proceeding or claim should or should not
be brought or maintained derivatively or as a class
action on behalf of the Trust or the Shareholders, and
(vi) with respect to such additional matters relating to
the Trust as may be required by the 1940 Act, this
Declaration of Trust, the Bylaws or any registration of
the Trust with the Commission (or any successor agency)
in any state, or as the Trustees may consider necessary
or desirable. There shall be no cumulative voting in the
election of any Trustee or Trustees. Shares may be voted
in person or by proxy.
<PAGE>
(d) INVESTMENT ADVISORY CONTRACTS
(i) Registrant's Management Agreement with Countrywide
Investments, Inc. for the Utility Fund, which was filed as
an Exhibit to Registrant's Post-Effective Amendment No.
32, is hereby incorporated by reference.
(ii) Registrant's Management Agreement with Countrywide
Investments, Inc. for the Equity Fund, which was filed as
an Exhibit to Registrant's Post-Effective Amendment No. 32,
is hereby incorporated by reference.
(iii) Registrant's Management Agreement with Countrywide
Investments, Inc. for the Growth/Value Fund, which was filed
as an Exhibit to Registrant's Post-Effective Amendment No.
34, is hereby incorporated by reference.
(iv) Registrant's Management Agreement with Countrywide
Investments, Inc. for the Aggressive Growth Fund, which was
filed as an Exhibit to Registrant's Post-Effective Amendment
No. 34, is hereby incorporated by reference.
herewith.
(v) Form of Advisory Agreement with Touchstone Advisors, Inc.
for the Emerging Growth Fund, the International Equity Fund,
the Value Plus Fund and the Enhanced 30 Fund is filed
herewith.
(vi) Subadvisory Agreement between Countrywide Investments, Inc.
and Mastrapasqua & Associates, Inc. for the Growth/Value
Fund, which was filed as an Exhibit to Registrant's Post-
Effective Amendment No. 34, is hereby incorporated by
reference.
(vii) Subadvisory Agreement between Countrywide Investments, Inc.
and Mastrapasqua & Associates, Inc. for the Aggressive Growth
Fund, which was filed as an Exhibit to Registrant's Post-
Effective Amendment No. 34, is hereby incorporated by
reference.
(viii) Form of Subadvisory Agreement for the Emerging Growth Fund,
the International Equity Fund, the Value Plus Fund and the
Enhanced 30 Fund is filed herewith.
(e) UNDERWRITING CONTRACTS
(i) Registrant's Underwriting Agreement with Countrywide
Investments, Inc., which was filed as an Exhibit to
Registrant's Post-Effective Amendement No. 32, is hereby
incorporated by reference.
(ii) Form of Underwriter's Dealer Agreement, which was filed as
an Exhibit to Registrant's Post-Effective Amendment No. 38,
is hereby incorporated by reference.
(iii) Form of Distribution Agreement with Touchstone Securities,
Inc. is filed herewith.
(f) BONUS OR PROFIT SHARING CONTRACTS
None.
(g) CUSTODIAN AGREEMENTS
(i) Custody Agreement with The Fifth Third Bank, the Custodian
for the Utility Fund and the Equity Fund, which was filed as
an Exhibit to Registrant's Post-Effective Amendment No.
31, is hereby incorporated by reference.
(ii) Custody Agreement with Firstar Bank (formerly Star Bank), the
Custodian for the Growth/Value Fund and the Aggressive Growth
Fund, which was filed as an Exhibit to Registrant's Post-
Effective Amendment No. 35, is hereby incorporated by
reference.
<PAGE>
(h) OTHER MATERIAL CONTRACTS
(i) Registrant's Accounting and Pricing Services Agreement with
Countrywide Fund Services, Inc., which was filed as an
Exhibit to Registrant's Post-Effective Amendement No. 38 is
hereby incorporated by reference.
(ii) Registrant's Transfer, Dividend Disbursing, Shareholder
Service and Plan Agency Agreement with Countrywide Fund
Services, Inc., which was filed as an Exhibit to Registrant's
Post-Effective Amendment No. 34, is hereby incorporated by
reference.
(iii) Administration Agreement between Countrywide Investments,
Inc. and Countrywide Fund Services, Inc., which was filed as
an Exhibit to Registrant's Post-Effective Amendment No. 35,
is hereby incorporated by reference.
(i) LEGAL OPINION
Opinion and Consent of Counsel, which was filed as an Exhibit
to Registrant's Pre-Effective Amendment No. 1, is hereby
incorporated by reference.
(j) OTHER OPINIONS
None
(k) OMITTED FINANCIAL STATEMENTS
None.
(l) INITIAL CAPITAL AGREEMENTS
Copy of Letter of Initial Stockholder, which was filed as an
Exhibit to Registrant's Pre-Effective Amendment No. 1, is
hereby incorporated by reference.
(m) RULE 12B-1 PLAN
(i) Registrant's Plans of Distribution Pursuant to Rule 12b-1,
which were filed as Exhibits to Registrant's Post-Effective
Amendment No. 32, are hereby incorporated by reference.
(ii) Form of Administration Agreement which was filed as an Exhibit
to Registrant's Post-Effective Amendment No. 35, is hereby
incorporated by reference.
(n) FINANCIAL DATA SCHEDULE
Financial Data Schedules for the Utility Fund (Class A and
Class C), the Equity Fund (Class A and Class C), the
Growth/Value Fund and the Aggressive Growth Fund, which were
filed as Exhibits to Registrant's Form N-SAR are hereby
incorporated by reference.
(o) RULE 18f-3 PLAN
Amended Rule 18f-3 Plan Adopted with Respect to the Multiple
Class Distribution System, which was filed as an Exhibit to
Registrant's Post-Effective Amendment No. 33, is hereby
incorporated by reference.
(p) CODE OF ETHICS
(i) Registrant's Code of Ethics is filed herewith.
<PAGE>
Item 24. Persons Controlled by or Under Common Control with the
- ------- Registrant
-------------------------------------------------------
None
Item 25. INDEMNIFICATION
- ------- ---------------
(a) Article VI of the Registrant's Restated Agreement and
Declaration of Trust provides for indemnification of officers
and Trustees as follows:
Section 6.4 Indemnification of Trustees, Officers, etc.
----------- ------------------------------------------
The Trust shall indemnify each of its Trustees and officers,
including persons who serve at the Trust's request as
directors, officers or trustees of another organization in
which the Trust has any interest as a shareholder, creditor or
otherwise (hereinafter referred to as a "Covered Person")
against all liabilities, including but not limited to amounts
paid in satisfaction of judgments, in compromise or as fines
and penalties, and expenses, including reasonable accountants'
and counsel fees, incurred by any Covered Person in connection
with the defense or disposition of any action, suit or other
proceeding, whether civil or criminal, before any court or
administrative or legislative body, in which such Covered
Person may be or may have been involved as a party or
otherwise or with which such person may be or may have been
threatened, while in office or thereafter, by reason of being
or having been such a Trustee or officer, director or trustee,
and except that no Covered Person shall be indemnified against
any liability to the Trust or its Shareholders to which such
Covered Person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard
of the duties involved in the conduct of such Covered Person's
office ("disabling conduct"). Anything herein contained to the
contrary notwithstanding, no Covered Person shall be
indemnified for any liability to the Trust or its Shareholders
to which such Covered Person would otherwise be subject unless
(1) a final decision on the merits is made by a court or other
body before whom the proceeding was brought that the Covered
Person to be indemnified was not liable by reason of disabling
conduct or, (2) in the absence of such a decision, a
reasonable determination is made, based upon a review of the
facts, that the Covered Person was not liable by reason of
disabling conduct, by (a) the vote of a majority of a quorum
of Trustees who are neither "interested persons" of the
Company as defined in the Investment Company Act of 1940 nor
parties to the proceeding ("disinterested, non-party
Trustees"), or (b) an independent legal counsel in a written
opinion.
<PAGE>
Section 6.5 Advances of Expenses.
----------- --------------------
The Trust shall advance attorneys' fees or other expenses
incurred by a Covered Person in defending a proceeding, upon
the undertaking by or on behalf of the Covered Person to repay
the advance unless it is ultimately determined that such
Covered Person is entitled to indemnification, so long as one
of the following conditions is met: (i) the Covered Person
shall provide security for his undertaking, (ii) the Trust
shall be insured against losses arising by reason of any
lawful advances, or (iii) a majority of a quorum of the
disinterested non-party Trustees of the Trust, or an
independent legal counsel in a written opinion, shall
determine, based on a review of readily available facts (as
opposed to a full trial-type inquiry), that there is reason to
believe that the Covered Person ultimately will be found
entitled to indemnification.
Section 6.6 Indemnification Not Exclusive, etc.
----------- -----------------------------------
The right of indemnification provided by this Article VI shall
not be exclusive of or affect any other rights to which any
such Covered Person may be entitled. As used in this Article
VI, "Covered Person" shall include such person's heirs,
executors and administrators, an "interested Covered Person"
is one against whom the action, suit or other proceeding in
question or another action, suit or other proceeding on the
same or similar grounds is then or has been pending or
threatened, and a "disinterested" person is a person against
whom none of such actions, suits or other proceedings or
another action, suit or other proceeding on the same or
similar grounds is then or has been pending or threatened.
Nothing contained in this article shall affect any
rights to indemnification to which personnel of the Trust,
other than Trustees and officers, and other persons may be
entitled by contract or otherwise under law, nor the power of
the Trust to purchase and maintain liability insurance on
behalf of any such person.
(b) The Registrant maintains a mutual fund and investment
advisory professional and directors and officers liability
policy. The policy provides coverage to the Registrant, its
trustees and officers and Countrywide Investments, Inc.
(the "Adviser") in its capacity as investment adviser and
principal underwriter, among others. Coverage under the policy
includes losses by reason of any act, error, omission,
misstatement, misleading statement, neglect or breach of duty.
The Registrant may not pay for insurance which protects the
Trustees and officers against liabilities rising from action
involving willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of
their offices.
<PAGE>
The Advisory Agreements and the Subadvisory Agreements provide
that the Adviser (or Subadvisor) shall not be liable for any
error of judgment or mistake of law or for any loss suffered
by the Registrant in connection with the matters to which the
Agreements relate, except a loss resulting from willful
misfeasance, bad faith or gross negligence of the Adviser (or
Subadvisor) in the performance of its duties or from the
reckless disregard by the Adviser (or Subadvisor) of its
obligations under the Agreement. Registrant will advance
attorneys' fees or other expenses incurred by the Adviser (or
Subadvisor) in defending a proceeding, upon the undertaking by
or on behalf of the Adviser (or Subadvisor) to repay the
advance unless it is ultimately determined that the Adviser is
entitled to indemnification.
The Underwriting Agreement with the Adviser provides that the
Adviser, its directors, officers, employees, shareholders and
control persons shall not be liable for any error of judgment
or mistake of law or for any loss suffered by Registrant in
connection with the matters to which the Agreement relates,
except a loss resulting from willful misfeasance, bad faith or
gross negligence on the part of any of such persons in the
performance of the Adviser's duties or from the reckless
disregard by any of such persons of the Adviser's obligations
and duties under the Agreement. Registrant will advance
attorneys' fees or other expenses incurred by any such person
in defending a proceeding, upon the undertaking by or on
behalf of such person to repay the advance if it is ultimately
determined that such person is not entitled to
indemnification.
Item 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT
ADVISERS
------------------------------------------------
A. Countrywide Investments, Inc. (the "Adviser") is a
registered investment adviser providing investment
advisory services to the Equity Fund and the Utility
Fund and investment management services to the Growth/.,
Value Fund and the Aggressive Growth Fund. The Adviser
acts as the investment adviser to six series of
Countrywide Tax-Free Trust and six series of
Countrywide Investment Trust, both of which are
registered investment companies. The Adviser
acts as the subadviser to the Huntington Florida Tax-Free
Money Fund series of The Huntington Funds. The Adviser
provides investment advisory services to individual
and institutional accounts and is a registered
broker-dealer.
<PAGE>
The following list sets forth the business and other
connections of the directors and executive officers of the
Adviser. Unless otherwise noted with an asterisk(*), the
address of the corporations listed below is 312 Walnut
Street, Cincinnati, Ohio 45202.
(1) Robert H. Leshner - President and a Director of the
Adviser.
(a) President and a Trustee of Countrywide
Strategic Trust, Countrywide Investment Trust
and Countrywide Tax-Free Trust.
(b) President and a Director of Countrywide
Financial Services, Inc., Countrywide Fund
Services, Inc. and CW Fund Distributors, Inc.
until December 1999.
(2) Jill T. McGruder - A Director of the Adviser.
(a) A Director of Countrywide Financial Services,
Inc., Countrywide Fund Services, Inc., CW Fund
Distributors, Inc., Capital Analysts Incorporated,
3 Radnor Corporate Center, Radnor, PA, an
investment adviser and broker-dealer.
(b) President, Chief Executive Officer and a Director
of IFS Financial Services, Inc.*, a holding
company, Touchstone Advisors, Inc.*, an investment
adviser and Touchstone Securities, Inc.*, a
broker-dealer.
(c) President and a Director of IFS Agency Services,
Inc.*, an insurance agency, IFS Insurance Agency,
Inc.*, an insurance agency and IFS Systems, Inc.*,
an information systems provider.
(d) Senior Vice President of The Western-Southern
Life Insurance Company, 400 Broadway, Cincinnati,
Ohio, an insurance company.
(e) A Trustee of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide
Tax-Free Trust.
(3) William F. Ledwin - A Director of the Adviser.
(a) A Director of Countrywide Financial
Services, Inc., Countrywide Fund Services, Inc.,
CW Fund Distributors, Inc., Touchstone Advisors,
Inc.*, IFS Agency Services, Inc.*, Capital
Analysts Incorporated, 3 Radnor Corporate Center,
Radnor, PA., IFS Insurance Agency, Inc.*,
Touchstone Securities, Inc.*, IFS Financial
Services, Inc.*, IFS Systems, Inc.* and Eagle
Realty Group, Inc., 421 East Fourth Street, a real
estate brokerage and management service provider.
(b) President and a Director of Fort Washington
Investment Advisors, Inc., 420 E. Fourth Street,
Cincinnati, OH., an investment adviser.
(c) Vice President and Chief Investment Officer of
Columbus Life Insurance Company, 400 East Fourth
Street, Cincinnati, OH., a life insurance
company.
(d) Senior Vice President and Chief Investment Officer
of The Western-Southern Life Insurance Company.
<PAGE>
(4) Maryellen Peretzky - Senior Vice President, Chief
Operating Officer and Secretary of the Adviser.
(a) Vice President of Countrywide Strategic Trust,
Countrywide Investment Trust and Countrywide
Tax-Free Trust
(b) Senior Vice President and Secretary of Countrywide
Financial Services, Inc., Countrywide Fund
Services, Inc. and CW Fund Distributors, Inc.
(c) Assistant Secretary of The Gannett Welsh & Kotler
Funds and Firsthand Funds.
(5) John J. Goetz - First Vice President and Chief
Investment Officer- Tax-Free Fixed Income of the Adviser.
(6) Sharon L. Karp - First Vice President-Marketing of
the Adviser.
(7) Terrie A. Wiedenheft - First Vice President, Chief
Financial Officer and Treasurer of the Adviser.
(a) First Vice President, Chief Financial Officer
and Treasurer of Countrywide Financial Services,
Inc., Countrywide Fund Services, Inc. and CW
Fund Distributors, Inc.
(8) Scott Weston - Assistant Vice President-Investments of
the Adviser.
(9) Charles E. Stutenroth IV - Vice President and Senior
Portfolio Manager of the Adviser.
(a) Vice President and Senior Portfolio Manager of
Fort Washington Investment Advisors, Inc.
(b) Senior Vice President and Portfolio Manager
of Bank of America Investment Management, Charlotte
North Carolina until 1999.
(10) John C. Holden - Vice President and Senior Portfolio
Manager of the Adviser.
(a) Vice President and Senior Portfolio Manager of
Fort Washington Investment Advisors, Inc.
(11) William H. Bunn - Assistant Vice President and Portfolio
Manager of the Adviser.
(a) Securities Analyst for Fort Washington Investment
Advisors, Inc., 420 East Fourth Street,
Cincinnati, Ohio
B. TOUCHSTONE ADVISORS, INC. ("Touchstone") is a registered
investment adviser which provides investment advisory
services to the Emerging Growth Fund, the International
Equity Fund, the Value Plus Fund and the Enhanced 30 Fund.
Touchstone also serves as the investment adviser to
Touchstone Variable Series Trust, a variable annuity.
The following list sets forth the business and other
connections of the directors and executive officers of
Touchstone. Unless otherwise noted with an asterisk(*), the
address of the corporations listed below is 311 Pike
Street, Cincinnati, Ohio 45202.
(1) Jill T. McGruder, President and a Director of Touchstone.
See biography above
(2) Teresa A. Siegel, Vice President and Chief Financial Officer
of Touchstone.
(a) Chief Financial Officer of IFS Financial Services, Inc.
(3) Patricia J. Wilson, Chief Compliance Officer of Touchstone
(a) Chief Compliance Officer of Touchstone Securities, Inc.
(b) Director of Compliance of IFS Financial Services, Inc.
(4) Donald J. Wuebbling, a Director of Touchstone
(a) Director of Touchstone Securities, Inc.
(b) Vice President and General Counsel of The Western and
Southern Life Insurance Company
(5) James N. Clark, a Director of Touchstone
(a) Director of Touchstone Securities, Inc.
(b) Executive Vice President and Director of The Western
and Southern Life Insurance Company
(6) William F. Ledwin, a Director of Touchstone
See biography above
C. FORT WASHINGTON INVESTMENT ADVISORS, INC.("Ft. Washington")
is a registered investment adviser which provides
sub-advisory services to the Value Plus Fund. Ft.
Washington also serves as the Sub-Advisor to series of
Touchstone Variable Series Trust and provides investment
advice to institutional and individual clients.
The following list sets forth the business and other
connections of the directors and executive officers of Ft.
Washington.
(1) William J. Williams, Chairman and a director of Ft.
Washington
(a) Chairman of the Board of The Western and Southern Life
Insurance Company
(2) William F. Ledwin, President and a director of Ft.
Washington
See biography above
(3) James J. Vance, Vice President and Treasurer of Ft.
Washington
(a) Vice President and Treasurer of The Western and Southern
Life Insurance Company
(5) Rance G. Duke, Vice President and Senior Portfolio Manager
of Ft. Washington
(a) Second Vice President and Senior Portfolio Manager of
The Western and Southern Life Insurance Company
(6) John C. Holden, Vice President and Senior Portfolio Manager
of Ft. Washington
See biography above
(7) Charles E. Stutenroth IV, Vice President and Senior
Portfolio Manager pf Ft. Washington
See biography above
(8) Brendan M. White, Vice President and Senior Portfolio
Manager of Ft. Washington
D. Mastrapasqua & Associates, Inc. ("Mastrapasqua")
is a registered investment adviser providing
investment advisory services to institutions and
individuals as well as the Growth/Value Fund and
the Aggressive Growth Fund. The address of
Mastrapasqua and its officers and directors is 814
Church Street, Suite 600, Nashville, Tennessee.
The following are officers and directors of
Mastrapasqua:
(1) Frank Mastrapasqua - Chairman and Chief Executive
Officer
(a) Chairman of Management Plus Associates, Inc., a
sports agency.
(2) Thomas A. Trantum - President
E. David L. Babson & Company, Inc. ("Babson") is a registered
investment adviser providing sub-advisory services to the
Emerging Growth Fund. The address of Babson is One
Memorial Drive, Cambridge, Massachusetts 02142.
[insert officers and director information]
F. Westfield Capital Management Company, Inc. ("Westfield") is
a registered adviser providing sub-advisory services to the
Emerging Growth Fund. The address of Westfield is One
Financial Center, Boston, MA 02111.
[insert officer and director information]
G. Credit Suisse Asset Management is a registered adviser
providing sub-advisory services to the International
Equity Fund. The address of Credit Suisse is One Citicorp
Center, 153 East 53rd Street, New York, NY 10022.
[insert officer and director information]
H. Todd Investment Advisors, Inc. is a registered adviser
providing sub-advisory services to the Enhanced 30 Fund.
The address of Todd is 3160 National City Tower,
Louisville, KY 40202.
[insert officer and director information]
Item 27 Principal Underwriters
- ------- ----------------------
(a) Countrywide Investments, Inc. also acts as
underwriter for Countrywide Tax-Free Trust and series
of Countrywide Investment Trust. Unless otherwise
noted with an asterisk(*), the address of the
persons named below is 312 Walnut Street,
Cincinnati, Ohio 45202.
*The address is 411 Pike Street, Cincinnati, Ohio,
45202.
**The address is 420 E. Fourth Street, Cincinnati,
Ohio 45202.
POSITION POSITION
WITH WITH
(b) NAME UNDERWRITER REGISTRANT
----- ----------- ----------
Robert H. Leshner President President/
and Director Trustee
* Jill T. McGruder Director Trustee
* William F. Ledwin Director None
Maryellen Peretzky Senior Vice Vice
President & President
Secretary
** John J. Goetz First Vice None
President and
Chief
Investment
Officer - Tax-Free
Fixed Income
** Charles E. Stutenroth Vice President None
& Senior
Portfolio Manager
** John C. Holden Vice President None
& Senior
Portfolio
Manager
Sharon L. Karp First Vice None
President-
Marketing
Terrie A. Wiedenheft First Vice None
President
& Treasurer
** Scott Weston Assistant Vice None
President-
Investments
** William H. Bunn Assistant Vice None
President and
Portfolio Manager
<PAGE>
Touchstone Securities, Inc., 311 Pike Street, Cincinnati,
Ohio 45202, acts as the principal underwriter for the High
Yield Fund.
POSITION POSITION
WITH WITH
(b) NAME UNDERWRITER REGISTRANT
----- ----------- ----------
Jill T. McGruder President/Director Trustee
William F. Ledwin Director None
Patricia J. Wilson Chief Compliance None
Officer
Teresa A. Siegel Vice President & None
Chief Financial
Officer
James J. Vance Vice President None
& Treasurer
Edward S. Heenan Controller/Director None
Donald J. Wuebbling Director None
James N. Clark Director None
Robert F. Morand Secretary None
Richard K. Taulbee Vice President None
(c) None
Item 28. LOCATION OF ACCOUNTS AND RECORDS
- ------- --------------------------------
Accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company
Act of 1940 and the Rules promulgated thereunder will
be maintained by the Registrant.
Item 29. MANAGEMENT SERVICES NOT DISCUSSED IN PART A OR PART B
- ------- -----------------------------------------------------
None.
<PAGE>
Item 30. UNDERTAKINGS
- ------- ------------
(a) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to
trustees, officers and controlling persons of the
Registrant pursuant to the provisions of Massachusetts
law and the Agreement and Declaration of Trust of the
Registrant or the Bylaws of the Registrant, or
otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such
liabilities (other than the payment by the Registrant
of expenses incurred or paid by a trustee, officer or
controlling person of the Registrant in the
successful defense of any action, suit or proceeding)
is asserted by such trustee, officer or controlling
person in connection with the securities being
registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
indemnification by it is against public policy as
expressed in the Act and will be governed by the
final adjudication of such issue.
(b) Within five business days after receipt of a written
application by shareholders holding in the aggregate at
least 1% of the shares then outstanding or shares then
having a net asset value of $25,000, whichever is less,
each of whom shall have been a shareholder for at least
six months prior to the date of application
(hereinafter the "Petitioning Shareholders"),
requesting to communicate with other shareholders with
a view to obtaining signatures to a request for a
meeting for the purpose of voting upon removal of any
Trustee of the Registrant, which application shall be
accompanied by a form of communication and request
which such Petitioning Shareholders wish to transmit,
Registrant will:
(i) provide such Petitioning Shareholders with
access to a list of the names and addresses of all
shareholders of the Registrant; or
(ii) inform such Petitioning Shareholders of the
approximate number of shareholders and the estimated
costs of mailing such communication, and to undertake
such mailing promptly after tender by such
Petitioning Shareholders to the Registrant of the
material to be mailed and the reasonable expenses of
such mailing.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Act of 1933 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 Cincinnati, State of Ohio, on the 15th day of February, 2000.
COUNTRYWIDE STRATEGIC TRUST
/s/ Robert H. Leshner
By:---------------------------
Robert H. Leshner
President
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the 15th day of February, 2000
/s/ Robert H. Leshner
- --------------------- President
ROBERT H. LESHNER and Trustee
/s/ Theresa M. Samocki
- ---------------------- Treasurer
THERESA M. SAMOCKI
* WILLIAM O. COLEMAN Trustee
- -----------------------
* PHILLIP R. COX Trustee
- ----------------------
* H. JEROME LERNER Trustee
- ----------------------
* JILL T. MCGRUDER Trustee
- ----------------------
* OSCAR P. ROBERTSON Trustee
- -----------------------
* NELSON SCHWAB, JR. Trustee
- -----------------------
* ROBERT E. STAUTBERG Trustee
- ------------------------
* JOSEPH S. STERN, JR. Trustee
- ------------------------
By /s/ Tina D. Hosking
--------------------
Tina D. Hosking
*Attorney-in-Fact
February 15, 2000
<PAGE>
EXHIBIT INDEX
1. Form of Investment Advisory Agreement for the Emerging Growth Fund, the
International Equity Fund, the Value Plus Fund and the Enhanced 30 Fund
with Touchstone Advisors, Inc.
2. Form of Sub-Advisory Agreement for the Emerging Growth Fund, the
International Equity Fund, the Value Plus Fund and the Enhanced 30 Fund
3. Form of Distribution Agreement with Touchstone Securities, Inc.
4. Registrant's Code of Ethics
<PAGE>
FORM OF INVESTMENT ADVISORY AGREEMENT
COUNTRYWIDE STRATEGIC TRUST
INVESTMENT ADVISORY AGREEMENT, dated as of ______________, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and
COUNTRYWIDE STRATEGIC TRUST, a Massachusetts business trust created pursuant to
a Declaration of Trust dated _____________, as amended from time to time (the
"Trust").
WHEREAS, the Trust is an open-end diversified management investment
company registered under the Investment Company Act of 1940, as amended, (the
"1940 Act"); and
WHEREAS, shares of beneficial interest in the Trust are divided into
separate series (each, along with any series which may in the future be
established, a "Fund"); and
WHEREAS, the Trust desires to avail itself of the services,
information, advice, assistance and facilities of an investment advisor and to
have an investment advisor perform for it various investment advisory and
research services and other management services; and
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and desires to provide investment
advisory services to the Trust;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE ADVISOR. The Trust hereby employs the Advisor to
manage the investment and reinvestment of the assets of each Fund subject to the
control and direction of the Trust's Board of Trustees, for the period on the
terms hereinafter set forth. The Advisor hereby accepts such employment and
agrees during such period to render the services and to assume the obligations
herein set forth for the compensation herein provided. The Advisor shall for all
purposes herein be deemed to be independent contractor and shall, except as
expressly provided or authorized (whether herein or otherwise), have no
authority to act for or represent the Trust in any way or otherwise be deemed an
agent of the Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISOR. In
providing the services and assuming the obligations set forth herein, the
Advisor may, at its expense, employ one or more sub-advisors for any Fund. Any
agreement between the Advisor and a sub-advisor shall be subject to the
renewal, termination and amendment provisions of paragraph 10 hereof. The
Advisor undertakes to provide the following services and to assume the following
obligations:
a) The Advisor will manage the investment and reinvestment of the assets
of each Fund, subject to and in accordance with the respective
investment objectives and policies of each Fund and any directions
which the Trust's Board of Trustees may issue from time to time. In
pursuance of the foregoing, the Advisor may engage separate
investment advisors ("Sub-Advisor(s)") to make all determinations
with respect to the investment of the assets of each Fund, to effect
the purchase and sale of portfolio securities and to take such steps
as may be necessary to implement the same. Such determination and
services by each Sub-Advisor shall also include determining the
manner in which voting rights, rights to consent to corporate action
and any other rights pertaining to the portfolio securities shall be
exercised. The Advisor shall, and shall cause each Sub-Advisor
to, render regular reports to the Trust's Board of Trustees
concerning the Trust's and each Fund's investment activities.
b) The Advisor shall, or shall cause the respective Sub-Advisor(s) to
place orders for the execution of all portfolio transactions, in the
name of the respective Fund and in accordance with the policies with
respect thereto set forth in the Trust's registration statements under
the 1940 Act and the Securities Act of 1933, as such registration
statements may be amended from time to time. In connection with the
placement of orders for the execution of portfolio transactions, the
Advisor shall create and maintain (or cause the Sub-Advisors to
create and maintain) all necessary brokerage records for each Fund,
which records shall comply with all applicable laws, rules and
regulations, including but not limited to records required by Section
31(a) of the 1940 Act. All records shall be the property of the Trust
and shall be available for inspection and use by the Securities and
Exchange Commission (the "SEC"), the Trust or any person retained by
the Trust. Where applicable, such records shall be maintained by the
Advisor (or Sub-Advisor) for the periods and in the places
required by Rule 31a-2 under the 1940 Act.
c) In the event of any reorganization or other change in the
Advisor, its investment principals, supervisors or members
of its investment (or comparable) committee, the Advisor
shall give the Trust's Board of Trustees written notice of
such reorganization or change within a reasonable time
(but not later than 30 days) after such reorganization or
change.
d) The Advisor shall bear its expenses of providing services
to the Trust pursuant to this Agreement except such
expenses as are undertaken by the Trust. In addition, the
Advisor shall pay the salaries and fees, if any, of all
Trustees, officers and employees of the Trust who are
affiliated persons, as defined in Section 2(a)(3) of the
1940 Act, of the Advisor.
<PAGE>
e) The Advisor will manage, or will cause the Sub-Advisors to
manage, the Fund assets and the investment and
reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the
Internal Revenue Code of 1986, as amended.
3. EXPENSES. The Trust shall pay the expenses of its operation,
including but not limited to (i) charges and expenses for Trust accounting,
pricing and appraisal services and related overhead, (ii) the charges and
expenses of the Trust's auditors; (iii) the charges and expenses of any
custodian, transfer agent, plan agent, dividend disbursing agent and registrar
appointed by the Trust with respect to the Funds; (iv) brokers' commissions, and
issue and transfer taxes, chargeable to the Trust in connection with securities
transactions to which the Trust is a party; (v) insurance premiums, interest
charges, dues and fees for Trust membership in trade associations and all taxes
and fees payable by the Trust to federal, state or other governmental agencies;
(vi) fees and expenses involved in registering and maintaining registrations of
the Trust and/or shares of the Trust with the SEC, state or blue sky securities
agencies and foreign countries, including the preparation of Prospectuses and
Statements of Additional Information for filing with the SEC; (vii) all expenses
of meetings of Trustees and of shareholders of the Trust and of preparing,
printing and distributing prospectuses, notices, proxy statements and all
reports to shareholders and to governmental agencies; (viii) charges and
expenses of legal counsel to the Trust; (ix) compensation of Trustees of the
Trust; and (x) interest on borrowed money, if any.
4. COMPENSATION OF THE ADVISOR.
a) As compensation for the services rendered and obligations assumed
hereunder by the Advisor, the Trust shall pay to the Advisor
monthly a fee that is equal on an annual basis to that percentage
of the average daily net assets of each Fund set forth on Schedule
1 attached hereto (and with respect to any future Fund, such
percentage as the Trust and the Advisor may agree to from time to
time). Such fee shall be computed and accrued daily. If the
Advisor serves as investment advisor for less than the whole of
any period specified in this Section 4a, the compensation to the
Advisor shall be prorated. For purposes of calculating the
Advisor's fee, the daily value of each Fund's net assets shall be
computed by the same method as the Trust uses to
compute the net asset value of that Fund.
b) The Advisor will pay all fees owing to each Sub-Advisor,
and the Trust shall not be obligated to the Sub-Advisors
in any manner with respect to the compensation of such
Sub-Advisors.
c) The Advisor reserves the right to waive all or a part of
its fee.
5. ACTIVITIES OF THE ADVISOR. The services of the Advisor to the Trust
hereunder are not to be deemed exclusive, and the Advisor shall be free to
render similar services to others. It is understood that the Trustees and
officers of the Trust are or may become interested in the Advisor as
stockholders, officers or otherwise, and that stockholders and officers of the
Advisor are or may become similarly interested in the Trust, and that the
Advisor may become interested in the Trust as a shareholder or otherwise.
6. USE OF NAMES. The Trust will not use the name of the Advisor in any
prospectus, sales literature or other material relating to the Trust in any
manner not approved prior thereto by the Advisor; except that the Trust may use
such name in any document which merely refers in accurate terms to its
appointment hereunder or in any situation which is required by the SEC or a
state securities commission; and provided further, that in no event shall such
approval be unreasonably withheld. The Advisor will not use the name of the
Trust in any material relating to the Advisor in any manner not approved prior
thereto by the Trust; except that the Advisor may use such name in any document
which merely refers in accurate terms to the appointment of the Advisor
hereunder or in any situation which is required by the SEC or a state securities
commission. In all other cases, the parties may use such names to the extent
that the use is approved by the party named, it being agreed that in no event
shall such approval be unreasonably withheld.
The Trustees of the Trust acknowledge that the Advisor has
reserved for itself the rights to the name "Touchstone Tax-Free Trust" (or any
similar names) and that use by the Trust of such name shall continue only with
the continuing consent of the Advisor, which consent may be withdrawn at any
time, effective immediately, upon written notice thereof to the Trust.
7. LIMITATION OF LIABILITY OF THE ADVISOR.
a) Absent willful misfeasance, bad faith, gross negligence,
or reckless disregard of obligations or duties hereunder
on the part of the Advisor, the Advisor shall not be
subject to liability to the Trust or to any shareholder in
any Fund for any act or omission in the course of, or
connected with, rendering services hereunder or for any
losses that may be sustained in the purchase, holding or
sale of any security. As used in this Section 7, the term
"Advisor" shall include Touchstone Advisors, Inc. and/or
any of its affiliates and the directors, officers and
employees of Touchstone Advisors, Inc. and/or any of its
affiliates.
b) The Trust will indemnify the Advisor against, and hold it
harmless from, any and all losses, claims, damages,
liabilities or expenses (including reasonable counsel fees
and expenses) resulting from acts or omissions of
the Trust. Indemnification shall be made only after: (i)
a final decision on the merits by a court or other
body before whom the proceeding was brought that the Trust
was liable for the damages claimed or (ii) in the
absence of such a decision, a reasonable determination
based upon a review of the facts, that the Trust was
liable for the damages claimed, which determination shall
be made by either (a) the vote of a majority of a
quorum of Trustees of the Trust who are neither
"interested persons" of the Trust nor parties to the
proceeding "disinterested non-party Trustees") or (b) an
independent legal counsel satisfactory to the parties
hereto, whose determination shall be set forth in a
written opinion. The Advisor shall be entitled to
advances from the Trust for payment of the reasonable
expenses incurred by it in connection with the matter as
to which it is seeking indemnification in the manner and
to the fullest extent that would be permissible under the
applicable provisions of the General Corporation Law of
Ohio. The Advisor shall provide to the Trust a written
affirmation of its good faith belief that the standard of
conduct necessary for indemnification under such law
has been met and a written undertaking to repay any such
advance if it should ultimately be determined that the
standard of conduct has not been met. In addition, at
least one of the following additional conditions shall
be met: (i) the Advisor shall provide security in form
and amount acceptable to the Trust for its undertaking;
(ii) the Trust is insured against losses arising by reason
of the advance; or (iii) a majority of a quorum of
the Trustees of the Trust, the members of which majority
are disinterested non-party Trustees, or independent
legal counsel in a written opinion, shall have determined,
based on a review of facts readily available to the
Trust at the time the advance is proposed to be made, that
there is reason to believe that the Advisor will
ultimately be found to be entitled to indemnification.
8. LIMITATION OF TRUST'S LIABILITY. The Advisor acknowledges that it
has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Advisor agrees that the Trust's
obligations hereunder in any case shall be limited to the Trust and to its
assets and that the Advisor shall not seek satisfaction of any such obligation
from the holders of the shares of any Fund nor from any Trustee, officer,
employee or agent of the Trust.
9. FORCE MAJEURE. The Advisor shall not be liable for delays or errors
occurring by reason of circumstances beyond its control, including but not
limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Advisor shall take reasonable steps to minimize service
interruptions but shall have no liability with respect thereto.
10. RENEWAL, TERMINATION AND AMENDMENT.
a) This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, for a period of two
years from the date hereof and it shall continue
indefinitely thereafter as to each Fund, provided that
such continuance is specifically approved by the parties
hereto and, in addition, at least annually by (i) the vote
of holders of a majority of the outstanding voting
securities of the affected Fund or by vote of a majority
of the Trust's Board of Trustees and (ii) by the vote of a
majority of the Trustees who are not parties to this
Agreement or interested persons of the Advisor, cast in
person at a meeting called for the purpose of voting on
such approval.
b) This Agreement may be terminated at any time, with respect
to any Fund(s), without payment of any penalty, by the
Trust's Board of Trustees or by a vote of the majority of
the outstanding voting securities of the affected Fund(s)
upon 60 days' prior written notice to the Advisor and by
the Advisor upon 60 days' prior written notice to the
Trust.
c) This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of
Trustees and, if required by applicable SEC rules and
regulations, a vote of the majority of the outstanding
voting securities of any Fund affected by such change.
This Agreement shall terminate automatically in the event
of its assignment.
d) The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the
meaning set forth for such terms in the 1940 Act.
11. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered in their names and on their behalf by the
undersigned, thereunto duly authorized, all as of the day and year first above
written. Pursuant to the Trust's Declaration of Trust, dated as of April 13,
1981, the obligations of this Agreement are not binding upon any of the Trustees
or shareholders of the Trust individually, but bind only the Trust estate.
COUNTRYWIDE STRATEGIC TRUST
By:________________________
TOUCHSTONE ADVISORS, INC.
By:__________________________
<PAGE>
SCHEDULE 1
EMERGING GROWTH FUND - 0.80% of average daily net assets
INTERNATIONAL EQUITY FUND - 0.95% of average daily net assets
VALUE PLUS FUND - 0.75% of average daily net assets
ENHANCED 30 FUND - 0.65% of average daily net assets
<PAGE>
FORM OF SUB-ADVISORY AGREEMENT
COUNTRYWIDE STRATEGIC TRUST
This SUB-ADVISORY AGREEMENT is made as of ______________, by and
between TOUCHSTONE ADVISORS, INC., an Ohio corporation (the "Advisor"), and ____
___________________________________, an ____ corporation (the "Sub-Advisor").
WHEREAS, the Advisor is an investment advisor registered under the
Investment Advisers Act of 1940, as amended, and has been retained by
Countrywide Strategic Trust (the "Trust"), a Massachusetts business trust
organized pursuant to a Declaration of Trust dated __________ and registered as
an open-end diversified management investment company under the Investment
Company Act of 1940 (the "1940 Act"), to provide investment advisory services
to the ___________ Fund (the "Fund"); and
WHEREAS, the Sub-Advisor also is an investment advisor registered under
the Investment Advisers Act of 1940, as amended; and
WHEREAS, the Advisor desires to retain the Sub-Advisor to furnish it
with portfolio management services in connection with the Advisor's investment
advisory activities on behalf of the Fund, and the Sub-Advisor is willing to
furnish such services to the Advisor and the Fund;
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is agreed as follows:
1. EMPLOYMENT OF THE SUB-ADVISOR. In accordance with and subject to the
Investment Advisory Agreement between the Trust and the Advisor, attached hereto
as Exhibit A (the "Advisory Agreement"), the Advisor hereby appoints the
Sub-Advisor to manage the investment and reinvestment of those assets of the
Fund allocated to it by the Advisor (the "Fund Assets"), subject to the control
and direction of the Advisor and the Trust's Board of Trustees, for the period
and on the terms hereinafter set forth. The Sub-Advisor hereby accepts such
employment and agrees during such period to render the services and to perform
the duties called for by this Agreement for the compensation herein provided.
The Sub-Advisor shall at all times maintain its registration as an investment
advisor under the Investment Advisers Act of 1940 and shall otherwise comply in
all material respects with all applicable laws and regulations, both state and
federal. The Sub-Advisor shall for all purposes herein be deemed an independent
contractor and shall, except as expressly provided or authorized (whether herein
or otherwise), have no authority to act for or represent the Trust in any way or
otherwise be deemed an agent of the Trust or the Fund.
<PAGE>
2. DUTIES OF THE SUB-ADVISOR. The Sub-Advisor will provide the
following services and undertake the following duties:
a. The Sub-Advisor will manage the investment and reinvestment
of the assets of the Fund, subject to and in accordance with the
investment objectives, policies and restrictions of the Fund and any
directions which the Advisor or the Trust's Board of Trustees may give
from time to time with respect to the Fund. In furtherance of the
foregoing, the Sub-Advisor will make all determinations with respect to
the investment of the assets of the Fund and the purchase and sale of
portfolio securities and shall take such steps as may be necessary or
advisable to implement the same. The Sub-Advisor also will determine
the manner in which voting rights, rights to consent to corporate
action and any other rights pertaining to the portfolio securities will
be exercised. The Sub-Advisor will render regular reports to the
Trust's Board of Trustees and to the Advisor (or such other advisor or
advisors as the Advisor shall engage to assist it in the evaluation of
the performance and activities of the Sub-Advisor). Such reports shall
be made in such form and manner and with respect to such matters
regarding the Fund and the Sub-Advisor as the Trust or the Advisor
shall from time to time request.
b. The Sub-Advisor shall provide support to the Advisor with
respect to the marketing of the Fund, including but not limited to: (i)
permission to use the Sub-Advisor's name as provided in Section 5, (ii)
permission to use the past performance and investment history of the
Sub-Advisor as the same is applicable to the Fund, (iii) access to the
individual(s) responsible for day-to-day management of the Fund for
marketing conferences, teleconferences and other activities involving
the promotion of the Fund, subject to the reasonable request of the
Advisor, (iv) permission to use biographical and historical data of the
Sub-Advisor and individual manager(s), and (v) permission to use the
names of clients to which the Sub-Advisor provides investment
management services, subject to any restrictions imposed by clients on
the use of such names.
c. The Sub-Advisor will, in the name of the Fund, place orders
for the execution of all portfolio transactions in accordance with the
policies with respect thereto set forth in the Trust's registration
statements under the 1940 Act and the Securities Act of 1933, as such
registration statements may be in effect from time to time. In
connection with the placement of orders for the execution of portfolio
transactions, the Sub-Advisor will create and maintain all necessary
brokerage records of the Fund in accordance with all applicable laws,
rules and regulations, including but not limited to records required by
Section 31(a) of the 1940 Act. All records shall be the property of the
Trust and shall be available for inspection and use by the Securities
and Exchange Commission (the "SEC"), the Trust or any person retained
by the Trust. Where applicable, such records shall be maintained by the
Advisor for the periods and in the places required by Rule 31a-2 under
the 1940 Act. When placing orders with brokers and dealers, the
Sub-Advisor's primary objective shall be to obtain the most favorable
price and execution available for the Fund, and in placing such orders
the Sub-Advisor may consider a number of factors, including, without
limitation, the overall direct net economic result to the Fund
(including commissions, which may not be the lowest available but
ordinarily should not be higher than the generally prevailing
competitive range), the financial strength and stability of the broker,
the efficiency with which the transaction will be effected, the ability
to effect the transaction at all where a large block is involved and
the availability of the broker or dealer to stand ready to execute
possibly difficult transactions in the future. The Sub-Advisor is
specifically authorized, to the extent authorized by law (including,
without limitation, Section 28(e) of the Securities Exchange Act of
1934, as amended (the "Exchange Act")), to pay a broker or dealer who
provides research services to the Sub-Advisor an amount of commission
for effecting a portfolio transaction in excess of the amount of
commission another broker or dealer would have charged for effecting
such transaction, in recognition of such additional research services
rendered by the broker or dealer, but only if the Sub-Advisor
determines in good faith that the excess commission is reasonable in
relation to the value of the brokerage and research services provided
by such broker or dealer viewed in terms of the particular transaction
or the Sub-Advisor's overall responsibilities with respect to
discretionary accounts that it manages, and that the Fund derives or
will derive a reasonably significant benefit from such research
services. The Sub-Advisor will present a written report to the Board of
Trustees of the Trust, at least quarterly, indicating total brokerage
expenses, actual or imputed, as well as the services obtained in
consideration for such expenses, broken down by broker-dealer and
containing such information as the Board of Trustees reasonably shall
request.
d. In the event of any reorganization or other change in the
Sub-Advisor, its investment principals, supervisors or members of its
investment (or comparable) committee, the Sub-Advisor shall give the
Advisor and the Trust's Board of Trustees written notice of such
reorganization or change within a reasonable time (but not later than
30 days) after such reorganization or change.
e. The Sub-Advisor will bear its expenses of providing
services to the Fund pursuant to this Agreement except such expenses as
are undertaken by the Advisor or the Trust.
f. The Sub-Advisor will manage the Fund Assets and the
investment and reinvestment of such assets so as to comply with the
provisions of the 1940 Act and with Subchapter M of the Internal
Revenue Code of 1986, as amended.
3. COMPENSATION OF THE SUB-ADVISOR.
a. As compensation for the services to be rendered and duties
undertaken hereunder by the Sub-Advisor, the Advisor will pay to the
Sub-Advisor a monthly fee equal on an annual basis to ____% of the
average daily net assets of the Fund. Such fee shall be computed and
accrued daily. If the Sub-Advisor serves in such capacity for less than
the whole of any period specified in this Section 3a, the compensation
to the Sub-Advisor shall be prorated. For purposes of calculating the
Sub-Advisor's fee, the daily value of the Fund's net assets shall be
computed by the same method as the Trust uses to compute the net asset
value of the Fund for purposes of purchases and redemptions of shares
thereof.
b. The Sub-Advisor reserves the right to waive all or a part
of its fees hereunder.
4. ACTIVITIES OF THE SUB-ADVISOR. It is understood that the Sub-Advisor
may perform investment advisory services for various other clients, including
other investment companies. The Sub-Advisor will report to the Board of Trustees
of the Trust (at regular quarterly meetings and at such other times as such
Board of Trustees reasonably shall request) (i) the financial condition and
prospects of the Sub-Advisor, (ii) the nature and amount of transactions
affecting the Fund that involve the Sub-Advisor and affiliates of the
Sub-Advisor, (iii) information regarding any potential conflicts of interest
arising by reason of its continuing provision of advisory services to the Fund
and to its other accounts, and (iv) such other information as the Board of
Trustees shall reasonably request regarding the Fund, the Fund's performance,
the services provided by the Sub-Advisor to the Fund as compared to its other
accounts and the plans of, and the capability of, the Sub-Advisor with respect
to providing future services to the Fund and its other accounts. At least
annually, the Sub-Advisor shall report to the Trustees the total number and type
of such other accounts and the approximate total asset value thereof (but not
the identities of the beneficial owners of such accounts). The Sub-Advisor
agrees to submit to the Trust a statement defining its policies with respect to
the allocation of business among the Fund and its other clients.
It is understood that the Sub-Advisor may become interested in the
Trust as a shareholder or otherwise.
The Sub-Advisor has supplied to the Advisor and the Trust copies of its
Form ADV with all exhibits and attachments thereto (including the Sub-Advisor's
statement of financial condition) and will hereafter supply to the Advisor,
promptly upon the preparation thereof, copies of all amendments or restatements
of such document.
5. USE OF NAMES. Neither the Advisor nor the Trust shall use the name
of the Sub-Advisor in any prospectus, sales literature or other material
relating to the Advisor or the Trust in any manner not approved in advance by
the Sub-Advisor; provided, however, that the Sub-Advisor will approve all uses
of its name which merely refer in accurate terms to its appointment hereunder or
which are required by the SEC or a state securities commission; and provided
further, that in no event shall such approval be unreasonably withheld. The
Sub-Advisor shall not use the name of the Advisor or the Trust in any material
relating to the Sub-Advisor in any manner not approved in advance by the Advisor
or the Trust, as the case may be; provided, however, that the Advisor and the
Trust shall each approve all uses of their respective names which merely refer
in accurate terms to the appointment of the Sub-Advisor hereunder or which are
required by the SEC or a state securities commission; and, provided further,
that in no event shall such approval be unreasonably withheld.
6. LIMITATION OF LIABILITY OF THE SUB-ADVISOR. Absent willful
misfeasance, bad faith, gross negligence, or reckless disregard of obligations
or duties hereunder on the part of the Sub-Advisor, the Sub-Advisor shall not be
subject to liability to the Advisor, the Trust or to any shareholder in the Fund
for any act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security. As used in this Section 6, the term "Sub-Advisor" shall
include the Sub-Advisor and/or any of its affiliates and the directors, officers
and employees of the Sub-Advisor and/or any of its affiliates.
7. LIMITATION OF TRUST'S LIABILITY. The Sub-Advisor acknowledges that
it has received notice of and accepts the limitations upon the Trust's liability
set forth in its Declaration of Trust. The Sub-Advisor agrees that (i) the
Trust's obligations to the Sub-Advisor under this Agreement (or indirectly under
the Advisory Agreement) shall be limited in any event to the assets of the Fund
and (ii) the Sub-Advisor shall not seek satisfaction of any such obligation from
the holders of shares of the Fund nor from any Trustee, officer, employee or
agent of the Trust.
8. FORCE MAJEURE. The Sub-Advisor shall not be liable for delays or
errors occurring by reason of circumstances beyond its control, including but
not limited to acts of civil or military authority, national emergencies, work
stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or
failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Sub-Advisor shall take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
9. RENEWAL, TERMINATION AND AMENDMENT.
a. This Agreement shall continue in effect, unless sooner
terminated as hereinafter provided, until __________, 2002; and it
shall continue thereafter provided that such continuance is
specifically approved by the parties and, in addition, at least
annually by (i) the vote of the holders of a majority of the
outstanding voting securities (as herein defined) of the Fund or by
vote of a majority of the Trust's Board of Trustees and (ii) by the
vote of a majority of the Trustees who are not parties to this
Agreement or interested persons of either the Advisor or the
Sub-Advisor, cast in person at a meeting called for the purpose of
voting on such approval.
b. This Agreement may be terminated at any time, without
payment of any penalty, (i) by the Advisor, by the Trust's Board of
Trustees or by a vote of the majority of the outstanding voting
securities of the Fund, in any such case upon not less than 60 days'
prior written notice to the Sub-Advisor and (ii) by the Sub-Advisor
upon not less than 60 days' prior written notice to the Advisor and the
Trust. This Agreement shall terminate automatically in the event of its
assignment.
c. This Agreement may be amended at any time by the parties
hereto, subject to approval by the Trust's Board of Trustees and, if
required by applicable SEC rules and regulations, a vote of the
majority of the outstanding voting securities of the Fund affected by
such change.
d. The terms "assignment," "interested persons" and "majority
of the outstanding voting securities" shall have the meaning set forth
for such terms in the 1940 Act.
10. SEVERABILITY. If any provision of this Agreement shall become or
shall be found to be invalid by a court decision, statute, rule or otherwise,
the remainder of this Agreement shall not be affected thereby.
11. NOTICE. Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed postage-paid, to
the other party at such address as such other party may designate in accordance
with this paragraph for the receipt of such notice. Until further notice to the
other party, it is agreed that the address of the Trust and that of the Advisor
for this purpose shall be 311 Pike Street, Cincinnati, Ohio 45202 and that the
address of the Sub-Advisor shall be ___________________________________________.
12. MISCELLANEOUS. Each party agrees to perform such further actions
and execute such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance with and
governed by the laws of the State of Ohio. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names and on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
TOUCHSTONE ADVISORS, INC.
By: ______________________
Name: Jill T. McGruder
Title: President
(NAME OF SUB-ADVISOR)
By:________________________
Name:
Title:
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of __________________________, 2000 by
and between COUNTRYWIDE STRATEGIC TRUST, a Massachusetts business trust (the
"Trust"), with respect to each of its series of shares of beneficial interest
("Shares") (each series of shares is a "Fund"), and TOUCHSTONE SECURITIES, INC.,
a Nebraska corporation ("Touchstone" or the Distributor").
W I T N E S S E T H
WHEREAS, the Trust is engaged in business as an open-end investment
company registered under the Investment Company Act of 1940 (collectively with
the rules and regulations promulgated thereunder, the "1940 Act");
WHEREAS, the Board of Trustees of the Trust has adopted a Plan of
Distribution for Class A and Single Class Shares, dated as of August 1, 1993
and a Plan of Distribution for Class C Shares, dated as of August 1,
1993 the ("Distribution Plans"), each of which is incorporated herein by
reference and pursuant to which the Trust desires to enter into this
Distribution Agreement; and
WHEREAS, the Trust wishes to engage Touchstone to provide certain
services with respect to the distribution of Shares of each Fund, and Touchstone
is willing to provide such services to the Trust, with respect to the Funds, on
the terms and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. APPOINTMENT OF DISTRIBUTOR; DUTIES.
(a) The Trust grants to the Distributor the right, as agent of
the Trust, to sell Shares upon the terms hereinbelow set forth during the term
of this Agreement. While this Agreement is in force, the Distributor agrees to
use its best efforts to find purchasers for the Shares.
(b) The Distributor shall have the right, as agent of the
Trust, to order Shares as needed, but not more than the Shares needed (except
for clerical errors and errors of transmission), to fill unconditional orders
for Shares placed with the Distributor, all such orders to be made in the manner
set forth in the respective Fund's then-current prospectus (the "Prospectus")
and then-current statement of additional information (the "Statement of
Additional Information"). The price which shall be paid to the Fund for the
Shares so purchased shall be that Fund's net asset value per Share as determined
in accordance with the provisions of the Trust's Declaration of Trust and
By-Laws, as each may from time to time be amended, and that Fund's Prospectus
and Statement of Additional Information (collectively, the "Governing
Instruments"). In addition to the price of the Shares, the Distributor shall
collect any applicable sales charge on Shares sold, from each purchaser thereof,
as provided in the respective Fund's Prospectus and Statement of Additional
Information, after taking into account any applicable reductions or eliminations
of sales charges described therein. The Distributor shall retain the sales
charge less any applicable commissions or transaction or agency fees paid to any
broker-dealer, bank, trust company or other financial institution having a
selling, servicing or agency agreement with the Distributor (an "Agent"),
through which such Shares have been sold. The Distributor or its Agent shall
notify the custodian of the respective Fund at the end of each business day, or
as soon thereafter as the orders placed with the Distributor have been compiled,
of the number of Shares and the prices thereof which have been ordered through
the Distributor since the end of the previous business day.
(c) The right granted to the Distributor to place orders for
Shares shall be exclusive, except that this exclusive right shall not apply to
Shares issued in the event that an investment company (whether a regulated or
private investment company or a personal holding company) is merged with and
into or consolidated with a Fund or the Trust or in the event that the Trust
acquires, on behalf of a Fund, by purchase or otherwise, all or substantially
all of the assets or the outstanding shares of any such company; nor shall it
apply to Shares issued by the Trust as a dividend or stock split. The exclusive
right to place orders for Shares, as hereby granted to the Distributor, may be
waived by the Distributor by notice to the Trust in writing, either
unconditionally or subject to such conditions and limitations as may be set
forth in such notice to the Trust. The Trust hereby acknowledges that the
Distributor may render distribution and other services to other parties,
including other investment companies. In connection with its duties hereunder,
the Distributor shall also arrange for computation of performance statistics
with respect to each Fund and arrange for publication of current price
information in newspapers and other publications.
(d) The Trust retains the ultimate right to control the sale
of the Shares, including the right to suspend sales in any jurisdiction, to
appoint and discharge agents of the Trust in connection with the Shares, and to
refuse to sell Shares to any person for any reason whatsoever.
2. TRUST DUTIES.
(a) The net asset value of Shares shall be determined by the
Trust, or by an agent of the Trust, as of the times and in accordance with the
method established pursuant to the Governing Instruments (and on such other days
as the Trustees deem necessary in order to comply with Rule 22c-1 under the 1940
Act). The Trust shall have right to suspend the sale of Shares if, because of
some extraordinary condition, trading in the securities in which such Fund
invests) is suspended or restricted or if conditions existing render such action
advisable or for any other reason deemed adequate by the Trust.
(b) The Trust will, from time to time, but subject to the
necessary approval, if any, of the Fund's shareholders, take all necessary
action to register such number of Shares under the Securities Act of 1933, as
amended (the "1933 Act"), as the Distributor may reasonably be expected to sell.
3. RELATIONSHIP BETWEEN TRUST AND DISTRIBUTOR. The Distributor shall be
an independent contractor and neither the Distributor nor any of its directors,
officers or employees, as such, is or shall be considered an employee of the
Trust pursuant to this Agreement. It is understood that the Trustees, officers
and shareholders of the Trust are or may become interested in the Distributor as
directors, officers, employees, or otherwise and that directors, officers and
employees of the Distributor are or may become interested in the Trust as
shareholders or otherwise. The Distributor is responsible for its own conduct
and the employment, control and conduct (but only with respect to the duties and
obligations of the Distributor hereunder) of its agents and employees and for
any injury to any person through its agents or employees. The Distributor
assumes full responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
4. BEST EFFORTS. The Distributor covenants and agrees that, in selling
Shares, it will use its best efforts in all respects duly to conform with the
requirements of all state and federal laws and the Rules of Fair Practice of the
National Association of Securities Dealers, Inc. (the "NASD") relating to the
sale of shares.
The Distributor will use its best efforts to assure that no person uses any
sales aids, promotional material or sales literature regarding the Shares that
have not been specifically approved in advance by the Distributor and the Trust.
The Distributor will use its best efforts to assure that no person, in
connection with the offer or sale of the Shares, makes any representations
regarding the Shares, the Trust or the Distributor which are not either then
authorized by the Trust and the Distributor or contained in a then-effective
registration statement relating to any of the Funds and the offering of the
Shares (the "Registration Statement").
5. INDEMNIFICATION
(a) The Distributor will indemnify and hold harmless the Trust
and each of its Trustees and officers and each person, if any, who controls the
Trust within the meaning of Section 15 of the Act (the "Indemnified Parties")
against all losses, liabilities, damages, claims or expenses (including the
reasonable cost of investigating or defending any alleged loss, liability,
damages, claim or expense and reasonable counsel fees incurred in connection
therewith) arising from any claim, demand, action or suit (individually a
"Claim" and, collectively, "Claims") made by any person who shall have acquired
any of the Shares through the Distributor, which Claim is based upon the 1933
Act or any other statute or common law and arises either:
(i) by reason of any wrongful act of the Distributor or any
of its employees (including any failure to conform with any
requirement of any state or federal law or the Rules of Fair
Practice of the NASD relating to the sale of Shares), or
(ii) on the ground that the Registration Statement
under the 1933 Act, including all amendments thereto, or the
respective Prospectus or Statement of Additional Information
or previous prospectus or statement of additional information,
with respect to such Shares, includes or included an untrue
statement of a material fact or omits or omitted to state a
material fact required to be stated therein or necessary in
order to make the statements therein not misleading,
but if and only if any such act, statement or omission was made in reliance upon
information furnished by the Distributor to the Trust.
(b) In no event (i) is the indemnity of the Distributor in
favor of any Indemnified Party pursuant to paragraph (a), above to be deemed to
protect any such Indemnified Party against liability to which such Indemnified
party would otherwise be subject by reason of willful misfeasance, bad faith or
gross negligence in the performance of his, her or its duties or by reason of
his, her or its reckless disregard of his, her or its obligations and duties
under this Agreement, or (ii) is the Distributor to be liable under or pursuant
to paragraph (a), above, with respect to any Claim made against any Indemnified
Party unless such Indemnified Party shall have notified the Distributor in
writing within a reasonable time after the summons or other first legal process
giving information as to the nature of the Claim shall have been served upon
such Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but the failure of the
Indemnified Party to notify the Distributor of any such Claim shall not relieve
the Distributor from any liability which it may have to any Indemnified Party
otherwise than pursuant to this Agreement.
(c) 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 Claim, and, if the Distributor elects to assume
the defense, such defense shall be conducted by counsel chosen by it and
reasonably satisfactory to each Indemnified Party. If the Distributor elects to
assume the defense of any such suit and retain such counsel, each Indemnified
Party shall bear the fees and expenses of any additional counsel retained by it,
provided, however, that if the Distributor does not elect to assume the defense
of any such suit, it shall reimburse the Indemnified Parties for the reasonable
fees and expenses of any counsel retained by them.
(d) Except with the prior written consent of the Distributor,
no Indemnified Party shall confess any Claim or make any compromise in any case
in which the Distributor is or will be asked to indemnify such Indemnified
Party.
(e) The Distributor agrees promptly to notify the Trust of the
commencement of any litigation or proceeding against it in connection with the
issuance and sale of any of the Shares.
(f) Neither the Distributor nor any Agent nor any other person
is authorized to give any information or to make any representation on behalf of
the Trust in connection with the sale of Shares, other than those contained in
the Trust's Registration Statement or Prospectus or Statement of Additional
Information relating to the respective Fund.
6. EXPENSES
(a) The Trust will pay, by causing the appropriate Fund(s) to
pay:
(i) all costs and expenses of the Trust and of the
Funds, including fees and disbursements of the Trust's counsel, in
connection with the preparation and filing of the Registration
Statement, Prospectuses and Statements of Additional Information, and
preparing and mailing to existing shareholders Prospectuses, Statements
of Additional Information and, with respect to Shares, statements of
confirmation and periodic reports (including the entire expense of
setting in type the Registration Statements, Prospectuses and
Statements of Additional Information or any periodic report with
respect to Shares);
(ii) the cost of preparing temporary or permanent
certificates for Shares;
(iii) the cost and expenses of delivering to the
Distributor at its office in Cincinnati, Ohio all Shares purchased
through it as agent hereunder;
(iv) subject to the Distribution Plans, a
distribution fee to the Distributor not to exceed the percentage, as
indicated on Schedule A hereto, of the respective Fund's average daily
net assets for its then-current fiscal year;
(v) all fees and disbursements of any transfer agent and
custodian of a Fund;
(vi) all fees of each shareholder servicing agent to a Fund,
if any;
(vii) all fees of any administrator or fund accounting agent
of a Fund;
(viii) all fees of the investment advisor, if any, of a Fund;
and
(ix) such other costs and expenses as shall be
determined, by agreement of the parties, to properly be chargeable to
and borne by the Trust.
(b) The Distributor, with respect to the sale of Shares, but subject to
the Trust's obligations under clause (iv) of subsection (a) above, will (i)
after the Prospectus and Statement of Additional Information and periodic
reports with respect to each Fund have been set in type, bear the expense (other
than the cost of printing and mailing to existing shareholders of such Fund) of
printing and distributing any copies thereof ordered by it which are to be used
in connection with the offering or sale of Shares to any Agent or prospective
investor, (ii) bear the expenses of preparing, printing and distributing any
other literature used by the Distributor or furnished by it for use by any Agent
in connection with the offering of Shares for sale to the public and any expense
of sending confirmations and statements to any Agent and (iii) bear the cost of
any compensation paid to Agents in connection with the sale of Shares.
7. COMPENSATION. As compensation to the Distributor for assuming the
expenses and performing the distribution services to be assumed and performed by
it pursuant to this Agreement, the Distributor will receive from the Trust such
amounts and at such times as are set forth in Schedule A to this Agreement (as
the same may from time to time be amended by agreement between the parties
hereto).
8. AMENDMENTS. If, at any time during the term of this Agreement, the
Trust shall deem it necessary or advisable in the best interests of any Fund
that any amendment of this Agreement be made in order to comply with any
recommendation or requirement of the Securities and Exchange Commission (the
"SEC") or other governmental authority or to obtain any advantage under Ohio,
Massachusetts or other applicable state law or under the federal tax laws, it
shall notify the Distributor of the form of amendment which it deems necessary
or advisable and the reasons therefor. 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, at any time during the term of this Agreement, the Distributor requests the
Trust to make any change in the Governing Instruments or in its methods of doing
business which are necessary in order to comply with any requirement of federal
law or regulations of the SEC or of a national securities association of which
the Distributor is or may become a member, relating to the sale of Shares, the
Distributor may terminate this Agreement forthwith by written notice to the
Trust without payment of any penalty.
9. OWNERSHIP OF SHARES. The Distributor agrees that it will not take
any long or short position in the Shares and that, so far as it can control the
situation, it will prevent any of its Directors or officers from taking any long
or short positions in the Shares, except as permitted by the Governing
Instruments.
<PAGE>
10. TERMINATION. This Agreement shall become effective upon its
execution and shall continue in force indefinitely, provided that such
continuance is "specifically approved at least annually" by the vote of a
majority of the Trustees of the Trust who are not "interested persons" of the
Trust or of the Distributor at a meeting specifically called for the purpose of
voting on such approval, and by the Board of Trustees of the Trust. The
aforesaid requirement that continuance of this Agreement be "specifically
approved at least annually" shall be construed in a manner consistent with the
1940 Act.
This Agreement may be terminated as to any Fund at any time by (i) the
Trust, (a) by the vote of a majority of the Trustees of the Trust who are not
"interested persons" of the Trust or the Distributor, (b) by the vote of the
Board of Trustees of the Trust, or (c) by the "vote of a majority of the
outstanding voting securities" of the Fund, or (ii) by the Distributor, in any
case without payment of any penalty on not more than 60 days' nor less than 30
days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
11. DEFINITIONS. The terms "vote of a majority of the outstanding
voting securities", "interested persons", "assignment" and "specifically
approved at least annually" shall have the respective meanings specified in, and
shall be construed in a manner consistent with, the 1940 Act, subject, however,
to such exemptions as may be granted by the SEC thereunder.
12. MISCELLANEOUS.
(a) If any provision of this Agreement becomes or is found to
be invalid by any court having jurisdiction or by any statute, rule or
regulation, the remainder of this Agreement shall not be affected
thereby.
(b) Any notices under this Agreement shall be in writing
addressed and delivered personally (or by telecopy) or mailed
postage-paid, to the other party at such address as such other party
may designate in accordance with this paragraph for the receipt of such
notice. Until further notice to the other party given in accordance
with this paragraph, it is agreed that the address of the Trust and of
the Distributor for this purpose shall be 311 Pike Street, Cincinnati,
Ohio 45202.
(c) Each party will perform such further actions and execute
such further documents as are necessary to effectuate the purposes
hereof. This Agreement shall be construed and enforced in accordance
with and governed by the laws of the State of Ohio. The captions in the
Agreement are included for convenience only and in no way define or
delimit any of the provisions hereof or otherwise affect their
construction or effect.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed and delivered in their names on their behalf by the
undersigned, thereunto duly authorized as of the day and year first above
written. The Distributor acknowledges that, under the Trust's Declaration of
Trust, the obligations of this Agreement are not binding upon any of the
Trustees or shareholders of a Fund individually, but bind only the Trust estate.
COUNTRYWIDE STRATEGIC TRUST
By__________________________________
President
TOUCHSTONE SECURITIES, INC.
By__________________________________
President
<PAGE>
Schedule A
Touchstone Strategic Trust
As compensation for assuming the expenses and performing the distribution
services enumerated in the Distribution Agreement, Distributor will receive from
Trust, in respect of each investment in the Trust, amounts determined as set
forth below:
For the Emerging Growth Fund, the International Equity Fund,
the Value Plus Fund and the Enhanced 30 Fund
Compensation as a
Amount of Investment % of Investment
-------------------- -------------------
Under $50,000 5.75%
$50,000 but less than $100,000 4.50%
$100,000 but less than $250,000 3.50%
$250,000 but less than $500,000 2.95%
$500,000 but less than $1 million 2.25%
$1 million or more None
In addition, Class A shares will each pay a distribution fee to the
Distributor at an annual rate of up to 0.25% of the average daily net assets
attributable to Class A shares in anticipation or as reimbursement for expenses
(other than interest or carrying charges) (i) of compensating Dealers or other
persons for providing personal shareholder services, maintaining shareholder
accounts and providing distribution assistance and (ii) of promoting the sale of
shares of the Funds.
In addition, Class C shares will each pay a distribution fee to the
Distributor at an annual rate of up to 0.25% of the average daily net assets
attributable to that class in anticipation or as reimbursement for expenses
(other than interest or carrying charges) (i) of compensating Dealers or other
persons for providing personal shareholder services, maintaining shareholder
accounts and providing distribution assistance and (ii) of promoting the sale of
shares of the Funds.
- 9 -
AMENDED CODE OF ETHICS
COUNTRYWIDE STRATEGIC TRUST
Adopted May 25, 1999
I. Statement of General Principles
This Code of Ethics has been adopted by Countrywide Strategic Trust
(the "Trust") for the purpose of instructing all employees, officers,
directors and trustees of the Trust and/or its investment adviser,
Countrywide Investments, Inc. ("Countrywide") in their ethical
obligations and to provide rules for their personal securities
transactions. All such employees, officers, directors and trustees owe
a fiduciary duty to the Trust and its shareholders. A fiduciary duty
means a duty of loyalty, fairness and good faith towards the Trust and
its shareholders, and the obligation to adhere not only to the specific
provisions of this Code but to the general principles that guide the
Code. These general principles are:
o The duty at all times to place the interests of the Trust and its
shareholders first;
o The requirement that all personal securities transactions be
conducted in a manner consistent with the Code of Ethics and in
such a manner as to avoid any actual or potential conflict of
interest or any abuse of any individual's position of trust and
responsibility; and
o The fundamental standard that such employees, officers,
directors and trustees should not take inappropriate advantage
of their positions, or of their relationship with the Trust or its
shareholders.
<PAGE>
It is imperative that the personal trading activities of the employees,
officers, directors and trustees of the Trust and Countrywide,
respectively, be conducted with the highest regard for these general
principles in order to avoid any possible conflict of interest, any
appearance of a conflict, or activities that could lead to disciplinary
action. This includes executing transactions through or for the benefit
of a third party when the transaction is not in keeping with the
general principles of this Code. All personal securities transactions
must also comply with Countrywide's Insider Trading Policy and
Procedures and the Securities and Exchange Commission's Rule 17j-1.
Under this rule, no Employee may:
o employ any device, scheme or artifice to defraud the Trust or any
of its shareholders;
o make to the Trust or any of its shareholders any untrue statement
of a material fact or omit to state to such client a material fact
necessary in order to make the statements made, in light of the
circumstances under which they are made, not misleading;
o engage in any act, practice, or course of business which operates
or would operate as a fraud or deceit upon the Trust or any of its
shareholders; or
o engage in any manipulative practice with respect to the Trust or
any of its shareholders.
II. Definitions
A. Advisory Employees: Employees who participate in or make
recommendations with respect to the purchase or sale of
of securities including fund portfolio managers and assistant fund
portfolio managers. The Compliance Officer will maintain a current
list of all Advisory Employees.
B. Beneficial Interest: ownership or any benefits of ownership,
including the opportunity to directly or indirectly profit or
otherwise obtain financial benefits from any interest in a
security.
C. Compliance Officer: Michele Hawkins or, in her absence, an
alternate Compliance Officer (Maryellen Peretzky, or Robert
Leshner), or their respective successors in such positions.
D. Employee Account: each account in which an Employee or a member of
his or her family has any direct or indirect Beneficial Interest or
over which such person exercises control or influence, including,
but not limited to, any joint account, partnership, corporation,
trust or estate. An Employee's family members include the
Employee's spouse, minor children, any person living in the home of
the Employee, and any relative of the Employee (including in-laws)
to whose support an Employee directly or indirectly contributes.
E. Employees: the employees, officers, and trustees of the Trust
and the employees, officers and directors of Countrywide, including
Advisory Employees. The Compliance Officer will maintain a current
list of all Employees.
F. Exempt Transactions: transactions which are 1) effected in an amount
or in a manner over which the Employee has no direct or indirect
influence or control, 2) pursuant to a systematic dividend reinvestment
plan, systematic cash purchase plan or systematic withdrawal plan, 3)
in connection with the exercise or sale of rights to purchase
additional securities from an issuer and granted by such issuer
pro-rata to all holders of a class of its securities, 4) in connection
with the call by the issuer of a preferred stock or bond, 5) pursuant
to the exercise by a second party of a put or call option, 6) closing
transactions no more than five business days prior to the expiration of
a related put or call option, or 7) with respect to any affiliated or
unaffiliated registered open-end investment company.
G. Countrywide Funds: any series of Countrywide Strategic Trust.
H. Recommended List: the list of those Securities which the Advisory
Employees currently are recommending for purchase or sale on behalf
of the Countrywide Funds.
I. Related Securities: securities issued by the same issuer or issuer
under common control, or when either security gives the holder any
contractual rights with respect to the other security, including
options, warrants or other convertible securities.
J. Securities: any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, collateral-trust certificate,
pre-organization certificate or subscription, transferable share,
investment contract, voting-trust certificate, certificate of deposit
for a security, fractional undivided interest in oil, gas or other
mineral rights, or, in general, any interest or instrument commonly
known as a "security," or any certificate or interest or
participation in temporary or interim certificate for, receipt for,
guarantee of, or warrant or right to subscribe to or purchase
(including options) any of the foregoing; except for the following:
1) securities issued by the government of the United States,
2) bankers' acceptances, 3) bank certificates of
deposit, 4) commercial paper, 5) debt securities, provided that (a) the
security has a credit rating of Aa or Aaa from Moody's Investor
Services, AA or AAA from Standard & Poor's Ratings Group, or an
equivalent rating from another rating service, or is unrated but
comparably creditworthy, (b) the security matures within twelve months
of purchase, (c) the market is very broad so that a large volume of
transactions on a given day will have relatively little effect on
yields, and (d) the market for the instrument features highly efficient
machinery permitting quick and convenient trading in virtually any
volume, and 6) shares of registered open-end investment companies.
K. Securities Transaction: the purchase or sale, or any action to
accomplish the purchase or sale, of a Security for an Employee Account.
<PAGE>
III. Personal Investment Guidelines
A. Personal Accounts and Pre-Clearance
1. Employees must conduct all securities transactions
for Employee Accounts through a Countrywide account,
unless the Employee gives prior written notice to the
Compliance Officer of an account with another
brokerage firm for transactions in registered
open-end investment company shares only. If such
notice is given, the Employee may, subject to this
Code, conduct registered open-end investment company
transactions through that brokerage firm.
2. Employees must obtain prior written permission from
the Compliance Officer to open or maintain a margin
account, or a joint or partnership account with
persons other than the Employee's spouse, parent, or
child (including custodial accounts).
3. No Employee may execute a Securities Transaction
without first obtaining Pre-Clearance from the
Compliance Officer. Prior to execution the Employee
must submit the Pre-Clearance form to the Compliance
Officer, or in the case of a Pre-Clearance request by
the Compliance Officer, to the alternate Compliance
Officer. An Employee may not submit a Pre-Clearance
request if, to the Employee's knowledge at the time
of the request, the same Security or a Related
Security is being actively considered for purchase or
sale, or is being purchased or sold, by a Countrywide
Fund.
4. Advisory Employees may not execute a Securities
Transactions while at the same time recommending
contrary action to a Countrywide Fund.
5. Settlement of Securities Transactions must be made on
or before settlement date. Extensions and
pre-payments are not permitted.
6. The Personal Investment Guidelines in this Section
III do not apply to Exempt Transactions. Employees
must remember that regardless of the transaction's
status as exempt or not exempt, the Employee's
fiduciary obligations remain unchanged.
7. While trustees of the Trust are subject at all times
to the fiduciary obligations described in
this Code, the Personal Investment Guidelines and
Compliance Procedures in Sections III and IV
of this Code apply to trustees whose affiliation with
the Trust is solely by reason of being a
trustee of the Trust only if the trustee knew, or in
the ordinary course of fulfilling the
duties of that position, should have known, that
during the seven days immediately preceding or
after the date of the trustee's transaction that the
same Security or a Related Security was or
was to be purchased or sold for a Countrywide Fund or
that such purchase or sale for a Countrywide Fund was
being considered, in which case such Sections apply
only to such transaction. Likewise, directors of
Countrywide who (i) are not directly employed by
Countrywide and (ii) do not in the ordinary course of
fulfilling the duties of that position
participate in or make recommendations with respect
to the purchase or sale of Securities by
the Countrywide Funds, are subject at all times to
the fiduciary obligations described in this
Code; provided, however, that the Personal Investment
Guidelines and Compliance Procedures in
Section III and IV of this Code apply to such
directors only if the director knew, or in the
ordinary course of fulfilling the duties of that
position, should have known, that during the
seven days immediately preceding or after the date of
the director's transaction that the same
Security or a Related Security was or was to be
purchased or sold for a Countrywide Fund or
that such purchase or sale for a Countrywide Fund was
being considered, in which case such
Sections apply only to such transaction.
B. Limitations on Pre-Clearance
1. After receiving a Pre-Clearance request, the Compliance Officer will
promptly review the request and will deny the request if the
Securities Transaction will violate this Code.
2. Employees may not execute a Securities Transactions on a day during
which a purchase or sell order in that same Security or a Related
Security is pending for, or is being actively considered on behalf
of, a Countrywide Fund. In order to determine whether a Security is
being actively considered on behalf of a Countrywide Fund, the
Compliance Officer will consult the current Recommended List and,
in the case of non-equity Securities, consult each Advisory
Employee responsible for investing in non-equity Securities for any
Countrywide Fund. Securities Transactions executed in violation of
this prohibition shall be unwound or, if not possible or practical,
the Employee must disgorge to the appropriate Countrywide Fund or
Funds the value received by the Employee due to any favorable price
differential received by the Employee. For example, if the Employee
buys 100 shares at $10 per share, and a Countrywide
Fund buys 1000 shares at $11 per share, the Employee will pay $100
(100 shares x $1 differential) to the Countrywide Fund.
3. An Advisory Employee may not execute a Securities Transaction within
seven (7) calendar days after a transaction in the same Security or
a Related Security has been executed on behalf of a
Countrywide Fund unless the Countrywide Fund's entire position in
the Security has been sold prior to the Advisory Employee's
Securities Transaction and the Advisory Employee is also
selling the Security. If the Compliance Officer determines that a
transaction has violated this prohibition, the transaction shall be
unwound or, if not possible or practical, the
Advisory Employee must disgorge to the appropriate Countrywide Fund
or Funds the value received by the Advisory Employee due to any
favorable price differential received by the Advisory Employee.
4. Pre-Clearance requests involving a Securities Transaction by
an Employee within fifteen calendar days after any Countrywide
Fund has traded in the same Security or a Related Security will be
evaluated by the Compliance Officer to ensure that the proposed
transaction by the Employee is consistent with this Code and that
all contemplated Countrywide Fund activity in the Security has
been completed. It is wholly within the Compliance Officer's
discretion to determine when Pre-Clearance will or will not be
given to an Employee if the proposed transaction falls within
the fifteen day period.
5. Pre-Clearance procedures apply to any Securities Transactions in a
private placement. In connection with a private placement
acquisition, the Compliance Officer will take into account,
among other factors, whether the investment opportunity should be
reserved for a Countrywide Fund, and whether the opportunity is
being offered to the Employee by virtue of the Employee's
position with the Trust or Countrywide. Employees who have been
authorized to acquire securities in a private placement will, in
connection therewith, be required to disclose that
investment if and when the Employee takes part in any subsequent
investment in the same issuer. In such circumstances, the
determination to purchase Securities of that issuer on
behalf of a Countrywide Fund will be subject to an independent
review by personnel of Countrywide with no personal interest in
the issuer.
6. Employees are prohibited from acquiring any Securities in
an initial public offering. This restriction is imposed in
order to preclude any possibility of an Employee profiting
improperly from the Employee's position with the Trust or
Countrywide, and applies only to the Securities offered for
sale by the issuer, either directly or through an underwriter,
and not to Securities purchased on a securities exchange or in
connection with a secondary distribution.
7. Employees are prohibited from acquiring low priced equity
securities (or "penny stock"), defined as those equity securities
trading at $5 per share or less.
C. Other Restrictions
1.If a Securities Transaction is executed on behalf of a Countrywide
Fund within seven (7) calendar days after an Advisory Employee
executed a transaction in the same Security or a
Related Security, the Compliance Officer will review the Advisory
Employee's and the Countrywide Fund's transactions to determine
whether the Advisory Employee did not meet his or her fiduciary
duties to the Trust and its shareholders in violation of this
Code. If the Compliance Officer determines that the Advisory
Employee's transaction violated this Code, the transaction shall
be unwound or, if not possible or practical, the Advisory Employee
must disgorge to the appropriate Countrywide Fund or Funds the
value received by the Advisory Employee due to any favorable
price differential received by the Advisory Employee.
2.Employees are prohibited from serving on the boards
of directors of publicly traded companies, absent
prior authorization in accord with the general
procedures of this Code. The consideration of prior
authorization will be based upon a determination that
the board service will be consistent with the
interests of the Trust and its shareholders. In the
event that board service is authorized, Employees
serving as directors will be isolated from other
Employees making investment decisions with respect to
the securities of the company in question.
3.No Employee may accept from a customer or vendor an
amount in excess of $100 per year in the form of
gifts or gratuities, or as compensation for services.
If there is a question regarding receipt of a gift,
gratuity or compensation, it is to be reviewed by the
Compliance Officer.
IV. Compliance Procedures
A. Employee Disclosure and Certification
1. At the commencement of employment with the Trust or
Countrywide, each Employee must certify that he or
she has read and understands this Code and recognizes
that he or she is subject to it, and must disclose
all personal Securities holdings.
2. The above disclosure and certification is also
required annually, along with an additional
certification that the Employee has complied with the
requirements of this Code and has disclosed or
reported all personal Securities Transactions
required to be disclosed or reported pursuant to the
requirements of this Code.
B. Pre-Clearance
1. Advisory Employees will maintain an accurate and
current Recommended List at all times,
updating the list as necessary. The Advisory
Employees will submit all Recommended Lists to
the Compliance Officer as they are generated, and the
Compliance Officer will retain the Recommended Lists
for use when reviewing Employee compliance with this
Code. Upon receiving a Pre-Clearance request, the
Compliance Officer will contact the trading desk and
all Advisory Employees to determine whether the
Security the Employee intends to purchase or sell is
or was owned within the past fifteen (15) days by a
Countrywide Fund, and whether there are any
pending purchase or sell orders for the Security.
The Compliance Officer will determine whether the
Employee's request violates any prohibitions or
restrictions set out in this Code.
2. If authorized, the Pre-Clearance is valid for orders
placed by the close of business on the second
trading day after the authorization is granted. If
during the two day period the
Employee becomes aware that the trade does not comply
with this Code or that the statements
made on the request form are no longer true, the
Employee must immediately notify the
Compliance Officer of that information and the
Pre-Clearance may be terminated. If during the
two day period the trading desk is notified that a
purchase or sell order for the same Security
or Related Security is pending or is being considered
on behalf of a Countrywide Fund, the trading
desk will not execute the Employee Transaction and
will notify the Employee and the Compliance Officer
that the Pre-Clearance is terminated.
C. Compliance
1. All Employees must direct their broker, dealer or
bank to send duplicate copies of all confirmations
and periodic account statements directly to the
Compliance Officer. Each Employee must report, no
later than ten (10) days after the close of each
calendar quarter, on the Securities Transaction
Report form provided by the Trust or Countrywide, all
transactions in which the Employee acquired any
direct or indirect Beneficial Interest in a Security,
including Exempt Transactions, and certify that he or
she has reported all transactions required to be
disclosed pursuant to the requirements of this Code.
2. The Compliance Officer will spot check the trading
confirmations provided by brokers to verify
that the Employee obtained any necessary Pre-
Clearance for the transaction. On a quarterly
basis the Compliance Officer will compare all
confirmations with the Pre-Clearance records, to
determine, among other things, whether any
Countrywide Fund owned the Securities at the time of
the transaction or purchased or sold the security
within fifteen (15) days of the transaction.
The Employee's annual disclosure of Securities
holdings will be reviewed by the Compliance
Officer for compliance with this Code, including
transactions that reveal a pattern of trading
inconsistent with this Code.
3. If an Employee violates this Code, the Compliance
Officer will report the violation to management
personnel of the Trust and Countrywide for
appropriate remedial action which, in addition to the
actions specifically delineated in other sections of
this Code, may include a reprimand of the Employee,
or suspension or termination of the Employee's
relationship with the Trust and/or Countrywide.
4. The management personnel of the Trust will prepare an
annual report to the Trust's board of trustees that
summarizes existing procedures and any changes in the
procedures made during the past year.
The report will identify any violations of this Code,
any significant remedial action during the past year
and any instances when a Securities Transaction was
executed on behalf of a Countrywide Fund within
seven (7) calendar days after an Advisory Employee
executed a transation but no remedial action was
taken. The report will also identify any recommended
procedural or substantive changes to this Code based
on management's experience under this Code,
evolving industry practices, or legal developments.
