N-1A/A 1 exchange_n1a-080908.txt PRE-EFFECTIVE AMEND. NO. 1 As filed with the Securities and Exchange Commission on January 10, 2008 Securities Act File No. 333-142172 Investment Company File No. 811-22053 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-1A REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X] Pre-Effective Amendment No. 1 [X] Post-Effective Amendment No. [ ] and/or REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X] Amendment No. 1 [X] (Check appropriate box or boxes) X Exchange-Traded Funds, Inc. ----------------------------- (Exact Name of Registrant as Specified in Charter) 420 Lexington Avenue, Suite 2550 New York, New York 10170 ------------------------ (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, including Area Code: (212) 986-7900 -------------- Anthony F. Dudzinski X Exchange-Traded Funds, Inc. 420 Lexington Avenue, Suite 2550 New York, New York 10170 ------------------------ (Name and Address of Agent for Service) Copy to: Michael R. Rosella, Esq. Paul, Hastings, Janofsky & Walker LLP 75 East 55th Street New York, New York 10022 Approximate Date of Proposed Public Offering: As soon as practicable after the effective date of the Registration Statement. It is proposed that this filing will become effective: (check appropriate box) [ ] immediately upon filing pursuant to paragraph (b) [ ] on (date) pursuant to paragraph (b) [ ] 60 days after filing pursuant to paragraph (a)(1) [ ] on (date) pursuant to paragraph (a)(1) [ ] 75 days after filing pursuant to paragraph (a)(2) [ ] on (date) pursuant to paragraph (a)(2) of Rule 485 If appropriate, check the following box: [ ] this post-effective amendment designates a new effective date for a previously filed post-effective amendment Registrant declares that an indefinite amount of its shares of beneficial interest is being registered by this Registration Statement pursuant to Section 24(f) under the Investment Company Act of 1940, as amended, and Rule 24f-2 thereunder. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall became effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. DRAFT ----- X EXCHANGE-TRADED FUNDS, INC. PRELIMINARY PROSPECTUS - SUBJECT TO COMPLETION DATED __________ __, 2008 PROSPECTUS Haverford Quality 250(TM) Exchange-Traded Fund X Exchange-Traded Funds, Inc. (the "Company") is an investment company that anticipates offering multiple series of underlying fund portfolios. Currently, the Company is offering one series, the Haverford Quality 250(TM) Exchange-Traded Fund (the "Haverford Quality 250 Fund," or, the "Fund"). The Haverford Quality 250 Fund offers shares, known as Haverford Quality 250(TM) shares that are listed on NYSE Arca, Inc. Haverford Quality 250(TM) shares are not individually redeemable by the Fund but trade on NYSE Arca, Inc. in individual share lots. This Prospectus relates solely to the Haverford Quality 250 Fund. Information contained in this Prospectus is subject to completion or amendment. A registration statement for the Company has been filed with the U.S. Securities and Exchange Commission (the "SEC") but has not yet become effective. Shares of the Fund may not be sold, nor may offers to buy be accepted, prior to the time the registration statement becomes effective. This communication shall not constitute an offer to sell, nor shall there be any sale of these securities in any state in which such offer, solicitation, or sale would be unlawful prior to registration or qualification under the securities laws of any such state. Neither the SEC nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any representation to the contrary is a criminal offense. TABLE OF CONTENTS Page INTRODUCTION..................................................................1 HAVERFORD QUALITY 250(TM) EXCHANGE-TRADED FUND................................. ADDITIONAL INFORMATION ABOUT THE FUND, ITS PRINCIPAL STRATEGIES AND RELATED RISKS.......................................... BUYING AND SELLING FUND SHARES................................................. PORTFOLIO TURNOVER RATE........................................................ DISTRIBUTION AND SERVICE PLAN.................................................. PORTFOLIO HOLDINGS............................................................. FUND MANAGEMENT................................................................ DIVIDENDS, CAPITAL GAINS, AND TAXES............................................ DAILY PRICING.................................................................. DELIVERY OF FUND DOCUMENTS..................................................... FINANCIAL HIGHLIGHTS........................................................... -i- INTRODUCTION This Prospectus provides important information you need to make an informed decision about whether to invest in X Exchange-Traded Funds, Inc. (the "Company"). It contains information about the Company, its investment portfolio known as the Haverford Quality 250(TM) Exchange-Traded Fund (the "Haverford Quality 250 Fund," or, the "Fund") and the shares of the Fund being offered by this Prospectus, known as Haverford Quality 250(TM) shares. An investment in the Fund is not a deposit in a bank and it is not insured or guaranteed by the Federal Deposit Insurance Corporation (FDIC) or any other governmental agency. The Company and the Fund are part of the XShares Advisors family of exchange-traded funds and are related for purposes of investor and investment services, as defined in Section 12(d)(1)(G) of the Investment Company Act of 1940, as amended (the "1940 Act"). WHAT ARE EXCHANGE-TRADED FUNDS? An exchange-traded fund ("ETF") is an investment company which offers shares that are listed on a U.S. securities exchange. Shares of ETFs, because they are listed on a stock exchange, can be traded throughout the day on that stock exchange at market-determined prices. ETFs typically invest predominantly in the securities of companies comprising an underlying index. As such, the ETF itself is an index fund. Unlike many mutual funds, the Fund does not seek to outperform any particular market sector and will not assume temporary defensive positions when markets decline or appear overvalued. WHAT IS X EXCHANGE-TRADED FUNDS, INC.? X Exchange-Traded Funds, Inc. is an investment company that anticipates offering multiple series of underlying fund portfolios. Currently, the Company is offering one series, the Haverford Quality 250 Fund. The Haverford Quality 250 Fund offers shares, known as Haverford Quality 250(TM) shares that are listed on NYSE Arca, Inc. ("NYSE Arca"). Haverford Quality 250(TM) shares are not individually redeemable by the Fund but trade on NYSE Arca in individual share lots. The Fund seeks to invest in a portfolio of securities that substantially replicates a particular benchmark index (the "Haverford Quality 250(TM) Index," or, the "Underlying Index"). XShares Advisors LLC (the "Advisor") serves as the investment advisor to the Fund. Haverford Investment Management, Inc. (the "Sub-Advisor" or "HIM") serves as the investment sub-advisor to the Fund and will be responsible for the day-to-day management of the Fund's portfolio, which involves principally reconfiguring the portfolio of the Fund, typically quarterly, to reflect any reconfiguration in the Haverford Quality 250(TM) Index by the Index Administrator, discussed below. WHAT IS THE HAVERFORD QUALITY 250(TM) INDEX AND HOW IS IT CREATED AND MAINTAINED? The Haverford Quality 250(TM) Index is a fundamentally weighted index consisting of 250 United States ("U.S.") equity securities of high-quality, dividend-paying companies. HIM is the creator of the Haverford Quality 250(TM) Index and created the Underlying Index using its patent-pending methodology and construction process. Based on its own proprietary intellectual model, HIM has established specific, defined characterization/inclusion/exclusion criteria (the "Index Methodology") that an issuer must meet in order to be included in the Underlying Index. HIM does not administer or maintain the Underlying Index. The Underlying Index will be administered by Dow Jones & Company, Inc. ("Dow Jones" or the "Index Administrator"), which will employ the Index Methodology to determine the composition of the Underlying Index. Dow Jones will also act as "index calculation agent" in connection with the calculation and dissemination of the Underlying Index. The Index Methodology is publicly available on the Fund's website at www.[hq250].com. Any change to the Index Methodology will be posted on the Fund's website at least 60 days prior to it being implemented. The Haverford Quality 250TM Index is reconstituted and rebalanced quarterly at which time some or all of the component securities may change. Information about the Haverford Quality 250(TM) Index, including the component securities in the Haverford Quality 250(TM) Index and value of the securities in the Haverford Quality 250(TM) Index are posted throughout the trading day every 15 seconds and are available through Reuters under the symbol [ ____]. 2 Haverford Quality 250(TM) Exchange-Traded Fund ------------------------------------------------------------------------------ Trading Symbol: [ ] CUSIP Number: [ ] Underlying Index Symbol: [ ] Inception Date: [ ] ------------------------------------------------------------------------------ INVESTMENT OBJECTIVE The Fund seeks to track the performance, before fees and expenses, of the Haverford Quality 250(TM) Index. The Fund's investment objective is not fundamental, and may be changed without shareholder approval. Shareholders will be given 60 days' notice of any change in investment objective. PRINCIPAL INVESTMENT STRATEGY The Fund employs a "passive management" investment strategy designed to track the performance of the Haverford Quality 250(TM) Index. The Haverford Quality 250(TM) Index is a fundamentally weighted index consisting of 250 U.S. equity securities of high-quality, dividend-paying companies. As its primary strategy, the Fund attempts to replicate the Haverford Quality 250(TM) Index by investing, under normal circumstances, at least 90%, and typically substantially all, of its assets in the securities that make up the Haverford Quality 250(TM) Index, holding each security in approximately the same proportion as its weighting in the Haverford Quality 250(TM) Index. The Fund will provide shareholders with at least 60 days' notice of any change in these policies. The Fund may also invest up to 10% of its assets in futures contracts, options on futures contracts, options, swaps on securities of companies in the Haverford Quality 250(TM) Index, as well as cash and cash equivalents, such as money market instruments (subject to applicable limitations of the 1940 Act). The Haverford Quality 250(TM) Index is constructed in the following manner. The Underlying Index starts from a universe of 40,000 U.S. incorporated companies, including real estate investment trusts ("REITs"), offering common stock listed on a U.S. securities exchange (e.g., the New York Stock Exchange, the American Stock Exchange or the NASDAQ Stock Market). The Index Methodology then employs a quality screen to identify issuers "A" rated or better according to Standard and Poor's Earnings and Dividend Ranking System or Value Line's Financial Strength Ranking System. Only issuers rated "A" or better will be considered for selection. The Index Methodology then identifies and excludes Master Limited Partnerships from the Underlying Index. From this list of potential issues, the Index Methodology then looks to identify those issuers which have paid or declared "regular dividend payments". A "regular dividend payment" is defined as a dividend payment, excluding special dividends, that is regular in payment frequency (i.e. annual, semi-annual, or quarterly). The Index Methodology then selects the largest 250 dividend paying issuers, based on "total annualized dividend payment," 3 for inclusion in the Underlying Index. "Total annualized dividend payment" is defined as an issuer's most recent or indicated regular dividend payment multiplied by the payment frequency (e.g. if the issuer makes dividend payments semi-annually, such dividend payment is multiplied by two, or if such issuer makes dividend payments quarterly, such dividend payment is multiplied by four), multiplied by the total number of common shares outstanding. In accordance with the Index Methodology, each issuer's weighting in the Underlying Index is tied to such issuer's total annualized dividend payment, as a percentage of the aggregate total annualized dividend payments of all 250 issuers. The Underlying Index is reconstituted and rebalanced on a quarterly basis. The Underlying Index is currently concentrated in the financial services sector. The Fund may also sample, rather than replicate, the Haverford Quality 250(TM) Index by holding securities that, in the aggregate, are intended to approximate the Haverford Quality 250(TM) Index in terms of key characteristics. If the Fund pursues a sampling strategy, it will continue to invest, under normal circumstances, at least 90% of its assets in the securities that make up the Haverford Quality 250(TM) Index. PRINCIPAL RISKS The Fund is subject to certain risks. Certain of these risks are described below. For a more detailed discussion of some of these risks, see "Additional Information About the Fund, Its Principal Strategies and Related Risks" below. o The Fund is subject to stock market risk, which is the risk that stock prices overall will decline over a given period of time. The Fund's total return, like stock prices generally, will fluctuate within a wide range, so an investor could lose money over short or even long periods. Stock markets tend to be volatile, with periods of rising prices and periods of falling prices. o The Fund is subject to index risk, which is the risk that stocks in the Haverford Quality 250(TM) Index may under-perform fixed income investments or stock market investments that track other markets, segments or sectors. The Advisor does not actively manage the Fund and therefore does not attempt to analyze, quantify or control the risks associated with investing in stocks of companies in the Haverford Quality 250(TM) Index. o The Fund is subject to dividend payment risk, which is the risk that an issuer of stock that the Fund invests in will reduce or eliminate the dividend rate on securities held by the Fund. o The Fund is subject to investment style risk, which is the risk that, to the extent that the Fund's assets are invested in small- and mid-capitalization stocks, the returns from these small- and mid-capitalization stocks will trail returns from the overall stock market. Historically, these stocks have been more volatile in price than the large-capitalization stocks. 4 o The Fund is subject to index sampling risk, which is the risk that, when employing a sampling strategy, the stocks held by the Fund will not provide investment performance tracking the Haverford Quality 250(TM) Index. o The Fund is subject to market price risk, which is the risk associated with the fact that the Haverford Quality 250(TM) shares are listed on NYSE Arca and can be bought and sold in the secondary market at market prices. Although it is expected that the market price of the Haverford Quality 250(TM) shares typically will approximate its net asset value ("NAV"), there may be times when the market price and the NAV differ significantly. Thus, you may pay more than NAV when buying Haverford Quality 250(TM) shares on the secondary market, and you may receive less than NAV when you sell Haverford Quality 250(TM) shares. o The Fund is subject to secondary market risk. Although the Haverford Quality 250(TM) shares are listed for trading on NYSE Arca, it is possible that an active trading market may not be maintained. Trading of the Haverford Quality 250(TM) shares on NYSE Arca may be halted if NYSE Arca officials deem such action appropriate, if the Haverford Quality 250(TM) shares are delisted from NYSE Arca or if the activation of market-wide "circuit breakers" halts stock trading generally. o The Fund is subject to industry concentration risk. Because the Fund's investments may be concentrated in a particular sector(s), it may be subject to a higher risk of loss as a result of adverse economic, business or other developments that affect such sector(s). o The Fund is subject to derivatives risk, which is the risk associated with investing in derivatives, such as stock futures, options contracts, and swap agreements. Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. o The Fund is subject to interest rate risk. The Haverford Quality 250(TM) Index, and therefore the Fund, may be more heavily weighted than other types of investments in market sectors that are sensitive to interest rate fluctuations (such as the financial and real estate sectors). The Fund therefore may be more sensitive to fluctuations in interest rates than other types of investments. In particular, increases to prevailing interest rates could have a negative impact on the performance of the Fund. Further information about the Fund and its risks can be found in "Additional Information About the Fund, Its Principal Strategies and Related Risks" in this Prospectus and in the Statement of Additional Information.. PERFORMANCE INFORMATION The Fund has only recently begun operations, so performance information is not yet available. 5 FEES AND EXPENSES The following table describes the fees and expenses you may pay if you buy and hold Haverford Quality 250(TM) shares. Transaction costs incurred by the Fund for buying and selling securities are not reflected in the table. Investors purchasing shares in the secondary market will not pay the Shareholder Fees shown below, but will pay the Operating Expenses and may be subject to costs (including customary brokerage commissions) charged by their broker. Operating Expenses are expressed as a percentage of average daily net assets and are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment) Sales Charge (Load) Imposed on Purchases: None Transaction Fee on Purchases and Redemptions: Varies(1) Additional Transaction Fee if not settled through the Continuous Net Settlement system of the National Securities Clearing Corporation $__________ ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets) Management Fee(2): [ ]% 12-1 Distribution Fee(3): [ ]% Other Expenses(4): [ ]% Acquired Fund Fees and Expenses(4): [ ]% ----------- TOTAL ANNUAL FUND OPERATING EXPENSES: [ ]% ----------- Less: Expense Reduction/Reimbursement(5) ([ ])% ----------- NET ANNUAL OPERATING EXPENSES(5): [ ]% ===========
(1) An investor purchasing or redeeming Creation Units of the Fund will pay a transaction fee to the Fund. The minimum Transaction Fee is $500, although the fee may vary. See "Creation Unit Purchase and Redemption Transaction Fees" below. In addition, an investor buying or selling shares of the Fund in the secondary market will pay a commission to his or her broker in an amount established by the broker. Investors who hold Creation Units will also pay the annual fund operating expenses described in the table above. (2) The Fund pays the Advisor a single, unified management fee for arranging for certain non-distribution related services necessary for the Fund to operate. For more information about the unified management fee, see "Investment Advisor" under "Fund Management". (3) The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up to .25% of average daily net assets may be made by the Fund. The Board of Directors of the Fund has determined that no such payments will be made for the twelve month period following commencement of operations. (4) "Other Expenses" and "Acquired Fund Fees and Expenses" are based on estimated amounts for the current fiscal year. (5) Haverford Investment Management, Inc. has contractually agreed to reduce its fees and/or pay Fund expenses (excluding, among other things, Acquired Fund Fees and Expenses, interest, taxes, brokerage commissions and extraordinary expenses) in order to limit Net Annual Operating Expenses for shares of the Fund to 0.[ ]% of the Fund's average net assets (the "Expense Cap"). The Expense Cap will remain in effect until at least [ ] [ ], 2009. Haverford Investment Management, Inc. is permitted to be reimbursed for fee reductions and/or expense payments made in the prior three fiscal years. This reimbursement may be 6 requested by Haverford Investment Management, Inc. if the aggregate amount actually paid by the Fund toward operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the Expense Cap. The Fund sells and redeems Haverford Quality 250(TM) shares only in Creation Units and principally on an in-kind basis for portfolio securities of the Haverford Quality 250(TM) Index. Haverford Quality 250(TM) shares IN LESS THAN CREATION UNIT AGGREGATIONS ARE NOT REDEEMABLE. The following example is intended to help retail investors compare the cost of investing in the Fund with the cost of investing in other funds. It illustrates the hypothetical expenses that such investors would incur over various periods if they invest $10,000 in the Fund. The example assumes that the Fund provides a return of 5% a year and that operating expenses remain the same. This example does not include the brokerage commissions that retail investors will pay to buy and sell Haverford Quality 250(TM) shares. It also does not include the transaction fees on purchases and redemptions of Creation Units, because these fees will not be imposed on retail investors. ------------------------------------- 1 YEAR 3 YEARS ------------------------------------- $[ ] $[ ] ------------------------------------- This example should not be considered to represent actual expenses or performance from the past or for the future. Actual future expenses may be higher or lower than those shown. CREATION UNIT PURCHASE AND REDEMPTION TRANSACTION FEES The Fund issues and redeems shares at NAV and only in Creation Unit blocks of 100,000 of Haverford Quality 250(TM) shares. As a practical matter, only institutions or large investors purchase or redeem Creation Units. A minimum Creation Unit transaction fee of $500 is charged for each purchase or redemption of Creation Units, regardless of the number of Creation Unit shares acquired. The level of the transaction fee is variable and will fluctuate depending on the number of securities contained in the applicable creation/redemption basket and on whether the purchase or redemption will take place outside the usual process at the National Securities Clearing Corporation. There is no maximum transaction fee level. Based on the current composition of the Index and the manner in which Creation Unit purchases and redemptions are expected to settle, it is presently expected that the applicable Creation Unit purchase/redemption fee will be $500. The value of a Creation Unit of the Fund, as of the date of this Prospectus, was approximately $2,500,000. Investors holding Creation Units will also pay the Annual Fund Operating Expenses described in the table above. Assuming an investment in a Creation Unit of $2,500,000, a 5% return, and assuming that the Fund's operating expenses remain the same and the Creation Units are redeemed at the end of each period, a purchaser of Creation Units will incur the following costs: 7 ------------------------------------- 1 YEAR 3 YEARS ------------------------------------- $[ ] $[ ] ------------------------------------- 8 ADDITIONAL INFORMATION ABOUT THE FUND, ITS PRINCIPAL STRATEGY AND RELATED RISKS The Fund is registered with the United States Securities and Exchange Commission (the "SEC") under the 1940 Act as an open-end, diversified management investment company. The following section provides more information about the Fund, the Haverford Quality 250(TM) Index and the principal investment strategies and risks that are common to the Fund. ADDITIONAL INVESTMENT STRATEGIES In addition, to the Fund's principal investment strategy, the Fund may, from time to time, use certain other strategies or engage in certain other investment practices that are not a principal strategy. For example, from time to time, the Fund may engage in securities lending and may invest in investment-grade debt securities (i.e., debt obligations classified within the four highest ratings of a nationally recognized statistical rating organization such as Moody's Investors Service ("Moody's") or Standard & Poor's ("S&P") or, if unrated, determined by the Advisor to be of comparable quality). The Fund may also hold cash and/or invest a portion of its assets in U.S. Government securities, money market instruments and repurchase agreements collateralized by the foregoing obligations. These other investments and strategies are described in detail in the Fund's Statement of Additional Information. MORE INFORMATION ABOUT THE FUND'S PRINCIPAL RISKS Index Risk. The Fund employs a "passive management" or indexing investment approach. The Fund attempts to track the investment performance of the Haverford Quality 250(TM) Index. Whenever practicable, the Fund uses the replication method as its primary strategy, meaning that it holds the same stocks, in approximately the same proportions, as the stocks in the Haverford Quality 250(TM) Index, regardless of their investment merit. Because the Fund is a passively managed index fund, the Advisor does not attempt to analyze individual companies or to quantify, manage or control the risks associated with investing in individual companies or in a portfolio that replicates the Haverford Quality 250(TM) Index. Although index funds, by their nature, tend to be tax-efficient investment vehicles, tax ramifications are not considered in the passive management of index funds like the Fund. Index Sampling Risk. From time to time regulatory constraints or other considerations may prevent the Fund from replicating precisely the Haverford Quality 250(TM) Index. This may occur for a number of reasons. For example, the Fund is taxed as a regulated investment company under the Internal Revenue Code of 1986, as amended (the "Code"), and the Code imposes certain percentage limitations applicable to investments by regulated investment companies. To the extent a strict application of the replication methodology would result in a violation of the Code, the Fund would be prevented from replicating the Haverford Quality 250(TM) Index. Similarly, other regulatory constraints, such as limitations on the ability of the Fund to invest more than a certain percentage in illiquid securities, may also prevent the Fund from precisely 9 replicating the Haverford Quality 250(TM) Index. In other circumstances, the Advisor may determine for other reasons to invest a portion of the Fund's assets in securities not included in the Haverford Quality 250(TM) Index. In each of these circumstances the Advisor will employ a strategy known as "sampling" whereby the Fund will invest in securities that, in the aggregate, are deemed by the Advisor to approximate the Haverford Quality 250(TM) Index in terms of key characteristics. To the extent the Fund employs a sampling strategy, it is subject to index sampling risk, which is the risk that the securities selected by the Advisor pursuant to this strategy may not, in fact, provide investment performance that closely tracks the Haverford Quality 250(TM) Index. Investment Style Risk. The Advisor makes no effort to manage the capitalization exposure of the Fund's portfolio. From time to time, depending on the construction of the Underlying Index, the Fund may invest its assets in small and medium-size companies. Such investments entail greater risk than investments in larger, more established companies. Small and medium-size companies often have narrower markets and more limited managerial and financial resources than larger, more established companies. Industry Concentration Risk. Because the Fund's investments may be concentrated in a particular sector(s), it may be subject to a higher risk of loss as a result of adverse economic, business or other developments than if its investments were diversified across different industry sectors. Sectors possess particular risks that may not affect other sectors. The Underlying Index's concentration in particular sector(s) may change over time, and the Fund may concentrate its investments in any number of different sectors. Currently, the Underlying Index is concentrated in the financial services sector. Derivatives Risk. The Fund may invest, to a limited extent, in derivatives. Derivatives may involve risks different from, and possibly greater than, those of traditional investments. To track the Haverford Quality 250(TM) Index as closely as possible, the Fund attempts to remain fully invested in stocks. The Fund may invest, to a limited extent, in stock futures and options contracts, warrants, convertible securities, and swap agreements, which are types of derivatives. Generally speaking, a derivative is a financial contract whose value is based on the value of a traditional security (such as a stock or bond), an asset (such as a commodity like gold), or a market index (such as the S&P 500 Index). Investments in derivatives may subject the Fund to risks different from, and possibly greater than, those of the underlying securities, assets, or market indexes. Losses (or gains) involving futures can sometimes be substantial--in part because a relatively small price movement in a futures contract may result in an immediate and substantial loss (or gain) for the Fund. Similar risks exist for warrants (securities that permit their owners to purchase a specific number of stock shares at a predetermined price), convertible securities (securities that may be exchanged for another asset), and swap agreements (contracts between parties in which each agrees to make payments to the other based on the return of a specified index or asset). The Fund will not use derivatives for speculation or for the purpose of leveraging (magnifying) investment returns. Market Price Risk. The market price of Haverford Quality 250(TM) shares of the Fund may differ from the Fund's NAV. Haverford Quality 250(TM) shares are listed for trading on NYSE Arca and can be bought and sold in the secondary market at market prices. Although it is expected that the market price of the Haverford Quality 250(TM) shares typically will approximate its NAV, there 10 may be times when the market price and the NAV differ significantly. Thus, you may pay more than NAV when buying Haverford Quality 250(TM) shares on the secondary market, and you may receive less than NAV when you sell those Haverford Quality 250(TM) shares. The market price of Haverford Quality 250(TM) shares, like the price of any exchange-traded security, includes a "bid-asked spread" charged by the exchange specialist and other market-makers that cover the particular security. While the Fund cannot predict, and does not control, whether or when the Haverford Quality 250(TM) shares will trade at a premium or a discount to NAV, it is likely that in times of severe market disruption, the bid-asked spread will increase significantly and the Haverford Quality 250(TM) shares would most likely be traded at a discount to NAV. In addition, any discount is likely to be greatest when the price of Haverford Quality 250(TM) shares is falling fastest--and this may be the time that you most want to sell your Haverford Quality 250(TM) shares. The Fund's website at [www.[hq250].com] will show the prior day's closing NAV and closing market price for the Fund's shares. In addition, the Fund's website will contain the following information, on a per share basis, for the Fund: (a) the prior business day's net asset value and the Bid/Ask Price and a calculation of the premium or discount of the Bid/Ask Price at the time of calculation of the net asset value against such net asset value; and (b) data in chart format displaying the frequency distribution of discounts and premiums of the daily Bid/Ask Price against the net asset value, within appropriate ranges, for each of the four previous calendar quarters. In addition, the Fund's website contains information regarding the premiums and discounts at which shares of the Fund have traded. Secondary Market Risk. An active secondary market for the Haverford Quality 250(TM) shares may not exist. Although the Haverford Quality 250(TM) shares are listed on NYSE Arca, it is possible that an active trading market may not be maintained. In addition, trading in the Haverford Quality 250(TM) shares on NYSE Arca will be halted whenever trading in equity securities generally is halted by the activation of market-wide "circuit breakers," which are tied to large decreases in the Dow Jones Industrial Average. Trading of the Haverford Quality 250(TM) shares also will be halted if (1) the shares are delisted from NYSE Arca without first being listed on another exchange, or (2) NYSE Arca officials determine that such action is appropriate in the interest of a fair and orderly market or to protect investors. If trading is halted, eligible investors (see below) will still be able to purchase Creation Units of the Fund directly and redeem such units with the Fund. If Haverford Quality 250(TM) shares are delisted from NYSE Arca, the Company will consider what appropriate action to take, which may include, among other things, seeking to list Haverford Quality 250(TM) shares on another national securities exchange, converting the Fund to a traditional mutual fund, or redeeming the Haverford Quality 250(TM) shares at NAV. In managing the Fund, the Advisor and Sub-Advisor seek a correlation of 0.95 or better between the Fund's performance and the performance of the Haverford Quality 250(TM) Index. A figure of 1.00 would represent perfect correlation. There is no guarantee that the Advisor and Sub-Advisor will be able to obtain this level of correlation. Limitations and restrictions on the level of investment in securities that are discussed in this Prospectus and that are expressed in terms of percentage limitations are measured at the time of investment, unless specifically indicated otherwise. Changes in market values that cause a percentage limitation to be exceeded will not necessarily require that securities be sold. 11 SHARES OF THE FUND ARE NOT INDIVIDUALLY REDEEMABLE. They can be redeemed with the Fund directly at NAV only in large lots known as Creation Units. You would incur brokerage costs in purchasing enough shares of the Fund to constitute a Creation Unit. MORE INFORMATION ABOUT THE HAVERFORD QUALITY 250(TM) INDEX The Haverford Quality 250(TM) Index was created and developed by HIM based on its own proprietary intellectual model. In developing the Haverford Quality 250(TM) Index, HIM has established specific criteria for determining which securities are included in the Haverford Quality 250(TM) Index. Dow Jones, as Index Administrator, is responsible for maintaining the Haverford Quality 250(TM) Index based on this criterion. The Haverford Quality 250(TM) Index is generally reconstituted on a quarterly basis. Decisions regarding additions to, and removals from, the Haverford Quality 250(TM) Index are made by the Index Administrator, on a quarterly basis, in its sole discretion. See "Information About the Haverford Quality 250(TM) Index and Index Administrator" in the Statement of Additional Information. Dow Jones also acts as "index calculation agent" in connection with the calculation and dissemination of the Haverford Quality 250(TM) Index. The Advisor has engaged HIM as Sub-Advisor with responsibility for the day-to-day management of the Fund. See "Sub-Advisor" below. HIM will generally employ only the replication method in adjusting the Fund's portfolio in response to changes in the Haverford Quality 250(TM) Index. The Advisor will provide oversight over HIM, which involves reviewing the portfolio of securities of the Fund against Haverford Quality 250(TM) Index, assisting in resolving any pricing issues and assisting in the development of trading strategies. To the extent that it is necessary to employ a sampling strategy with respect to the Fund's portfolio, the Sub-Advisor will generally be responsible for determining which securities to invest in as part of that strategy, subject to the Advisor's approval. The Fund is not actively managed and the actions of the Advisor and the Sub-Advisor will not result in the active management of the Fund. The Fund reserves the right to substitute a different index for the Haverford Quality 250(TM) Index if the Haverford Quality 250(TM) Index is discontinued, if HIM as the creator of the Haverford Quality 250(TM) Index terminates its arrangements with the Advisor relating to the use of the Haverford Quality 250(TM) Index, or for any other reason determined in good faith by the Fund's Board of Directors. If HIM's arrangement with the Advisor relating to the use of the Haverford Quality 250(TM) Index is terminated, the Company will take whatever action is deemed to be in the best interests of the Fund's shareholders and the shareholders will be provided with advance written notice of such action. HOW ARE THE HAVERFORD QUALITY 250(TM) SHARES DIFFERENT FROM TRADITIONAL MUTUAL FUND SHARES? Traditional mutual fund shares are issued by, and redeemed from, a fund at any time for cash at the shares' net asset value (NAV). NAV is typically calculated only once a day and reflects a fund's total assets, less its liabilities, divided by the number of shares it has outstanding. In determining the value of its assets, a traditional mutual fund typically values its underlying securities as of the close of trading on the New York Stock Exchange. As a result, no matter what time during the day an investor in a traditional mutual fund places an order to purchase or 12 redeem shares, that investor's order will be priced at that fund's NAV determined as of the close of trading of the New York Stock Exchange. Traditional mutual fund shares may be purchased from the fund directly by the shareholder or through a financial intermediary. In contrast, Haverford Quality 250(TM) shares cannot be purchased from, or redeemed by, the Fund except by or through a Participating Organization (defined below), and then only for an in-kind basket of securities in amounts sufficient to constitute a Creation Unit. An organized secondary market is expected to exist for the Haverford Quality 250(TM) shares, unlike traditional mutual fund shares, because Haverford Quality 250(TM) shares are listed for trading on NYSE Arca. As a result, investors can purchase and sell Haverford Quality 250(TM) shares on the secondary market through a broker. Secondary market transactions do not take place at NAV but at market prices that change throughout the day, based on the supply of, and demand for, Haverford Quality 250(TM) shares. Shareholders will also incur typical brokerage and transaction costs when buying or selling Haverford Quality 250(TM) shares on the secondary market. Although the market price of Haverford Quality 250(TM) shares typically approximates its NAV, there may be times when the market price and the NAV differ, so you may receive more or less than NAV when you purchase or sell your Haverford Quality 250(TM) shares on the secondary market. Also, it is possible that an active trading market may not be maintained. BUYING AND SELLING FUND SHARES BUYING AND SELLING SHARES ON THE SECONDARY MARKET Shares can be bought or sold throughout the trading day like shares of any publicly traded security. To buy or sell Haverford Quality 250(TM) shares you must have a brokerage account. When buying or selling shares through a broker, you will incur customary brokerage commissions and charges. The price at which you buy or sell Fund shares (i.e., the market price) may be more or less than the NAV of the shares. Unless imposed by your broker, there is no minimum dollar amount you must invest and no minimum number of Fund shares you must buy. Haverford Quality 250(TM) shares are listed on NYSE Arca. NYSE Arca is generally open Monday through Friday and is closed for weekends and the following holidays: New Year's Day, Martin Luther King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. BUYING SHARES DIRECTLY FROM THE FUND You can purchase shares directly from the Fund only in Creation Units or multiples thereof. The Fund issues Creation Units in blocks of 100,000 shares. The number of Fund shares in a Creation Unit will not change over time, except in the event that the Fund splits or revalues its shares. The Fund will not issue fractional Creation Units. Creation Units may be purchased only in exchange for a basket of securities - known as the In-Kind Creation Basket and cash equal to the Cash Component, as discussed further below. The Fund reserves the right to reject any purchase request at any time, for any reason, and without notice. The Fund can stop selling 13 shares or postpone payment of redemption proceeds at times when NYSE Arca is closed or under any emergency circumstances as determined by the SEC. To purchase shares directly from the Fund, you must be a Participating Organization or you must purchase through a broker that is a Participating Organization. A Participating Organization is a participant of the Continuous Net Settlement System of the NSCC or the Depository Trust Company ("DTC") that has executed a Participant Agreement with the Fund's distributor, [ALPS Distributors, Inc. (the "Distributor")]. The Distributor will provide a list of Participating Organizations upon request. Because Creation Units can be purchased or redeemed only in exchange for a basket of securities likely to cost millions of dollars, it is expected that only a limited number of institutional investors will purchase and redeem shares directly with the Fund. Thus, certain information in this Prospectus (e.g., information about purchasing and redeeming Haverford Quality 250(TM) shares directly from the Fund and references to transaction fees imposed on purchases and redemptions of Creation Units) is not relevant to most retail investors. These arrangements are designed to protect shareholders of the Fund from the potentially adverse effects that may be caused by the need to make frequent purchases and sales of portfolio securities as a result of cash inflows and outflows, as experienced in a traditional mutual fund. For example, in a traditional mutual fund, redemptions can result in adverse tax consequences on non-redeeming taxable shareholders because the mutual fund must sell portfolio securities to raise cash to pay redemptions. These sales may generate taxable capital gains which are then distributed to all shareholders, including non-redeeming shareholders. In contrast, the in-kind redemption mechanism of the Fund will enable the Fund to meet redemption requests without the need to sell portfolio securities and, as a result, redemptions from the Fund will generally not have any tax impact on the non-redeeming shareholders. EXCEPT WHEN AGGREGATED IN CREATION UNITS, Haverford Quality 250(TM) shares ARE NOT REDEEMABLE SECURITIES OF THE FUND. - In-Kind Creation Basket. On each business day, prior to the opening of trading on NYSE Arca, the Fund's Advisor will post on the NSCC bulletin board the In-Kind Creation Basket for the Fund for that day. The In-Kind Creation Basket will identify the name and number of shares of each security that must be contributed to the Fund for each Creation Unit purchased. The Fund reserves the right to accept a nonconforming creation basket. - Cash Component. In addition to the in-kind deposit of securities, an investor will either pay to, or receive from, the Fund an amount of cash (the "Balancing Amount") equal to the difference between the NAV of a Creation Unit and the value of the securities in the creation basket. The Balancing Amount ensures that the consideration paid by an investor for a Creation Unit is exactly equal to the value of the Creation Unit. The Fund's Advisor will publish, on a daily basis, information about the previous day's Balancing Amount. An investor also must pay a transaction fee, described below, in cash. The Balancing Amount and the transaction fee, taken together, are referred to as the Cash Component. - Placement of Purchase Orders. All purchase orders must be placed through a Participating Organization. Purchase orders will be processed either through a manual clearing process run by DTC or through an enhanced clearing process that is available only to those DTC participants that also are participants in the Continuous Net Settlement 14 System of the NSCC. Participating Organizations that do not use the NSCC's enhanced clearing process will be charged a higher transaction fee (discussed below). A purchase order must be received by the Fund's Distributor prior to the close of regular trading on NYSE Arca (generally 4:00 p.m., Eastern Time) on the day the order is placed, and all other procedures set forth in the Participant Agreement must be followed, in order for you to receive the NAV determined on that day. - Transaction Fee on Purchase of Creation Units. The Fund imposes a transaction fee on each purchase of Creation Units. The level of the fee is variable and will depend on the number of securities in the Creation Unit purchase or redemption basket and on whether the transaction is effected through the NSCC's enhanced clearing process or through the manual DTC clearing process. For transactions effected through the NSCC enhanced clearing process, the fee is typically $5 per security with a minimum charge of $500, increasing in increments of $500 with no maximum charge. For transactions effected through the manual DTC closing process, the fee is typically $15 per security, with a minimum of $500, increasing in increments of $500 with no maximum charge. Investors permitted to tender a nonconforming creation basket would be subject to an additional charge commensurate with the cost to the Fund. The transaction fee is paid to the Fund, not to the distributor, the Advisor or a third party. The fee protects existing shareholders of the Fund from the costs associated with issuing Creation Units. Shares of the Fund are held in book entry form, which means that no stock certificates are issued. The DTC, or its nominee, will be the registered owner of all outstanding shares of the Fund. Your beneficial ownership of shares will be shown on the records of DTC or its participants through which you hold the shares. Neither the Advisor nor the Distributor will have any record of your ownership. Therefore, to exercise any right as an owner of shares, you must rely on the procedures of DTC and its participants. Your account information will be maintained by your broker, which will provide you with account statements, confirmations of your purchases and sales of Fund shares, and tax information. Your broker also will be responsible for distributing income and capital gains distributions and for ensuring that you receive shareholder reports and other communications from the Fund whose shares you own. You will receive other services (e.g., dividend reinvestment and average cost information) only if your broker offers these services. REDEEMING SHARES DIRECTLY FROM A FUND You may redeem shares of the Fund only in Creation Units or multiples thereof. To redeem shares directly with the Fund, you must be a Participating Organization or you must redeem through a broker that is a Participating Organization. Units may be redeemed only in exchange for a basket of securities - known as the In-Kind Redemption Basket and cash equal to the Cash Component, as discussed further below. - In-Kind Redemption Basket. Redemption proceeds will be paid in kind with a basket of securities known as the In-Kind Redemption Basket. In most cases, the In-Kind Redemption basket will be the same as the In-Kind Creation Basket for that same day. There will be times, however, when the creation and redemption baskets differ. The 15 composition of the In-Kind Redemption Basket will be available on the NSCC bulletin board. The Fund reserves the right to honor a redemption request with a nonconforming redemption basket, with the consent of the redeeming investor. - Cash Component. Depending on whether the NAV of a Creation Unit is higher or lower than the value of the redemption securities, you will either receive from or pay to the Fund a Balancing Amount in cash. If you are due to receive a Balancing Amount, the amount you actually receive will be reduced by the amount of the applicable transaction fee. You also must pay a transaction fee, described below, in cash. The Balancing Amount and the transaction fee, taken together, are referred to as the Cash Component. - Placement of Redemption Orders. As with purchases, redemptions must be processed either through the DTC process or the enhanced NSCC process. A redemption order is deemed received on the date of transmittal if it is received by the Distributor prior to the close of regular trading on NYSE Arca on that date, and if all other procedures set forth in the Participant Agreement are followed. - Transaction Fee on Redemption of Creation Units. The Fund imposes a transaction fee on each redemption of Creation Units. The amount of the transaction fee on redemptions effected through the NSCC and the DTC, and on nonconforming redemptions, is the same as the fee imposed on comparable purchases (see previous section). As with the transaction fee on purchases, the transaction fee on redemptions is paid to the Fund, not to the Advisor, the Distributor or a third party. The fee protects existing shareholders of the Fund from the costs associated with redeeming Creation Units. You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the Fund. Because new Fund shares may be issued on an ongoing basis, a "distribution" of Fund shares could be occurring at any time. Certain activities that you perform as a dealer could, depending on the circumstances, result in you being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended (the "Securities Act"). For example, you could be deemed a statutory underwriter if you purchase Creation Units from the Fund, break them down into the constituent Fund shares, and sell those shares directly to customers, or if you choose to couple the creation of a supply of new Fund shares with an active selling effort involving solicitation of secondary-market demand for Fund shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person's activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter. Dealers who are not "underwriters" but are participating in a distribution (as opposed to engaging in ordinary secondary-market transactions), and thus dealing with Haverford Quality 250(TM) shares as part of an "unsold allotment" within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in securities of other registered investment companies, including the Fund. The acquisition of Fund 16 shares by registered investment companies is subject to the restrictions of Section 12(d)(1) of the 1940 Act. Pursuant to an exemptive order issued by the SEC and applicable to the Fund, other registered investment companies, particularly registered investment companies such as mutual funds, are permitted to invest in the Fund beyond the limits of Section 12(d)(1), subject to certain terms and conditions, including that the registered investment company enter into an agreement with the Company regarding the terms of the investment. EXCHANGES Shares of the Fund may not be exchanged for shares of another fund within the XShares Advisors family of exchange-traded funds. FREQUENT TRADING Unlike frequent trading of shares of a traditional open-end mutual funds (i.e., not exchange-traded shares), frequent trading of shares of the Fund on the secondary market does not disrupt portfolio management, increase the Fund's trading costs, lead to realization of capital gains, or otherwise harm Fund shareholders because these trades do not involve the Fund directly. A few institutional investors are authorized to purchase and redeem the Fund's shares directly with the Fund. Because these trades are effected in-kind (i.e., for securities, and not for cash), they do not cause any of the harmful effects (noted above) that may result from frequent cash trades. Moreover, the Fund imposes transaction fees on in-kind purchases and redemptions of the Fund to cover the custodial and other costs incurred by the Fund in effecting in-kind trades. These fees increase if an investor substitutes cash in part or in whole for securities, reflecting the fact that the Fund's trading costs increase in those circumstances. For these reasons, the Board of Directors has determined that it is not necessary to adopt policies and procedures to detect and deter frequent trading and market-timing in shares of the Fund. PORTFOLIO TURNOVER RATE The Fund is passively managed to the Haverford Quality 250(TM) Index and may sell securities regardless of how long they have been held in order to replicate the Haverford Quality 250(TM) Index. [In some cases, the Fund's annual turnover rate may exceed 100%.] A higher rate of portfolio turnover will result in higher transaction costs, including brokerage commissions. Also, to the extent that higher portfolio turnover results in more frequently realized net gains to the Fund, the Fund's distributions of taxable income may increase. DISTRIBUTION AND SERVICE PLAN The Fund has adopted a Distribution and Service Plan (the "Rule 12b-1 Plan") pursuant to which the Fund may pay financial intermediaries a fee of up to .25% of its average daily net assets for distribution and other services provided by that intermediary in accordance with the terms of the Rule 12b-1 Plan. The Board of Directors has determined that no payments will be made by the Fund under the Rule 12b-1 Plan for the twelve-month period following commencement of operations. If such fees are paid in the future, they would increase the costs associated with your 17 investments in the Fund and decrease the Fund's NAV because these fees are paid by the Fund. These fees, if paid in the future, would be paid out of the Fund's assets on an on-going basis, and therefore, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. PORTFOLIO HOLDINGS The Fund publicly disseminates its full portfolio holdings each day the Fund is open for business through its internet web site at [www.hq250.com]. The Fund may terminate or modify this policy at any time without further notice to shareholders. In addition, the In-Kind Creation Basket and In-Kind Redemption Basket, which identify the securities and share quantities which are delivered in exchange for purchases and redemptions of Creation Units, are publicly disseminated daily prior to the open of NYSE Arca via the NSCC. A description of the Fund's policies and procedures with respect to the disclosure of the Fund's portfolio securities is available in the Statement of Additional Information. FUND MANAGEMENT INVESTMENT ADVISOR XShares Advisors LLC serves as investment advisor to the Fund with overall responsibility for the general management and administration of the Fund, subject to the supervision of the Fund's Board of Directors. Under the Investment Advisory Agreement, the Advisor is responsible for arranging sub-advisory, transfer agency, custody, fund administration, and all other non-distribution related services for the Fund to operate. The Advisor will also be responsible for employing any sampling strategy for the Fund. For the services it provides to the Fund, the Advisor receives a unified management fee based on a percentage of the daily net assets of the Fund. The management fee is calculated daily and paid monthly in arrears. Out of the management fee, the Advisor pays, or arranges for the payment of, all fees and expenses of the Sub-Advisor, Transfer Agent, the Administrator and Accounting Agent, and the Custodian (as defined below). The Fund is responsible for the payment of all other expenses associated with its operation, including but not limited to, brokerage expenses, taxes, interest, fees and expenses of counsel to the Company, incurred on behalf of the Fund, fees and expenses of the Disinterested Directors (including legal counsel fees), incurred on behalf of the Fund, fees and expenses of the Chief Compliance Officer and expenses associated with the Company's compliance program, incurred on behalf of the Fund, litigation expenses, fees and expenses of the Fund's independent auditors, registration fees, expenses associated with compliance by the Company with regulatory requirements, including those relating to the development and distribution of its prospectus and shareholder reports, and extraordinary expenses. Pursuant to the Investment Advisory Agreement, the Advisor is authorized to engage one or more sub-advisors to perform any of the services contemplated to be performed by the Advisor under the Investment Advisory Agreement and may cause such sub-advisor to pay out of its sub-advisory fee, the fees and expenses of the Transfer Agent, the 18 Administrator and Accounting Agent, and the Custodian (as defined below). The Advisor is responsible for payment of the Sub-Advisory fee, as discussed below. The Advisor is located at 420 Lexington Avenue, New York, New York 10170. The Advisor's parent company is XShares Group LLC. For its services provided to the Fund under the Investment Advisory Agreement, the Fund pays the Advisor a fee equal to [ ]% of the Fund's average daily net assets. The fee is accrued daily and paid monthly. SUB-ADVISOR Haverford Investment Management, Inc. will act as investment sub-advisor to the Fund and its principal place of business is located at Three Radnor Corporate Center, Suite 450, Radnor, Pennsylvania 19087-4546. HIM is an affiliate of The Haverford Trust Company ("Haverford Trust"). Founded in 1979, Haverford Trust offers trust, estate and private banking services. As of December 31, 2007, HIM had approximately $179 million in assets under management. Pursuant to a Sub-Advisory Agreement between the Advisor and the Sub-Advisor, the Sub-Advisor will be responsible for the day-to-day management of the Fund, subject to the supervision of the Advisor and the Company's Board of Directors. In this regard, the Sub-Advisor will be responsible for implementing the replication strategy for the Fund with regard to its Underlying Index and for general administration, compliance and management services as may be agreed between the Advisor and the Sub-Advisor from time to time. In accordance with the terms of the Sub-Advisory Agreement, the Advisor will pay HIM, out of its own resources, a fee at the annual rate of [ ] of 1% of the Fund's average daily net assets for the first $1 billion in assets and [ ] of 1% of the Fund's average daily net assets in excess of $1 billion. Out of the Sub-Advisory fee, HIM pays all fees and expenses of the Transfer Agent, Administrator and Accounting Agent, and Custodian, incurred by the Fund. HIM has contractually agreed to pay Fund operating expenses (excluding, among other things, Acquired Fund Fees and Expenses, interest, taxes, brokerage commissions and extraordinary expenses) in order to limit the Fund's Net Annual Operating Expenses for shares of the Fund to [ ]% of the Fund's average net assets. The Expense Cap will remain in effect until at least [ ] [ ], 2009. HIM is permitted to be reimbursed for fee reductions and/or expense payments made in the prior three fiscal years. This reimbursement may be requested by HIM if the aggregate amount actually paid by the Fund toward operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the Expense Cap. In connection with the creation of the Fund, the Advisor and HIM entered into a Master Joint Development Agreement dated October 26, 2007. Pursuant to the terms of that certain Master Joint Development Agreement, HIM will pay the Advisor a fee in connection with the Advisor's services and expenses associated with the creation of the Fund. The Fund is not responsible for any portion of that fee payable to the Advisor. 19 A discussion regarding the basis for the Board of Directors' approval of the Investment Advisory Agreement and Sub-Advisory Agreement will be available in the Fund's annual or semi-annual report. PORTFOLIO MANAGER Jason D. Pride, Vice President, Director of Research and Member of the Investment Selection Committee, joined HIM in 2001 and has over 9 years of investment experience. Prior to joining HIM, Mr. Pride was a research analyst at Logan Capital Management, Inc. and Warburg Dillon Read, LLC. Mr. Pride received a B.S. degree from the Massachusetts Institute of Technology. Mr. Pride is responsible for various functions related to portfolio management including, but not limited to, investing cash inflows, implementing investment strategy, and researching and reviewing investment strategy. The Statement of Additional Information has more detailed information about the portfolio manager's compensation, other accounts managed by the portfolio manager and the portfolio manager's ownership of securities of the Fund. ADMINISTRATION, CUSTODIAN AND TRANSFER AGENT The Bank of New York Mellon serves as the Administrator to the Fund. The Administrator's principal address is 101 Barclay Street, New York, New York 10286. The Bank of New York Mellon serves as the Custodian to the Fund. The Custodian's principal address is 101 Barclay Street, New York, New York 10286. The Bank of New York Mellon serves as the Transfer Agent to the Fund. The Transfer Agent's principal address is 101 Barclay Street, New York, New York 10286. DISTRIBUTOR [ALPS Distributors, Inc.] serves as the distributor of Creation Units for the Fund on an agency basis. The Distributor's principal address is [1290 Broadway, Suite 1100, Denver, Colorado 80203.] The Distributor does not maintain a secondary market in shares of the Fund. DIVIDENDS, CAPITAL GAINS, AND TAXES FUND DISTRIBUTIONS The Fund pays out dividends from its net investment income to investors annually. The Fund distributes any net capital gains annually. 20 DIVIDEND REINVESTMENT SERVICE Brokers may make available to their customers who own Haverford Quality 250(TM) shares the DTC book-entry dividend reinvestment service. If this service is available and used, dividend distributions of both income and capital gains will automatically be reinvested in additional whole and fractional Haverford Quality 250(TM) shares of the Fund purchased in the secondary market. Without this service, investors would receive their distributions in cash. To determine whether the dividend reinvestment service is available and whether there is a commission or other charge for using this service, consult your broker. Brokers may require Fund shareholders to adhere to specific procedures and timetables. TAXES As with any investment, you should consider how your investment in shares of the Fund will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in shares of the Fund. Unless your investment in shares is made through a tax-exempt entity or tax-deferred retirement account, such as an IRA plan, you need to be aware of the possible tax consequences when a Fund makes distributions and when you sell your shares of the Fund. TAXES ON DISTRIBUTIONS Distributions from the Fund's net investment income (other than qualified dividend income), including distributions out of the Fund's net short-term capital gains, if any, and distributions of income from securities lending, are taxable to you as ordinary income. Distributions by the Fund of net long-term capital gains in excess of net short-term capital losses (capital gain dividends) are taxable to you as long-term capital gains, regardless of how long you have held Haverford Quality 250(TM) shares. Under current law, distributions by the Fund that qualify as qualified dividend income are taxable to you at long-term capital gain rates. In order for a distribution by the Fund to be treated as qualified dividend income, (i) the Fund itself must receive qualified dividend income from U.S. corporations, (ii) the Fund must meet holding period and other requirements with respect to its dividend paying stocks, and (iii) you must meet holding period requirements and other requirements with respect to the Fund's shares. In general, your distributions are subject to federal income tax for the year when they are paid. Certain distributions paid in January, however, may be treated as paid on December 31 of the prior year. If you are neither a resident nor a citizen of the United States or if you are a foreign entity, the Fund's ordinary income dividends (which include distributions of net short-term capital gains) will generally be subject to a 30% U.S. withholding tax, unless a lower treaty rate applies. 21 If you are a resident or a citizen of the United States, by law, back-up withholding will apply to your distributions and proceeds if you have not provided a taxpayer identification number or social security number and made other required certifications. TAXES WHEN SHARES ARE SOLD Currently, any capital gain or loss realized upon a sale of Haverford Quality 250(TM) shares is generally treated as a long-term gain or loss if Haverford Quality 250(TM) shares have been held for more than one year. Any capital gain or loss realized upon a sale of Haverford Quality 250(TM) shares held for one year or less is generally treated as a short-term gain or loss, except that any capital loss on the sale of Haverford Quality 250(TM) shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid with respect to such Haverford Quality 250(TM) shares. The foregoing discussion summarizes some of the consequences under current federal tax law of an investment in the Fund. It is not a substitute for personal tax advice. You may also be subject to state and local taxation on Fund distributions and sales of Haverford Quality 250(TM) shares. Consult your personal tax Advisor about the potential tax consequences of an investment in Haverford Quality 250(TM) shares under all applicable tax laws. DAILY PRICING The NAV of the Fund's shares is calculated each business day as of the close of regular trading on the New York Stock Exchange, generally 4:00 p.m., Eastern Time. NAV per share is computed by dividing the net assets by the number of shares outstanding. If you buy or sell Fund shares on the secondary market, you will pay or receive the market price, which may be higher or lower than NAV. Your transaction will be priced at NAV only if you purchase or redeem your Fund shares in Creation Unit blocks. The approximate value of Haverford Quality 250(TM) shares is disseminated every fifteen seconds throughout the trading day by NYSE Arca or by other information providers, such as Reuters. This approximate value should not be viewed as a "real-time" update of the NAV, because the approximate value may not be calculated in the same manner as the NAV, which is computed once a day. The approximate value generally is determined by using both current market quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio securities held by the Fund. The Fund is not involved in, or responsible for, the calculation or dissemination of the approximate value and makes no warranty as to its accuracy. When calculating the NAV of Haverford Quality 250(TM) shares, stocks held by the Fund are valued at their market value when reliable market quotations are readily available. Certain short-term debt instruments used to manage the Fund's cash are valued on the basis of amortized cost. When reliable market quotations are not readily available, securities are priced at their fair value, which is the price a security's owner might reasonably expect to receive upon its sale. Fair-value pricing may be used by the Fund to value certain small-capitalization or mid-capitalization 22 securities with little or no trading activity for extended periods of time. Although rare, fair-value pricing may be used, if (1) trading in a security is halted and does not resume before the Fund's pricing time or if a security does not trade in the course of a day and (2) the Fund holds enough of the security that such security's price could affect the Fund's NAV. Fair-value prices are determined by the Advisor according to procedures adopted by the Board of Directors. When fair-value pricing is employed, the prices of securities used by the Fund to calculate its NAV may differ from quoted or published prices for the same securities. DELIVERY OF FUND DOCUMENTS HOUSEHOLDING Householding is an option available to certain investors in the Fund. Householding is a method of delivery, based on the preference of the individual investor, in which a single copy of certain shareholder documents can be delivered to investors who share the same address, even if their accounts are registered under different names. Householding for the Fund is available through certain broker-dealers. If you are interested in enrolling in householding and receiving a single copy of the Prospectus and other shareholder documents, please contact your broker-dealer. If you are currently enrolled in householding and wish to change your householding status, please contact your broker-dealer. FINANCIAL HIGHLIGHTS Performance information is not presented for the Fund since it has only recently begun operations. 23 X EXHANGE-TRADED FUNDS, INC. 420 Lexington Avenue New York, New York 10170 FOR MORE INFORMATION If you would like more information about X Exhange-Traded Funds, Inc., the following documents are available free, upon request: ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS Additional information about the Fund's investments will be available in the Fund's annual and semi-annual reports to shareholders. In the annual reports, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund's performance during their last fiscal year. STATEMENT OF ADDITIONAL INFORMATION (SAI) The SAI provides more detailed information about the Fund. The annual and semi-annual reports will be incorporated by reference into this Prospectus and the SAI is incorporated by reference into, and is thus legally a part of, this Prospectus. To receive a free copy of the latest annual or semi-annual report, when available, or the SAI, or to request additional information about the Fund, please contact us as follows: Call: 1-800-925-2870 Monday through Friday 9:00 a.m. to 5:00 p.m. (Eastern Time) Write: X Exchange-Traded Funds, Inc. [c/o ALPS Distributors, Inc. 1290 Broadway, Suite 1100 Denver, Colorado 80203] Visit: [www.hq250.com] INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION You can review and copy information about the Fund (including the SAI) at the SEC's Public Reference Room in Washington, DC. To find out more about this public service, call the SEC at 1-202-551-8090. Reports and other information about the Fund is also available in the EDGAR Database on the SEC's Internet site at http://www.sec.gov, or you can receive copies of this information, after paying a duplicating fee, by electronic request to the following e-mail address: publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549-0104. 24 The Company's Investment Company Act file number: 811-22053 (C) 2008 XShares Advisors LLC 25 DRAFT ----- X EXCHANGE-TRADED FUNDS, INC. Haverford Quality 250(TM) Exchange-Traded Fund Statement of Additional Information [ ], 2008 This Statement of Additional Information, which is not a prospectus, contains additional information about X Exchange-Traded Funds, Inc. (the "Company") an investment company that anticipates offering multiple series of underlying fund portfolios. Currently, the Company is offering one series, the Haverford Quality 250(TM) Exchange-Traded Fund. This Statement of Additional Information should be read in conjunction with the Company's current Prospectus, dated [ ], 2008, as it may be revised from time to time. Capitalized terms used herein that are not defined have the same meaning ascribed to them as in the Prospectus. The audited financial statements of assets and liabilities and related report of [Eisner LLP], the Company's independent registered public accounting firm, are included herein. A copy of the Prospectus may be obtained without charge, by contacting the Company's Distributor, [ALPS Distributors, Inc. 1290 Broadway, Suite 1100, Denver, Colorado 80203.] B-1 TABLE OF CONTENTS I. GENERAL INFORMATION ABOUT THE COMPANY...............................B-3 II. INVESTMENT POLICIES AND RELATED RISKS................................B- III. FUNDAMENTAL INVESTMENT LIMITATIONS...................................B- IV. MANAGEMENT...........................................................B- V. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES..................B- VI. CODE OF ETHICS.......................................................B- VII. PROXY VOTING POLICIES................................................B- VIII. PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES................B- IX. PORTFOLIO TRANSACTIONS...............................................B- X. SHARE PRICE..........................................................B- XI. INFORMATION ABOUT HAVERFORD QUALITY 250(TM) SHARES ..................B- XII. CAPITAL STOCK AND OTHER SECURITIES...................................B- XIII. DIVIDENDS AND DISTRIBUTIONS..........................................B- XIV. TAXATION.............................................................B- XV. LICENSE GRANT........................................................B- XVI. FINANCIAL STATEMENTS.................................................B- B-2 I. GENERAL INFORMATION ABOUT THE COMPANY X Exchange-Traded Funds, Inc. (the "Company") was organized as a Maryland corporation on April 13, 2007. The Company is an investment company consisting of multiple series of underlying fund portfolios. Currently, the Company is offering only one series, the Haverford Quality 250(TM) Exchange-Traded Fund (the "Haverford Quality 250 Fund," or, the "Fund"). This Statement of Additional Information relates only to the Haverford Quality 250 Fund. The Fund currently offers one class of shares known as the Haverford Quality 250(TM) shares. The Company may create additional Funds or classes of shares. There is no limit on the number of full and fractional shares that the Fund may issue. The Fund is registered with the United States Securities and Exchange Commission (the "SEC") under the Investment Company Act of 1940 (the "1940 Act") as an open-end, diversified management investment company. The Fund offers and issues the Haverford Quality 250(TM) shares at net asset value, or NAV, only in aggregations of a specified number of shares, generally in exchange for a basket of equity securities included in the Haverford Quality 250(TM) Index, together with the deposit of a specified cash payment. The Haverford Quality 250(TM) shares have been approved for listing and secondary trading on NYSE Arca, Inc. ("NYSE Arca"), subject to notice of issuance. The Haverford Quality 250(TM) shares will trade on NYSE Arca at market prices that may be below, at, or above NAV. The Haverford Quality 250(TM) shares are redeemable only in Creation Unit Aggregations, and, generally, in exchange for portfolio securities and a specified cash payment. Creation Units are aggregations of 100,000 shares. In the event of the liquidation of a Fund, the Company may lower the number of shares in a Creation Unit. The Company reserves the right to offer a "cash" option for creations and redemptions of the Haverford Quality 250(TM) shares, although it has no current intention of doing so. The Haverford Quality 250(TM) shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Company cash at least equal to 115% of the market value of the missing Deposit Securities. See the "Creation and Redemption of Creation Unit Aggregations" section. In each instance of such cash creations or redemptions, transaction fees may be imposed that will be higher than the transaction fees associated with in-kind creations or redemptions. In all cases, such fees will be limited in accordance with SEC requirements applicable to management investment companies offering redeemable securities. II. INVESTMENT POLICIES AND RELATED RISKS The Haverford Quality 250 Fund's investment objective and principal investment strategies and risks are set forth in the Prospectus. The following information supplements the information contained in the Prospectus. In addition to the Haverford Quality 250 Fund's principal investment strategies, the Haverford Quality 250 Fund may, from time to time, use certain other strategies or engage in certain other investment practices that are not principal strategies. Some of these strategies and practices, and their associated risks, are described below. For example, from time to time, the Haverford Quality 250 Fund may engage in securities lending and may invest in investment-grade debt securities (i.e., debt obligations classified B-3 within the four highest ratings of a nationally recognized statistical rating organization such as Moody's Investors Service ("Moody's") or Standard & Poor's ("S&P") or, if unrated, determined by the Haverford Quality 250 Fund's investment advisor to be of comparable quality). In addition to these strategies and practices, the Fund may invest in futures contracts, options on futures contracts, options, as well as swaps on securities of companies in the Haverford Quality 250(TM) Index. The Haverford Quality 250 Fund may also hold cash and/or invest a portion of its assets in U.S. Government securities, money market instruments and repurchase agreements collateralized by the foregoing obligations. Limitations and restrictions on the level of investment in securities that are discussed in the Prospectus or in this Statement of Additional Information and that are expressed in terms of percentage limitations are measured at the time of investment, unless specifically indicated otherwise. Changes in market values, net assets, or other circumstances that cause a percentage limitation to be exceeded will not necessarily require that any security be sold. BORROWING. The Haverford Quality 250 Fund may borrow money from banks or through reverse repurchase agreements in amounts up to one-third of its total assets. To the extent the Haverford Quality 250 Fund borrows money, it will pay interest on the borrowed money and may incur additional transaction costs and will be subject to the risk that the return realized from the investment of borrowed money will not exceed these interest and transaction costs. With respect to borrowings, the Haverford Quality 250 Fund is required to maintain continuous asset coverage (i.e., total assets including borrowings, less liabilities exclusive of borrowings) of 300% of the amount borrowed. If the required 300% asset coverage should decline as a result of market fluctuations or for other reasons, the Haverford Quality 250 Fund may be required to sell some of its portfolio holdings to raise cash and reduce the amount borrowed so as to restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell securities at that time. In addition to these borrowings, the Haverford Quality 250 Fund may borrow from banks up to 5% of its total assets for temporary or emergency purposes. Borrowings of up to 5% for temporary and emergency purposes are not subject to the requirements to maintain continuous asset coverage of 300%. COMMON STOCK. The Haverford Quality 250 Fund will invest in common stock. Common stock represents an equity or ownership interest in an issuer. In the event an issuer is liquidated or declares bankruptcy, the claims of owners of the issuer's bonds, other debt holders, and owners of preferred stock take precedence over the claims of those who own common stock. FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Haverford Quality 250 Fund may enter into futures contracts and options on futures contracts. The Haverford Quality 250 Fund will only enter into futures contracts and options on futures contracts that are standardized and traded on a U.S. or foreign exchange, board of trade, or similar entity, or quoted on an automated quotation system. The Haverford Quality 250 Fund will not use futures or options on futures for speculative purposes. A futures contract is an agreement between two parties to buy or sell at a specific time in the future a specific quantity of a commodity at a specific price. The commodity may consist of an asset, a reference rate, or an index. The value of a futures contract tends to increase and decrease in tandem with the value of the underlying commodity. When entering into a futures B-4 contract, the Haverford Quality 250 Fund would be required to make a good faith margin deposit in cash or U.S. Government securities with a broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit is intended to assure completion of the contract if it is not terminated prior to its specified delivery date. Brokers may establish deposit requirements which are higher than the exchange minimums. Initial margin deposits are typically calculated as a percentage of the contract's market value. After a futures contract position is opened, the value of the contract is marked to market daily. If the futures contract value changes, or if the value of the securities placed in margin deposit with the broker changes, to the extent that margin deposit requirements are no longer satisfied, the Haverford Quality 250 Fund will be required to make payment of additional "variation margin." Conversely, contract value changes or changes in the value of margin securities may occur in such a way as to result in "excess margin," which would typically be repaid to the Haverford Quality 250 Fund. When investing in futures contracts, the Haverford Quality 250 Fund must satisfy certain asset segregation requirements to ensure that the use of futures is not leveraged. When the Haverford Quality 250 Fund takes a long position in a futures contract, it must segregate liquid assets equal to the purchase price of the contract, less any margin or deposit. When the Haverford Quality 250 Fund takes a short position in a futures contract, it must segregate liquid assets in an amount equal to the market value of the securities underlying such contract (less any margin or deposit), which amount must be at least equal to the market price at which the short position was established. Asset segregation requirements are not applicable when the Haverford Quality 250 Fund "covers" an options or futures position generally by entering into an offsetting position. An option on a futures contract (or futures option) conveys the right, but not the obligation, to purchase (in the case of a call option) or sell (in the case of a put option) a specific futures contract at a specific price (called the "exercise" or "strike" price) any time before the option expires. The seller of an option is called an option writer. The purchase price of an option is called the premium. The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case, for example, if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying futures contract exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying futures contract. Generally, any profit realized by an option buyer represents a loss for the option writer. The Haverford Quality 250 Fund may engage in futures contracts and options on futures contracts only to the extent permitted by the Commodity Futures Trading Commission ("CFTC") and the SEC. In this regard, the Haverford Quality 250 Fund has claimed an exclusion from registration as a "commodity pool operator" under the Commodity Exchange Act. The Haverford Quality 250 Fund intends to limit its hedging transactions in futures contracts so that immediately after any such transaction, the aggregate initial margin that is required to be posted by the Haverford Quality 250 Fund under the rules of the exchange on which the futures contract B-5 (or futures option) is traded, plus any premiums paid by the Haverford Quality 250 Fund on its open futures options positions, does not exceed 5% of its total assets, after taking into account any unrealized profits and unrealized losses on the its open contracts (and excluding the amount that a futures option is "in-the-money" at the time of purchase). An option to buy a futures contract is "in-the-money" if the then-current purchase price of the underlying futures contract exceeds the exercise or strike price; an option to sell a futures contract is "in-the-money" if the exercise or strike price exceeds the then-current purchase price of the contract that is the subject of the option. The risk of loss in trading futures contracts and in writing futures options can be substantial, because of the low margin deposits required, the extremely high degree of leverage involved in futures and options pricing, and the potential high volatility of the futures markets. As a result, a relatively small price movement in a futures position may result in immediate and substantial loss (or gain) to the investor. For example, if at the time of purchase, 10% of the value of the futures contract is deposited as margin, a subsequent 10% decrease in the value of the futures contract would result in a total loss of the margin deposit, before any deduction for the transaction costs, if the account were then closed out. A 15% decrease would result in a loss equal to 150% of the original margin deposit if the contract were closed out. Thus, a purchase or sale of a futures contract, and the writing of a futures option, may result in losses in excess of the amount invested in the position. In the event of adverse price movements, the Haverford Quality 250 Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if the Haverford Quality 250 Fund has insufficient cash, it may have to sell portfolio securities to meet daily margin requirements (and segregation requirements, if applicable) at a time when it may be disadvantageous to do so. In addition, on the settlement date, the Haverford Quality 250 Fund may be required to make delivery of the instruments underlying the futures positions it holds. The Haverford Quality 250 Fund could suffer losses if it is unable to close out a futures contract or a futures option because of an illiquid secondary market. Futures contracts and futures options may be closed out only on an exchange which provides a secondary market for such products. However, there can be no assurance that a liquid secondary market will exist for any particular futures product at any specific time. Thus, it may not be possible to close a futures or option position. Moreover, most futures exchanges limit the amount of fluctuation permitted in futures contract prices during a single trading day. The daily limit establishes the maximum amount that the price of a futures contract may vary either up or down from the previous day's settlement price at the end of a trading session. Once the daily limit has been reached in a particular type of contract, no trades may be made on that day at a price beyond that limit. The daily limit governs only price movement during a particular trading day and therefore does not limit potential losses, because the limit may prevent the liquidation of unfavorable positions. Futures contract prices have occasionally moved to the daily limit for several consecutive trading days with little or no trading, thereby preventing prompt liquidation of future positions and subjecting some futures traders to substantial losses. The inability to close futures and options positions also could have an adverse impact on the ability to hedge a portfolio investment or to establish a substitute for a portfolio investment. The Haverford Quality 250 Fund bears the risk that XShares Advisors LLC (the "Advisor") will incorrectly predict future market trends. If the Advisor attempts to use a futures B-6 contract or a futures option as a hedge against, or as a substitute for, a portfolio investment, the Haverford Quality 250 Fund will be exposed to the risk that the futures position will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the Haverford Quality 250 Fund. While hedging strategies involving futures products can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Fund investments. The Haverford Quality 250 Fund could lose margin payments it has deposited with its futures broker, if, for example, the broker breaches its agreement with the Haverford Quality 250 Fund or becomes insolvent or goes into bankruptcy. In that event, the Haverford Quality 250 Fund may be entitled to return of margin owed to it only in proportion to the amount received by the broker's other customers, potentially resulting in losses to the Fund. GOVERNMENT OBLIGATIONS. The Haverford Quality 250 Fund may invest in U.S. Government obligations, including U.S. Treasury bonds, notes and bills and the obligations of Federal Home Loan Banks, Federal Farm Credit Banks, Federal Land Banks, the Federal Housing Administration, the Farmers Home Administration, the Export-Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association, the Federal National Mortgage Association, the General Services Administration, the Student Loan Marketing Association, the Central Bank for Cooperatives, the Federal Home Loan Mortgage Corporation, the Federal Intermediate Credit Banks and the Maritime Administration. Obligations of certain agencies and instrumentalities of the U.S. Government, such as those of the Government National Mortgage Association, are supported by the right of the issuer to borrow from the Treasury; others, such as those of the Federal National Mortgage Association, are supported by the discretionary authority of the U.S. Government to purchase the agency's obligations; still others, such as those of the Student Loan Marketing Association, are supported only by the credit of the instrumentality. No assurance can be given that the U.S. Government would provide financial support to U.S. Government-sponsored instrumentalities if it is not obligated to do so by law. Securities issued or guaranteed by the U.S. government have historically involved little risk of loss of principal if held to maturity. However, due to fluctuations in interest rates, the market value of such securities may vary during the period a shareholder owns shares of the Haverford Quality 250 Fund. INVESTMENTS IN OTHER INVESTMENT COMPANIES. The Haverford Quality 250 Fund may invest in other investment companies. As a shareholder in an investment company, the Fund would bear its ratable share of that investment company's expenses, including its management and administration fees. MONEY MARKET INSTRUMENTS. The Haverford Quality 250 Fund may invest in "money market instruments," which include, among other things, bank obligations, commercial paper and corporate bonds with remaining maturities of 13 months or less. Bank obligations include bankers' acceptances, negotiable certificates of deposit, and non-negotiable time deposits earning a specified return and issued by a U.S. bank which is a member of the Federal Reserve System or insured by the Bank Insurance Fund of the Federal B-7 Deposit Insurance Corporation ("FDIC"), or by a savings and loan association or savings bank which is insured by the Savings Association Insurance Fund of the FDIC. Bank obligations also include U.S. dollar-denominated obligations of foreign branches of U.S. banks and obligations of domestic branches of foreign banks. Investments by the Fund in commercial paper will consist of issues that are rated "A-2" or better by S&P or "Prime-2" or better by Moody's. In addition, the Haverford Quality 250 Fund may acquire unrated commercial paper and corporate bonds that are determined by the Advisor at the time of purchase to be of comparable quality to rated instruments that may be acquired by the Haverford Quality 250 Fund. Commercial paper may include variable and floating rate instruments. While there may be no active secondary market with respect to a particular instrument purchased by the Haverford Quality 250 Fund, the Fund may, from time to time as specified in the instrument, demand payment of the principal of the instrument or may resell the instrument to a third party. The absence of an active secondary market, however, could make it difficult for the Haverford Quality 250 Fund to dispose of the instrument if the issuer defaulted on its payment obligation or during periods when the Haverford Quality 250 Fund is not entitled to exercise its demand rights, and the Haverford Quality 250 Fund could, for this or other reasons, suffer a loss with respect to such instrument. OPTIONS. The Haverford Quality 250 Fund may purchase put and call options. An option on a security (or index) is a contract that gives the holder of the option, in return for the payment of a "premium," the right, but not the obligation, to buy from (in the case of a call option) or sell to (in the case of a put option) the writer of the option the security underlying the option (or the cash value of the index) at a specified exercise price prior to the expiration date of the option. The writer of an option on a security has the obligation upon exercise of the option (1) to deliver the underlying security upon payment of the exercise price (in the case of a call option) or (2) to pay the exercise price upon delivery of the underlying security (in the case of a put option). The writer of an option on an index has the obligation upon exercise of the option to pay an amount equal to the cash value of the index minus the exercise price, multiplied by a specified multiplier for the index option. Unlike exchange-traded options, which are standardized, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows the purchaser or writer greater flexibility to tailor an option to its needs, OTC options generally involve greater credit risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded. A call option grants to the holder the right to buy (and obligates the writer to sell) the underlying security at the strike price. A put option grants to the holder the right to sell (and obligates the writer to buy) the underlying security at the strike price. The purchase price of an option is called the "premium." The potential loss to an option buyer is limited to the amount of the premium plus transaction costs. This will be the case if the option is held and not exercised prior to its expiration date. Generally, an option writer sells options with the goal of obtaining the premium paid by the option buyer, but that person could also seek to profit from an anticipated rise or decline in option prices. If an option sold by an option writer expires without being exercised, the writer retains the full amount of the premium. The option writer, however, B-8 has unlimited economic risk because its potential loss, except to the extent offset by the premium received when the option was written, is equal to the amount the option is "in-the-money" at the expiration date. A call option is in-the-money if the value of the underlying position exceeds the exercise price of the option. A put option is in-the-money if the exercise price of the option exceeds the value of the underlying position. Generally, any profit realized by an option buyer represents a loss for the option writer. The writing of an option will not be considered to constitute the issuance of a "senior security" by the Haverford Quality 250 Fund for purposes of the 1940 Act, and such transaction will not be subject to the 300% asset coverage requirement otherwise applicable to borrowings by the Haverford Quality 250 Fund, if it segregates liquid assets in a segregated account in sufficient amount to cover the transaction. If a trading market in particular options were to become unavailable, investors in those options (such as the Haverford Quality 250 Fund) would be unable to close out their positions until trading resumes, and they may be faced with substantial losses if the value of the underlying interest moves adversely during that time. Even if the market were to remain available, there may be times when options prices will not maintain their customary or anticipated relationships to the prices of the underlying interests and related interests. Lack of investor interest, changes in volatility, or other factors or conditions might adversely affect the liquidity, efficiency, continuity, or even the orderliness of the market for particular options. The Haverford Quality 250 Fund bears the risk that the Advisor will not accurately predict future market trends. If the Advisor attempts to use an option as a hedge against, or as a substitute for, a portfolio investment, the Haverford Quality 250 Fund will be exposed to the risk that the option will have or will develop imperfect or no correlation with the portfolio investment. This could cause substantial losses for the Haverford Quality 250 Fund. While hedging strategies involving options can reduce the risk of loss, they can also reduce the opportunity for gain or even result in losses by offsetting favorable price movements in other Haverford Quality 250 Fund investments. Many options, in particular OTC options, are complex and often valued based on subjective factors. Improper valuations can result in increased cash payment requirements to counterparties or a loss of value to the Haverford Quality 250 Fund. REAL ESTATE INVESTMENT TRUSTS (REITs). The Haverford Quality 250 Fund may invest in REITs, which pool investors' funds for investment primarily in income-producing real estate or real estate related loans or interests. Unlike corporations, REITs do not have to pay income taxes if they meet certain requirements of the Internal Revenue Code of 1986, as amended (the "Code"). Among other organizational and operational requirements, to qualify, a REIT must distribute at least 95% of its taxable income to its shareholders and receive at least 75% of that income from rents, mortgages and sales of property. REITs can generally be classified as equity REITs, mortgage REITs and hybrid REITs. Equity REITs invest the majority of their assets directly in real property and derive their income primarily from rental and lease payments. Equity REITs can also realize capital gains by selling properties that have appreciated in value. Mortgage REITs make loans to commercial real estate developers and derive their income primarily from interest payments on such loans. Hybrid REITs combine the characteristics of both equity and mortgage REITs. B-9 An equity REIT's performance ultimately depends on the types and locations of the properties it owns and on how well it manages its properties. For instance, rental income could decline because of extended vacancies, increased competition from nearby properties, tenants' failure to pay rent, or incompetent management. Property values could decrease because of overbuilding, environmental liabilities, uninsured damages caused by natural disasters, a general decline in the neighborhood, rent controls, losses due to casualty or condemnation, increases in property taxes and/or operating expenses, or changes in zoning laws or other factors. Changes in interest rates could affect the performance of REITs. In general, during periods of rising interest rates, REITs may lose some of their appeal to investors who may be able to obtain higher yields from other income-producing investments, such as long-term bonds. Higher interest rates may also mean that it is more expensive to finance property purchases, renovations and improvements, which could hinder a REIT's performance. During periods of declining interest rates, certain mortgage REITs may hold mortgages that the mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such mortgage REITs. While equity REITs are affected by changes in the value of the underlying properties they own, mortgage REITs are affected by changes in the value of the properties to which they have extended credit. REITs may not be diversified and are subject to the risks involved with financing projects. REITs may also be subject to substantial cash flow dependency and self-liquidation. In addition, REITs could possibly fail to qualify for tax-free pass-through of income under the Code or to maintain their exemptions from registration under the 1940 Act. Such factors may also adversely affect a borrower's or a lessee's ability to meet its obligations to a REIT. In the event of a default by a borrower or lessee, a REIT may experience delays in enforcing its rights as a mortgagee or lessor and may incur substantial costs associated with protecting its investments. Under certain circumstances the Fund could own real estate directly as a result of a default on debt securities it owns. If the Fund has rental income or income from the direct disposition of real property, the receipt of such income may adversely affect its ability to retain its tax status as a regulated investment company. REPURCHASE AGREEMENTS. The Haverford Quality 250 Fund may enter into repurchase agreements. A repurchase agreement is an agreement under which the Haverford Quality 250 Fund acquires a fixed income security (generally a security issued by the U.S. government or an agency thereof, a banker's acceptance, or a certificate of deposit) from a commercial bank, broker, or dealer, and simultaneously agrees to resell such security to the seller at an agreed upon price and date (normally, the next business day). Because the security purchased constitutes collateral for the repurchase obligation, a repurchase agreement may be considered a loan that is collateralized by the security purchased. The resale price reflects an agreed upon interest rate effective for the period the instrument is held by the Haverford Quality 250 Fund and is unrelated to the interest rate on the underlying instrument. In these transactions, the securities acquired by the Haverford Quality 250 Fund (including accrued interest earned thereon) must have a total value in excess of the value of the repurchase agreement and be held by a custodian bank until repurchased. In addition, the Advisor will monitor the Haverford Quality 250 Fund's repurchase agreement transactions generally and will evaluate the B-10 creditworthiness of any bank, broker, or dealer party to a repurchase agreement relating to the Fund. The use of repurchase agreements involves certain risks. One risk is the seller's ability to pay the agreed-upon repurchase price on the repurchase date. If the seller defaults, the Haverford Quality 250 Fund may incur costs in disposing of the collateral, which would reduce the amount realized thereon. If the seller seeks relief under the bankruptcy laws, the disposition of the collateral may be delayed or limited. For example, if the other party to the agreement becomes insolvent and subject to liquidation or reorganization under the bankruptcy or other laws, a court may determine that the underlying security is collateral for a loan by the Haverford Quality 250 Fund not within its control and therefore the realization by it on such collateral may be automatically stayed. Finally, it is possible that the Haverford Quality 250 Fund may not be able to substantiate its interest in the underlying security and may be deemed an unsecured creditor of the other party to the agreement. Repurchase agreements are usually for short periods, seven days or less, but can be for longer periods. The Haverford Quality 250 Fund will not enter into a repurchase agreement of a duration of more than seven days if, taken together with other illiquid securities, more than 15% of the Haverford Quality 250 Fund's net assets would be so invested. RESTRICTED AND ILLIQUID SECURITIES. The Haverford Quality 250 Fund may acquire investments that are illiquid or have limited liquidity, such as private placements or investments that are not registered under the Securities Act of 1933, as amended (the "1933 Act"), and cannot be offered for public sale in the United States without first being registered under the 1933 Act. An illiquid investment is any investment that cannot be disposed of within seven days in the normal course of business at approximately the amount at which it is valued by the Haverford Quality 250 Fund. The price the Haverford Quality 250 Fund pays for illiquid securities or receives upon resale may be lower than the price paid or received for similar securities with a more liquid market. The Haverford Quality 250 Fund will not invest more than 15% of the value of its net assets in securities that are illiquid. Historically, illiquid securities have included securities subject to contractual or legal restrictions on resale because they have not been registered under 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. Limitations on resale may have an adverse effect on the marketability of portfolio securities and the Haverford Quality 250 Fund 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. The Haverford Quality 250 Fund might also have to register such restricted securities in order to dispose of them which, if possible at all, would result in additional expense and delay. Adverse market conditions could impede such a public offering of securities. The Haverford Quality 250 Fund may, from time to time, purchase other non-publicly traded securities, private placements and restricted securities. These securities may involve a higher degree of business and financial risk that can result in substantial losses. As a result of the absence of a public trading market for these securities, they may be less liquid than publicly-traded securities. Although these securities may be resold in privately negotiated transactions, the prices realized from sales could be less than those originally paid by the Haverford Quality B-11 250 Fund or less than what may be considered the fair value of such securities. Furthermore, companies whose securities are not publicly traded may not be subject to the disclosure and other investor protection requirements which might be applicable if their securities were publicly-traded. If such securities are required to be registered under the securities laws of one or more jurisdictions before being resold, the Fund may be required to bear the expenses of registration. 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 Haverford Quality 250 Fund may purchase Rule 144A securities sold to institutional investors without registration under the 1933 Act. Rule 144A 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 for resales of certain securities to qualified institutional buyers. Rule 144A securities may be determined to be liquid in accordance with guidelines established and approved by the Board of Directors of the Haverford Quality 250 Fund. If trading in Rule 144A securities were to decline, these securities could become illiquid after being purchased, increasing the level of illiquidity of the Haverford Quality 250 Fund. As a result, by holding these securities, the Fund might not be able to sell these securities when the Advisor wishes to do so, or might have to sell them at less than fair value. REVERSE REPURCHASE AGREEMENTS. The Haverford Quality 250 Fund may invest in reverse repurchase agreements. In a reverse repurchase agreement, the Haverford Quality 250 Fund sells a security to another party, such as a bank or broker-dealer, in return for cash and agrees to repurchase that security at an agreed-upon price and time. The repurchase price will include an interest element. A reverse repurchase agreement is considered to be a borrowing for purposes of the 1940 Act. The Haverford Quality 250 Fund will typically invest the cash received from the reverse repurchase agreement and will also continue to receive any principal and interest payments on the security loaned to the reverse repurchase agreement counterparty during the term of the agreement. Reverse repurchase agreements involve the risk that the Haverford Quality 250 Fund will not realize earnings from the investment of the cash proceeds obtained from the transaction in sufficient amount to offset the interest paid to the reverse repurchase agreement counterparty. The Haverford Quality 250 Fund's custodian bank will be required segregate liquid assets in a segregated account in sufficient amount to cover the Haverford Quality 250 Fund's obligation to repurchase the securities under the contract. The Haverford Quality 250 Fund will enter into reverse repurchase agreements only with parties whose creditworthiness has been reviewed and found satisfactory by the Advisor. SECURITIES LENDING. The Haverford Quality 250 Fund may lend its investment securities to qualified institutional investors (typically brokers, dealers, banks, or other financial institutions). The Haverford Quality 250 Fund receives collateral equal to at least 105% of the B-12 current market value of the loaned securities and that collateral is marked to market daily. By lending its investment securities, the Haverford Quality 250 Fund attempts to increase its net investment income through the receipt of interest on the collateral received. The Haverford Quality 250 Fund will pay reasonable administration and custodial fees in connection with the loan of securities. If the borrower defaults on its obligation to return the securities lent because of insolvency or other reasons, the Haverford Quality 250 Fund could experience delays and costs in recovering the securities lent or in gaining access to the collateral. These delays and costs could be greater for foreign securities. If the Haverford Quality 250 Fund is not able to recover the securities lent, it may sell the collateral and purchase a replacement investment in the market. The value of the collateral could decrease below the value of the replacement investment by the time the replacement investment is purchased. Cash received as collateral through loan transactions may be invested in other eligible securities. Investing this cash subjects that investment to market appreciation or depreciation. Loans of portfolio securities may not exceed 33 1/3% of the Haverford Quality 250 Fund's total assets. SHORT-TERM INSTRUMENTS. The Haverford Quality 250 Fund may invest in short-term instruments, which include obligations of the U.S. government and its agencies or instrumentalities; commercial paper, variable amount master demand notes and other debt securities, including high quality U.S. dollar-denominated short-term bonds and notes issued by domestic and foreign corporations; variable and floating rate securities; bank obligations; repurchase agreements collateralized by these securities; and shares of other investment companies that primarily invest in any of the above-referenced securities. Short-term instruments may also include U.S. dollar-denominated certificates of deposit, time deposits, bankers' acceptances and other short-term obligations issued by domestic banks and domestic or foreign branches or subsidiaries of foreign banks. Certificates of deposit are certificates evidencing the obligation of a bank to repay funds deposited with it for a specified period of time. Such instruments include Yankee Certificates of Deposit ("Yankee CDs"), which are certificates of deposit denominated in U.S. dollars and issued in the United States by the domestic branch of a foreign bank. Time deposits are non-negotiable deposits maintained in a banking institution for a specified period of time at a stated interest rate. Time deposits which may be held by the Haverford Quality 250 Fund are not insured by the FDIC or any other agency of the U.S. government. Bankers' acceptances are credit instruments evidencing the obligation of a bank to pay a draft drawn on it by a customer. These instruments reflect the obligation both of the bank and of the drawer to pay the face amount of the instrument upon maturity. Domestic commercial banks organized under federal law are supervised and examined by the Comptroller of the Currency and are required to be members of the Federal Reserve System. Domestic banks organized under state law are supervised and examined by state banking authorities but are members of the Federal Reserve System only if they elect to join. In addition, state banks are subject to federal examination and to a substantial body of federal law and regulation. As a result of federal or state laws and regulations, domestic banks, among other things, generally are required to maintain specified levels of reserves, are limited in the amounts which they can loan to a single borrower, and are subject to other regulations designed to promote financial soundness. However, not all of such laws and regulations apply to the foreign branches of domestic banks. B-13 Obligations of foreign branches and subsidiaries of domestic banks and domestic and foreign branches of foreign banks, such as certificates of deposit and time deposits, may be general obligations of the parent banks in addition to the issuing branch, or may be limited by the terms of a specific obligation and governmental regulation. Such obligations are subject to different risks than are those of domestic banks. These risks include foreign economic and political developments, foreign governmental restrictions that may adversely affect payment of principal and interest on the obligations, foreign exchange controls and foreign withholding and other taxes on interest income. Foreign branches and subsidiaries are not necessarily subject to the same or similar regulatory requirements that apply to domestic banks, such as mandatory reserve requirements, loan limitations, and accounting, auditing and financial record keeping requirements. In addition, less information may be publicly available about a foreign branch of a domestic bank or about a foreign bank than about a domestic bank. SWAP AGREEMENTS. A swap agreement is an agreement between two parties to exchange payments at specified dates (periodic payment dates) on the basis of a specified amount (notional amount) with the payments calculated with reference to a specified asset, reference rate, or index. Examples of swap agreements include, but are not limited to, interest rate swaps, credit default swaps, equity swaps, commodity swaps, foreign currency swaps, index swaps, and total return swaps. Most swap agreements provide that when the periodic payment dates for both parties are the same, payments are netted, and only the net amount is paid to the counterparty entitled to receive the net payment. Consequently, the Haverford Quality 250 Fund's current obligations (or rights) under a swap agreement will generally be equal only to the net amount to be paid or received under the agreement, based on the relative values of the positions held by each counterparty. Swap agreements allow for a wide variety of transactions. For example, fixed rate payments may be exchanged for floating rate payments; U.S. dollar-denominated payments may be exchanged for payments denominated in a different currency; and payments tied to the price of one asset, reference rate, or index may be exchanged for payments tied to the price of another asset, reference rate, or index. The Haverford Quality 250 Fund is required to maintain liquid assets in a segregated account in an amount sufficient to cover its obligations under the swap agreement. The use of swap agreements by the Haverford Quality 250 Fund entails certain risks, which may be different from, or possibly greater than, the risks associated with investing directly in the securities and other investments that are the referenced asset for the swap agreement. For example, if the counterparty under a swap agreement defaults on its obligation to make payments due from it, as a result of its bankruptcy or otherwise, the Haverford Quality 250 Fund may lose such payments altogether, or collect only a portion thereof, which collection could involve costs or delays. Swaps are highly specialized instruments that require investment techniques, risk analyses, and tax planning different from those associated with stocks, bonds, and other traditional investments. The use of a swap requires an understanding not only of the referenced asset, reference rate, or index but also of the swap itself, without the benefit of observing the performance of the swap under all possible market conditions. Swap agreements may be subject to liquidity risk, which exists when a particular swap is difficult to purchase or sell. If a swap transaction is particularly large or if the relevant market is illiquid (as is the case with many OTC swaps), it may not be possible to initiate a transaction or liquidate a position at an advantageous time or price, which may result in significant losses. In B-14 addition, a swap transaction may be subject to the Haverford Quality 250 Fund's limitation on investments in illiquid securities. Swap agreements may be subject to pricing risk, which exists when a particular swap becomes extraordinarily expensive (or cheap) relative to historical prices or the prices of corresponding cash market instruments. Under certain market conditions, it may not be economically feasible to initiate a transaction or liquidate a position in time to avoid a loss or take advantage of an opportunity or to realize the intrinsic value of the swap agreement. The swaps market is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential government regulation, could adversely affect the Haverford Quality 250 Fund's ability to terminate existing swap agreements or to realize amounts to be received under such agreements. III. FUNDAMENTAL INVESTMENT LIMITATIONS The Haverford Quality 250 Fund has adopted the following investment limitations as fundamental limitations, which cannot be changed without the approval of the holders of a majority of the Haverford Quality 250 Fund's outstanding shares. For these purposes, a "majority of outstanding shares" means the vote of the lesser of: (1) 67% or more of the outstanding shares of the Haverford Quality 250 Fund, if the holders of more than 50% of the Haverford Quality 250 Fund's outstanding shares are present or represented by proxy; or (2) more than 50% of the outstanding shares of the Haverford Quality 250 Fund. The Haverford Quality 250 Fund may not: 1. Borrow money or issue senior securities, except through reverse repurchase agreements or otherwise as permitted under the 1940 Act, as interpreted, modified, or otherwise permitted by regulatory authority. 2. Purchase or sell physical commodities unless acquired as a result of ownership of securities or other instruments. This limitation shall not prevent the Haverford Quality 250 Fund from purchasing, selling, or entering into futures contracts, or acquiring securities or other instruments and options thereon backed by, or related to, physical commodities. 3. Invest 25% or more of the value of its total assets in securities of issuers in any one industry or group of industries, except that the Fund will concentrate to approximately the same extent that its Underlying Index concentrates in the securities of any particular industry or group of industries. This restriction does not apply to obligations issued or guaranteed by the United States Government, its agencies or instrumentalities. 4. Make loans, except as permitted under the 1940 Act, and as interpreted, modified, or otherwise permitted by regulatory authority. 5. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments. This limitation shall not prevent the Haverford Quality 250 Fund from investing in securities or other instruments backed by real estate or securities issued by any company engaged in the real estate business. B-15 6. Act as an underwriter of another issuer's securities, except to the extent that the Haverford Quality 250 Fund may be deemed to be an underwriter within the meaning of the 1933 Act in connection with the purchase and sale of portfolio securities. 7. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings. Initial and variation margin for futures and options contracts will not be deemed to be a pledge of the Haverford Quality 250 Fund's assets. Compliance with the investment limitations set forth above is measured at the time the securities are purchased. If a percentage restriction is adhered to at the time the investment is made, a later change in percentage resulting from a change in the market value of assets will not constitute a violation of such restriction, however, with respect to borrowings and illiquid securities, as described herein, changes in the percentages of such securities after the time of investment will be monitored and assessed to ensure the Haverford Quality 250 Fund's compliance with said limitations. IV. MANAGEMENT OFFICERS AND DIRECTORS The business and affairs of the Fund are managed under the direction of the Company's Board of Directors (the "Board"). The Directors and executive officers of the Company, their addresses, ages, principal occupations during the past five years, and other affiliations are set forth below. Each Director serves until his termination; retirement, resignation, or death; or as otherwise specified in the Company's organizational documents. The Board is currently comprised of four Directors, of whom three Directors are not "interested" persons of the Company or the Advisor, as defined under the 1940 Act ("Disinterested Directors"). The Directors may also serve as directors for other funds advised by the Advisor or for funds that have an investment advisor that is affiliated with the Advisor. The mailing address of the Directors and officers is 420 Lexington Avenue, New York, New York 10170. B-16
Term of Number of Name, Address, Position(s) Office and Principal Portfolios in Fund and Age Held with Length of Occupation(s) Complex Overseen Other Directorships Fund Time Served During Past 5 Years by Director held by Director ------------------------ ----------- ----------- ------------------- ------------------ ------------------- Disinterested Directors: Vincent J. Amabile Director Since 2007 Board Member of [1] Director of Gabelli Age 65 Gabelli Group Group Capital Capital Partners, Partners, Inc.; Inc.; Former Director, Realty Advisor at Gabelli Funds, Inc. Securities, Inc. until 2004. Soma Coulibaly Director Since 2007 President and CEO [1] Director of Epiphany Age 47 of Cartridge World School , Director of Greater Boston P. Career; Director, since June 2005; Realty Funds, Inc. Former SVP Operations at Houghton Mifflin from 2002 to 2004. Theodore P. Netzky Director Since 2007 Chairman of Netcorp [1] Director of Facet Age 65 since 1985; Financial; Director, Director and CEO of Realty Funds, Inc. Facet Financial since 1985. Interested Directors/ Officers:(*) David W. Jaffin Director Since 2007 Chief Operating [1] Director, Realty Age 53 and Officer, XShares Funds, Inc. Chairman of Group LLC since the Board 2006; Chief Financial Officer, XShares Advisors LLC since 2006; Secretary and Treasurer, HealthShares(TM) Inc. since 2006; President, Technical Coatings Laboratory from 2000 to 2005. Anthony F. Dudzinksi President Since 2007 President, XShares N/A Director, TDAX Funds, Age 44 Group LLC since Inc. 2006; Chief Executive Officer and Chief Operating Officer of XShares Advisors LLC since 2006; Vice-President, B-17 Term of Number of Name, Address, Position(s) Office and Principal Portfolios in Fund and Age Held with Length of Occupation(s) Complex Overseen Other Directorships Fund Time Served During Past 5 Years by Director held by Director ------------------------ ----------- ----------- ------------------- ------------------ ------------------- HealthShares(TM) Inc. since 2006; CEO US Euro Securities from 2004 to 2006; President and COO of M. H. Meyerson & Co., Inc. from 2000 to 2003. James McCluskey Chief Since 2007 SVP Finance & N/A N/A Age 51 Financial Controller, XShares Officer, Group LLC, since Secretary 2006; Interim CFO and at Lincoln Treasurer Financial until 2006. ------------------------ (*) Officers/Directors of the Company are "interested persons" as defined in the 1940 Act.
No officer, director or employee of the Advisor or any of its affiliates receives any compensation from the Company or the Haverford Quality 250 Fund for serving as an officer or Director of the Company or the Haverford Quality 250 Fund. The Company pays each Disinterested Director an annual fee of $30,000, plus $3,000 per meeting attended ($1,000 per meeting, if attended telephonically). Each Disinterested Director will also receive $1,000 per Audit Committee meeting attended. The Chairman of the Company's Audit Committee will not receive any additional compensation. The Company reimburses each Director for his or her costs and expenses associated with their performance of their duties hereunder, including the cost and expenses associated with attendance of meetings of the Board. Assuming that four meetings of the Board and two meetings of the Audit Committee are held annually, it is estimated that the compensation to each Director for the fiscal year ended July 31, 2008 will be(1): ------------------------ [1] The estimated compensation shown in this chart is for the period beginning on [ ], 2008 through [ ] 2008. This compensation is estimated only, based on current compensation levels. There is no assurance that this estimate is reliable and actual compensation may be higher or lower than that reflected above. B-18
Pension or Retirement Total Compensation Aggregate Benefits Accrued as Estimated Annual From Company and Fund Compensation Part of Company Benefits Upon Complex Paid to Name of Person, Position from Company Expenses(1) Retirement Directors ------------------------------ ------------ --------------------- ---------------- ---------------------- - - - - David W. Jaffin, Director and Chairman of the Board Theodore Netzky, Director $44,000 - - $44,000 and Chairman of the Audit Committee Vincent J. Amabile, Director $44,000 - - $44,000 Soma Coulibaly, Director $44,000 - - $44,000
Director Ownership of Fund Shares. The following table shows the dollar range of fund shares beneficially owned by each Director as of [ ], 2008. Since as of the dated of this Statement of Additional Information, the Fund has yet to commence operations, none of the Directors own any shares of the Fund.
AGGREGATE DOLLAR RANGE OF EQUITY SECURITIES IN ALL DOLLAR RANGE OF EQUITY FUNDS OVERSEEN BY DIRECTOR IN NAME OF DIRECTOR SECURITIES FOR THE FUND COMPLEX ---------------- ----------------------- -------------------------------- David W. Jaffin N/A N/A Theodore Netzky N/A N/A Vincent J. Amabile N/A N/A Soma Coulibaly N/A N/A
BOARD COMMITTEES The Fund's Board of Directors has established the following committees: Audit Committee. The Board has an Audit Committee that meets at least twice annually to select, oversee and set the compensation of the Company's independent registered public accounting firm (the "Accountants"). The Audit Committee is responsible for pre-approving all B-19 audit and non-audit services performed by the Accountants for the Company and for pre-approving certain non-audit services performed by the Accountants for the Advisor and the Fund's sub-advisor and certain of their control persons. The Audit Committee is comprised of all of the Company's Disinterested Directors. The Audit Committee also meets with the Accountants to review the Fund's financial statements and to report on its findings to the Board, and to provide the Accountants the opportunity to report on various other matters. The Audit Committee also acts as the Company's qualified legal compliance committee. Nominating Committee. The Board has a Nominating Committee to whose discretion the selection and nomination of directors who are not "interested persons," as defined in the 1940 Act, of the Fund is committed. The Nominating Committee is comprised of all of the Company's Disinterested Directors. This committee will consider any candidate for Director recommended by a current shareholder if the Committee is required by law to do so. INVESTMENT ADVISOR AND SUB-ADVISOR XShares Advisors LLC (the "Advisor") serves as the investment advisor to the Haverford Quality 250 Fund with overall responsibility for the general management and administration of the Haverford Quality 250 Fund, subject to the supervision of the Company's Board of Directors. The Advisor is also responsible for employing any sampling strategy for the Haverford Quality 250 Fund. The Advisor is located at 420 Lexington Avenue, New York, New York 10170. The Advisor's parent company is XShares Group LLC ("XShares Group"). XShares Group is an early stage financial services company specializing in the development of innovative financial products and investment strategies. Haverford Investment Management, Inc. serves as sub-advisor ("HIM," or, the "Sub-Advisor") to the Haverford Quality 250 Fund. HIM is located at Three Randor Corporate Center, Suite 450, Radnor, Pennsylvania 19087-3446. HIM was established in 2004 and is an affiliate of the Haverford Trust Company ("Haverford Trust"). Haverford Trust was founded in 1979 and offers investment management services, trust, estate and private banking services. As of December 31, 2007, HIM had approximately $179 million in assets under management. Pursuant to a Sub-Advisory Agreement between the Advisor and Sub-Advisor, the Sub-Advisor will be responsible for the day-to-day management of the Haverford Quality 250 Fund, subject to the supervision of the Advisor and the Haverford Quality 250 Fund's Board of Directors. In this regard, the Sub-Advisor will be responsible for implementing the replication strategy for the Haverford Quality 250 Fund with regard to the Haverford Quality 250(TM) Index and for general administration, compliance and management services as may be agreed between Advisor and the Sub-Advisor from time to time. INVESTMENT ADVISORY AND SUB-ADVISORY AGREEMENT The Advisor serves as the investment advisor to the Haverford Quality 250 Fund pursuant to an Investment Advisory Agreement with the Company (the "Advisory Agreement"). Pursuant to the Advisory Agreement, the Advisor is responsible, subject to the supervision of the Company's Board for the day-to-day management of the Haverford Quality 250 Fund in accordance with the Haverford Quality 250 Fund's investment objectives, policies and strategies. The Advisor also administers the Company's business affairs, provides office facilities and equipment and certain clerical, bookkeeping and administrative services, and permits its officers and employees to serve without compensation as officers, Directors or employees of the B-20 Company. Pursuant to the Advisory Agreement, the Advisor is authorized to engage one or more sub-advisors for the performance of any of the services to be provided by the Advisor under the Advisory Agreement. Under the Advisory Agreement, the Advisor is also responsible for arranging sub-advisory, transfer agency, custody, fund administration and accounting, and other non-distribution related services necessary for the Funds to operate. For the services it provides to the Funds, the Advisor receives a unified management fee equal to an annual rate of [ ]% of the Haverford Quality 250 Fund 's average daily net assets. The fees are accrued daily and paid monthly. Out of the management fee, the Advisor pays, or arranges for the payment of, all fees and expenses of the Sub-Advisor, the Transfer Agent, the Administrator and Accounting Agent, and the Custodian (as defined below). The Haverford Quality 250 Fund is responsible for the payment of all other expenses associated with its operation, including but not limited to, brokerage expenses, taxes, interest, fees and expenses of counsel to the Company, incurred on behalf of the Fund, fees and expenses of the Disinterested Directors (including legal counsel fees), certain out-of-pocket expenses of the Advisor or Sub-Advisor, including, but not limited to cost of obtaining prices for security valuations (including manual broker quotes), Federal Reserve charges related to securities transactions, postage and insurance on physical transfer items, telecommunication charges, and proxy voting execution, advice and reporting etc., fees and expenses of the Chief Compliance Officer and expenses associated with the Haverford Quality 250 Fund's compliance program, incurred on behalf of the Fund, litigation expenses, fees and expenses of the Fund's independent auditors, registration fees, expenses associated with compliance by the Company with regulatory requirements, including those relating to the development and distribution of its prospectus and shareholder reports, and extraordinary expenses. The Advisor at its discretion may waive its right to any portion of the advisory fee and may use any portion of this fee for purposes of shareholder and administrative services. There can be no assurance that such fees will be waived in the future. In accordance with the terms of the Sub-Advisory Agreement with HIM, the Advisor pays HIM, out if its own resources, a fee at the annual rate of [ ] of 1% of the Haverford Quality 250 Fund 's average daily net assets for the first $1 billion in assets and [ ]of 1% of the Haverford Quality 250 Fund 's average daily net assets in excess of $1 billion. Out of the Sub-Advisory fee, HIM pays all fees and expenses of the Transfer Agent, Administrator and Accounting Agent, and Custodian. HIM has contractually agreed to reduce its fees and/or pay the Haverford Quality 250 Fund operating expenses (excluding any front-end or contingent deferred loads, acquired fund fees and expenses, taxes, leverage interest, brokerage commissions, expenses incurred in connection with any merger or reorganization, or extraordinary expenses such as litigation) in order to limit the Haverford Quality 250 Fund 's Net Annual Operating Expenses for shares of the Fund to [ ]% of the Fund's average net assets (the "Expense Cap"). The Expense Cap will remain in effect until at least [ ] [ ], 2009. HIM is permitted to be reimbursed for fee reductions and/or expense payments made in the prior three fiscal years. This reimbursement may be requested by HIM if the aggregate amount actually paid by the Haverford Quality 250 Fund toward operating expenses for such fiscal year (taking into account the reimbursement) does not exceed the Expense Cap. B-21 The Advisory Agreement and Sub-Advisory Agreement between the Advisor and the Sub-Advisor, with respect to the Haverford Quality 250 Fund, were initially approved by the Board on [ ], 2008. The Advisory Agreement and the Sub-Advisory Agreement, with respect to the Haverford Quality 250 Fund, continue in effect for two years from their effective date and may be continued in effect annually thereafter if such continuance is approved by (i) the Board, or (ii) a majority (as defined in the 1940 Act) of the outstanding voting securities of the Haverford Quality 250 Fund, provided that in either case the continuance is also approved by a majority of the Disinterested Directors, by a vote cast in person at a meeting called for the purpose of voting on such continuance. The Advisory Agreement and Sub-Advisory Agreement are both terminable without penalty by the Company with respect to one or more of the Haverford Quality 250 Fund on 60 days written notice when authorized either by majority vote of its outstanding voting shares or by a vote of a majority of its Board (including a majority of the Disinterested Directors), or by the Advisor or the Sub-Advisor (as applicable) on 60 days written notice, and will automatically terminate in the event of its assignment. Both the Advisory Agreement and Sub-Advisory Agreement provide that, in the absence of willful misfeasance, bad faith or gross negligence on the part of the Advisor or the Sub-Advisor, or of reckless disregard by both of them of their obligations thereunder, the Advisor and the Sub-Advisor shall not be liable for any action or failure to act in accordance with its duties thereunder. PORTFOLIO MANAGER Set forth below is information regarding the individual, Mr. Jason D. Pride, identified in the prospectus as primarily responsible for the day-to-day management of the Fund ("Portfolio Manager"). All asset information is as of October 31, 200[6]. Management of Other Accounts. The table below shows the number of other accounts managed by the Portfolio Manager and the total assets in the accounts in each of the following categories: registered investment companies, other pooled investment vehicles and other accounts. For each category, the table also shows the number of accounts and the total assets in the accounts with respect to which the advisory fee is based on account performance.
------------------------------------------------------------------------------------------------------------- Name of Number of Other Accounts Managed and Total Number of Accounts and Total Assets for Portfolio Assets by Account Type Which Advisory Fee is Performance Based Manager ------------------------------------------------------------------------------------------------------------- Registered Other Pooled Other Registered Other Pooled Other Investment Investment Accounts Investment Investment Accounts Companies Vehicles Companies Vehicles ------------------------------------------------------------------------------------------------------------- Jason D. Pride -- -- 47 -- -- -- ------------------------------------------------------------------------------------------------------------- -- -- $355,580,249 -- -- -- -------------------------------------------------------------------------------------------------------------
Portfolio Manager Compensation. Haverford Trust compensates the Fund's Portfolio Manager for his management of the Fund. The Portfolio Manager's compensation consists of salary. The Portfolio Manager's overall compensation is designed to be competitive with similar investment advisers and to compensate the Portfolio Manager for his contribution to HIM and its investment products. Compensation is not based upon Fund or account performance, but is B-22 based on quantitative and qualitative factors. These may include HIM's and its parent's profitability, investment ideas, teamwork, leadership and overall contributions. Portfolio Manager Ownership of Fund Shares. Since the Haverford Quality 250 Fund has not yet commenced operations, the Portfolio Manager does not beneficially own any shares of the Haverford Quality 250 Fund. Potential Conflicts of Interest. The Portfolio Manager's management of "other accounts" may give rise to potential conflicts of interest in connection with his management of the Fund's investments, on the one hand, and the investments of the other accounts, on the other. The other accounts may have the same investment objective as the Fund. Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the Portfolio Manager could favor one account over another. Another potential conflict could include the Portfolio Manager's knowledge about the size, timing and possible market impact of Fund trades, whereby the Portfolio Manager could use this information to the advantage of other accounts and to the disadvantage of the Fund. However, HIM has established policies and procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated. DISTRIBUTOR AND RULE 12b-1 PLAN Distributor. ALPS Distributors, Inc., a Colorado corporation with principal offices at 1290 Broadway, Suite 1100, Denver, Colorado, serves as the distributor of Creation Units for the Fund on an agency basis (the "Distributor"). The Distributor has entered into a Distribution Agreement with the Company pursuant to which it distributes the shares of the Haverford Quality 250 Fund. Shares are continuously offered for sale by the Distributor only in Creation Unit Aggregations. Fund shares in less than Creation Unit Aggregations are not distributed by the Distributor. Under the Distribution Agreement, the Distributor, for nominal consideration (i.e., $1.00) and as agent for the Haverford Quality 250 Fund, will solicit orders for the purchase of the Haverford Quality 250 Fund's shares, provided that any subscriptions and orders will not be binding on the Haverford Quality 250 Fund until accepted by the Haverford Quality 250 Fund. The Distributor will deliver Prospectuses and, upon request, Statements of Additional Information to persons purchasing Creation Unit Aggregations and will maintain records of orders placed with it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and a member of the Financial Industry Regulatory Authority ("FINRA"). The Distributor may also enter into agreements with securities dealers ("Soliciting Dealers") who will solicit purchases of Creation Unit Aggregations of Fund shares. Such Soliciting Dealers may also be Participating Organizations (as discussed in "Procedures for Creation of Creation Unit Aggregations" below) or DTC participants (as defined below). The Distribution Agreement was initially approved by the Board on [ ] [ ], 2008. The Distribution Agreement continues in effect for two years from its effective date and may be continued in effect annually thereafter if such continuance is approved by (i) the Board, or (ii) a B-23 majority (as defined in the 1940 Act) of the outstanding voting securities of the Haverford Quality 250 Fund, provided that in either case the continuance is also approved by a majority of the Disinterested Directors, by a vote cast in person at a meeting called for the purpose of voting on such continuance. The Distribution Agreement is terminable without penalty by the Company with respect to the Haverford Quality 250 Fund on 60 days' written notice when authorized either by majority vote of its outstanding voting shares or by a vote of a majority of its Board (including a majority of the Disinterested Directors), or by the Distributor on 60 days' written notice, and will automatically terminate in the event of its assignment. The Distribution Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the part of the Distributor, or of reckless disregard by it of its obligations thereunder, the Distributor shall not be liable for any action or failure to act in accordance with its duties thereunder. Rule 12b-1 Plan. The Company's Board of Directors has adopted a distribution and service plan pursuant to Rule 12b-1 of the 1940 Act with respect to the Haverford Quality 250 Fund (the "Plan"). Under the Plan, the Haverford Quality 250 Fund may reimburse the Distributor up to a maximum rate of 0.25% per annum of the Haverford Quality 250 Fund's average daily net assets (the "Shareholder Servicing Fee") for providing or arranging for others to provide shareholder services and for the maintenance of shareholder accounts. The fee is accrued daily and paid monthly. The Board of Directors has determined that no payments will be made by the Haverford Quality 250 Fund under the Rule 12b-1 Plan during the first twelve months of the Haverford Quality 250 Fund's operation. The Plan also provides that the Advisor or the Distributor may make payments from time to time from their own resources, which may include the advisory fees, distribution fees and past profits for the following purposes: (i) to pay the costs of and to compensate others, including Participating Organizations with whom the Distributor has entered into written agreements, for performing shareholder servicing on behalf of the Haverford Quality 250 Fund; (ii) to compensate certain Participating Organizations for providing assistance in distributing the shares of the Haverford Quality 250 Fund; and (iii) to pay the costs of the preparation and printing of brochures and other promotional materials, mailings to prospective shareholders, advertising, and other promotional activities, including the salaries and/or commissions of sales personnel of the Distributor and other persons in connection with the distribution of the Haverford Quality 250 Fund's shares. Such payments will not increase the amount which the Haverford Quality 250 Fund is required to pay to the Advisor or the Distributor for any fiscal year under the Investment Advisory Agreement or Distribution Agreement in effect for that year. In accordance with Rule 12b-1, the Plan provides that all written agreements relating to the Plan entered into between either the Haverford Quality 250 Fund or the Distributor and Participating Organizations or other organizations must be in a form satisfactory to the Haverford Quality 250 Fund's Board of Directors. In addition, the Plan requires the Haverford Quality 250 Fund and the Distributor to prepare, at least quarterly, written reports setting forth all amounts expended for pursuant to the Plan and identifying the servicing and distribution activities for which those expenditures were made. The Plan provides that it may continue in effect for successive annual periods provided it is approved by the Haverford Quality 250 Fund's shareholders or by the Board of Directors, B-24 including a majority of Disinterested Directors. The Plan was initially approved by the Board of Directors on [ ] [ ], 2008, and will remain in effect until [ ] [ ], 2009. The Plan further provides that it may not be amended to increase materially the amounts which may be spent by the Haverford Quality 250 Fund pursuant to the Plan without shareholder approval, and that other material amendments must be approved by the Board of Directors, in the manner described in the preceding sentence. The Plan may be terminated at any time by a vote of a majority of the Disinterested Directors or the Haverford Quality 250 Fund's shareholders. ADMINISTRATOR AND ACCOUNTING AGENT The Bank of New York Mellon ("BONY") serves as Administrator and Accounting Agent for the Haverford Quality 250 Fund. Its principal address is 101 Barclay Street, New York, New York 10286. BONY serves as Administrator and Accounting Agent for the Haverford Quality 250 Fund pursuant to an Administration and Accounting Agreement. Under the Administration and Accounting Agreement, BONY is obligated on a continuous basis, to provide certain administration, valuation, accounting and computational services necessary for the proper administration of the Company and the Fund. As the Fund Accountant, BONY holds the Fund's assets, calculates the net asset value of Shares and calculates net income and realized capital gains or losses. Pursuant to the Administration and Accounting Agreement, the Company has agreed to indemnify BONY for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from negligence or willful misconduct in the performance of its duties. CUSTODIAN AND TRANSFER AGENT BONY, 101 Barclay Street, New York, New York 10286 also serves as custodian for the Haverford Quality 250 Fund pursuant to a Custodian Agreement. BONY also serves as transfer agent of the Haverford Quality 250 Fund pursuant to a Transfer Agency Agreement. BONY may be reimbursed by the Haverford Quality 250 Fund for its out-of-pocket expenses. LEGAL COUNSEL Paul, Hastings, Janofsky & Walker LLP, 75 East 55th Street, New York, New York 10022, serves as legal counsel to the Company. INDEPENDENT REGISTERED PUBLIC ACCOUNTING COMPANY [Eisner LLP] serves as the Haverford Quality 250 Fund's independent registered public accounting firm. The independent registered public accounting firm audits the Haverford Quality 250 Fund's annual financial statements and provides other related services. V. CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES As of [ ] [ ], 2008, the officers and Directors, as a group, owned beneficially less than 1% of the shares of the Haverford Quality 250 Fund. B-25 [As of [ ] [ ], 2008, no shareholder owned of record, 5% or more of the outstanding shares of the Haverford Quality 250 Fund.] VI. CODE OF ETHICS The Company, the Advisor, the Sub-Advisor and the Distributor have each adopted codes of ethics pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics restrict the personal securities transactions of access persons, as defined in the codes, of the Haverford Quality 250 Fund in securities that may be purchased or held by the Haverford Quality 250 Fund to ensure that such investments do not disadvantage the Haverford Quality 250 Fund. The codes of ethics for the Company, the Advisor, the Sub-Advisor and the Distributor are filed as exhibits to the Haverford Quality 250 Fund's registration statement and instructions concerning how these documents can be obtained may be found on the back cover of the Haverford Quality 250 Fund's Prospectus. VII. PROXY VOTING POLICIES The Board of Directors has delegated the responsibility to vote proxies for securities held in the Haverford Quality 250 Fund's portfolios to the [Advisor], subject to the Board's oversight. The Advisor's proxy voting policies, attached as Appendix A, are reviewed periodically, and, accordingly are subject to change. The Haverford Quality 250 Fund's voting record relating to portfolio securities for the 12-month period ended [ ] [ ], 2008, may be obtained on the Haverford Quality 250 Fund's website at www.[hq250].com and on the SEC's website at http://www.sec.gov. VIII. PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES The Company's Board of Directors has adopted a policy regarding the disclosure of information about the Haverford Quality 250 Fund's portfolio securities. The Haverford Quality 250 Fund's portfolio holdings are publicly disseminated each day the Fund is open for business through financial reporting and news services including publicly available internet web sites. In addition, a basket composition file, which includes the security names and share quantities required to be delivered in exchange for the Haverford Quality 250 Fund shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of NYSE Arca via the National Securities Clearing Corporation ("NSCC"). The basket represents one Creation Unit of the Haverford Quality 250 Fund. IX. PORTFOLIO TRANSACTIONS The policy of the Company regarding purchases and sales of securities for the Haverford Quality 250 Fund is that primary consideration will be given to obtaining "best execution" of transaction at commission rates that are reasonable in relation to the value of brokerage services obtained. Consistent with this policy, when securities transactions are effected on a stock exchange, the Company's policy is to pay commissions which are considered fair and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Advisor and the Sub-Advisor rely upon their experience and knowledge regarding commissions generally charged by various brokers and on their judgment in evaluating B-26 the brokerage services received from the broker effecting the transaction. Such determinations are necessarily subjective and imprecise, as in most cases, an exact dollar value for those services is not ascertainable. The Advisor and Sub-Advisor owe a fiduciary duty to their clients to obtain best execution on trades effected. "Best execution" does not necessarily mean that only brokers offering the lowest available commission rate will be selected to execute transactions. In determining "best execution," the full range of brokerage services applicable to a particular transaction may be considered, which may include, but is not limited to: liquidity, price, commission, timing, aggregated trades, capable floor brokers or traders, competent block trading coverage, ability to position, capital strength and stability, reliable and accurate communications and settlement processing, use of automation, knowledge of other buyers or sellers, arbitrage skills, administrative ability, underwriting and provision of information on a particular security or market in which the transaction is to occur. The specific criteria will vary depending upon the nature of the transaction, the market in which it is executed, and the extent to which it is possible to select from among multiple broker/dealers. The Advisor and Sub-Advisor will also use ECNs when appropriate. The Advisor and Sub-Advisor do not presently participate in any soft dollar arrangements. They may, however, aggregate trades with clients of the Sub-Advisor, whose commission dollars are used to generate soft dollar credits. Although the Company's commissions are not used for soft dollars, the Company may benefit from the soft dollar products/services received by the Sub-Advisor. The Advisor and Sub-Advisor assume general supervision over placing orders on behalf of the Company for the purchase or sale of portfolio securities. If purchases or sales of portfolio securities of the Company and one or more other clients of the Advisor or Sub-Advisor are considered at or about the same time, transactions in such securities are allocated among the several clients in a manner deemed equitable and consistent with its fiduciary obligations to all by the Advisor and Sub-Advisor. In some cases, this procedure could have a detrimental effect on the price or volume of the security so far as the Company is concerned. However, in other cases, it is possible that the ability to participate in volume transactions and to negotiate lower brokerage commissions will be beneficial to the Company. Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are likely to result in comparatively greater brokerage expenses. The portfolio turnover rate for the Haverford Quality 250 Fund may exceed 100%. The overall reasonableness of brokerage commissions is evaluated by the Advisor and the Sub-Advisor based upon its knowledge of available information as to the general level of commission paid by other institutional investors for comparable services. X. SHARE PRICE NET ASSET VALUE The Haverford Quality 250 Fund's share price, called its net asset value, or NAV, is calculated each business day as of the close of regular trading on the New York Stock Exchange B-27 ("NYSE"), generally 4:00 p.m., Eastern Time. NAV per share is computed by dividing the net assets allocated to each share class by the number of the Haverford Quality 250 Fund shares outstanding for that class. XI. INFORMATION ABOUT HAVERFORD QUALITY 250(TM) SHARES The Fund offers and issues an exchange-traded class of shares called the Haverford Quality 250(TM) shares. The Haverford Quality 250 Fund issues and redeems the Haverford Quality 250(TM) shares in large lots, known as "Creation Units." To purchase or redeem a Creation Unit, you must be a Participating Organization or you must do so through a broker that is a Participating Organization. A Participating Organization is either a member of the Continuous Net Settlement System of the National Securities Clearing Corporation ("NSCC") or a participant in the Depository Trust Company ("DTC") that has executed a Participant Agreement with the Company's Distributor. The Haverford Quality 250 Fund issues Creation Units in kind, in exchange for a basket of stocks that are part of the Haverford Quality 250 Fund's Underlying Index (Deposit Securities). The Haverford Quality 250 Fund also redeems Creation Units in kind; an investor who tenders a Creation Unit will receive, as redemption proceeds, a basket of stocks that are part of the Haverford Quality 250 Fund's portfolio holdings (Redemption Securities). The Deposit Securities and the Redemption Securities will usually, but may not necessarily always, be the same. As part of any creation or redemption transaction, the investor will either pay or receive some cash in addition to the securities, as described more fully below. The Haverford Quality 250 Fund reserves the right to issue Creation Units for cash, rather than in kind, although it has no current intention of doing so. INFORMATION ABOUT THE HAVERFORD QUALITY 250(TM) INDEX AND THE INDEX ADMINISTRATOR HIM is the creator of the Haverford Quality 250(TM) Index. Based on its own proprietary intellectual model, HIM has established specific, defined characterization/inclusion/exclusion criteria (an "Index Methodology") that an issuer must meet in order to be included in the Haverford Quality 250(TM) Index. HIM does not administer or maintain the Haverford Quality 250(TM) Index. The Haverford Quality 250(TM) Index is administered by Dow Jones & Company, Inc. ("Dow Jones") and will serve as the index administrator (the "Index Administrator"). As Index Administrator, Dow Jones will employ the Index Methodology to determine the composition of the Haverford Quality 250(TM) Index and maintain the Haverford Quality 250(TM) Index. Dow Jones will also act as "index calculation agent" in connection with the calculation and dissemination of the Haverford Quality 250(TM) Index. The Index Methodology is publicly available on the Fund's website at www.[hq250].com. Any change to the Index Methodology will be posted on the Fund's website at least 60 days prior to being implemented. The Haverford Quality 250(TM) Index is compiled, maintained and calculated without regard to the Advisor, Sub-Advisor, or Distributor. The Index Administrator has no obligation to B-28 take the specific needs of the Advisor, Sub-Advisor or Distributor into account in the determination and calculation of the Haverford Quality 250(TM) Index. It is expected that the Haverford Quality 250(TM) Index will be available through major market data vendors as a result of dissemination to the Consolidated Tape Association by NYSE Arca. NYSE Arca is not affiliated with the Company, the Haverford Quality 250 Fund, the Advisor, the Sub-Advisor or the Distributor. The Haverford Quality 250 Fund is entitled to use its the Haverford Quality 250(TM) Index pursuant to a licensing agreement between HIM and the Advisor. There is no charge to the Haverford Quality 250 Fund in connection with this licensing agreement. EXCHANGE LISTING AND TRADING The Haverford Quality 250(TM) shares have been approved for listing on NYSE Arca and will trade on NYSE Arca at market prices that may differ from net asset value. The only relationship that NYSE Arca has with the Advisor, the Sub-Advisor, the Distributor or the Company in connection with the Funds is that NYSE Arca lists the Haverford Quality 250(TM) shares pursuant to its listing agreement with the Company. NYSE Arca has no obligation or liability in connection with the administration, marketing or trading of the Haverford Quality 250 Fund. There can be no assurance that, in the future, the Haverford Quality 250 Fund's Haverford Quality 250(TM) shares will continue to meet all of NYSE Arca's listing requirements. NYSE Arca may, but is not required to, delist the Fund's Haverford Quality 250(TM) shares if: (1) following the initial 12-month period beginning upon the commencement of trading, there are fewer than 50 beneficial owners of the Fund's Haverford Quality 250(TM) shares for 30 or more consecutive trading days; (2) the value of the Haverford Quality 250(TM) Index related to the Fund is no longer calculated or available; or (3) such other event shall occur or condition exist that, in the opinion of NYSE Arca, makes further dealings on NYSE Arca inadvisable. NYSE Arca will also delist the Fund's Haverford Quality 250(TM) shares upon termination of the Fund's Haverford Quality 250(TM) shares class. As with any stock traded on an exchange, purchases and sales of the Fund's Haverford Quality 250(TM) shares will be subject to usual and customary brokerage commissions. The Company reserves the right to adjust the price levels of the Haverford Quality 250(TM) shares (but not their value) in the future to help maintain convenient trading ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, and would have no effect on the net assets of the Fund. BOOK ENTRY ONLY SYSTEM DTC acts as securities depositary for the Haverford Quality 250(TM) shares. The Haverford Quality 250(TM) shares are registered in the name of the DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in limited circumstances set forth below, certificates will not be issued for the Haverford Quality 250(TM) shares. DTC is a limited-purpose trust company that was created to hold securities of its participants (the DTC Participants) and to facilitate the clearance and settlement of securities transactions among the DTC Participants in B-29 such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by NYSE and FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers, and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the "Indirect Participants"). Beneficial ownership of the Haverford Quality 250(TM) shares is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in the Haverford Quality 250(TM) shares (owners of such beneficial interests are referred to herein as "Beneficial Owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of the Haverford Quality 250(TM) shares. The Haverford Quality 250 Fund recognizes DTC or its nominee as the record owner of all the Haverford Quality 250(TM) shares for all purposes. Beneficial Owners of the Haverford Quality 250(TM) shares are not entitled to have the Haverford Quality 250(TM) shares registered in their names, and will not receive or be entitled to physical delivery of share certificates. Each Beneficial Owner must rely on the procedures of DTC and any DTC Participant and/or Indirect Participant through which such Beneficial Owner holds its interests, to exercise any rights of a holder of the Haverford Quality 250(TM) shares. Conveyance of all notices, statements, and other communications to Beneficial Owners is effected as follows. DTC will make available to the Company upon request and for a fee a listing of the Haverford Quality 250(TM) shares of the Haverford Quality 250 Fund held by each DTC Participant. The Company shall obtain from each such DTC Participant the number of Beneficial Owners holding the Haverford Quality 250(TM) shares, directly or indirectly, through such DTC Participant. The Company shall provide each such DTC Participant with copies of such notice, statement, or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Company shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Share distributions shall be made to DTC or its nominee as the registered holder of the Haverford Quality 250(TM) shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants' accounts with payments in amounts proportionate to their respective beneficial interests in the Haverford Quality 250(TM) shares of the Haverford Quality 250 Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of the Haverford Quality 250(TM) shares held through such DTC Participants will be governed by standing instructions and B-30 customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a "street name," and will be the responsibility of such DTC Participants. The Company has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in the Haverford Quality 250(TM) shares, or for maintaining, supervising, or reviewing any records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants. DTC may determine to discontinue providing its service with respect to the Haverford Quality 250(TM) shares at any time by giving reasonable notice to the Company and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Company shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such replacement is unavailable, to issue and deliver printed certificates representing ownership of the Haverford Quality 250(TM) shares, unless the Company makes other arrangements with respect thereto satisfactory to NYSE Arca (or such other exchange on which the Haverford Quality 250(TM) shares may be listed). PURCHASE AND ISSUANCE OF THE HAVERFORD QUALITY 250(TM) SHARES IN CREATION UNITS The Haverford Quality 250 Fund issues and sell the Haverford Quality 250(TM) shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day, of an order in proper form. The Haverford Quality 250 Fund will not issue fractional Creation Units. A Business Day is any day on which NYSE Arca is open for business. FUND DEPOSIT The consideration for purchase of a Creation Unit from the Haverford Quality 250 Fund generally consists of the in kind deposit of a designated portfolio of equity securities (the Deposit Securities) per each Creation Unit Aggregation constituting a substantial replication of the stocks included in the Haverford Quality 250(TM) Index and an amount of cash (the Cash Component) consisting of a Balancing Amount (described below) and a Transaction Fee (also described below). Together, the Deposit Securities and the Cash Component constitute the Fund Deposit. The Balancing Amount is an amount equal to the difference between the net asset value (NAV) of a Creation Unit and the market value of the Deposit Securities (the "Deposit Amount"). It ensures that the NAV of a Fund Deposit (not including the Transaction Fee) is identical to the NAV of the Creation Unit it is used to purchase. If the Balancing Amount is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities), then that amount will be paid by the purchaser to the Haverford Quality 250 Fund in cash. If the Balancing Amount is a negative number (i.e., the NAV per Creation Unit is less than the market value of the Deposit Securities), then that amount will be paid by the Haverford B-31 Quality 250 Fund to the purchaser in cash (except as offset by the Transaction Fee, described below). The Company, through the NSCC (discussed below), makes available on each Business Day, immediately prior to the opening of the regular trading session on NYSE Arca (currently 9:30 a.m., Eastern Time), a list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit for the Haverford Quality 250 Fund (based on information at the end of the previous Business Day). The Fund Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of the Haverford Quality 250 Fund until such time as the next-announced Fund Deposit composition is made available. The Haverford Quality 250 Fund reserves the right to accept a nonconforming Fund Deposit. The identity and number of shares of the Deposit Securities required for a Fund Deposit may change to reflect rebalancing adjustments and corporate actions by the Haverford Quality 250 Fund, or in response to adjustments to the weighting or composition of the component stocks of the Haverford Quality 250(TM) Index. In addition, the Company reserves the right to permit or require the substitution of an amount of cash--i.e., a "cash in lieu" amount--to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery, may not be eligible for transfer through the Clearing Process (discussed below), or may not be eligible for trading by a Participating Organization (as defined below) or the investor for which a Participating Organization is acting. Brokerage commissions incurred in connection with acquisition of Deposit Securities not eligible for transfer through the systems of DTC and hence not eligible for transfer through the Clearing Process (discussed below) will be an expense of the Haverford Quality 250 Fund. However, the Advisor, subject to the approval of the Board of Directors, may adjust the Transaction Fee (described below) to protect existing shareholders from this expense. In addition to the list of names and numbers of securities constituting the current Deposit Securities, the Company, through the NSCC, also makes available on each Business Day, the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit of the Haverford Quality 250 Fund. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Haverford Quality 250 Fund, and the Haverford Quality 250 Fund's determination shall be final and binding. PROCEDURES FOR CREATION OF CREATION UNITS To be eligible to place orders with the Distributor and to purchase Creation Units from the Haverford Quality 250 Fund, you must be (i) a Participating Organization, i.e., a broker dealer or other participant in the clearing process through the Continuous Net Settlement System of the NSCC (the "Clearing Process"), a clearing agency that is registered with the SEC, or (ii) a DTC Participant, and in each case, must have executed an agreement with the Distributor governing the purchase and redemption of Creation Units (the Participant Agreement). A Participating Organization and DTC Participant are collectively referred to as an "Authorized Participant." Investors should contact the Distributor for the names of Authorized Participants B-32 that have signed a Participation Agreement. The Haverford Quality 250 Fund Shares, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant. All orders to create Creation Unit Aggregations, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must be received by the Distributor no later than the closing time of the regular trading session on NYSE Arca ("Closing Time") (ordinarily 4:00 p.m., Eastern Time) in each case on the date such order is placed in order for creation of Creation Unit Aggregations to be effected based on the NAV of Shares of the Haverford Quality 250 Fund as next determined on such date after receipt of the order in proper form. In the case of custom orders, the order must be received by the Distributor no later than 3:00 p.m. Eastern Time on the trade date. A custom order may be placed by an Authorized Participant in the event that the Company permits or requires the substitution of an amount of cash to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for trading by such Authorized Participant or the investor for which it is acting or other relevant reason. The date on which an order to create Creation Unit Aggregations (or an order to redeem Creation Unit Aggregations, as discussed below) is placed is referred to as the "Transmittal Date." Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below (see the Placement of Creation Orders Using Clearing Process and the Placement of Creation Orders Outside Clearing Process sections). Severe economic or market disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized Participant. All orders from investors who are not Authorized Participants to create Creation Unit Aggregations shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition, the Authorized Participant may request the investor to make certain representations or enter into agreements with respect to the order, e.g., to provide for payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement and that, therefore, orders to create Creation Unit Aggregations of a Fund have to be placed by the investor's broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement. Those placing orders for Creation Unit Aggregations through the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date. Orders for Creation Unit Aggregations that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component. Placement of Creation Orders Using Clearing Process. The Clearing Process is the process of creating or redeeming Creation Unit Aggregations through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process must be B-33 delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Custodian to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party's creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Company, together with such additional information as may be required by the Distributor. An order to create Creation Unit Aggregations through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed. Placement of Creation Orders Outside Clearing Process. Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement with the Distributor. A DTC Participant who wishes to place an order creating Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Unit Aggregations will instead be effected through a transfer of securities and cash directly through DTC. The Haverford Quality 250 Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of the Haverford Quality 250 Fund by no later than 11:00 a.m., Eastern Time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Company, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian no later than 2:00 p.m., Eastern Time, on the next Business Day immediately following such Transmittal Date. An order to create Creation Unit Aggregations outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date; and (ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, on the next Business Day immediately following the Transmittal Date, such order will be canceled. Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted to reflect the then current Deposit Securities and Cash Component. The delivery of Creation Unit Aggregations so created will occur no later than the third (3rd) Business Day following the day on which the purchase order is deemed received by the Distributor. Additional transaction fees may be imposed with respect to transactions effected outside the Clearing Process (through a DTC participant) and in the limited circumstances in which any cash can be used in lieu of Deposit Securities to create Creation Units. (See Creation Transaction Fee section below). B-34 Creation Unit Aggregations may be created in advance of receipt by the Company of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the NAV of the Fund Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component, plus (ii) 105% of the market value of the undelivered Deposit Securities (the "Additional Cash Deposit"). The order shall be deemed to be received on the Business Day on which the order is placed provided that the order is placed in proper form prior to 4:00 p.m., Eastern Time, on such date, and federal funds in the appropriate amount are deposited with the Custodian by 11:00 a.m., Eastern Time, the following Business Day. If the order is not placed in proper form by 4:00 p.m. or federal funds in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be canceled and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Company, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Company in an amount at least equal to 115% of the daily marked to market value of the missing Deposit Securities. To the extent that missing Deposit Securities are not received by 1:00 p.m., Eastern Time, on the third Business Day following the day on which the purchase order is deemed received by the Distributor or in the event a marked-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Company may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Company and Fund for the costs incurred by the Company in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Company will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Company and deposited into the Company. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Creation Unit Aggregations so created will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor. Acceptance of Orders for Creation Unit Aggregations. The Company reserves the absolute right to reject a creation order transmitted to it by the Distributor with respect to the Fund if: (i) the order is not in proper form; (ii) the investor(s), upon obtaining the Fund Shares ordered, would own 80% or more of the currently outstanding shares of the Fund; (iii) the Deposit Securities delivered are not as disseminated for that date by the Custodian, as described above; (iv) acceptance of the Deposit Securities would have certain adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund Deposit would otherwise, in the discretion of the Company or the Advisor, have an adverse effect on the Company or the rights of beneficial owners; or (vii) in the event that circumstances outside the control of the Company, the Custodian, the Distributor and the Advisor make it, for all practical purposes, impossible to process creation orders. Examples of such circumstances include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting the Company, the Advisor, the B-35 Distributor, DTC, NSCC, the Custodian or sub-custodian or any other participant in the creation process, and similar extraordinary events. The Distributor shall notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf of such prospective creator of its rejection of the order of such person. The Company, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor shall any of them incur any liability for the failure to give any such notification. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility, and acceptance for deposit of any securities to be delivered shall be determined by the Company, and the Company's determination shall be final and binding. Creation Transaction Fee. To compensate the Company for transfer and other transaction costs involved in creation transactions through the Clearing Process, investors will be required to pay a creation transaction fee, payable to the Company regardless of the number of creations made each day. A minimum Creation Unit transaction fee is charged for each purchase or redemption of Creation Units, regardless of the number of Creation Unit shares acquired. The level of the transaction fee is variable and will fluctuate depending on the number of securities contained in the applicable creation/redemption basket and on whether the purchase or redemption will take place outside the usual process at the NSCC. There is no maximum transaction fee level. An additional Creation Unit charge may be imposed for cash creations (to offset the Company's brokerage and other transaction costs associated with using cash to purchase the requisite Deposit Securities). Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Company. The level of the Creation/Redemption transaction fee is described in the Prospectus. Redemption of Fund Shares in Creation Units Aggregations. Fund Shares may be redeemed only in Creation Unit Aggregations at their NAV next determined after receipt of a redemption request in proper form by a Fund through the Transfer Agent and only on a Business Day. The Haverford Quality 250 Fund will not redeem Shares in amounts less than Creation Unit Aggregations. Beneficial owners must accumulate enough Shares in the secondary market to constitute a Creation Unit Aggregation in order to have such Shares redeemed by the Company. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit Aggregation. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Fund Shares to constitute a redeemable Creation Unit Aggregation. With respect to the Haverford Quality 250 Fund, the Custodian, through the NSCC, makes available prior to the opening of the regular trading session on NYSE Arca (currently 9:30 a.m., Eastern Time) on each Business Day, the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit Securities that are applicable to creations of Creation Unit Aggregations. Unless cash redemptions are available or specified for the Haverford Quality 250 Fund, the redemption proceeds for a Creation Unit Aggregation generally consist of the Haverford B-36 Quality 250 Fund Securities, as announced on the Business Day of the request for redemption received in proper form, plus or minus cash in an amount equal to the difference between the NAV of the Fund Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less a redemption transaction fee as listed below. In the event that the Fund Securities have a value greater than the NAV of the Fund Shares, a compensating cash payment equal to the difference is required to be made by or through an Authorized Participant by the redeeming shareholder. The right of redemption may be suspended or the date of payment postponed (i) for any period during which NYSE Arca is closed (other than customary weekend and holiday closings); (ii) for any period during which trading on NYSE Arca is suspended or restricted; (iii) for any period during which an emergency exists as a result of which disposal of the shares of the Fund or determination of a Fund's NAV is not reasonably practicable; or (iv) in such other circumstances as is permitted by the SEC. Redemption Transaction Fee. A redemption transaction fee is imposed to offset transfer and other transaction costs that may be incurred by the Haverford Quality 250 Fund. An additional variable charge for cash redemptions (when cash redemptions are available or specified) for the Haverford Quality 250 Fund may be imposed. Investors will also bear the costs of transferring the Fund Securities from the Company to their account or on their order. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit Aggregation may be charged an additional fee for such services. The redemption transaction fees for the Haverford Quality 250 Fund are the same as the creation fees set forth above. Placement of Redemption Orders Using Clearing Process. Orders to redeem Creation Unit Aggregations through the Clearing Process must be delivered through a Participating Party that has executed the Participant Agreement. An order to redeem Creation Unit Aggregations using the Clearing Process is deemed received by the Company on the Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern Time, on such Transmittal Date, and (ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the NAV of the relevant Fund as next determined. An order to redeem Creation Unit Aggregations using the Clearing Process made in proper form but received by the Company after 4:00 p.m., Eastern Time, will be deemed received on the next Business Day immediately following the Transmittal Date and will be effected at the NAV next determined on such next Business Day. The requisite Fund Securities and the Cash Redemption Amount will be transferred by the third NSCC Business Day following the date on which such request for redemption is deemed received. Placement of Redemption Orders Outside Clearing Process. Orders to redeem Creation Unit Aggregations outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Unit Aggregations to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Unit Aggregations will instead be effected through transfer of Fund Shares directly through DTC. An order to redeem Creation Unit Aggregations outside the Clearing Process is deemed received by the Company on the B-37 Transmittal Date if (i) such order is received by the Transfer Agent not later than 4:00 p.m., Eastern Time on such Transmittal Date; (ii) such order is accompanied or followed by the requisite number of Shares of the Fund, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., Eastern Time (for the Fund Shares) on the next Business Day immediately following such Transmittal Date (the "DTC Cut-Off-Time") and 2:00 p.m., Eastern Time for any Cash Component, if any, owed to the Haverford Quality 250 Fund; and (iii) all other procedures set forth in the Participant Agreement are properly followed. After the Company has deemed an order for redemption outside the Clearing Process received, the Company will initiate procedures to transfer the requisite Fund Securities which are expected to be delivered within three Business Days and the Cash Redemption Amount, if any, owed to the redeeming Beneficial Owner to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Company. The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered/received upon redemption will be made by the Custodian according to the procedures set forth under Determination of NAV computed on the Business Day on which a redemption order is deemed received by the Company. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by a DTC Participant not later than Closing Time on the Transmittal Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be determined by the Custodian on such Transmittal Date. If, however, either (i) the requisite number of Shares of the Haverford Quality 250 Fund are not delivered by the DTC Cut-Off-Time, as described above, or (ii) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered/received will be computed on the Business Day following the Transmittal Date provided that the Fund Shares of the Haverford Quality 250 Fund are delivered through DTC to the Custodian by 11:00 a.m. the following Business Day pursuant to a properly submitted redemption order. If it is not possible to effect deliveries of the Fund Securities, the Company may in its discretion exercise its option to redeem such Fund Shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Haverford Quality 250 Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its Fund Shares based on the NAV of Shares of the Haverford Quality 250 Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Haverford Quality 250 Fund's brokerage and other transaction costs associated with the disposition of Fund Securities). The Haverford Quality 250 Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that differs from the exact composition of the Fund Securities, or cash in lieu of some securities added to the Cash Component, but in no event will the total value of the securities delivered and the cash transmitted differ from the NAV. Redemptions of Fund Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the Haverford Quality 250 Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Unit Aggregations for cash to B-38 the extent that the Company could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities under such laws. An Authorized Participant or an investor for which it is acting subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit Aggregation may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Fund Shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment, beneficial ownership of shares or delivery instructions. XII. CAPITAL STOCK AND OTHER SECURITIES There are no restrictions on the right of shareholders to retain or dispose of the Haverford Quality 250 Fund's shares, other than the possible future termination of the Haverford Quality 250 Fund or share class. The Haverford Quality 250 Fund or class may be terminated by reorganization into another mutual fund or class or by liquidation and distribution of the assets of the Haverford Quality 250 Fund or class. Unless terminated by reorganization or liquidation, the Haverford Quality 250 Fund and share class will continue indefinitely. The Company is organized as a corporation under Maryland law. A shareholder of the Haverford Quality 250 Fund will not be personally liable for payment of the Haverford Quality 250 Fund's debts except by reason of his or her own conduct or acts. The authorized capital stock of the Company consists of [17,500,000,000] shares of stock, having a par value of $.0001 per share. The Company's Board of Directors is authorized to divide the shares into separate series of stock, one for each of the Haverford Quality 250 Fund that may be created. The series (Haverford Quality 250 Fund) set forth herein has been established by the Board of Directors under the Charter of the Company. The Haverford Quality 250 Fund series represents a separate pool of assets of the Company's shares and has different objectives and investment policies than other series of Funds within the Company. Except as noted below, each share when issued will have equal dividend, distribution and liquidation rights within the series for which it was issued, and each fractional share has rights in proportion to the percentage it represents of a whole share. Generally, all shares will vote in the aggregate, as a single class except if voting by class is required by law or the matter involved affects only one class, in which case shares will be voted separately by class. Shares of all series have identical voting rights, except where, by law, certain matters must be approved by a majority of the shares of the affected series. There are no conversion or preemptive rights in connection with any shares of the Haverford Quality 250 Fund. The Haverford Quality 250 Fund has no sinking fund provisions. All shares when issued in accordance with the terms of the offering will be fully paid and non-assessable. The Haverford Quality 250 Fund's redemption provisions are described in its current Prospectus and elsewhere in this Statement of Additional Information. The shares of the Haverford Quality 250 Fund has non-cumulative voting rights, which means that the holders of more than 50% of the shares outstanding voting for the election of Directors can elect 100% of the Directors if the holders choose to do so, and, in that event, the holders of the remaining shares will not be able to elect any person or persons to the Board of Directors. The Company's Charter and Bylaws provide the holders of one-third of the B-39 outstanding shares of the Haverford Quality 250 Fund present at a meeting in person or by proxy will constitute a quorum for the transaction of business at all meetings. As a general matter, the Company will not hold annual or other meetings of the Haverford Quality 250 Fund's shareholders. This is because the Bylaws of the Company provide for annual meetings only as required by the 1940 Act. Annual and other meetings may be required with respect to such additional matters relating to the Haverford Quality 250 Fund as may be required by the 1940 Act, any registration of the Funds with the SEC or any state, or as the Directors may consider necessary or desirable. Each Director serves until the next meeting of shareholders called for the purpose of considering the re-election of such Director or the election of a successor to such Director. XIII. DIVIDENDS AND DISTRIBUTIONS The following information supplements and should be read in conjunction with the section in the Prospectus entitled "FUND DISTRIBUTIONS." General Policies. Dividends from net investment income, if any, are declared and paid annually by the Haverford Quality 250 Fund. Distributions of net realized securities gains, if any, generally are declared and paid once a year, but the Company may make distributions on a more frequent basis for the Haverford Quality 250 Fund to improve index tracking or to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of the 1940 Act. Dividends and other distributions on Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Company. The Company makes additional distributions to the extent necessary (i) to distribute the entire annual taxable income of the Company, plus any net capital gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of the Internal Revenue Code. Management of the Company reserves the right to declare special dividends if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Haverford Quality 250 Fund as a regulated investment company ("RIC") or to avoid imposition of income or excise taxes on undistributed income. Dividend Reinvestment Service. The Company will not make the DTC book-entry dividend reinvestment service available for use by Beneficial Owners for reinvestment of their cash proceeds. However, certain broker-dealers may make the DTC book-entry dividend reinvestment service available to their customers who own the Haverford Quality 250 Fund shares. If this service is available and used, dividend distributions of both income and capital gains would automatically be reinvested in additional whole and fractional Fund shares of the Haverford Quality 250 Fund purchased in the secondary market. Without this service, investors will receive their distributions in cash. In order to achieve the maximum total return on their investments, investors are encouraged to use the dividend reinvestment service. To determine whether the dividend reinvestment service is available and whether there is a commission or B-40 other charge for using this service, consult your broker. Brokers may require the Haverford Quality 250 Fund shareholders to adhere to specific procedures and timetables. XIV. TAXATION The following supplements the tax information contained in the Prospectus. For federal income tax purposes, the Haverford Quality 250 Fund is treated as a separate corporate entity and has elected and intends to continue to qualify as a regulated investment company under Subchapter M of the Code. Such qualification generally relieves the Haverford Quality 250 Fund of liability for federal income taxes to the extent its earnings are distributed in accordance with applicable requirements. If, for any reason, the Haverford Quality 250 Fund does not qualify for a taxable year for the special federal tax treatment afforded regulated investment companies, the Haverford Quality 250 Fund would be subject to federal tax on all of its taxable income at regular corporate rates, without any deduction for dividends to shareholders. In such event, dividend distributions would be taxable as ordinary income to shareholders to the extent of the Haverford Quality 250 Fund's current and accumulated earnings and profits and would be eligible for the dividends received deduction available in some circumstances to corporate shareholders. Moreover, if the Haverford Quality 250 Fund were to fail to make sufficient distributions in a year, the Haverford Quality 250 Fund would be subject to corporate income taxes and/or excise taxes in respect of the shortfall or, if the shortfall is large enough, the Haverford Quality 250 Fund could be disqualified as a regulated investment company. A 4% non-deductible excise tax is imposed on regulated investment companies that fail to currently distribute an amount equal to specified percentages of their ordinary taxable income and capital gain net income (excess of capital gains over capital losses), if any. The Haverford Quality 250 Fund intends to make sufficient distributions or deemed distributions of its ordinary taxable income and any capital gain net income prior to the end of each calendar year to avoid liability for this excise tax. Dividends declared in October, November or December of any year payable to shareholders of record on a specified date in such months will be deemed to have been received by shareholders and paid by the Haverford Quality 250 Fund on December 31 of such year if such dividends are actually paid during January of the following year. The tax principles applicable to transactions in financial instruments and futures contacts and options that may be engaged in by the Fund and investments in passive foreign investment companies ("PFICs") are complex and, in some cases, uncertain. Such transactions and investments may cause the Haverford Quality 250 Fund to recognize taxable income prior to the receipt of cash, thereby requiring the Haverford Quality 250 Fund to liquidate other positions or to borrow money so as to make sufficient distributions to shareholders to avoid corporate-level tax. Moreover, some or all of the taxable income recognized may be ordinary income or short-term capital gain, so that the distributions may be taxable to shareholders as ordinary income. In addition, in the case of any shares of a PFIC in which the Fund invests, the Haverford Quality 250 Fund may be liable for corporate-level tax on any ultimate gain or distributions on the shares B-41 if the Haverford Quality 250 Fund fails to make an election to recognize income annually during the period of its ownership of the PFIC shares. Special rules govern the federal income tax treatment of certain transactions denominated in a currency other than the U.S. dollar or determined by reference to the value of one or more currencies other than the U.S. dollar. The types of transactions covered by the special rules include the following: (1) the acquisition of, or becoming the obligor under, a bond or other debt instrument (including, to the extent provided in Treasury regulations, preferred stock); (2) the accruing of certain trade receivables and payables; and (3) the entering into or acquisition of any forward contract, futures contract, option, or similar financial instrument if such instrument is not marked to market. The disposition of a currency other than the U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also treated as a transaction subject to the special currency rules. However, foreign currency-related regulated futures contracts and non-equity options are generally not subject to the special currency rules if they are or would be treated as sold for their fair market value at year-end under the marked-to-market rules applicable to other futures contracts unless an election is made to have such currency rules apply. With respect to transactions covered by the special rules, foreign currency gain or loss is calculated separately from any gain or loss on the underlying transaction and is normally taxable as ordinary income or loss. A taxpayer may elect to treat as capital gain or loss foreign currency gain or loss arising from certain identified forward contracts, futures contracts, and options that are capital assets in the hands of the taxpayer and which are not part of a straddle. The Treasury Department issued regulations under which certain transactions subject to the special currency rules that are part of a "Section 988 hedging transaction" will be integrated and treated as a single transaction or otherwise treated consistently for purposes of the Code. Any gain or loss attributable to the foreign currency component of a transaction engaged in by the Haverford Quality 250 Fund which is not subject to the special currency rules (such as foreign equity investments other than certain preferred stocks) will be treated as capital gain or loss and will not be segregated from the gain or loss on the underlying transaction. The Haverford Quality 250 Fund will be required in certain cases to withhold "backup withholding" on taxable dividends or gross proceeds realized upon sale paid to shareholders who have failed to provide a correct tax identification number in the manner required, who are subject to withholding by the Internal Revenue Service for failure properly to include on their return payments of taxable interest or dividends, or who have failed to certify to the Haverford Quality 250 Fund when required to do so either that they are not subject to backup withholding or that they are "exempt recipients." Backup withholding is not an additional tax and any amounts withheld may be credited against a shareholder's ultimate federal income tax liability if proper documentation is provided. The foregoing discussion is based on federal tax laws and regulations which are in effect on the date of this Statement of Additional Information; such laws and regulations may be changed by legislative or administrative action. Shareholders are advised to consult their tax advisers concerning their specific situations and the application of state, local and foreign taxes. B-42 XV. LICENSE GRANT HIM makes no representation or warranty, express or implied, to the owners of the Haverford Quality 250 Fund or any member of the public regarding the advisability of investing in securities generally or in the Haverford Quality 250 Fund particularly or the ability of the Haverford Quality 250(TM) Index to track general market performance. The Haverford Quality 250(TM) Index is determined, composed and calculated without regard to the Advisor, the Sub-Advisor (HIM) or the Fund. The Index Administrator has no obligation to take the needs of the Advisor, the Sub-Advisor or the owners of the Haverford Quality 250 Fund into consideration in determining, composing or calculating the Haverford Quality 250(TM) Index. [HIM is not responsible for and has not participated in the determination of the timing of, prices at, or quantities of the Haverford Quality 250 Fund to be issued or in the determination or calculation of the equation by which the Fund is to be converted into cash.] XVI. FINANCIAL STATEMENTS The Fund's statements of assets and liabilities and the report thereon of [Eisner LLP], an independent registered public accounting firm, also appearing therein, is included as part of this Statement of Additional Information. For a more complete discussion of the Haverford Quality 250 Fund's performance, following commencement of operations, please see the Haverford Quality 250 Fund's annual and semi-annual reports to shareholders, which may be obtained without charge. B-43 PART C OTHER INFORMATION Item 23. Exhibits. (a) Articles of Incorporation: (1) (b) By-laws: (1) (c) Instruments Defining Rights of Security Holders: * (d) Investment Advisory Contracts: * (e) Underwriting Contracts: * (f) Bonus or Profit Sharing Contracts: Not applicable. (g) Custodian Agreements: * (h) Other Material Agreements: * (i) Legal Opinion: * (j) Other Opinions: Filed herewith. (k) Not applicable. (l) Initial Capital Agreements: * (m) Not applicable. (n) Not applicable. (p) Codes of Ethics: * (q) Power of Attorney: * --------------------------------------------------- (1) Incorporated herein by reference to Registrant's Registration Statement on Form N-1A filed on April 17, 2007. * To be filed by amendment. Item 24. Persons controlled by or Under Common Control with the Fund. The Registrant may be deemed to be under common control with HealthSharesTM, Inc., StateShares, Inc., TDAX Funds, Inc. and Realty Funds, Inc. Item 25. Indemnification. Reference is made to the provisions of Article X of the Registrant's Articles of Incorporation filed as an exhibit to this Registration Statement (as noted in Item 23 above) and Article XII of Registrant's By-Laws filed as an exhibit to this Registration Statement (as noted in Item 23 above). Item 26. Business and Other Connections of Investment Adviser. Reference is made to the sections entitled "Fund Management" in the Prospectus and "Management" in the Statement of Additional Information for information regarding the business of the Adviser and Sub-Adviser. For information as to the business, profession, vocation and employment of a substantial nature of each of the directors and officers of the Adviser, reference is made to the Adviser's current Form ADV (File No. 141392), pursuant to the Investment Advisers Act of 1940, as amended incorporated herein by reference. Item 27. Principal Underwriters. (a) [To be completed by amendment.] (b) Provide the information required by the following table for each director, officer or partner of each principal underwriter named in the response to Item 20: Positions and Offices Positions and Offices Name with the Distributor with the Registrant ---- --------------------- --------------------- (c) Not applicable. Item 28. Location of Accounts and Records. [To be completed by amendment.] The accounts, books and other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940, as amended, and rules promulgated thereunder, are maintained in the physical possession of ___________. Item 29. Management Services. There are no management related service contracts not discussed in Part A or Part B. Item 30. Undertakings. None. SIGNATURES Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant has duly caused this Pre-Effective Amendment No. 1 to its Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, and State of New York, on the 10th day of January, 2008. X Exchange-Traded Funds, Inc. By: /s/ Anthony F. Dudzinski -------------------------------------------------- Anthony F. Dudzinski Authorized Signatory 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 dates indicated.
SIGNATURE CAPACITY DATE --------- -------- ---- /s/ Anthony F. Dudzinski --------------------------------------- President, Chief Executive Officer January 10, 2008 Anthony F. Dudzinski and Director /s/ David W. Jaffin --------------------------------------- Secretary and Treasurer January 10, 2008 David W. Jaffin
EXHIBIT INDEX (j) Consent of Counsel.