<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 19, 1996
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. / /
AND
REGISTRATION STATEMENT / /
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. / /
THE DIVERSIFIED INVESTORS
STRATEGIC ALLOCATION FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
FOUR MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 914-697-8000
ROBERT F. COLBY
DIVERSIFIED INVESTMENT ADVISORS, INC.
FOUR MANHATTANVILLE ROAD
PURCHASE, NEW YORK 10577
(NAME AND ADDRESS OF AGENT FOR SERVICE)
COPY TO:
ROGER P. JOSEPH
BINGHAM, DANA & GOULD
150 FEDERAL STREET
BOSTON, MASSACHUSETTS 02110
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING: As soon as practicable after
the effective date of this registration statement.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the
Registrant hereby declares that an indefinite number of its Shares of Beneficial
Interest (par value $0.00001 per share) is being registered by this registration
statement.
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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 BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
<PAGE> 2
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THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
FORM N-1A
CROSS REFERENCE SHEET
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<TABLE>
<CAPTION>
PART A
ITEM NO. PROSPECTUS HEADINGS
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<S> <C> <C>
1. Cover Page...................................... Cover Page
2. Synopsis........................................ Expense Summary
3. Condensed Financial Information................. Not Applicable
4. General Description of Registrant............... Cover Page; Management of the Trust
5. Management of the Fund.......................... Management of the Trust and
Portfolio Series; Other Information
5A. Management's Discussion of Fund Performance..... Not applicable
6. Capital Stock and other Securities.............. Cover Page; Purchases and
Redemptions of Shares; Management
of the Trust; Other Information
7. Purchase of Securities Being Offered............ Purchases and Redemptions of
Shares; Other Information
8. Redemption or Repurchase........................ Purchases and Redemptions of Shares
9. Pending Legal Proceedings....................... Not applicable
<CAPTION>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
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<S> <C> <C>
10. Cover Page...................................... Cover Page
11. Table of Contents............................... Table of Contents
12. General Information and History................. Not Applicable
13. Investment Objectives and Policies.............. Investment Objectives and Policies;
Investment Restrictions
</TABLE>
(i)
<PAGE> 3
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THE DIVERSIFIED INVESTORS FUNDS GROUP
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<TABLE>
<CAPTION>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
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<S> <C> <C>
14. Management of the Fund.......................... Management of the Trust
15. Control Persons and Principal Holders of
Securities...................................... See Prospectus -- "Management of
the Trust"
16. Investment Advisory and Other Services.......... Management of the Trust; see
Prospectus -- "Management of the
Trust"
17. Brokerage Allocation............................ Investment Objectives and Policies;
Investment Restrictions
18. Capital Stock and Other Securities.............. Taxation; Description of the Trust;
Fund Shares; see Prospectus --
"Management of the Trust and "Other
Information"
19. Purchase, Redemption and Pricing of Securities
Being Offered................................... Determination of Net Asset Value;
Valuation of Securities; see
Prospectus -- "Purchases and
Redemptions of Shares"
20. Tax Status...................................... Taxation; see Prospectus -- "Other
Information"
21. Underwriters.................................... See Prospectus -- "Management of
the Trust" and "Purchases and
Redemptions of Shares"
22. Calculations of Performance Data................ Performance Information
23. Financial Statements............................ Experts; Statements of Assets and
Liabilities; Reports of Independent
Accountants
</TABLE>
PART C
Information required to be included in Part C is set forth under the appropriate
item, so numbered, in Part C of this registration statement.
(ii)
<PAGE> 4
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PROSPECTUS Dated , 1996, Subject to Completion
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THE DIVERSIFIED INVESTORS
STRATEGIC ALLOCATION FUNDS
The Diversified Investors Strategic Allocation Funds (the "Trust") is an
open-end non-diversified management investment company composed of three
distinct series with different investment objectives and policies (the "Funds").
Each Fund is a separate mutual fund issuing its own shares. Diversified
Investment Advisors, Inc. ("Diversified") is the investment adviser (the
"Adviser") to each Fund and seeks to achieve the objective of each Fund by
investing in a diversified portfolio of other mutual funds managed by
Diversified. The three Funds offered for sale by this Prospectus are as follows:
Diversified Investors Conservative Strategic Allocation Fund
Diversified Investors Moderate Strategic Allocation Fund
Diversified Investors Aggressive Strategic Allocation Fund
The Trust is designed to meet the long-term investment needs of, and will
be available only as a funding vehicle to, (i) certain employee retirement plans
of for-profit and not-for-profit entities including those having cash or
deferred arrangements and those covering self-employed individuals and
owner-employees (such as 401(k) Plans, 403(b) Plans, 457 Plans, Money Purchase
Plans, Profit Sharing Plans, Simplified Employee Pension Plans and Keogh Plans),
and (ii) qualified personal retirement plans such as IRAs and rollover IRAs
(collectively, "Qualified Investors").
This Prospectus sets forth information about the Trust and the Funds that a
prospective investor should consider before investing. Investors should read
this Prospectus and retain it for future reference. Additional information,
contained in a "Statement of Additional Information," has been filed with the
Securities and Exchange Commission and is available upon request without charge
by calling the Trust at (914) 697-8000. The Statement of Additional Information,
which has the same date as this Prospectus, is incorporated by reference into
this Prospectus.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF ANY OFFER TO BUY 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.
<PAGE> 5
INVESTMENT OBJECTIVES OF THE FUNDS
Each Fund offers investors a professionally managed asset allocation
investment program by purchasing shares of existing mutual funds managed by
Diversified (the "Underlying Diversified Funds"). Consistent with its investment
objective described below, each Fund will allocate its assets among the
Underlying Diversified Funds according to Diversified's outlook for the economy,
financial markets and relative market valuation of the Underlying Diversified
Funds. Each Fund's share price will fluctuate with changing market conditions
and the value of the Underlying Diversified Funds in which it invests. The Funds
should not be acquired for short-term financial needs nor used to play
short-term swings in the stock or bond markets. The Funds cannot guarantee that
they will achieve their objectives.
Each Underlying Diversified Fund is a series of The Diversified Investors
Funds Group, an open-end diversified management investment company. Each
Underlying Diversified Fund seeks to achieve its investment objective by
investing all of its assets in a corresponding series of Diversified Investors
Portfolios (the "Underlying Diversified Portfolios"), an open-end diversified
management investment company with separate series which have the same
investment objectives as the Underlying Diversified Funds. See "Hub and Spoke(R)
Structure" below. Diversified is the investment adviser for each series of the
Underlying Diversified Portfolios and appoints one or more subadvisers to
provide day-to-day investment management services. The ten Underlying
Diversified Funds in which the Funds may invest, their general investment
characteristics and their subadvisers are as follows:
<TABLE>
<CAPTION>
UNDERLYING INVESTMENT
DIVERSIFIED FUND CHARACTERISTIC SUBADVISER
- ----------------------------- ----------------- -------------------------------
<S> <C> <C>
Money Market Stability Capital Management Group
High Quality Bond Income Merganser Capital Management,
Inc.
Intermediate Government Bond Income Capital Management Group
Government/Corporate Bond Income Capital Management Group
High-Yield Bond Aggressive Income Delaware Investment Advisors
Equity Income Growth & Income Asset Management Group
Growth & Income Growth & Income Putnam Advisory Company, Inc.
Growth Growth Jundt Associates, Inc.
Special Equity Growth Liberty Investment Management,
Inc., ARK Asset Management Co.,
Inc., Pilgrim Baxter &
Associates, Westport Asset
Management, Inc.
International Equity Growth Capital Guardian Trust Company
</TABLE>
The High Quality Bond Fund, Intermediate Government Bond Fund,
Government/Corporate Bond Fund and the High-Yield Bond Fund are herein
collectively referred to as the "Fixed Income Underlying Funds" and the Equity
Income Fund, Growth & Income Fund, Equity Growth Fund, Special Equity Fund and
International Equity Fund are herein collectively referred to as the "Equity
Underlying Funds".
CONSERVATIVE STRATEGIC ALLOCATION FUND. The investment objective of the
Conservative Strategic Allocation Fund is to seek a high level of income and
preservation of capital. Under normal circumstances, at least 65% of the assets
of the Conservative Strategic Allocation Fund will be invested in a combination
of Fixed-Income Underlying Funds and the Money Market Fund. The Conservative
Strategic Allocation Fund may also invest in the Equity Income Fund or the
Growth & Income Fund; it will not invest in the other Equity Underlying Funds.
Under normal circumstances, approximately 10% of the Fund's assets will be
invested in the Money Market Fund. However, Diversified may increase the
allocation to the Money Market Fund to provide a reserve for future allocations
to other Underlying
2
<PAGE> 6
Diversified Funds during periods of unusual market conditions, to reduce
volatility or as a temporary defensive measure when Diversified believes
security markets to be overvalued.
For the Conservative Strategic Allocation Fund, Diversified has established
the following general ranges for the allocation of assets among the three
classes of Underlying Diversified Funds: Fixed Income Underlying
Funds -- 50% - 100%; Equity Underlying Funds -- 0% - 20%; and Money Market
Fund -- 0% - 50%. In addition, Diversified has established the following target
ranges for allocation of assets to specific Underlying Diversified Funds:
<TABLE>
<S> <C>
Money Market Fund -- 0% - 50%
High Quality Bond Fund -- 10% - 30%
Intermediate Government Bond Fund -- 10% - 30%
Government/Corporate Bond Fund -- 10% - 30%
High-Yield Bond Fund -- 10% - 30%
Equity Income Fund -- 0% - 10%
Growth & Income Fund -- 0% - 10%
</TABLE>
These general ranges reflect Diversified's present strategy for the allocation
of assets during normal market conditions to achieve the investment objective of
the Conservative Strategic Allocation Fund and may be changed at any time
without the approval of shareholders.
MODERATE STRATEGIC ALLOCATION FUND. The investment objective of the
Moderate Strategic Allocation Fund is to seek a high total investment return.
The Moderate Strategic Allocation Fund will seek to achieve this objective by
investing substantially all of its assets in a managed mix of Equity Underlying
Funds, Fixed-Income Underlying Funds and the Money Market Fund. Diversified will
determine the proportions of each type of investment to achieve an asset mix it
believes appropriate for an investor who desires diversification of investment.
The Moderate Strategic Allocation Fund will vary the proportion of each
Underlying Diversified Fund purchased according to Diversified's interpretations
of changes in economic conditions and the sensitivity of each type of investment
to those changes. Diversified will shift emphasis among Equity Underlying Funds,
Fixed-Income Underlying Funds and the Money Market Fund to maximize
participation in positive markets and preservation of capital in negative
markets and otherwise in response to market conditions.
For the Moderate Strategic Allocation Fund, Diversified has established the
following general ranges for the allocation of assets among the three classes of
Underlying Diversified Funds: Fixed Income Underlying Funds -- 25% - 75%; Equity
Underlying Funds -- 25% - 75%; and Money Market Fund -- 0% - 25%. In addition,
Diversified has established the following target ranges for allocation of assets
to specific Underlying Diversified Funds:
<TABLE>
<S> <C>
Money Market Fund -- 0% - 25%
High Quality Bond Fund -- 5% - 25%
Intermediate Government Bond Fund -- 0% - 20%
Government/Corporate Bond Fund -- 5% - 25%
High-Yield Bond Fund -- 0% - 20%
Equity Income Fund -- 0% - 20%
Growth & Income Fund -- 0% - 20%
Equity Growth Fund -- 0% - 20%
Special Equity Fund -- 0% - 20%
International Equity Fund -- 0% - 20%
</TABLE>
These general ranges reflect Diversified's present strategy for the
allocation of assets during normal market conditions to achieve the investment
objective of the Moderate Strategic Allocation Fund and may be changed at any
time without the approval of shareholders.
AGGRESSIVE STRATEGIC ALLOCATION FUND. The investment objective of the
Aggressive Strategic Allocation Fund is to seek long-term growth of capital and
growth of income. Under normal
3
<PAGE> 7
circumstances, at least 65% of the assets of the Aggressive Strategic Allocation
Fund will be invested in Equity Underlying Funds. The Aggressive Strategic
Allocation Fund may also invest in any of the Fixed-Income Funds. Diversified
may also allocate assets of the Fund to the Money Market Fund during periods of
unusual market conditions, in order to reduce volatility or as a temporary
defensive measure when Diversified believes security markets to be overvalued.
For the Aggressive Strategic Allocation Fund, Diversified has established
the following general ranges for the allocation of assets among the three
classes of Underlying Diversified Funds: Fixed Income Underlying
Funds -- 0% - 50%; Equity Underlying Funds -- 50% - 100%; and Money Market
Funds -- 0% - 20%. In addition, Diversified has established the following target
ranges for allocation of assets to specific Underlying Diversified Funds:
<TABLE>
<S> <C>
Money Market Fund -- 0% - 20%
High Quality Bond Fund -- 0% - 20%
Intermediate Government Bond Fund -- 0% - 10%
Government/Corporate Bond Fund -- 0% - 20%
High-Yield Bond Fund -- 0% - 20%
Equity Income Fund -- 0% - 30%
Growth & Income Fund -- 0% - 30%
Equity Growth Fund -- 0% - 30%
Special Equity Fund -- 0% - 30%
International Equity Fund -- 0% - 30%
</TABLE>
These general ranges reflect Diversified's present strategy for the
allocation of assets during normal market conditions to achieve the investment
objective of the Aggressive Strategic Allocation Fund and may be changed at any
time without the approval of shareholders.
EXPENSE SUMMARY
The following table provides a summary of estimated expenses relating to
purchases and sales of shares of each Fund and the aggregate annual operating
expenses for each Fund as a percentage of average net assets of each Fund.
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S> <C>
Maximum Sales Load Imposed on Purchase............................................... None
Maximum Sales Load Imposed on Reinvested Dividends................................... None
Deferred Sales Load.................................................................. None
Redemption Fees...................................................................... None
Exchange Fees........................................................................ None
</TABLE>
ANNUAL OPERATING EXPENSES
<TABLE>
<S> <C>
Asset Allocation and Administrative Fee.............................................. 20%
Distribution (Rule 12b-1) Fees....................................................... None
Other Expenses....................................................................... None
Total Fund Expenses.................................................................. 20%
</TABLE>
IN ADDITION, EACH FUND WILL INDIRECTLY BEAR ITS PRO RATA SHARE OF FEES AND
EXPENSES (INCLUDING INVESTMENT MANAGEMENT AND RULE 12B-1 FEES) INCURRED BY THE
UNDERLYING DIVERSIFIED FUNDS AND THE INVESTMENT RETURNS OF EACH FUND WILL BE NET
OF THE EXPENSES OF THE UNDERLYING DIVERSIFIED FUNDS. The following chart
provides the expense ratios (net of waivers and reimbursements) for each
4
<PAGE> 8
of the Underlying Diversified Funds in which the Conservative, Moderate and
Aggressive Strategic Allocation Funds will invest.
<TABLE>
<CAPTION>
CONSERVATIVE FUND FUND EXPENSES
----------------- -------------
<S> <C>
Money Market Fund .80%
High Quality Bond Fund 1.00%
Intermediate Government Bond Fund 1.00%
Government/Corporate Bond Fund 1.00%
High Yield Bond Fund 1.10%
Equity Income Fund 1.00%
Growth & Income Fund 1.15%
</TABLE>
<TABLE>
<CAPTION>
MODERATE AND AGGRESSIVE FUNDS FUND EXPENSES
----------------------------- -------------
<S> <C>
Money Market Fund .80%
High Quality Bond Fund 1.00%
Intermediate Government Bond Fund 1.00%
Government/Corporate Bond Fund 1.00%
High Yield Bond Fund 1.10%
Equity Income Fund 1.00%
Growth & Income Fund 1.15%
Equity Growth Fund 1.25%
Special Equity Fund 1.50%
International Equity Fund 1.40%
</TABLE>
Based on the foregoing, the range of the average weighted expense ratio is
expected to be % to % for the Conservative Strategic Allocation Fund, % to
% for the Moderate Strategic Allocation Fund and % to % for the Aggressive
Strategic Allocation Fund. A range is provided since the average assets of each
Fund invested in each of the Underlying Diversified Funds will fluctuate.
Using the midpoint of the ranges set forth above, the following example
illustrates the expenses a shareholder would incur on a $1,000 investment,
assuming a 5% annual rate of return and redemption at the end of each period
shown.
<TABLE>
<CAPTION>
AFTER AFTER
FUND 1 YEAR 3 YEARS
---- ------- -------
<S> <C> <C>
Conservative............................................. $ $
Moderate................................................. $ $
Aggressive............................................... $ $
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES, AND ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE SHOWN.
The purpose of the table is to assist investors in understanding the
various costs and expenses that shareholders will bear directly and indirectly.
The expenses of the Underlying Diversified Funds and the example reflect
estimated expenses for the High Quality Bond Fund, Intermediate Government Bond
Fund, Government/Corporate Bond Fund, Equity Income Fund, Growth & Income Fund,
Equity Growth Fund, Special Equity Fund and International Equity Fund based on a
projected level of average daily net assets of $50,000,000 per fund. There can
be no assurance that this level of average daily net assets will be achieved for
each such fund. If average daily net assets are lower than $50,000,000 for any
such fund, Fund Expenses may be a higher percentage of that fund's average daily
net assets. Fund Expenses for the Money Market Fund reflect actual expenses for
the year ended December 31, 1994 and reflect a voluntary reimbursement by
Diversified of certain expenses. Without such reimbursement, Fund Expenses for
the Money Market
5
<PAGE> 9
Fund would have been 58.41%. In addition, Fund Expenses reflect a voluntary
undertaking by Diversified to waive a portion of the investment advisory fees
and administrative services fees with respect to the Underlying Funds. See
"Management of the Trust -- Management of the Underlying Funds".
The Underlying Diversified Funds are subject to a distribution plan (the
"Distribution Plan") pursuant to Rule 12b-1 under the Investment Company Act of
1940, as amended (the "1940 Act"). Under the Distribution Plan, each Underlying
Diversified Fund may pay Diversified Investors Securities Corp. (the
"Distributor") in anticipation of, or as reimbursement for, expenses incurred by
the Distributor in connection with the sale of shares of the Underlying
Diversified Funds, a fee not to exceed on an annual basis 0.25% of the average
daily net assets of such Underlying Fund. Long term shareholders may pay more
than the economic equivalent of the maximum charges permitted by the National
Association of Securities Dealers, Inc.
DESCRIPTION OF THE UNDERLYING DIVERSIFIED FUNDS/PORTFOLIOS
The following is a brief description of the principal investment objective
of the Underlying Diversified Funds. Additional investment practices are
described in the Special Risks and Considerations section on pages , the
Statement of Additional Information and the prospectus for the Underlying
Diversified Funds. As noted above, the Underlying Diversified Funds seek to
achieve their investment objectives by investing all of their investable assets
in Underlying Diversified Portfolios with investment objectives that correspond
with their own. See "Hub & Spoke(R) Structure" below. The Underlying Diversified
Funds have different investment objectives. Because each Underlying Diversified
Fund seeks its objective by investing in a corresponding Underlying Diversified
Portfolio, the investment policies of the Underlying Diversified Portfolios are
described below. Since each Underlying Diversified Fund has a different
investment objective, each can be expected to have different investment results
and to be subject to different market and financial risks.
Diversified has contracted with one or more Subadvisers for each Underlying
Diversified Portfolio for certain investment advisory services. Diversified and
the Subadviser or Subadvisers for a particular Underlying Diversified Portfolio
are referred to herein collectively as the "Advisers".
The investment objectives of an Underlying Diversified Fund or an
Underlying Diversified Portfolio may be changed without the vote of the holders
of the outstanding voting securities of such Underlying Diversified Fund or
Underlying Diversified Portfolio. Shareholders of an Underlying Diversified Fund
will receive 30 days' prior written notice of any change in the investment
objective of that Underlying Diversified Fund or its corresponding Underlying
Diversified Portfolio. There can be no assurance that any of the investment
objectives of the Underlying Diversified Funds or the Underlying Diversified
Portfolios will be met.
UNDERLYING DIVERSIFIED FUNDS AVAILABLE TO ALL FUNDS
MONEY MARKET FUND/PORTFOLIO. The investment objective of the Money Market
Portfolio is to provide liquidity and as high a level of current income as is
consistent with the preservation of capital. The Money Market Portfolio invests
in high quality short-term money market instruments. Securities in which the
Money Market Portfolio invests may not earn as high a level of current income as
long-term or lower quality securities, which generally have less liquidity,
greater market risk and more fluctuation in market value. To achieve its
investment objective, the Money Market Portfolio invests in U.S.
dollar-denominated short-term money market obligations, including securities
issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, certificates of deposit, time deposits, bankers' acceptances
and other short-term obligations issued by domestic banks and foreign banks, and
high quality commercial paper and other short-term corporate obligations,
including those with floating or variable rates of interest. In addition, the
Money Market Portfolio may lend its portfolio securities, enter into repurchase
agreements and reverse repurchase agreements, and invest in securities
6
<PAGE> 10
issued by foreign banks and corporations outside the United States. The Money
Market Portfolio reserves the right to concentrate 25% or more of its total
assets in obligations of domestic banks.
In accordance with Rule 2a-7 under the 1940 Act, the Money Market Portfolio
will maintain a dollar-weighted average portfolio maturity of 90 days or less,
purchase only instruments having remaining maturities of 397 days or less and
invest only in U.S. dollar-denominated securities determined in accordance with
procedures established by the Board of Trustees (the "Board of Trustees") to
present minimal credit risks and which are rated in one of the two highest
rating categories for debt obligations by at least two nationally recognized
statistical rating organizations (an "NRSRO") (or one NRSRO if the instrument
was rated by only one such organization) or, if unrated, are of comparable
quality as determined in accordance with procedures established by the Board of
Trustees (collectively, "Eligible Securities"). Eligible Securities include
"First Tier Securities" and "Second Tier Securities". First Tier Securities
include those that possess a rating in the highest category in the case of a
single-rated security or at least two ratings in the highest rating category in
the case of multiple-rated securities or, if the securities do not possess a
rating, are determined to be of comparable quality by the Advisers pursuant to
the guidelines adopted by the Board of Trustees. All other Eligible Securities
are Second Tier Securities. The Money Market Portfolio will invest at least 95%
of its total assets in First Tier Securities.
HIGH QUALITY BOND FUND/PORTFOLIO. The investment objective of the High
Quality Bond Portfolio is to provide as high a level of current income as is
consistent with the preservation of capital. The yield of the High Quality Bond
Portfolio normally is expected to be higher than a money market fund but lower
than a longer-term or lower quality bond fund. Unlike a money market fund, the
High Quality Bond Fund does not seek to maintain a stable net asset value and
may not be able to return dollar-for-dollar the money invested. The High Quality
Bond Portfolio pursues its investment objective by investing at least 65% of its
assets under normal circumstances in high quality debt securities with short and
intermediate maturities (including repurchase agreements and reverse repurchase
agreements). The Advisers attempt to maintain the Portfolio's "duration" between
one and four years, which means that the Portfolio's overall sensitivity to
interest rates should be slightly more than that of bonds and notes with
remaining average maturities from one to four years. The Portfolio's dollar-
weighted average maturity (or dollar-weighted average life in the case of
asset-backed and mortgage-backed securities) may be longer than four years from
time to time, but will not exceed five years under normal conditions. The
Portfolio may hold individual securities with remaining maturities of up to
thirty years. The Portfolio seeks consistency of return with minimal exposure to
negative total returns on an annual basis. The Advisers' strategy is to position
the Portfolio in those high quality sectors of the fixed income market that
offer the most attractive yields on a risk-adjusted basis. The duration of the
Portfolio will be a function of the security and sector selection process and
market conditions in general. Since the value of fixed income securities
generally fluctuates inversely with changes in interest rates, the value of
securities held by the Portfolio will tend to decline during periods of rising
interest rates.
INTERMEDIATE GOVERNMENT BOND FUND/PORTFOLIO. The investment objective of
the Intermediate Government Bond Portfolio is to provide as high a level of
current income as is consistent with the preservation of capital. The yield of
the Intermediate Government Bond Portfolio normally is expected to be higher
than a money market fund but lower than a longer-term or lower quality bond
fund. The Intermediate Government Bond Portfolio pursues its investment
objective by investing in high quality U.S. Government obligations and high
quality short-term obligations (including repurchase agreements and reverse
repurchase agreements). The Intermediate Government Bond Portfolio normally will
invest at least 65% of its assets in U.S. Government obligations. The Advisers
attempt to maintain the Intermediate Government Bond Portfolio's "duration"
between one and five years, which means that the Intermediate Government Bond
Portfolio's overall sensitivity to interest rates should be similar to that of
bonds and notes with remaining average maturities from one to five years. The
Intermediate Government Bond Portfolio's dollar-weighted average maturity (or
dollar-weighted average life in the case of mortgage-backed securities) may be
longer than five years from time to time, but will not
7
<PAGE> 11
exceed ten years or be less than three years under normal conditions. The
Intermediate Government Bond Portfolio may hold individual securities with
remaining maturities of up to thirty years.
GOVERNMENT/CORPORATE BOND FUND/PORTFOLIO. The investment objective of the
Government/Corporate Bond Portfolio is to achieve the maximum total return. The
Government/Corporate Bond Portfolio's yield normally is expected to be higher
than a money market fund but lower than a longer-term or lower quality bond
fund. The Government/Corporate Bond Portfolio pursues its investment objective
by investing in investment grade debt securities, U.S. Government obligations,
including U.S. Government agency and instrumentality obligations and
collateralized mortgage obligations guaranteed by these agencies and
instrumentalities, and high quality short-term obligations (including repurchase
agreements and reverse repurchase agreements). Under normal circumstances, at
least 65% of the Portfolio's assets is invested in U.S. Government securities,
corporate bonds and short-term instruments. The Advisers attempt to maintain the
Government/Corporate Bond Portfolio's "duration" between three and ten years,
which means that the Portfolio's overall sensitivity to interest rates should be
slightly more than that of bonds and notes with remaining average maturities
from three to fifteen years. The Government/Corporate Bond Portfolio's
dollar-weighted average maturity (or dollar-weighted average life in the case of
mortgage-backed securities) may be longer than fifteen years from time to time,
but will not exceed thirty years under normal conditions. The
Government/Corporate Bond Portfolio may hold individual securities with
remaining maturities of up to thirty years.
HIGH-YIELD BOND FUND/PORTFOLIO. The investment objective of the High-Yield
Bond Portfolio is to seek a high level of current income. The High-Yield Bond
Portfolio pursues its investment objective by investing in a diversified
portfolio consisting primarily of high-yielding, fixed-income and zero coupon
securities, such as bonds, debentures and notes, convertible securities and
preferred stocks. The Portfolio may invest all or a substantial portion of its
assets in lower-rated debt securities, commonly referred to as "junk bonds".
Such investments may include foreign securities and obligations issued or
guaranteed by the U.S. Government, any of its states or territories, any foreign
government or any of their respective subdivisions, agencies or
instrumentalities. The High-Yield Bond Portfolio normally will invest at least
65% of its assets in high-yielding, income producing debt securities and
preferred stocks, including convertible and zero coupon securities. Zero coupon
securities are debt securities that pay no cash income but are sold at
substantial discounts from their face value. Certain zero coupon securities also
are sold at substantial discounts but provide for the commencement of regular
interest payments at a deferred date. The Portfolio may invest up to 35% of its
assets in equity securities, including common stocks, warrants and rights.
Lower-rated debt securities usually are defined as securities rated Ba or
lower by Moody's Investors Service, Inc. or BB or lower by Standard & Poors.
Lower-rated debt securities are considered speculative and involve greater risk
of default or price changes due to changes in the issuer's creditworthiness than
higher-rated securities and are more sensitive to changes in the issuer's
capacity to pay. Investing in lower-rated debt securities is an aggressive
approach to income investing. The 1980s saw a dramatic increase in the use of
lower-rated debt securities to finance highly leveraged corporate acquisitions
and restructurings. Past experience may not provide an accurate indication of
future performance of lower-rated debt securities, especially during periods of
economic recession. In fact, from 1989 to 1991, the percentage of lower-rated
debt securities that defaulted rose significantly above prior levels.
Lower-rated debt securities may be thinly traded, which can adversely affect the
prices at which they can be sold and can result in high transaction costs. If
market quotations are not available, these lower-rated debt securities will be
valued in accordance with standards set by the Board of Trustees, including the
use of outside pricing services. Judgment plays a greater role in valuing
lower-rated debt securities than securities for which more extensive quotations
and last-sale information are available. Adverse publicity and changing investor
perceptions may affect the ability of outside pricing services used by the
Portfolio to value its portfolio securities, and the Portfolio's ability to
dispose of the lower-rated bonds. The market prices of lower-rated debt
securities may decline significantly in periods of general economic difficulty,
which may follow periods of rising interest rates.
8
<PAGE> 12
During an economic downturn or a prolonged period of rising interest rates, the
ability of issuers of lower-rated debt to service their payment obligations,
meet projected goals, or obtain additional financing may be impaired. The
Portfolio may choose, at its own expense or in conjunction with others, to
pursue litigation or otherwise exercise its rights as a security holder to seek
to protect the interests of security holders if it determines this to be in the
interest of Portfolio investors.
The considerations discussed above for lower-rated debt securities also are
applicable to lower quality unrated debt instruments of all types, including
loans and other direct indebtedness of businesses with poor credit standing.
Unrated debt instruments are not necessarily of lower quality than rated
securities but they may not be attractive to as many buyers.
EQUITY INCOME FUND/PORTFOLIO. The investment objective of the Equity
Income Portfolio is to provide a high level of current income through investment
in a diversified portfolio of common stocks with relatively high current yields;
capital appreciation is a secondary objective. The Equity Income Portfolio seeks
to achieve its investment objective by investing primarily in a diversified
portfolio of stocks of companies which, in the opinion of the Advisers, are
fundamentally sound financially and which pay relatively high dividends on a
consistent basis. The Advisers attempt to manage the Portfolio so that it will
outperform other equity income funds in negative markets. As a result of this
objective, the Portfolio may underperform relative to other equity income funds
in positive markets. The Portfolio invests primarily in common stocks and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Portfolio also invests in bonds and short-term obligations
as well as securities convertible into common stocks, preferred stocks, debt
securities and short-term obligations. The Portfolio allocates its investments
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.
GROWTH & INCOME FUND/PORTFOLIO. The investment objective of the Growth &
Income Portfolio is to provide current income and capital appreciation. The
Growth & Income Portfolio seeks to achieve its investment objective by investing
primarily in a diversified portfolio of securities selected for their potential
to generate current income or long-term capital appreciation. In general, the
objective of the Portfolio is to achieve greater potential for capital
appreciation than an income fund and less price volatility than a growth fund.
The Growth & Income Portfolio invests primarily in common stocks and preferred
stocks listed on the New York Stock Exchange and on other national securities
exchanges and, to a lesser extent, in stocks that are traded over-the-counter.
The Portfolio may also invest in bonds and short-term obligations as well as
securities convertible into common stocks, preferred stocks, debt securities and
short-term obligations. The Portfolio allocates its investments among different
industries and companies and changes its portfolio securities for investment
considerations and not for trading purposes. In general, the Portfolio seeks to
invest in growing, financially stable and undervalued companies.
UNDERLYING DIVERSIFIED FUNDS ALSO AVAILABLE TO THE MODERATE AND AGGRESSIVE FUNDS
EQUITY GROWTH FUND/PORTFOLIO. The investment objective of the Equity
Growth Portfolio is to provide a high level of capital appreciation through
investment in a diversified portfolio of common stocks with potential for above
average growth in earnings and dividends; current income is a secondary
objective. The Equity Growth Portfolio seeks to achieve its investment objective
by investing primarily in a diversified portfolio of common stocks, but may also
invest in other types of securities such as preferred stocks, convertible and
non-convertible bonds, warrants and foreign securities including American
Depository Receipts ("ADRs"). Under normal circumstances, at least 65% of the
assets of the Portfolio are invested in equity securities. The Equity Growth
Portfolio invests primarily in stocks of companies that have a market value of
all their issued and outstanding common stock of $10 to $15 billion and
preferred stocks listed on the New York Stock Exchange and on other national
securities exchanges and, to a lesser extent, in stocks that are traded
over-the-counter. The Portfolio also invests in bonds and short-term obligations
as well as securities convertible into common stocks, preferred stocks, debt
securities and short-term obligations. The Portfolio allocates its investments
9
<PAGE> 13
among different industries and companies, and changes its portfolio securities
for investment considerations and not for trading purposes.
SPECIAL EQUITY FUND/PORTFOLIO. The investment objective of the Special
Equity Portfolio is to provide a high level of capital appreciation through
investment in a diversified portfolio of common stocks of small to medium size
companies. The Special Equity Portfolio is designed for investors in search of
substantial long-term growth who can accept above-average stock market risk and
little or no current income. The Special Equity Portfolio seeks to achieve its
investment objective by investing primarily in a diversified portfolio of stocks
of small to medium size companies which, in the opinion of the Advisers, will
present an opportunity for significant increases in earnings and/or value,
without consideration for current income. The Portfolio's primary equity
investments will be common stocks of small and medium size U.S. companies with
market capitalizations of less than $2 billion. Multiple managers are used to
control the volatility often associated with investments in small to medium size
companies and to maximize opportunities in positive markets. The Portfolio may
also invest in bonds and short-term obligations as well as securities
convertible into common stocks, preferred stocks, debt securities and short-term
obligations. The Special Equity Portfolio allocates its investments among
different industries and companies, and changes its portfolio securities for
investment considerations and not for trading purposes.
INTERNATIONAL EQUITY FUND/PORTFOLIO. The investment objective of the
International Equity Portfolio is to provide a high level of long-term capital
appreciation through investment in a diversified portfolio of securities of
foreign issuers. The International Equity Portfolio seeks to achieve its
investment objective by investing primarily in foreign securities. Foreign
securities are defined as securities of issuers, wherever organized, which trade
solely on a foreign exchange or over-the-counter market, or, in the judgment of
the Advisers, have their principal activities outside of the United States. In
determining whether an issuer's principal activities and interests are outside
the United States, the Advisers will look at such factors as the location of its
assets, operations, facilities, personnel, sales and earnings. Under normal
circumstances, at least 65% of the assets of the Portfolio are invested in
foreign equity securities. The Advisers will purchase securities of companies in
a minimum of 3 countries outside the United States.
The International Equity Portfolio may invest up to 10% of its assets in
securities of issuers in the world's emerging markets. Countries with emerging
markets include those that have an emerging stock market as defined by the
International Finance Corporation, those with low-to middle-income economies
according to the World Bank, and those listed in World Bank publications as
developing. While the Advisers believe that these investments present the
possibility for significant growth over the long-term, they also entail
significant risks. Many investments in emerging markets can be considered
speculative, and their prices can be much more volatile than those in the more
developed nations of the world. This difference reflects the greater
uncertainties of investing in less established markets and economies.
SPECIAL RISKS AND CONSIDERATIONS
Prospective investors should consider the following special risks and
considerations:
- - The investments of each Fund are concentrated in the Underlying Diversified
Funds, so each Fund's investment performance is directly related to the
investment performance of these Underlying Diversified Funds.
- - As a matter of fundamental policy, the Funds must allocate their investments
among the Underlying Diversified Funds. As a result, they do not have the same
flexibility to invest as a mutual fund without such constraints.
10
<PAGE> 14
- - The officers, trustees and investment manager of the Trust presently serve as
officers, trustees and investment manager of the Underlying Diversified Funds.
Therefore, conflicts may arise as these persons fulfill their fiduciary
responsibilities to the Funds and the Underlying Diversified Funds.
- - Each Fund may invest in Equity Underlying Funds. The Equity Underlying Funds
seek to reduce risk of loss of principal due to changes in the value of
individual stocks by investing in a diversified portfolio of common stocks and
through the use of options on stocks. Such investment techniques do not,
however, eliminate all risks. Smaller capitalization companies may experience
higher growth rates and higher failure rates than do larger capitalization
companies due to the risk related to markets, market share, product
performance and financial resources. The limited volume and frequency of
trading of small capitalization companies may subject their stocks to greater
price deviation than stocks of larger companies.
- - Each Fund that does so invest may invest a portion of its assets in the
High-Yield Bond Fund. As a result each Fund will be subject to some of the
risks resulting from high yield investing.
- - Each of the Funds may invest a portion of its assets in Underlying Funds which
invest in medium grade bonds. If these bonds are downgraded, the Funds will
consider whether to increase or decrease their investment in the affected
Underlying Diversified Fund.
- - The Moderate and Aggressive Strategic Allocation Funds may invest in the
International Equity Fund, which invests primarily in foreign equity
securities. These investments will subject the Funds to risks associated with
investing in foreign securities.
INVESTMENT POLICIES OF THE UNDERLYING DIVERSIFIED
FUNDS/PORTFOLIOS
In pursuing its investment objective, each of the Underlying Diversified
Portfolios is permitted to engage in a wide range of investment policies.
Certain of these policies are described below and further information about the
Underlying Diversified Funds/Portfolios is contained in the Statement of
Additional Information as well as the prospectus for such funds. Because each
Fund invests in the Underlying Diversified Funds, shareholders of each Fund will
be affected by these investment policies in direct proportion to the amount of
assets each Fund allocates to the Underlying Diversified Funds pursuing such
policies.
OPTIONS AND FUTURES CONTRACTS. Each Underlying Diversified Portfolio may
enter into transactions in futures contracts, options on futures contracts,
options on securities indexes and options on securities, for the purpose of
hedging each Underlying Diversified Portfolio's securities, which would have the
effect of reducing the volatility of its net asset value. In general, each such
transaction involves the establishment of a position which is expected to move
in a direction opposite to that of the security or securities being hedged.
Options and futures contracts can be highly volatile and a Portfolio's attempt
to hedge may not be successful.
SHORT-TERM INSTRUMENTS. Each Underlying Diversified Portfolio may invest
in cash, commercial paper, short-term obligations, repurchase agreements or
other forms of debt securities (including, without limitation, a short-term
investment fund investing in any of such securities).
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Each Underlying
Diversified Portfolio may enter into repurchase agreements. A repurchase
agreement arises when a buyer purchases securities from a seller, which is
usually a member bank of the Federal Reserve System or a member firm of the New
York Stock Exchange (or a subsidiary thereof), with the agreement that the
seller will repurchase the securities at a higher price at a later date. In the
event of a bankruptcy or default of certain sellers of repurchase agreements,
the Portfolio could experience costs and delays in liquidating the underlying
security, which is held as collateral, and the Portfolio might incur a loss if
the value of the collateral held declines during this period.
11
<PAGE> 15
Each Underlying Diversified Portfolio may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold may decline below the repurchase price
of those securities.
FOREIGN SECURITIES. Certain Underlying Diversified Portfolios invest all
or a portion of their assets in securities of foreign issuers, including
investments in sponsored American Depository Receipts ("ADRs"). ADRs are
receipts typically issued by an American bank or trust company evidencing
ownership of the underlying foreign securities. Investments in foreign equity
and debt securities involve increased or additional risks from those encountered
when investing in securities of domestic issuers. Risks and opportunities must
be evaluated when investing in particular foreign securities. Such risks include
(1) currency fluctuations; (2) restrictions on, and costs associated with, the
exchange of currencies; (3) the difficulty in obtaining or enforcing a court
judgment abroad; (4) reduced levels of publicly available information concerning
issuers; (5) restrictions on foreign investment in other jurisdictions; (6)
reduced levels of governmental regulation of foreign securities markets; (7)
difficulties in effecting the repatriation of capital invested abroad; (8)
difficulties in transaction settlements and the effect of this delay on
shareholder equity; (9) foreign withholding taxes; (10) political, economic, and
similar risks, including expropriation and nationalization; (11) different
accounting, auditing, and financial standards; (12) price volatility; and (13)
the diverse structure and liquidity of the securities markets of various
countries and regions.
LENDING OF PORTFOLIO SECURITIES. The Underlying Diversified Portfolios may
lend their portfolio securities to brokers, dealers and other financial
organizations. By lending its securities, a Portfolio can increase its income by
continuing to receive interest on the loaned securities as well as by either
investing the cash collateral in short-term securities or obtaining yield in the
form of interest paid when U.S. Government obligations are used as collateral.
There may be risks of delay in receiving additional collateral or risks of delay
in recovery of the securities or even loss of rights in the collateral should
the borrower of the securities fail financially. A Portfolio will adhere to the
following conditions whenever its securities are loaned: (i) the Portfolio must
receive at least 100% cash collateral or equivalent securities from the
borrower; (ii) the borrower must increase this collateral whenever the market
value of the loaned securities including accrued interest exceeds the level of
the collateral; (iii) the Portfolio must be able to terminate the loan at any
time; (iv) the Portfolio must receive reasonable interest on the loan, as well
as any dividends, interest or other distributions on the loaned securities, and
any increase in market value; (v) the Portfolio may pay only reasonable
custodian fees in connection with the loan; and (vi) voting rights on the loaned
securities may pass to the borrower. However, if a material event adversely
affecting the loaned securities were to occur, the Portfolio would terminate the
loan and regain the right to vote the securities.
GENERAL. As "diversified" funds, no more than 5% of the assets of any
Underlying Diversified Portfolio may be invested in the securities of one issuer
(other than U.S. Government securities), except that up to 25% of each
Portfolio's assets may be invested without regard to this limitation. No
Underlying Diversified Portfolio will invest more than 25% of its assets in the
securities of issuers in any one industry. These are fundamental investment
policies which may not be changed without investor approval. As a
non-fundamental operating policy, no more than 15% (10% in the case of the Money
Market Portfolio) of the net assets of any Underlying Diversified Portfolio may
be invested in (i) securities the resale of which are subject to legal or
contractual restrictions is restricted under federal securities laws and (ii)
illiquid or not readily marketable securities (including repurchase agreements
maturing in more than seven days).
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<PAGE> 16
HUB & SPOKE(R) STRUCTURE
The Underlying Diversified Funds and Underlying Diversified Portfolios have
licensed certain proprietary rights, know-how and financial services referred to
as Hub and Spoke(R) from Signature Financial Group, Inc. ("Signature"). The
Underlying Diversified Funds invest in the Underlying Diversified Portfolios
through Signature's Hub and Spoke(R) mutual fund method. Hub and Spoke(R)
employs a two-tier, master/feeder fund structure. Hub and Spoke(R) is a
registered service mark of Signature.
In addition to selling beneficial interests to the Underlying Diversified
Funds, the Underlying Diversified Portfolios may sell beneficial interests to
other mutual funds, insurance company separate accounts, collective investment
vehicles or institutional investors. Such investors will invest in the
Underlying Diversified Portfolios on the same terms and conditions as the
Underlying Diversified Funds and will pay a proportionate share of the
Underlying Diversified Portfolios' expenses. However, the other investors are
not required to sell their shares at the same public offering price as the
Underlying Diversified Funds due to variations in sales commissions and other
operating expenses. Therefore, all investors should be aware that these
differences may result in differences in returns experienced by investors in the
different entities that invest in each Underlying Diversified Portfolio.
Information concerning other holders of interests in the Underlying Diversified
Portfolios is available from Diversified at (914) 697-8000.
Smaller entities investing in an Underlying Diversified Portfolio may be
materially affected by the actions of larger entities investing in that
Portfolio. For example, if a large fund withdraws from an Underlying Diversified
Portfolio, the remaining investors may experience higher pro rata operating
expenses, thereby producing lower returns. Additionally, the affected Portfolio
may become less diverse, resulting in increased portfolio risk. (However, this
possibility also exists for any type of collective investment vehicle which has
institutional or other large investors.) Also, investors with a greater pro rata
ownership in an Underlying Diversified Portfolio could have effective voting
control of the operations of that Portfolio. Whenever an Underlying Diversified
Fund is requested to vote on matters pertaining to an Underlying Diversified
Portfolio (other than a vote to continue a Portfolio upon the withdrawal of an
investor in the Portfolio), the Underlying Diversified Fund will hold a meeting
of shareholders and will cast all of its votes in the same proportion as the
votes of the shareholders. The percentage of votes representing Underlying
Diversified Fund shareholders not voting will be voted in the same proportion as
the shareholders who do, in fact, vote. Certain changes in the investment
objectives, policies or restrictions of an Underlying Diversified Portfolio may
require that the Underlying Diversified Fund withdraw its interest in that
Portfolio. Any such withdrawal could result in a distribution "in kind" of
portfolio securities (as opposed to a cash distribution from the series). If
securities are distributed, an Underlying Diversified Fund could incur brokerage
or other charges in converting the securities to cash. In addition, the
distribution in kind may result in a less diversified portfolio of investments
or adversely affect the liquidity of a Fund. Notwithstanding the above, there
are other means for meeting shareholders' redemption requests such as temporary
borrowings.
An Underlying Diversified Fund may withdraw its investment from its
corresponding Portfolio at any time if its Board of Trustees determines that it
is in the best interests of the Fund to do so. Upon any such withdrawal, such
Board of Trustees would consider what action might be taken, including the
investment of all the investable assets of an Underlying Diversified Fund in
another pooled investment entity having the same investment objective as the
Underlying Diversified Fund or the retention of an investment adviser to manage
that fund's assets in accordance with the investment policies described herein.
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<PAGE> 17
MANAGEMENT OF THE TRUST
Subject to such policies as the Board of Trustees of the Trust may
determine and pursuant to Investment Advisory Agreements (the "Advisory
Agreements") with the Trust with respect to each Fund, Diversified manages the
assets of each Fund in accordance with the investment policies approved by the
Board of Trustees. Subject to such policies, Diversified provides general
investment advice to each Fund. For its services under the Advisory Agreements,
Diversified receives from each Fund fees accrued daily and paid monthly at an
annual rate equal to 0.20% of the average daily net assets. Investment
management decisions are taken by a committee of Diversified's personnel and not
by a particular individual.
Before approving any advisory contract, the Board of Trustees of the Trust,
including a majority of the trustees who are not "interested persons" as defined
in Section 2(a)(19) of the 1940 Act, must find that advisory fees charged under
such contract are based on services provided that are in addition to, rather
than duplicative of, services provided pursuant to any Underlying Diversified
Portfolio advisory contract. Such finding, and the basis upon which the finding
was made, will be recorded fully in the minute books of the Trust. Such
procedures were followed by the Board of Trustees with respect to each of the
Advisory Contracts.
The management of each Fund's business and affairs is the responsibility of
the Board of Trustees of the Trust. A majority of Trust's directors will be
non-interested persons as defined in Section 2(a)(19) of the 1940 Act. However,
the Trustees and the Officers of the Trust and Diversified also serve in similar
positions with the Underlying Diversified Funds. Thus, if the interests of a
Fund and the Underlying Diversified Funds were ever to become divergent, it is
possible that a conflict of interest could arise and affect how this group of
persons fulfill their fiduciary duties to that Fund and the Underlying
Diversified Funds. The Trustees of the Trust believe they have structured each
Fund to avoid these concerns. However, it is conceivable that a situation could
occur where proper action for a Fund could be adverse to the interests of an
Underlying Diversified Fund, or vice versa. If such a possibility arises, the
Trustees and Officers of the affected funds and Diversified will carefully
analyze the situation and take all steps they believe reasonable to minimize
and, where possible eliminate the potential conflict. Moreover, close and
continuous monitoring will be exercised to avoid, insofar as possible, these
concerns.
MANAGEMENT OF THE UNDERLYING DIVERSIFIED FUNDS/PORTFOLIOS. Diversified
serves as investment manager to all of the Underlying Diversified Portfolios and
is responsible for selection and management of the Underlying Diversified
Portfolios' subadvisers and portfolio investments.
The determination of how each Underlying Diversified Portfolio's assets
will be invested will be made by Diversified and the appropriate subadviser(s)
pursuant to the investment objectives and policies of each Underlying
Diversified Portfolio and guidelines established by its Board of Trustees.
For each Underlying Diversified Portfolio, Diversified has entered into an
Investment Subadvisory Agreement (each a "Subadvisory Agreement") with the
Subadvisers listed in the table below (each a "Subadviser", and collectively the
"Subadvisers"). For its services under each Subadvisory Agreement, the
Subadvisers receive a fee from Diversified at an annual rate equal to the
percentages specified in the table below of the corresponding Portfolio's
average net assets. Each fee will be accrued monthly by multiplying the
arithmetic average of the beginning and ending monthly net assets in the
Portfolio by the fee schedule and dividing by 12. Each fee will be paid on a
quarterly basis.
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<PAGE> 18
<TABLE>
<CAPTION>
UNDERLYING DIVERSIFIED PORTFOLIO COMPENSATION RATE (%)
PORTFOLIO SUBADVISERS ADVISER(1) SUBADVISERS
- ---------------------------- ----------------------------------- ------------ -----------
<S> <C> <C> <C>
Money Market Portfolio Capital Management Group 0.25 0.05
High Quality Bond Portfolio Merganser Capital Management 0.35 (2)
Corporation
Intermediate Government Bond Capital Management Group 0.35 0.15
Portfolio
Government/Corporate Bond Capital Management Group 0.35 0.15
Portfolio
High-Yield Bond Portfolio Delaware Investment Advisers 0.55 (3)
Balanced Portfolio Institutional Capital Corporation 0.45 (4)
Equity Income Portfolio Asset Management Group 0.45 0.25
Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (5)
Equity Growth Portfolio Jundt Associates, Inc. 0.70 0.625
Special Equity Portfolio (6) 0.80 0.50
International Equity Capital Guardian Trust Company 0.75 (7)
Portfolio
</TABLE>
- ---------------
(1) The Adviser is currently waiving a portion of its fee. See "Fees and
Expenses" on page for a discussion of the fee waivers currently in effect.
(2) 0.50% on the first $10,000,000 in assets, 0.375% on the next $15,000,000 in
assets, 0.25% on the next $75,000,000 in assets and 0.1875% on all assets in
excess of $100,000,000.
(3) 0.40% on the first $20,000,000 in assets, 0.30% on the next $20,000,000 in
assets and 0.20% on assets in excess of $40,000,000.
(4) 0.55% on the first $25,000,000 in assets, 0.45% on the next $25,000,000 in
assets and 0.35% on assets in excess of $50,000,000.
(5) 0.30% on the first $100,000,000 in assets and 0.20% on assets in excess of
$100,000,000.
(6) The Special Equity Portfolio has four Subadvisers: Pilgrim Baxter &
Associates, Ltd.; Ark Asset Management Co., Inc.; Liberty Investment
Management, Inc.; and Westport Asset Management, Inc.
(7) 0.75% on the first $25,000,000 in assets, 0.60% on the next $25,000,000 to
$50,000,000 in assets, 0.425% on the next $50,000,000 to $250,000,000 in
assets and 0.375% on all assets in excess of $250,000,000.
It is the responsibility of a Subadviser to make the day-today investment
decisions of the Underlying Diversified Portfolio and to place the purchase and
sales orders for securities transactions of such Portfolio, subject in all cases
to the general supervision of Diversified. Each Subadviser makes the investment
selections for its respective Underlying Diversified Portfolio consistent with
the guidelines and directions set by Diversified and the Board of Trustees of
the Portfolio Series. Each Subadviser furnishes at its own expense all services,
facilities and personnel necessary in connection with managing the corresponding
Portfolio's investments and effecting securities transactions for a Portfolio.
Diversified has entered into separate Subadvisory Agreements with respect
to each of the Money Market Portfolio, Intermediate Government Bond Portfolio
and Government/Corporate Bond Portfolio with Capital Management Group, a
division of 1740 Advisers, Inc., a wholly-owned subsidiary of The Mutual Life
Insurance Company of New York ("MONY"). The address of Capital Management Group
is 1740 Broadway, New York, New York 10019. Total assets under management by
Capital Management Group at December 31, 1995 were approximately $ million,
all of which were assets of registered investment companies. Investment
management decisions of Capital Management Group are made by committee and not
by managers individually.
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<PAGE> 19
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Income Portfolio with Asset Management Group, a division of 1740
Advisers, Inc. a wholly-owned subsidiary of MONY. The address of Asset
Management Group is 1740 Broadway, New York, New York 10019. Total assets under
management by Asset Management Group at December 31, 1995 were approximately
$ million, $ million of which were assets of registered investment
companies. Investment management decisions of Asset Management Group are made
by committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
High Quality Bond Portfolio with Merganser Capital Management Corporation
("Merganser"). Merganser was formed in September 1987 and is owned by certain of
its employees. Total assets under management for all institutional bond clients
at December 31, 1995 were approximately $ billion, $ million of which
were assets of registered investment companies. The principal business address
of Merganser is One Cambridge Center, Cambridge, Massachusetts 02142. Investment
management decisions of Merganser are made by committee and not by managers
individually.
Diversified has entered into a Subadvisory Agreement with respect to the
High-Yield Bond Portfolio with Delaware Investment Advisers (a division of
Delaware Management Company, Inc.). ("Delaware"). Delaware was formed in
February 1985 and is owned by Lincoln National Corp. Total assets under
management for all high-yield bond clients at December 31, 1995 were
approximately $ billion, $ billion of which were assets of registered
investment companies. The principal business address of Delaware is 2005 Market
Street, Philadelphia, Pennsylvania 19103. Investment management decisions of
Delaware are made by committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Balanced Portfolio with Institutional Capital Corporation ("Institutional
Capital"). Institutional Capital was formed in January 1970 and is owned by
certain of its employees. Total assets under management for all balanced clients
at December 31, 1995 were approximately $ million, all of which were assets
of registered investment companies. The principal business address of
Institutional Capital is 303 West Madison Street, Chicago, IL 60606. Investment
management decisions of Institutional Capital are made by committee and not by
managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Portfolio with Putnam Advisory Company, Inc. ("Putnam"). Putnam
was formed in 1937 and is owned by Marsh & McLennan Companies, Inc. The
principal address of Putnam is One Post Office Square, Boston, MA 02109. Total
assets under management for growth & income clients at December 31, 1995 were
approximately $ billion, $ billion of which were assets of registered
investment companies. Investment management decisions of Putnam are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Equity Growth Portfolio with Jundt Associates, Inc. ("Jundt"). Jundt was formed
in December 1972 and is owned by certain of its employees. Total assets under
management for all core equity clients at December 31, 1995 were approximately
$ billion, $ million of which were assets of registered investment
companies. The principal business address of Jundt is 1550 Utica Avenue South,
Suite 950, St. Louis Park, MN 55416. Investment management decisions of Jundt
are made by committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
International Equity Portfolio with Capital Guardian Trust Company ("CGTC").
CGTC was formed in 1968 and is owned by The Capital Group Companies, Inc. The
principal address of CGTC is 333 South Hope Street, Los Angeles, California
90071. Total assets under management for all international equity clients by
CGTC at December 31, 1995 were approximately $ billion, and total assets
under management of registered investment companies for which CGTC acts as
subadviser was $ million as of that date. CGTC uses a system of multiple
portfolio managers pursuant to which the Portfolio is divided into segments that
are assigned to individual portfolio managers. With investment guidelines, each
portfolio manager makes individual decisions as to company, country, industry,
timing and percentage based on extensive field research and direct company
contact.
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<PAGE> 20
With respect to the Special Equity Portfolio, Diversified has entered into
Subadvisory Agreements with four Subadvisers as follows:
- - ARK Asset Management Co., Inc. ("ARK") was formed in July 1989 and is owned by
certain employees of ARK Asset Holdings, Inc. Total assets under management
for all small capitalization clients at December 31, 1995 were approximately
$ billion, $ million of which were assets of registered investment
companies. The principal business address of ARK is 55 Water Street, New York,
NY 10041.
- - Liberty Investment Management, Inc. ("Liberty") was formed in 1994 and is
owned by certain of its employees. Liberty succeeded to certain of the
investment management businesses of Eagle Asset Management, Inc. Total assets
under management for all equity clients at December 31, 1995 were
approximately $ million, $ million of which were assets of registered
investment companies. The principal business address of Liberty is 880
Carillon Parkway, St. Petersburg, FL 33716.
- - Pilgrim Baxter & Associates, Ltd. ("Pilgrim") was formed in 1995 and is owned
by United Asset Management, Inc., a publicly-owned corporation. Pilgrim
succeeded to certain of the investment management businesses, and acquired the
corporate name of, Pilgrim Baxter & Associates, Ltd. in April 1995. Total
assets under management for all equity clients at December 31, 1995 were
approximately $ billion, $ billion of which were assets of registered
investment companies. The principal business address of Pilgrim is 1255
Drummers Lanes, Wayne, PA 19087.
- - Westport Asset Management, Inc. ("Westport") was formed in July 1993 and is
owned by certain of its employees. Total assets under management for all
equity clients at December 31, 1995 were approximately $ million, $
million of which were assets of registered investment companies. The principal
business address of Westport is 253 Riverside Avenue, Westport, CT 06880.
Investment management decisions by each of these Subadvisers are made by
committee and not by managers individually.
UNDERLYING DIVERSIFIED FUNDS -- DISTRIBUTION PLAN AND AGREEMENT
The Trustees of the Underlying Diversified Funds have adopted a
Distribution Plan in accordance with Rule 12b-1 under the 1940 Act after having
concluded that there is a reasonable likelihood that the Distribution Plan will
benefit the Underlying Diversified Funds and their shareholders. As contemplated
by the Distribution Plan, the Distributor acts as the agent of the Funds in
connection with the offering of shares of the Underlying Diversified Funds
pursuant to a Distribution Agreement.
Under the Distribution Plan, the Distributor may receive a fee from each
Underlying Diversified Fund at an annual rate not to exceed 0.25% of the
Underlying Diversified Fund's average daily net assets in anticipation of, or as
reimbursement for, expenses incurred in connection with the sale of shares of
the Underlying Diversified Fund, such as (i) payments of quarterly trail or
maintenance commissions to registered representatives of the Distributor or
other broker-dealers in an amount not to exceed on an annual basis 0.25% of the
average daily net assets maintained in the Underlying Diversified Fund by their
customers, (ii) reimbursements of sales commissions advanced by the Distributor
to sales brokers, and (iii) advertising expenses and the expenses of printing
(excluding typesetting) and distributing prospectuses and reports used for sales
purposes, expenses of preparing and printing sales literature and other
distribution-related expenses.
ADMINISTRATOR
Pursuant to (i) the Advisory Agreements with the Trust, (ii) an
Administrative and Transfer Agency Services Agreement with the Underlying
Diversified Funds and (iii) the Advisory Agreements with the Underlying
Diversified Portfolios, Diversified, as Administrator, provides the Trust, the
Underlying Diversified Funds and the Underlying Diversified Portfolios with
general office facilities and supervises the overall administration of the
Trust, the Underlying Diversified Funds and the Underlying Diversified
Portfolios, including, among other responsibilities, the negotiation of
contracts
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<PAGE> 21
and fees with, and the monitoring of performance and billings of, independent
contractors and agents; the preparation and filing of all documents required for
compliance with applicable laws and regulations; providing equipment and
clerical personnel necessary for maintaining the organization of the Trust, the
Underlying Diversified Funds and the Underlying Diversified Portfolios;
preparation of certain documents in connection with meetings of trustees,
shareholders and investors; and the maintenance of books and records.
Diversified provides persons satisfactory to the Boards of Trustees to serve as
officers of the Trust, the Underlying Diversified Funds and the Underlying
Diversified Portfolios, as the case may be. Such officers, as well as certain
other employees and Trustees, may be directors, officers or employees of
Diversified or its affiliates. In addition, Diversified provides transfer agency
services to the Trust and the Underlying Diversified Funds. With respect to the
Underlying Diversified Funds, Diversified, as Administrator, receives a fee
accrued daily and paid monthly at an annual rate equal to 0.30% of the average
daily net assets of the Underlying Diversified Fund. Diversified is currently
waiving a portion of its administrative services fee. Diversified acts as
Administrator to the Funds and the Underlying Diversified Portfolios pursuant to
the respective Advisory Agreements and receives no additional compensation for
providing such administrative services.
SERVICE AGENTS
All shareholders of the Funds must be represented by Diversified or another
Service Agent that has entered into a Service Agreement with Diversified.
Diversified acts as a Service Agent pursuant to its Advisory Agreements with the
Trust and receives no additional compensation from the Funds for such
shareholder services. The service fees of any other Service Agents will be paid
by Diversified. The services provided by a Service Agent may include
establishing and maintaining shareholder accounts, processing purchase and
redemption transactions, arranging for bank wires, answering client inquiries
regarding the Trust, assisting clients in changing account designations and
addresses, providing periodic statements showing the client's account balance,
transmitting proxy statements, periodic reports, updated Prospectuses and other
communications to shareholders and, with respect to meetings of shareholders,
collecting, tabulating and forwarding to the Trust executed proxies and
obtaining such other information and performing such other services as
Diversified or the Service Agent's clients may reasonably request and agree upon
with the Service Agent. Service Agents may separately charge their clients
additional fees only to cover provision of additional or more comprehensive
services not already provided by Diversified, or of the type or scope not
generally offered by a mutual fund, such as enhanced retirement or trust
reporting. Any Service Agent must agree to transmit to shareholders who are its
customers appropriate disclosures of any fees that it may charge them directly.
PURCHASES AND REDEMPTIONS OF SHARES
PURCHASES
The Trust is designed to meet the long-term investment needs of, and will
be available only as a funding vehicle to, Qualified Investors (as defined on
the cover page of this Prospectus). The retirement plans which may invest in the
Funds are hereinafter referred to as "Plans" and the employees, self-employed
persons or individuals participating in such Plans are hereinafter referred to
as "Plan Participants". With respect to these Plans, the employer and/or the
Plan Participants will make contributions which may be invested in shares of the
Funds pursuant to the terms and conditions of the underlying Plan.
Shares of the Funds may be purchased without a sales charge on any day on
which the Adviser and applicable Subadviser or Subadvisers are open for business
("Fund Business Day") at the net asset value next determined after an order in
proper form is transmitted to and accepted by the Distributor. The procedure
through which a Qualified Investor or Plan Participant may transmit an order to
the Distributor will be set forth in the documents relating to the underlying
Plan. Plan Participants should contact their Plan administrator, if appropriate,
for further information on how to purchase shares of
18
<PAGE> 22
the Funds. In addition, Qualified Investors and Plan Participants may call the
Distributor at 914-697-8000 for information with respect to the proper procedure
to transmit an order; however, except for purchase orders in connection with
exchanges from other funds as described below under "Exchange Privileges",
purchases may not be effected through telephone orders. The minimum initial
investment is $5,000 (the Trust is currently waiving its minimum initial
investment requirement) and there is no minimum for subsequent investments.
However, a particular Plan may impose different minimum initial and minimum
subsequent investment requirements. Purchases will be effected on the same day
the purchase order is received by the Distributor provided such order is
received prior to 4:00 p.m. New York time on any day on which the New York Stock
Exchange ("NYSE") is open for trading. Shares earn dividends from and including
the day the purchase is effected, but not on the day of redemption.
Checks received from a Qualified Investor are invested in full and
fractional shares. If shares are purchased with a check that does not clear, the
purchase will be cancelled and any losses or fees incurred in the transaction
will be the responsibility of such Qualified Investor. Checks must be drawn on
or payable through a U.S. bank and be in U.S. dollars. If shares are purchased
by check and a redemption request relating to such shares is received within 15
days of a purchase, the Trust will release such redemption proceeds when the
check clears. It is possible, although unlikely, that this could take up to 15
days.
Underlying Plans which include fixed investment options issued by insurance
companies may restrict or prohibit the purchase of shares of the Conservative
Strategic Allocation Fund with monies withdrawn from any such fixed interest
investment option.
Each Fund reserves the right to cease offering its shares for sale at any
time or to reject any order for the purchase of its shares.
REDEMPTIONS
A Qualified Investor or Plan Participant may redeem all or any portion of
the shares in its account at any time at the net asset value next determined
after a redemption request in proper form is received and accepted by the
Distributor. The proper form for a redemption request may vary in accordance
with the terms of the underlying Plan through which a Qualified Investor or Plan
Participant invests in a Fund. Plan Participants should contact their Plan
administrator, if appropriate, for further information on how to redeem shares
of a Fund. In addition, Qualified Investors and Plan Participants may call the
Distributor at 914-697-8000 for information with respect to the proper procedure
to transmit a redemption request; however, except for redemption requests in
connection with loans under certain Plans and exchanges into other funds as
described below under "Exchange Privileges", redemptions may not be effected
through telephone requests.
Investment return and principal value of an investment in the Funds will
fluctuate, so that the value of shares redeemed may be more or less than the
Qualified Investor's cost. Redemptions of shares may be taxable events to
Qualified Investors otherwise subject to tax on which a Qualified Investor may
realize a gain or a loss. No Fund will make redemptions in kind.
Redemption proceeds normally will be paid or mailed within seven days
following receipt of a redemption request in good order; however, when the NYSE
is closed, when trading on the NYSE is restricted, or when the Securities and
Exchange Commission determines that an emergency exists to warrant such an
action, the Funds may suspend redemption rights or postpone the date of payment.
The Trust reserves the right to redeem shares in the account of any
Qualified Investor if at any time the total value of such account falls below
$1,000 for any reason other than a decrease in the net asset value of its
shares. A Qualified Investor will be notified that the value of its account is
less than the minimum amount and allowed 15 days to make an additional
investment before the redemption is processed. Shares will be redeemed at the
net asset value on the date of redemption.
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<PAGE> 23
SIGNATURE GUARANTEES. To protect Qualified Investors and the Trust from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Trust to be sure that the entity requesting redemption is
the entity that is authorized to request redemption from that account. Signature
guarantees are required for: (1) any redemptions by mail if the proceeds are to
be paid to someone other than the shareholder of record or are to be sent to an
address other than an investor's address as shown on the Trust's records; (2)
any redemptions by mail which request that the proceeds be wired to a bank, (3)
redemption requests for more than $50,000; and (4) requests to transfer the
registration of shares to another owner. These requirements may be waived in
certain instances.
The Trust will accept signature guarantees from all institutions which are
eligible to provide them under federal or state law, provided the individual
giving the signature guarantee is authorized to do so. Institutions which
typically are eligible to provide signature guarantees include commercial banks,
trust companies, brokers, dealers, national securities exchanges, savings and
loan associations and credit unions. A signature guarantee is not the same as a
notarized signature.
EXCHANGE PRIVILEGES
Subject to applicable legal constraints, Qualified Investors may exchange
their shares in a Fund for shares of another Fund or a series of the Underlying
Diversified Funds. In addition, some underlying Plans may provide for exchange
privileges with other investment options available under such Plans. Underlying
Plans which include fixed investment options issued by insurance companies may
restrict or prohibit exchanges of shares of certain of the Funds for shares of
series of the Underlying Diversified Funds if the shares of the Fund to be
exchanged have been purchased with monies withdrawn from any such fixed interest
investment option.
There are no charges for exchanges. However, Plan Participants should
contact their Plan administrator, if appropriate, for further information
regarding exchanges. In addition, Qualified Investors and Plan Participants may
call the Distributor at 914-697-8000 for information with respect to the proper
procedures to effect such exchanges, including, when appropriate, the procedure
for effecting such exchanges by telephone. Some Plans may impose charges and
additional restrictions. An exchange order is treated the same as a redemption
followed by a purchase and will be effected at the respective net asset values
of the shares involved.
All Qualified Investors and Plan Participants should be aware that an
exchange transaction authorized by telephone and reasonably believed to be
genuine by the Trust or the Distributor may subject the Qualified Investor or
Plan Participant to risk of loss if such instruction is subsequently found not
to be genuine. The Trust and the Distributor will employ reasonable procedures,
including requiring investors to give certain identification information and
tape recording of telephone instructions, to confirm that instructions
communicated by telephone are genuine. To the extent that the Trust or the
Distributor fails to use reasonable procedures to verify the genuineness of
telephone instructions, they may be liable for any losses due to telephone
instructions that prove to be fraudulent or unauthorized.
The Trust reserves the right to terminate or modify the exchange privilege
in the future.
PERFORMANCE INFORMATION
From time to time, the Trust may provide yield and/or total return
quotations for any of the Funds and may also quote fund rankings in the relevant
fund category from various sources, such as Russell Data Services (a division of
Frank Russell Company), Lipper Analytical Services, Inc., Weisenberger
Investment Company Service, Morningstar, Inc. and CDA. The current yield for a
Fund will be calculated by dividing net investment income per share during a
recent 30-day period by the net asset value per share on the last day of the
period and annualizing the resulting quotient. Total return quotations will
reflect the annual percentage change over stated periods in the value of an
investment in a Fund. Yield reflects only net income as of a stated time, while
total return reflects all components of
20
<PAGE> 24
investment return over a stated period of time. A Fund's quotations may from
time to time be used in advertisements, shareholder reports or other
communications to shareholders. For a discussion of the manner in which a Fund
will calculate its yield and total return, see the Statement of Additional
Information.
Investors should note that the investment results of a Fund will fluctuate
over time, and any presentation of a Fund's current yield or total return for
any prior period should not be considered a representation of what an investment
may earn or what an investor's yield or total return may be in any future
period.
OTHER INFORMATION
NET ASSET VALUE
The net asset value of shares of the Funds is determined each Fund Business
Day. This determination is made once each day as of the close of regular trading
on the NYSE, currently 4:00 p.m., New York time, by dividing the value of a
Fund's net assets (i.e., the value of its investment in its Underlying
Diversified Funds and other assets less its liabilities, including expenses
payable or accrued) by the number of shares of the Fund outstanding at the time
the determination is made.
Each Underlying Diversified Portfolio values its assets based on their
current market value when market quotations are available. Where market
quotations are not available, assets are valued at fair value as determined in
good faith under the direction of the Underlying Diversified Portfolio's Board
of Trustees. Debt obligations with 60 days or less remaining to maturity may be
valued by the amortized cost method which the Underlying Diversified Portfolio's
Trustees have determined to constitute fair value for such securities.
DISTRIBUTIONS
The Funds intend to distribute all net investment income and net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) to shareholders. Dividends from net investment income (which may
include net short-term capital gains) and distributions from net capital gains,
if any, are normally declared and paid once a year in December. "Net investment
income" includes all dividends, interest and other income earned by a Fund, net
of a Fund's expenses.
All dividends and distributions declared by a Fund will be reinvested in
additional shares of that Fund at net asset value determined on the business day
immediately following the record date of the distribution. A Fund may make
additional distributions if necessary to avoid a 4% federal excise tax on
certain undistributed income and capital gain.
TAX MATTERS
The following discussion is for general information only and, specifically,
does not purport to address the taxation of Qualified Investors in all
circumstances or of contributors to, participants in, and beneficiaries under
any Qualified Investor. A prospective investor should consult with its own
adviser as to the tax consequences of an investment in the Trust, including the
state and local tax treatment of distributions from a Fund.
Each Fund intends to elect to be, and to qualify to be treated as, a
separate "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). To so qualify, the Funds must
meet certain income, distribution and diversification requirements. Provided a
Fund meets all such requirements, no federal income or excise taxes will be
required to be paid by that Fund on that part of its investment company taxable
income (consisting generally of net income and net short-term capital gain, if
any) and net capital gain that is distributed to shareholders. A Fund's
investment company taxable income and net capital gains for tax purposes will in
general be derived from distributions from the Underlying Diversified Funds as
well as from gains and losses recognized
21
<PAGE> 25
in connection with the redemption of shares in the Underlying Diversified Funds.
Each Underlying Diversified Fund similarly has elected to be, and intends to
qualify to be treated each year as, a separate "regulated investment company"
under Subchapter M of the Code. To so qualify, the Underlying Diversified Funds
must meet the income, distribution and diversification requirements previously
noted, through their interests in the Underlying Diversified Portfolios.
Provided an Underlying Diversified Fund meets all such requirements, no federal
income or excise taxes will be required to be paid by that Fund on that part of
its investment company taxable income and net capital gain that is distributed
to its shareholders, including the Funds. An Underlying Diversified Fund's
foreign source income may, however, be subject to foreign taxes withheld at the
source. The Underlying Diversified Portfolios will also not be required to pay
any federal income or excise taxes.
Retirement plans satisfying all conditions applicable to them under the
Code which invest in the Fund generally will not be subject to federal tax
liability on either distributions from the Funds or redemptions of shares of the
Funds. Rather, participants in such Plans will be taxed when they begin taking
distributions from the investing Plan in accordance with the rules under the
Code governing the taxation of such distributions. Qualified Investors otherwise
generally exempt from federal taxation of their income might nevertheless be
taxed on distributions of the Funds, and on any gain realized on redemption of
Fund shares, where the Qualified Investor is subject to the unrelated business
taxable income provisions of the Code with respect to its investment in the
Funds because, e.g., its acquisition of shares in a Fund was financed with debt.
If, for any reason, a Qualified Investor is not exempt from income taxation
such Qualified Investor will be subject to tax on distributions received from
the Funds irrespective of the fact that such distributions are reinvested in
additional shares. Distributions to such Investors, other than of net capital
gains, will be taxable as ordinary income; distributions of net capital gains
would be taxable to such Investors as long-term capital gain without regard to
the length of time they have held shares in a Fund. Certain dividends declared
in October, November or December of a calendar year and paid in January of the
succeeding calendar year to a Qualified Investor which is subject to tax on the
distribution are taxable to such Investor as if paid on December 31 of the year
in which they were declared.
The foregoing is only a summary of some of the important federal tax
considerations generally affecting the Trust and its shareholders. Please refer
to the Statement of Additional Information for a more extensive discussion. In
addition, there may be other federal, state or local tax considerations
applicable to a particular investor. Prospective shareholders are urged to
consult their own tax advisers concerning the tax consequences of an investment
in the Trust.
EXPENSES
Under each Advisory Agreement, Diversified has agreed to bear any expenses
of the Funds other than the 0.20% investment advisory fee payable to Diversified
thereunder. Of course, shareholders of the Funds will still indirectly bear
their proportionate share of the expenses of the Underlying Diversified Funds
and Underlying Diversified Portfolios.
The respective expenses of the Trust (which will be borne by Diversified as
discussed above), the Underlying Diversified Funds and the Underlying
Diversified Portfolios include the compensation of their respective Trustees who
are not affiliated with Diversified or any Subadviser; governmental fees;
interest charges; taxes; fees and expenses of independent auditors, of legal
counsel and of any transfer agent, custodian, registrar or dividend disbursing
agent; insurance premiums; and expenses of calculating the net asset value of,
and the net income on, interests in the Portfolios and shares of the Funds and
the Underlying Diversified Funds.
Expenses of the Trust (which will be borne by Diversified as discussed
above) and the Underlying Diversified Funds also include all fees under its
Administrative Services Agreement; expenses of distributing and redeeming shares
and servicing shareholder accounts; expenses of preparing, printing and mailing
prospectuses, reports, notices, proxy statements and reports to shareholders and
to
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<PAGE> 26
governmental officers and commissions; expenses of shareholder and Trustee
meetings; expenses relating to the issuance, registration and qualification of
shares of the Trust and Underlying Diversified Funds and the preparation,
printing and mailing of prospectuses for such purposes; and membership dues in
the Investment Company Institute.
Expenses of the Underlying Diversified Portfolios also include expenses
connected with the execution, recording and settlement of security transactions;
fees and expenses of the Underlying Diversified Portfolios' custodian for all
services to the Underlying Diversified Portfolios, including safekeeping of
funds and securities and maintaining required books and accounts; expenses of
preparing and mailing reports to investors and to governmental officers and
commissions; expenses of meetings of investors and Trustees; and the advisory
fees payable to Diversified under the Advisory Agreements.
DESCRIPTION OF SHARES, VOTING RIGHTS AND LIABILITIES
The Trust's Declaration of Trust permits the Trustees to issue an unlimited
number of full and fractional Shares of Beneficial Interest (par value $0.00001
per share) and to divide or combine the shares into a greater or lesser number
of shares without thereby changing the proportionate beneficial interests in the
Trust. The Trust reserves the right to create and issue additional series of
shares, in which case the shares of each series would participate equally in the
earnings, dividends and assets of the particular series.
Each share of a Fund represents an equal proportionate interest in that
Fund with each other share. Shares have no preference, preemptive, conversion or
similar rights. Shares when issued are fully paid and nonassessable, except as
set forth below. Shareholders are entitled to one vote for each share held on
matters on which they are entitled to vote. The Trust is not required to and has
no current intention to hold annual meetings of shareholders although the Trust
will hold special meetings of Fund shareholders when in the judgment of the
Trustees of the Trust it is necessary or desirable to submit matters for a
shareholder vote. Shares of each Fund are entitled to vote separately to approve
changes in fundamental investment policies or restrictions for that Fund, but
shares of all Funds will vote together in the election or selection of Trustees
and independent accountants for the Trust. If requested to do so by at least 10%
of the Trust's outstanding shares, a meeting of Trust shareholders will be
called for the purpose of voting on the removal of a Trustee or Trustees. The
Trust will assist in shareholder communications as required by Section 16(c) of
the 1940 Act.
The Trust is an entity of the type commonly known as a "Massachusetts
business trust". Under Massachusetts law, shareholders of such a business trust
may, under certain circumstances, be held personally liable as partners for its
obligations. However, the Trustees of the Trust believe that the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which both inadequate insurance existed and a Fund
itself was unable to meet its obligations.
------------------------
The Trust's Statement of Additional Information, dated , 1996,
contains more detailed information about the Trust, the Underlying Diversified
Funds and the Underlying Diversified Portfolios.
23
<PAGE> 27
TABLE OF CONTENTS
<TABLE>
<S> <C>
Investment Objective of the Funds...................................... 2
Expense Summary........................................................ 4
Description of the Underlying Diversified Funds/Portfolios............. 6
Special Risks and Considerations....................................... 10
Investment Policies of the Underlying Diversified Funds/Portfolios..... 11
Hub & Spoke(R) Structure............................................... 12
Management of the Trust................................................ 14
Purchases and Redemptions of Shares.................................... 18
Other Information...................................................... 21
</TABLE>
------------------------------------
No person has been authorized to give any information or to make any
representations other than those contained in the Trust's Prospectus, Statement
of Additional Information or official sales literature in connection with the
offering of the Funds' shares and, if given or made, such other information or
representations must not be relied on as having been authorized by the Trust or
the Distributor. This Prospectus does not constitute an offer in any state in
which, or to any person to whom, such offer may not lawfully be made.
------------------------------------
<PAGE> 28
STATEMENT OF ADDITIONAL INFORMATION
, 1996
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
DIVERSIFIED INVESTORS CONSERVATIVE STRATEGIC ALLOCATION FUND
DIVERSIFIED INVESTORS MODERATE STRATEGIC ALLOCATION FUND
DIVERSIFIED INVESTORS AGGRESSIVE STRATEGIC ALLOCATION FUND
4 MANHATTANVILLE ROAD, PURCHASE, NEW YORK 10577 (914)697-8000
The Diversified Investors Strategic Allocation Funds (the "Trust") is comprised
of three funds. This Statement of Additional Information describes the shares of
each such fund, including Diversified Investors Conservative Strategic
Allocation Fund (the "Conservative Fund"), Diversified Investors Moderate
Strategic Allocation Fund (the "Moderate Fund") and Diversified Investors
Aggressive Strategic Allocation Fund (the "Aggressive Fund") (each a "Fund", and
collectively the "Funds").
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
The Trust 2
Investment Objective and Policies 2
Investment Restrictions 16
Standard Performance Information 18
Determination of Net Asset Value; Valuation of Securities 20
Management of the Trust 22
Taxation 25
Distribution Plan 27
Independent Accountants 28
Description of the Trust; Fund Shares 28
Experts 29
Appendix 30
</TABLE>
THIS STATEMENT OF ADDITIONAL INFORMATION SETS FORTH INFORMATION WHICH MAY BE OF
INTEREST TO INVESTORS BUT WHICH IS NOT NECESSARILY INCLUDED IN THE FUNDS'
PROSPECTUS AS AMENDED FROM TIME TO TIME ("PROSPECTUS"). THIS STATEMENT OF
ADDITIONAL INFORMATION SHOULD BE READ ONLY IN CONJUNCTION WITH THE PROSPECTUS, A
COPY OF WHICH MAY BE OBTAINED BY AN INVESTOR WITHOUT CHARGE BY CONTACTING
DIVERSIFIED INVESTORS SECURITIES CORP. ("DISC"), THE FUNDS' DISTRIBUTOR, AT THE
ADDRESS AND TELEPHONE NUMBER SHOWN ABOVE FOR THE TRUST. TERMS USED BUT NOT
DEFINED HEREIN, WHICH ARE DEFINED IN THE PROSPECTUS, ARE USED HEREIN AS DEFINED
IN THE PROSPECTUS.
THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT A PROSPECTUS AND IS AUTHORIZED
FOR DISTRIBUTION TO PROSPECTIVE INVESTORS ONLY IF PRECEDED OR ACCOMPANIED BY AN
EFFECTIVE PROSPECTUS.
<PAGE> 29
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
THE TRUST
The Trust is an open-end non-diversified management investment company
which was organized as a business trust under the laws of the Commonwealth of
Massachusetts on January 5, 1996. Diversified Investment Advisors, Inc.
("Diversified" or the "Adviser") is investment advisor to the Trust. Shares of
the Trust are divided into three separate series described herein. Each such
series or Fund seeks to achieve its investment objective by investing all of its
assets in a diversified portfolio of other mutual funds managed by Diversified
("Underlying Diversified Funds").
Each Underlying Diversified Fund is a series of The Diversified Investors
Funds Group, an open-end diversified, management investment company. Each
Underlying Diversified Fund seeks to achieve its investment objective by
investing all of its assets in a corresponding series of Diversified Investors
Portfolios (the "Underlying Diversified Portfolios"), an open-end diversified
management investment company with separate series which have the same
investment objectives as the Underlying Diversified Funds. Diversified is the
investment adviser for each series of the Underlying Diversified Portfolios and
appoints one or more subadvisers (the "Subadvisers") to provide day-to-day
investment management services. As to each Underlying Diversified Portfolio, the
Adviser and its Subadviser(s) are referred to collectively as the "Advisers".
Each Fund is designed to meet the long-term investment needs of, and will
be available only as a funding vehicle to, (i) certain employee retirement plans
of for-profit and not-for-profit entities including those having cash or
deferred arrangements and those covering self-employed individuals and
owner-employees (such as 401(k) Plans, 403(b) Plans, 457 Plans, Money Purchase
Plans, Profit Sharing Plans, Simplified Employee Pension Plans and Keogh Plans),
and (ii) qualified personal retirement plans such as IRAs and rollover IRAs
(collectively, "Qualified Investors").
INVESTMENT OBJECTIVE AND POLICIES
THE FUNDS
The investment objectives and policies of each Fund are described in the
Funds' Prospectus. There can, of course, be no assurance that a Fund will
achieve its investment objective.
THE UNDERLYING DIVERSIFIED FUNDS/PORTFOLIOS
The following information supplements the discussion of the investment
objectives and policies of the Underlying Diversified Funds/Portfolios discussed
in the Funds' Prospectus. Set forth below are explanations of various investment
techniques which may be employed by the Underlying Diversified Funds/Portfolios.
BANK OBLIGATIONS. 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.
Obligations of foreign branches and subsidiaries of domestic banks and
domestic and foreign branches of foreign banks, such as certificates of deposit
("CDs") and time deposits ("TDs"), 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
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risks than are those of domestic banks. These risks include foreign economic and
political developments, foreign governmental restrictions that may adversely
affect payment of principal and interest on the obligations, foreign exchange
controls and foreign withholding and other taxes on interest income. These
foreign branches and subsidiaries are not necessarily subject to the same or
similar regulatory requirements that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and accounting, auditing and financial
record keeping requirements. In addition, less information may be publicly
available about a foreign branch of a domestic bank or about a foreign bank than
about a domestic bank.
Obligations of United States branches of foreign banks may be general
obligations of the parent bank in addition to the issuing branch, or may be
limited by the terms of a specific obligation and by federal or state regulation
as well as governmental action in the country in which the foreign bank has its
head office. A domestic branch of a foreign bank with assets in excess of $1
billion may be subject to reserve requirements imposed by the Federal Reserve
System or by the state in which the branch is located if the branch is licensed
in that state.
In addition, branches licensed by the Comptroller of the Currency and
branches licensed by certain states may be required to: (1) pledge to the
regulator, by depositing assets with a designated bank within the state, a
certain percentage of their assets as fixed from time to time by the appropriate
regulatory authority; and (2) maintain assets within the state in an amount
equal to a specified percentage of the aggregate amount of liabilities of the
foreign bank payable at or through all of its agencies or branches within the
state.
In view of the foregoing factors associated with the purchase of CDs and
TDs issued by foreign branches of domestic banks, by foreign subsidiaries of
domestic banks, by foreign branches of foreign banks or by domestic branches of
foreign banks, the Advisers carefully evaluate such investments on a
case-by-case basis.
U.S. GOVERNMENT AND AGENCY SECURITIES. Securities issued or guaranteed by
the U.S. Government or its agencies or instrumentalities include U.S. Treasury
securities, which differ only in their interest rates, maturities and times of
issuance. Treasury Bills have initial maturities of one year or less; Treasury
Notes have initial maturities of one to ten years; and Treasury Bonds generally
have initial maturities of greater than ten years. Some obligations issued or
guaranteed by U.S. Government agencies and instrumentalities, for example,
Government National Mortgage Association pass-through certificates, are
supported by the full faith and credit of the U.S. Treasury; others, such as
those of the Federal Home Loan Banks, by the right of the issuer to borrow from
the Treasury; others, such as those issued by the Federal National Mortgage
Association, by discretionary authority of the U.S. Government to purchase
certain obligations of the agency or instrumentality; and others, such as those
issued by the Student Loan Marketing Association, only by the credit of the
agency or instrumentality. While the U.S. Government provides financial support
to such U.S. Government-sponsored agencies or instrumentalities, no assurance
can be given that it will always do so, since it is not so obligated by law. An
Underlying Diversified Portfolio will invest in such securities only when the
Advisers are satisfied that the credit risk with respect to the issuer is
minimal.
COMMERCIAL PAPER. Commercial paper consists of short-term (usually from 1
to 270 days) unsecured promissory notes issued by corporations in order to
finance their current operations. A variable amount master demand note (which is
a type of commercial paper) represents a direct borrowing arrangement involving
periodically fluctuating rates of interest under an agreement between a
commercial paper issuer and an institutional lender pursuant to which the lender
may determine to invest varying amounts.
The Underlying Diversified Portfolios may purchase three types of
commercial paper, as classified by exemption from registration under the
Securities Act of 1933, as amended (the "1933 Act"). The three types include
open market, privately placed, and letter of credit commercial paper. Trading of
such commercial paper is conducted primarily by institutional investors through
investment dealers or
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directly through the issuers. Individual investor participation in the
commercial paper market is very limited.
Open Market. "Open market" commercial paper refers to the commercial paper
of any industrial, commercial, or financial institution which is openly traded,
including directly issued paper. "Open market" paper's 1933 Act exemption is
under Section 3(a)(3) which limits the use of proceeds to current transactions,
limits maturities to 270 days and requires that the paper contain no provision
for automatic rollovers.
Privately Placed. "Privately placed" commercial paper relies on the
exemption from registration provided by Section 4(2), which exempts transactions
by an issuer not involving any public offering. The commercial paper may only be
offered to a limited number of accredited investors. "Privately placed"
commercial paper has no maturity restriction.
Letter of Credit. "Letter of credit" commercial paper is exempt from
registration under Section 3(a)(2) of the 1933 Act. It is backed by an
irrevocable or unconditional commitment by a bank to provide funds for repayment
of the notes. Unlike "open market" and "privately placed" commercial paper,
"letter of credit" paper has no limitations on purchases.
VARIABLE RATE AND FLOATING RATE SECURITIES. The Underlying Diversified
Portfolios may purchase floating and variable rate demand notes and bonds, which
are obligations ordinarily having stated maturities in excess of 397 days, but
which permit the holder to demand payment of principal at any time, or at
specified intervals not exceeding 397 days, in each case upon not more than 30
days' notice. Variable rate demand notes include master demand notes which are
obligations that permit a Portfolio to invest fluctuating amounts, which may
change daily without penalty, pursuant to direct arrangements between the
Portfolio, as lender, and the borrower. The interest rates on these notes
fluctuate from time to time. The issuer of such obligations normally has a
corresponding right, after a given period, to prepay in its discretion the
outstanding principal amount of the obligations plus accrued interest upon a
specified number of days' notice to the holders of such obligations. The
interest rate on a floating rate demand obligation is based on a known lending
rate, such as a bank's prime rate, and is adjusted automatically each time such
rate is adjusted. The interest rate on a variable rate demand obligation is
adjusted automatically at specified intervals. Frequently, such obligations are
collateralized by letters of credit or other credit support arrangements
provided by banks. Because these obligations are direct lending arrangements
between the lender and borrower, it is not contemplated that such instruments
generally will be traded, and there generally is no established secondary market
for these obligations, although they are redeemable at face value. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, an Underlying Diversified Portfolio's right to redeem is
dependent on the ability of the borrower to pay principal and interest on
demand. Such obligations frequently are not rated by credit rating agencies and
an Underlying Diversified Portfolio may invest in obligations which are not so
rated only if the Advisers determine that at the time of investment the
obligations are of comparable quality to the other obligations in which the
Portfolio may invest. The Advisers, on behalf of an Underlying Diversified
Portfolio, will consider on an ongoing basis the creditworthiness of the issuers
of the floating and variable rate demand obligations held by the Portfolio. The
Underlying Diversified Portfolios will not invest more than 15% (10% in the case
of the Money Market Portfolio) of the value of their net assets in floating or
variable rate demand obligations as to which they cannot exercise the demand
feature on not more than seven days' notice if there is no secondary market
available for these obligations, and in other securities that are not readily
marketable. See "Investment Restrictions" below.
PARTICIPATION INTERESTS. An Underlying Diversified Portfolio may purchase
from financial institutions participation interests in securities in which such
Portfolio may invest. A participation interest gives a Portfolio an undivided
interest in the security in the proportion that the Portfolio's participation
interest bears to the total principal amount of the security. These instruments
may have fixed, floating or variable rates of interest, with remaining
maturities of 13 months or less. If the participation interest is unrated, or
has been given a rating below that which is permissible for purchase by the
Underlying
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Diversified Portfolio, the participation interest will be backed by an
irrevocable letter of credit or guarantee of a bank, or the payment obligation
otherwise will be collateralized by U.S. Government securities, or, in the case
of unrated participation interests, the Advisers must have determined that the
instrument is of comparable quality to those instruments in which an Underlying
Diversified Portfolio may invest. For certain participation interests, an
Underlying Diversified Portfolio will have the right to demand payment, on not
more than seven days' notice, for all or any part of the Portfolio's
participation interest in the security, plus accrued interest. As to these
instruments, an Underlying Diversified Portfolio intends to exercise its right
to demand payment only upon a default under the terms of the security, as needed
to provide liquidity to meet redemptions, or to maintain or improve the quality
of its investment portfolio. An Underlying Diversified Portfolio will not invest
more than 15% (10% in the case of the Money Market Portfolio) of its net assets
in participation interests that do not have this demand feature, and in other
securities that are not readily marketable. See "Investment Restrictions" below.
ILLIQUID SECURITIES. 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. Mutual funds do not
typically hold a significant amount of these restricted or other illiquid
securities because of the potential for delays on resale and uncertainty in
valuation. Limitations on resale may have an adverse effect on the marketability
of portfolio securities and a mutual 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. A
mutual 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.
In recent years, however, a large institutional market has developed for
certain securities that are not registered under the 1933 Act, including
repurchase agreements, commercial paper, foreign securities, municipal
securities and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale of such investments to the
general public or to certain institutions may not be indicative of their
liquidity.
The Securities and Exchange Commission (the "SEC") has adopted Rule 144A,
which allows a broader institutional trading market for securities otherwise
subject to restriction on their resale to the general public. Rule 144A
establishes a "safe harbor" from the registration requirements of the 1933 Act
for resales of certain securities to qualified institutional buyers.
The Advisers will monitor the liquidity of Rule 144A securities for each
Portfolio under the supervision of the Board of Trustees of the Underlying
Diversified Portfolios. In reaching liquidity decisions, the Advisers will
consider, among other things, the following factors: (1) the frequency of trades
and quotes for the security, (2) the number of dealers and other potential
purchasers wishing to purchase or sell the security, (3) dealer undertakings to
make a market in the security and (4) the nature of the security and of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers and the mechanics of the transfer).
UNSECURED PROMISSORY NOTES. An Underlying Diversified Portfolio also may
purchase unsecured promissory notes ("Notes") which are not readily marketable
and have not been registered under the 1933 Act, provided such investments are
consistent with the Portfolio's investment objective. The Notes purchased by the
Portfolio will have remaining maturities of 13 months or less and will be deemed
by the Board of Trustees of the Portfolio to present minimal credit risks and
will meet the quality criteria set forth above under "Investment Policies." The
Portfolio will invest no more than 15%
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(10% in the case of the Money Market Portfolio) of its net assets in such Notes
and in other securities that are not readily marketable (which securities would
include floating and variable rate demand obligations as to which the Portfolio
cannot exercise the demand feature described above and as to which there is no
secondary market). See "Investment Restrictions" below.
REPURCHASE AGREEMENTS AND REVERSE REPURCHASE AGREEMENTS. Repurchase
agreements are agreements by which a person purchases a security and
simultaneously commits to resell that security to the seller (which is usually a
member bank of the Federal Reserve System or a member firm of the New York Stock
Exchange (or a subsidiary thereof)) at an agreed-upon date within a number of
days (usually not more than seven) from the date of purchase. The resale price
reflects the purchase price plus an agreed-upon market rate of interest which is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed-upon price,
which obligation is in effect secured by the value of the underlying security,
usually U.S. Government or government agency issues. Under the Investment
Company Act of 1940, as amended (the "1940 Act"), repurchase agreements may be
considered to be loans by the buyer. An Underlying Diversified Portfolio's risk
is limited to the ability of the seller to pay the agreed upon amount on the
delivery date. If the seller defaults, the underlying security constitutes
collateral for the seller's obligation to pay although an Underlying Diversified
Portfolio may incur certain costs in liquidating this collateral and in certain
cases may not be permitted to liquidate this collateral. All repurchase
agreements entered into by the Underlying Diversified Portfolios are fully
collateralized, with such collateral being marked to market daily.
The Underlying Diversified Portfolios may borrow funds for temporary or
emergency purposes, such as meeting larger than anticipated redemption requests,
and not for leverage. One means of borrowing is by agreeing to sell portfolio
securities to financial institutions such as banks and broker-dealers and to
repurchase them at a mutually agreed date and price (a "reverse repurchase
agreement"). At the time a Portfolio enters into a reverse repurchase agreement
it will place in a segregated custodial account cash, U.S. Government securities
or high-grade debt obligations having a value equal to the repurchase price,
including accrued interest. Reverse repurchase agreements involve the risk that
the market value of the securities sold by the Underlying Diversified Portfolio
may decline below the repurchase price of those securities.
FOREIGN SECURITIES -- ALL PORTFOLIOS. The Underlying Diversified
Portfolios may invest their assets in securities of foreign issuers. Investing
in securities issued by companies whose principal business activities are
outside the United States may involve significant risks not present in domestic
investments. For example, there is generally less publicly available information
about foreign companies, particularly those not subject to the disclosure and
reporting requirements of the U.S. securities laws. Foreign issuers are
generally not bound by uniform accounting, auditing and financial reporting
requirements comparable to those applicable to domestic issuers. Investments in
foreign securities also involve the risk of possible adverse changes in
investment or exchange control regulations, expropriation or confiscatory
taxation, brokerage or other taxation, limitation on the removal of funds or
other assets of an Underlying Diversified Portfolio, political or financial
instability or diplomatic and other developments which would affect such
investments. Further, economies of particular countries or areas of the world
may differ favorably or unfavorably from the economy of the United States.
It is anticipated that in most cases the best available market for foreign
securities would be on exchanges or in over-the-counter markets located outside
the United States. Foreign stock markets, while growing in volume and
sophistication, are generally not as developed as those in the United States,
and securities of some foreign issuers (particularly those located in developing
countries) may be less liquid and more volatile than securities of comparable
United States companies. Foreign security trading practices, including those
involving securities settlement where an Underlying Diversified Portfolio's
assets may be released prior to receipt of payment, may expose a Portfolio to
increased risk in the event of a failed trade or the insolvency of a foreign
broker-dealer. In addition, foreign brokerage commissions are generally higher
than commissions on securities traded in the United States and may
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be non-negotiable. In general, there is less overall governmental supervision
and regulation of foreign securities exchanges, brokers and listed companies
than in the United States.
FOREIGN SECURITIES -- MONEY MARKET PORTFOLIO. The Money Market Portfolio
may invest in the following foreign securities: (i) U.S. dollar-denominated
obligations of foreign branches and subsidiaries of domestic banks and foreign
banks (such as Eurodollar CDs, which are U.S. dollar-denominated CDs issued by
branches of foreign and domestic banks located outside the United States;
Eurodollar TDs ("ETDs"), which are U.S. dollar-denominated deposits in a foreign
branch of a foreign or domestic bank; and Canadian TDs, which are essentially
the same as ETDs except they are issued by branches of major Canadian banks),
(ii) high quality, U.S. dollar-denominated short-term bonds and notes (including
variable amount master demand notes) issued by foreign corporations, (including
Canadian commercial paper, which is commercial paper issued by a Canadian
corporation or a Canadian counterpart of a U.S. corporation, and Europaper,
which is U.S. dollar-denominated commercial paper of a foreign issuer) and (iii)
U.S. dollar-denominated obligations issued or guaranteed by one or more foreign
governments or any of their political subdivisions, agencies or
instrumentalities that are determined by the Adviser to be of comparable quality
to the other obligations in which the Money Market Portfolio may invest. Such
securities also include debt obligations of supranational entities.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the World Bank), the European Coal and Steel Community, the Asian
Development Bank and the InterAmerican Development Bank.
FOREIGN SECURITIES -- PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO. Not
more than 5% of an Underlying Diversified Portfolio's assets may be invested in
closed-end investment companies which primarily hold foreign securities.
Investments in such companies may entail the risk that the market value of such
investments may be substantially less than their net asset value and that there
would be duplication of investment management and other fees and expenses.
Securities of foreign issuers include investments in sponsored American
Depository Receipts ("ADRs"). ADRs are depository receipts for securities of
foreign issuers and provide an alternative method for a Portfolio to make
foreign investments. These securities will not be denominated in the same
currency as the securities into which they may be converted. Generally, ADRs, in
registered form, are designed for use in U.S. securities markets. ADRs are
receipts typically issued by a U.S. bank or trust company evidencing ownership
of the underlying securities.
The Underlying Diversified Portfolios may invest in foreign securities that
impose restrictions on transfer within the United States or to United States
persons. Although securities subject to such transfer restrictions may be
marketable abroad, they may be less liquid than foreign securities of the same
class that are not subject to such restrictions.
FORWARD FOREIGN CURRENCY EXCHANGE CONTRACTS. Because some Underlying
Diversified Portfolios may buy and sell securities denominated in currencies
other than the U.S. dollar and receive interest, dividends and sale proceeds in
currencies other than the U.S. dollar, the Underlying Diversified Portfolios
from time to time may enter into foreign currency exchange transactions to
convert to and from different foreign currencies and to convert foreign
currencies to and from the U.S. dollar. The Underlying Diversified Portfolios
either enter into these transactions on a spot (i.e., cash) basis at the spot
rate prevailing in the foreign currency exchange market or use forward contracts
to purchase or sell foreign currencies.
A forward foreign currency exchange contract is an obligation to purchase
or sell a specific currency at a future date, which may be any fixed number of
days from the date of the contract. Forward foreign currency exchange contracts
establish an exchange rate at a future date. These contracts are transferable in
the interbank market conducted directly between currency traders (usually large
commercial banks) and their customers. A forward foreign currency exchange
contract generally has no deposit requirement and is traded at a net price
without commission. An Underlying Diversified
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Portfolio maintains with its custodian a segregated account of high grade liquid
assets in an amount at least equal to its obligations under each forward foreign
currency exchange contract. Neither spot transactions nor forward foreign
currency exchange contracts eliminate fluctuations in the prices of foreign
securities or in foreign exchange rates, or prevent loss if the prices of these
securities should decline.
The Underlying Diversified Portfolios may enter into foreign currency
hedging transactions in an attempt to protect against changes in foreign
currency exchange rates between the trade and settlement dates of specific
securities transactions or changes in foreign currency exchange rates that would
adversely affect a portfolio position or an anticipated investment position.
With respect to Portfolios other than the International Equity Portfolio
consideration of the prospect for currency parities will be incorporated into
the Advisers' long-term investment decisions. Therefore these Portfolios will
not routinely enter into foreign currency hedging transactions with respect to
security transactions; however, the Advisers believe that it is important to
have the flexibility to enter into foreign currency hedging transactions when
they determine that the transactions would be in a Portfolio's best interest.
Although these transactions tend to minimize the risk of loss due to a decline
in the value of the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of the hedged currency
increase. The precise matching of the forward contract amounts and the value of
the securities involved will not generally be possible because the future value
of such securities in foreign currencies will change as a consequence of market
movements in the value of such securities between the date the forward contract
is entered into and the date it matures. The projection of currency market
movements is extremely difficult, and the successful execution of a hedging
strategy is highly uncertain.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission ("CFTC"), the CFTC may in the future assert authority to
regulate forward contracts. In such event, the ability to utilize forward
contracts in the manner set forth in the Prospectus may be restricted. Forward
contracts may reduce the potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies. Unanticipated
changes in currency prices may result in poorer overall performance for a
Portfolio than if it had not entered into such contracts. The use of foreign
currency forward contracts may not eliminate fluctuations in the underlying U.S.
dollar equivalent value of the prices of or rates of return on a Portfolio's
foreign currency denominated portfolio securities and the use of such techniques
will subject the Portfolio to certain risks.
The matching of the increase in value of a forward contract and the decline
in the U.S. dollar equivalent value of the foreign currency denominated asset
that is the subject of the hedge generally will not be precise. In addition, a
Portfolio may not always be able to enter into foreign currency forward
contracts at attractive prices and this will limit a Portfolio's ability to use
such contract to hedge or cross-hedge its assets. Also, with regard to a
Portfolio's use of cross-hedges, there can be no assurance that historical
correlations between the movement of certain foreign currencies relative to the
U.S. dollar will continue. Thus, at any time poor correlation may exist between
movements in the exchange rates of the foreign currencies underlying a
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Portfolio's assets that are the subject of such
cross-hedges are denominated.
GUARANTEED INVESTMENT CONTRACTS. The Underlying Diversified Portfolios may
invest in guaranteed investment contracts ("GICs") issued by insurance
companies. Pursuant to such contracts, a Portfolio makes cash contributions to a
deposit fund of the insurance company's general account. The insurance company
then credits to the fund guaranteed interest. The GICs provide that this
guaranteed interest will not be less than a certain minimum rate. The insurance
company may assess periodic charges against a GIC for expenses and service costs
allocable to it, and the charges will be deducted from the value of the deposit
fund. Because a Portfolio may not receive the principal amount of a GIC from the
insurance company on seven days' notice or less, the GIC is considered an
illiquid investment and, together with other instruments in a Portfolio which
are not readily marketable, will not exceed 15% (10% in the case of the Money
Market Portfolio) of the Portfolio's net assets. The term of a GIC
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will be 13 months or less. In determining average weighted portfolio maturity, a
GIC will be deemed to have a maturity equal to the longer of the period of time
remaining until the next readjustment of the guaranteed interest rate or the
period of time remaining until the principal amount can be recovered from the
issuer through demand.
WHEN-ISSUED SECURITIES. The Underlying Diversified Portfolios may purchase
securities on a "when-issued" or on a "forward delivery" basis. It is expected
that, under normal circumstances, the Portfolios would take delivery of such
securities. When a Portfolio commits to purchase a security on a "when-issued"
or on a "forward delivery" basis, the Portfolio establishes procedures
consistent with the relevant policies of the SEC. Since those policies currently
recommend that an amount of a Portfolio's assets equal to the amount of the
purchase be held aside or segregated to be used to pay for the commitment, the
Portfolio expects always to have cash, cash equivalents, or high quality debt
securities sufficient to cover any commitments or to limit any potential risk.
However, although a Portfolio does not intend to make such purchases for
speculative purposes and intends to adhere to the provisions of SEC policies,
purchases of securities on such bases may involve more risk than other types of
purchases. For example, a Portfolio may have to sell assets which have been set
aside in order to meet redemptions. Also, if a Portfolio determines it is
advisable as a matter of investment strategy to sell the "when-issued" or
"forward delivery" securities, a Portfolio would be required to meet its
obligations from the then available cash flow or the sale of securities, or,
although it would not normally expect to do so, from the sale of the
"when-issued" or "forward delivery" securities themselves (which may have a
value greater or less than the Portfolio's payment obligation).
ZERO COUPON OBLIGATIONS. An Underlying Diversified Portfolio may acquire
zero coupon obligations when consistent with its investment objective and
policies. Such obligations have greater price volatility than coupon obligations
and will not result in payment of interest until maturity. Since dividend income
is accrued throughout the term of the zero coupon obligation but is not actually
received until maturity, a Portfolio may have to sell other securities to pay
said accrued dividends prior to maturity of the zero coupon obligation.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS -- UNDERLYING
DIVERSIFIED PORTFOLIOS OTHER THAN MONEY MARKET PORTFOLIO. The successful use of
such instruments draws upon the Advisers' skill and experience with respect to
such instruments. Should interest or exchange rates move in an unexpected
manner, a Portfolio may not achieve the anticipated benefits of futures
contracts or options on futures contracts or may realize losses and thus will be
in a worse position than if such strategies had not been used. In addition, the
correlation between movements in the price of futures contracts or options on
futures contracts and movements in the price of the securities and currencies
hedged or used for cover will not be perfect and could produce unanticipated
losses.
A Portfolio may enter into contracts for the purchase or sale for future
delivery of fixed-income securities or foreign currencies, or contracts based on
financial indices including any index of U.S. Government securities, foreign
government securities or corporate debt securities. U.S. futures contracts have
been designed by exchanges which have been designated "contracts markets" by the
CFTC, and must be executed through a futures commission merchant, or brokerage
firm, which is a member of the relevant contract market. Futures contracts trade
on a number of exchange markets, and, through their clearing corporations, the
exchanges guarantee performance of the contracts as between the clearing members
of the exchange. A Portfolio may enter into futures contracts which are based on
debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury Bonds, Treasury Notes, Government
National Mortgage Association modified pass-through mortgage-backed securities
and three-month U.S. Treasury Bills. A Portfolio may also enter into futures
contracts which are based on bonds issued by entities other than the U.S.
Government.
Purchases or sales of stock index futures contracts are used to attempt to
protect the Portfolio's current or intended stock investments from broad
fluctuations in stock prices. For example, the Portfolio may sell stock index
futures contracts in anticipation of or during a decline in the market value of
the Portfolio's securities. If such decline occurs, the loss in value of
portfolio securities may be offset,
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<PAGE> 37
in whole or part, by gains on the futures position. When a Portfolio is not
fully invested in the securities market and anticipates a significant market
advance, it may purchase stock index futures contracts in order to gain rapid
market exposure that may, in part or entirely, offset increases in the cost of
securities that the Portfolio intends to purchase. As such purchases are made,
the corresponding positions in stock index futures contracts will be closed out.
In a substantial majority of these transactions, the Portfolio will purchase
such securities upon termination of the futures position, but under unusual
market conditions, a long futures position may be terminated without a related
purchase of securities.
At the same time a futures contract is purchased or sold, the Portfolio
must allocate cash or securities as a deposit payment ("initial deposit"). It is
expected that the initial deposit would be approximately 1/2% to 5% of a
contract's face value. Daily thereafter, the futures contract is valued and the
payment of "variation margin" may be required, since each day the Portfolio
would provide or receive cash that reflects any decline or increase in the
contract's value.
At the time of delivery of securities pursuant to such a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although futures contracts by their terms call for the actual delivery or
acquisition of securities, in most cases the contractual obligation is fulfilled
before the date of the contract without having to make or take delivery of the
securities. The offsetting of a contractual obligation is accomplished by buying
(or selling, as the case may be) on a commodities exchange an identical futures
contract calling for delivery in the same month. Such a transaction, which is
effected through a member of an exchange, cancels the obligation to make or take
delivery of the securities. Since all transactions in the futures market are
made, offset or fulfilled through a clearinghouse associated with the exchange
on which the contracts are traded, a Portfolio will incur brokerage fees when it
purchases or sells futures contracts.
The purpose of the acquisition or sale of a futures contract, in the case
of an Underlying Diversified Portfolio which holds or intends to acquire
fixed-income securities, is to attempt to protect the Portfolio from
fluctuations in interest or foreign exchange rates without actually buying or
selling fixed-income securities or foreign currencies. For example, if interest
rates were expected to increase, a Portfolio might enter into futures contracts
for the sale of debt securities. Such a sale would have much the same effect as
selling an equivalent value of the debt securities owned by the Portfolio. If
interest rates did increase, the value of the debt security in a Portfolio would
decline, but the value of the futures contracts to the Portfolio would increase
at approximately the same rate, thereby keeping the net asset value of the
Portfolio from declining as much as it otherwise would have. The Portfolio could
accomplish similar results by selling debt securities and investing in bonds
with short maturities when interest rates are expected to increase. However,
since the futures market is more liquid than the cash market, the use of futures
contracts as an investment technique allows a Portfolio to maintain a defensive
position without having to sell its portfolio securities.
Similarly, when it is expected that interest rates may decline, futures
contracts may be purchased to attempt to hedge against anticipated purchases of
debt securities at higher prices. Since the fluctuations in the value of futures
contracts should be similar to those of debt securities, a Portfolio could take
advantage of the anticipated rise in the value of debt securities without
actually buying them until the market had stabilized. At that time, the futures
contracts could be liquidated and the Portfolio could then buy debt securities
on the cash market. To the extent a Portfolio enters into futures contracts for
this purpose, the assets in the segregated asset account maintained to cover the
Portfolio's obligations with respect to such futures contracts will consist of
cash, cash equivalents or high quality liquid debt securities from its portfolio
in an amount equal to the difference between the fluctuating market value of
such futures contracts and the aggregate value of the initial and variation
margin payments made by the Portfolio with respect to such futures contracts.
The ordinary spreads between prices in the cash and futures market, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject
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<PAGE> 38
to initial deposit and variation margin requirements. Rather than meeting
additional variation margin requirements, investors may close futures contracts
through offsetting transactions which could distort the normal relationship
between the cash and futures markets. Second, the liquidity of the futures
market depends on participants entering into offsetting transactions rather than
making or taking delivery. To the extent participants decide to make or take
delivery, liquidity in the futures market could be reduced, thus producing
distortion. Third, from the point of view of speculators, the margin deposit
requirements in the futures market are less onerous than margin requirements in
the securities market. Therefore, increased participation by speculators in the
futures market may cause temporary price distortions. Due to the possibility of
distortion, a correct forecast of general interest rate trends by the Advisers
may still not result in a successful transaction.
In addition, futures contracts entail risks. Although the Advisers believe
that use of such contracts will benefit the Underlying Diversified Portfolios,
if the Advisers' investment judgment about the general direction of interest
rates is incorrect, a Portfolio's overall performance would be poorer than if it
had not entered into any such contract. For example, if a Portfolio has hedged
against the possibility of an increase in interest rates which would adversely
affect the price of debt securities held by it and interest rates decrease
instead, the Portfolio will lose part or all of the benefit of the increased
value of its debt securities which it has hedged because it will have offsetting
losses in its futures positions. In addition, in such situations, if a Portfolio
has insufficient cash, it may have to sell debt securities to meet daily
variation margin requirements. Such sales of bonds may be, but will not
necessarily be, at increased prices which reflect the rising market. An
Underlying Diversified Portfolio may have to sell securities at a time when it
may be disadvantageous to do so.
The Underlying Diversified Portfolios intend to purchase and write options
on futures contracts for hedging purposes. The purchase of a call option on a
futures contract is similar in some respects to the purchase of a call option on
an individual security. Depending on the pricing of the option compared to
either the price of the futures contract upon which it is based or the price of
the underlying debt securities, it may or may not be less risky than ownership
of the futures contract or underlying debt securities. As with the purchase of
futures contracts, when a Portfolio is not fully invested it may purchase a call
option on a futures contract to hedge against a market advance due to declining
interest rates.
The writing of a call option on a futures contract constitutes a partial
hedge against declining prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is below the exercise price, a Portfolio will retain
the full amount of the option premium which provides a partial hedge against any
decline that may have occurred in the Portfolio's portfolio holdings. The
writing of a put option on a futures contract constitutes a partial hedge
against increasing prices of the security or foreign currency which is
deliverable upon exercise of the futures contract. If the futures price at
expiration of the option is higher than the exercise price, the Portfolio will
retain the full amount of the option premium which provides a partial hedge
against any increase in the price of securities which the Portfolio intends to
purchase. If a put or call option the Portfolio has written is exercised, the
Portfolio will incur a loss which will be reduced by the amount of the premium
it receives. Depending on the degree of correlation between changes in the value
of its portfolio securities and changes in the value of its futures positions,
the Portfolio's losses from existing options on futures may to some extent be
reduced or increased by changes in the value of portfolio securities.
The purchase of a put option on a futures contract is similar in some
respects to the purchase of protective put options on portfolio securities. For
example, a Portfolio may purchase a put option on a futures contract to hedge
its portfolio against the risk of rising interest rates.
The amount of risk an Underlying Diversified Portfolio assumes when it
purchases an option on a futures contract is the premium paid for the option
plus related transaction costs. In addition to the correlation risks discussed
above, the purchase of an option also entails the risk that changes in the value
of the underlying futures contract will not be fully reflected in the value of
the option purchased.
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The Board of Trustees of the Underlying Diversified Portfolios has adopted
the requirement that futures contracts and options on futures contracts be used
either (i) as a hedge without regard to any quantitative limitation, or (ii) for
other purposes to the extent that immediately thereafter the aggregate amount of
margin deposits on all (non-hedge) futures contracts of the Portfolio and
premiums paid on outstanding (non-hedge) options on futures contracts owned by
the Portfolio does not exceed 5% of the market value of the total assets of the
Portfolio. In addition, the aggregate market value of the outstanding futures
contracts purchased by the Portfolio may not exceed 50% of the market value of
the total assets of the Portfolio. Neither of these restrictions will be changed
by the Portfolio's Board of Trustees without considering the policies and
concerns of the various applicable federal and state regulatory agencies.
An Underlying Diversified Portfolio may purchase and write options on
foreign currencies for hedging purposes in a manner similar to that in which
futures contracts on foreign currencies, or forward contracts, will be utilized.
For example, a decline in the dollar value of a foreign currency in which
portfolio securities are denominated will reduce the dollar value of such
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminutions in the value of portfolio securities,
the Portfolio may purchase put options on the foreign currency. If the value of
the currency does decline, a Portfolio will have the right to sell such currency
for a fixed amount in dollars and will thereby offset, in whole or in part, the
adverse effect on its portfolio which otherwise would have resulted.
Conversely, where a rise in the dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, the Portfolio may purchase call options thereon. The
purchase of such options could offset, at least partially, the effects of the
adverse movements in exchange rates. As in the case of other types of options,
however, the benefit to the Portfolio deriving from purchases of foreign
currency options will be reduced by the amount of the premium and related
transaction costs. In addition, where currency exchange rates do not move in the
direction or to the extent anticipated, the Portfolio could sustain losses on
transactions in foreign currency options which would require it to forego a
portion or all of the benefits of advantageous changes in such rates.
An Underlying Diversified Portfolio may write options on foreign currencies
for the same types of hedging purposes. For example, where a Portfolio
anticipates a decline in the dollar value of foreign currency denominated
securities due to adverse fluctuations in exchange rates it could, instead of
purchasing a put option, write a call option on the relevant currency. If the
expected decline occurs, the options will most likely not be exercised, and the
diminution in value of portfolio securities will be offset by the amount of the
premium received.
Similarly, instead of purchasing a call option to hedge against an
anticipated increase in the dollar cost of securities to be acquired, the
Portfolio could write a put option on the relevant currency which, if rates move
in the manner projected, will expire unexercised and allow the Portfolio to
hedge such increased cost up to the amount of the premium. As in the case of
other types of options, however, the writing of a foreign currency option will
constitute only a partial hedge up to the amount of the premium, and only if
rates move in the expected direction. If this does not occur, the option may be
exercised and the Portfolio would be required to purchase or sell the underlying
currency at a loss which may not be offset by the amount of the premium. Through
the writing of options on foreign currencies, the Portfolio also may be required
to forego all or a portion of the benefits which might otherwise have been
obtained from favorable movements in exchange rates.
The Underlying Diversified Portfolios intend to write covered call options
on foreign currencies. A call option written on a foreign currency by a
Portfolio is "covered" if the Portfolio owns the underlying foreign currency
covered by the call or has an absolute and immediate right to acquire that
foreign currency without additional cash consideration (or for additional cash
consideration held in a segregated account by its custodian) upon conversion or
exchange of other foreign currency held in its portfolio. A call option is also
covered if the Portfolio has a call on the same foreign currency and in the
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<PAGE> 40
same principal amount as the call written where the exercise price of the call
held (a) is equal to or less than the exercise price of the call written or (b)
is greater than the exercise price of the call written if the difference is
maintained by the Portfolio in cash, U.S. Government securities and other high
quality liquid debt securities in a segregated account with its custodian.
The Underlying Diversified Portfolios also intend to write call options on
foreign currencies that are not covered for cross-hedging purposes. A call
option on a foreign currency is for cross-hedging purposes if it is not covered,
but is designed to provide a hedge against a decline in the U.S. dollar value of
a security which the Portfolio owns or has the right to acquire and which is
denominated in the currency underlying the option due to an adverse change in
the exchange rate. In such circumstances, the Portfolio collateralizes the
option by maintaining in a segregated account with its custodian, cash or U.S.
Government securities or other high quality liquid debt securities in an amount
not less than the value of the underlying foreign currency in U.S. dollars
marked to market daily.
Unlike transactions entered into by a Portfolio in futures contracts,
options on foreign currencies and forward contracts are not traded on contract
markets regulated by the CFTC or (with the exception of certain foreign currency
options) by the SEC. To the contrary, such instruments are traded through
financial institutions acting as market-makers, although foreign currency
options are also traded on certain national securities exchanges, such as the
Philadelphia Stock Exchange and the Chicago Board Options Exchange, subject to
SEC regulation. Similarly, options on currencies may be traded over-the-counter.
In an over-the-counter trading environment, many of the protections afforded to
exchange participants will not be available. For example, there are no daily
price fluctuation limits, and adverse market movements could therefore continue
to an unlimited extent over a period of time. Although the purchaser of an
option cannot lose more than the amount of the premium plus related transaction
costs, this entire amount could be lost. Moreover, the option writer and a
trader of forward contracts could lose amounts substantially in excess of their
initial investments, due to the margin and collateral requirements associated
with such positions.
Options on foreign currencies traded on national securities exchanges are
within the jurisdiction of the SEC, as are other securities traded on such
exchanges. As a result, many of the protections provided to traders on organized
exchanges will be available with respect to such transactions. In particular,
all foreign currency option positions entered into on a national securities
exchange are cleared and guaranteed by the Options Clearing Corporation ("OCC"),
thereby reducing the risk of counterparty default. Further, a liquid secondary
market in options traded on a national securities exchange may be more readily
available than in the over-the-counter market, potentially permitting a
Portfolio to liquidate open positions at a profit prior to exercise or
expiration, or to limit losses in the event of adverse market movements.
The purchase and sale of exchange-traded foreign currency options, however,
is subject to the risks of the availability of a liquid secondary market
described above, as well as the risks regarding adverse market movements,
margining of options written, the nature of the foreign currency market,
possible intervention by governmental authorities and the effects of other
political and economic events. In addition, exchange-traded options on foreign
currencies involve certain risks not presented by the over-the-counter market.
For example, exercise and settlement of such options must be made exclusively
through the OCC, which has established banking relationships in applicable
foreign countries for this purpose. As a result, the OCC may, if it determines
that foreign governmental restrictions or taxes would prevent the orderly
settlement of foreign currency option exercises, or would result in undue
burdens on the OCC or its clearing member, impose special procedures on exercise
and settlement, such as technical changes in the mechanics of delivery of
currency, the fixing of dollar settlement prices or prohibitions on exercise.
As in the case of forward contracts, certain options on foreign currencies
are traded over-the-counter and involve liquidity and credit risks which may not
be present in the case of exchange-traded currency options. A Portfolio's
ability to terminate over-the-counter options will be more limited than with
exchange-traded options. It is also possible that broker-dealers participating
in over-the-counter
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options transactions will not fulfill their obligations. Until such time as the
staff of the SEC changes its position, each Portfolio will treat purchased
over-the-counter options and assets used to cover written over-the-counter
options as illiquid securities. With respect to options written with primary
dealers in U.S. Government securities pursuant to an agreement requiring a
closing purchase transaction at a formula price, the amount of illiquid
securities may be calculated with reference to the repurchase formula.
In addition, futures contracts, options on futures contracts, forward
contracts and options on foreign currencies may be traded on foreign exchanges.
Such transactions are subject to the risk of governmental actions affecting
trading in or the prices of foreign currencies or securities. The value of such
positions also could be adversely affected by (i) other complex foreign
political and economic factors, (ii) lesser availability than in the United
States of data on which to make trading decisions, (iii) delays in the
Portfolio's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (iv) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States, and (v) lesser trading volume.
OPTIONS ON SECURITIES -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER THAN MONEY
MARKET PORTFOLIO. The Underlying Diversified Portfolios may write (sell)
covered call and put options to a limited extent on its portfolio securities
("covered options"). However, a Portfolio may forego the benefits of
appreciation on securities sold or may pay more than the market price on
securities acquired pursuant to call and put options written by the Portfolio.
When an Underlying Diversified Portfolio writes a covered call option, it
gives the purchaser of the option the right to buy the underlying security at
the price specified in the option (the "exercise price") by exercising the
option at any time during the option period. If the option expires unexercised,
the Portfolio will realize income in an amount equal to the premium received for
writing the option. If the option is exercised, a decision over which a
Portfolio has no control, the Portfolio must sell the underlying security to the
option holder at the exercise price. By writing a covered call option, a
Portfolio forgoes, in exchange for the premium less the commission ("net
premium"), the opportunity to profit during the option period from an increase
in the market value of the underlying security above the exercise price.
When an Underlying Diversified Portfolio writes a covered put option, it
gives the purchaser of the option the right to sell the underlying security to
the Portfolio at the specified exercise price at any time during the option
period. If the option expires unexercised, the Portfolio will realize income in
the amount of the premium received for writing the option. If the put option is
exercised, a decision over which a Portfolio has no control, the Portfolio must
purchase the underlying security from the option holder at the exercise price.
By writing a covered put option, a Portfolio, in exchange for the net premium
received, accepts the risk of a decline in the market value of the underlying
security below the exercise price. A Portfolio will only write put options
involving securities for which a determination is made at the time the option is
written that the Portfolio wishes to acquire the securities at the exercise
price.
An Underlying Diversified Portfolio may terminate its obligation as the
writer of a call or put option by purchasing an option with the same exercise
price and expiration date as the option previously written. This transaction is
called a "closing purchase transaction." Where a Portfolio cannot effect a
closing purchase transaction, it may be forced to incur brokerage commissions or
dealer spreads in selling securities it receives or it may be forced to hold
underlying securities until an option is exercised or expires.
When a Portfolio writes an option, an amount equal to the net premium
received by the Portfolio is included in the liability section of the
Portfolio's Statement of Assets and Liabilities as a deferred credit. The amount
of the deferred credit will be subsequently marked to market to reflect the
current market value of the option written. The current market value of a traded
option is the last sale price or, in the absence of a sale, the mean between the
closing bid and asked price. If an option expires on its stipulated expiration
date or if the Portfolio enters into a closing purchase transaction, the
Portfolio will
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<PAGE> 42
realize a gain (or loss if the cost of a closing purchase transaction exceeds
the premium received when the option was sold), and the deferred credit related
to such option will be eliminated. If a call option is exercised, the Portfolio
will realize a gain or loss from the sale of the underlying security and the
proceeds of the sale will be increased by the premium originally received. The
writing of covered call options may be deemed to involve the pledge of the
securities against which the option is being written. Securities against which
call options are written will be segregated on the books of the custodian for
the Portfolio.
A Portfolio may purchase call and put options on any securities in which it
may invest. A Portfolio would normally purchase a call option in anticipation of
an increase in the market value of such securities. The purchase of a call
option would entitle the Portfolio, in exchange for the premium paid, to
purchase a security at a specified price during the option period. A Portfolio
would ordinarily have a gain if the value of the securities increased above the
exercise price sufficiently to cover the premium and would have a loss if the
value of the securities remained at or below the exercise price during the
option period.
A Portfolio would normally purchase put options in anticipation of a
decline in the market value of securities in its portfolio ("protective puts")
or securities of the type in which it is permitted to invest. The purchase of a
put option would entitle a Portfolio, in exchange for the premium paid, to sell
a security, which may or may not be held in the Portfolio's portfolio, at a
specified price during the option period. The purchase of protective puts is
designed merely to offset or hedge against a decline in the market value of the
Portfolio's portfolio securities. Put options also may be purchased by a
Portfolio for the purpose of affirmatively benefiting from a decline in the
price of securities which the Portfolio does not own. A Portfolio would
ordinarily recognize a gain if the value of the securities decreased below the
exercise price sufficiently to cover the premium and would recognize a loss if
the value of the securities remained at or above the exercise price. Gains and
losses on the purchase of protective put options would tend to be offset by
countervailing changes in the value of underlying portfolio securities.
The Underlying Diversified Portfolios have adopted certain other
nonfundamental policies concerning option transactions which are discussed
below. A Portfolio's activities in options may also be restricted by the
requirements of the Internal Revenue Code of 1986, as amended (the "Code"), for
qualification as a regulated investment company.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the option
markets close before the markets for the underlying securities, significant
price and rate movements can take place in the underlying securities markets
that cannot be reflected in the option markets. It is impossible to predict the
volume of trading that may exist in such options, and there can be no assurance
that viable exchange markets will develop or continue.
The Underlying Diversified Portfolios may engage in over-the-counter
options transactions with broker-dealers who make markets in these options. At
present, approximately ten broker-dealers, including several of the largest
primary dealers in U.S. Government securities, make these markets. The ability
to terminate over-the-counter option positions is more limited than with
exchange-traded option positions because the predominant market is the issuing
broker rather than an exchange, and may involve the risk that broker-dealers
participating in such transactions will not fulfill their obligations. To reduce
this risk, the Portfolios will purchase such options only from broker-dealers
who are primary government securities dealers recognized by the Federal Reserve
Bank of New York and who agree to (and are expected to be capable of) entering
into closing transactions, although there can be no guarantee that any such
option will be liquidated at a favorable price prior to expiration. The Advisers
will monitor the creditworthiness of dealers with whom a Portfolio enters into
such options transactions under the general supervision of the Portfolios'
Trustees.
OPTIONS ON SECURITIES INDICES -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER
THAN MONEY MARKET PORTFOLIO. In addition to options on securities, the
Underlying Diversified Portfolios may also
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purchase and write (sell) call and put options on securities indices. Such
options give the holder the right to receive a cash settlement during the term
of the option based upon the difference between the exercise price and the value
of the index. Such options will be used for the purposes described above under
"Options on Securities."
Options on securities indices entail risks in addition to the risks of
options on securities. The absence of a liquid secondary market to close out
options positions on securities indices is more likely to occur, although the
Portfolios generally will only purchase or write such an option if the Advisers
believe the option can be closed out.
Use of options on securities indices also entails the risk that trading in
such options may be interrupted if trading in certain securities included in the
index is interrupted. The Portfolios will not purchase such options unless the
Advisers believe the market is sufficiently developed such that the risk of
trading in such options is no greater than the risk of trading in options on
securities.
Price movements in the Portfolios' securities may not correlate precisely
with movements in the level of an index and, therefore, the use of options on
indices cannot serve as a complete hedge. Because options on securities indices
require settlement in cash, the Advisers may be forced to liquidate portfolio
securities to meet settlement obligations.
SHORT SALES "AGAINST THE BOX" -- UNDERLYING DIVERSIFIED PORTFOLIOS OTHER
THAN MONEY MARKET PORTFOLIO. In a short sale, a fund sells a borrowed security
and has a corresponding obligation to the lender to return the identical
security. A Portfolio may engage in short sales only if at the time of the short
sale it owns or has the right to obtain, at no additional cost, an equal amount
of the security being sold short. This investment technique is known as a short
sale "against the box".
In a short sale, the seller does not immediately deliver the securities
sold and is said to have a short position in those securities until delivery
occurs. If a Portfolio engages in a short sale, the collateral for the short
position will be maintained by its custodian or qualified sub-custodian. While
the short sale is open, a Portfolio maintains in a segregated account an amount
of securities equal in kind and amount to the securities sold short or
securities convertible into or exchangeable for such equivalent securities.
These securities constitute the Portfolio's long position.
The Underlying Diversified Portfolios will not engage in short sales
against the box for investment purposes. A Portfolio may, however, make a short
sale as a hedge, when it believes that the price of a security may decline,
causing a decline in the value of a security (or a security convertible or
exchangeable for such security), or when a Portfolio wants to sell the security
at an attractive current price, but also wishes to defer recognition of gain or
loss for federal income tax purposes or for purposes of satisfying certain tests
applicable to regulated investment companies under the Code. In such case, any
future losses in a Portfolio's long position should be reduced by a gain in the
short position. Conversely, any gain in the long position should be reduced by a
loss in the short position. The extent to which such gains or losses are reduced
depends upon the amount of the security sold short relative to the amount a
Portfolio owns. There are certain additional transaction costs associated with
short sales against the box, but the Portfolios endeavor to offset these costs
with the income from the investment of the cash proceeds of short sales.
As a nonfundamental operating policy, the Advisers do not expect that more
than 40% of a Portfolio's total assets would be involved in short sales against
the box. The Advisers do not currently intend to engage in such sales.
INVESTMENT RESTRICTIONS
Fundamental policies of the Funds may not be changed without the approval
of the lesser of (1) 67% of the Funds' shares present at a meeting of
shareholders if the holders of more than 50% of the outstanding shares are
present in person or by proxy or (2) more than 50% of the Funds' outstanding
shares. Other restrictions, in the form of operating policies are subject to
change by Trust's Board of
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Trustee without shareholder approval. Any investment restriction which involves
a maximum percentage of securities or assets shall not be considered to be
violated unless an excess over the percentage occurs immediately after, and is
caused by, an acquisition of securities or assets of, or borrowings by, a Fund.
FUNDAMENTAL POLICIES
As a matter of fundamental policy, each Fund may not:
(1) Borrowing. Borrow money, except each Fund may borrow as a temporary
measure for extraordinary or emergency purposes, and then only in
amounts not exceeding 30% of its total assets valued at market. Each
Fund will not borrow in order to increase income (leveraging), but only
to facilitate redemption requests which might otherwise require
untimely investment liquidations;
(2) Commodities. Purchase or sell commodities or commodity or futures
contracts;
(3) Loans. Make loans, although the Underlying Diversified Portfolios may
purchase money market securities and enter into repurchase agreements;
(4) Margin. Purchase securities on margin;
(5) Mortgaging. Mortgage, pledge, hypothecate or, in any manner, transfer
any security owned by the Funds as security for indebtedness except as
may be necessary in connection with permissible borrowings, in which
event such mortgaging, pledging, or hypothecating may not exceed 30% of
each Fund's total assets, valued at market;
(6) Real Estate. Purchase or sell real estate;
(7) Senior Securities. Issue senior securities (except permitted
borrowings);
(8) Short Sales. Effect short sales of securities; or
(9) Underwriting. Underwrite securities issued by other persons, except to
the extent the Funds may be deemed to be underwriters within the
meaning of the Securities Act of 1933 in connection with the purchase
and sale of their portfolio securities in the ordinary course of
pursuing their investment programs.
OPERATING POLICIES
As a matter of operating policy, each Fund may not:
(1) Control of Portfolio Companies. Invest in companies for the purpose of
exercising management or control;
(2) Illiquid Securities. Purchase a security if, as a result of such
purchase, more than 10% of the value of each Fund's net assets would be
invested in illiquid securities or other securities that are not
readily marketable;
(3) Oil and Gas Programs. Purchase participations or other direct
interests or enter into leases with respect to, oil, gas, other mineral
exploration or development programs;
(4) Options. Invest in options;
(5) Ownership of Portfolio Securities by Officers and Directors. Purchase
or retain the securities of any issuer if, to the knowledge of the
Funds' management, those officers and directors of the Trust and of its
investment manager, who each owns beneficially more than .5% of the
outstanding securities of such issuer, together own beneficially more
than 5% of such securities;
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<PAGE> 45
(6) Unseasoned Issuers. Purchase the securities of any issuer (other than
obligations issued or guaranteed by the U.S. Government or any foreign
government, their agencies or instrumentalities or Shares of Price
mutual funds) if, as a result, more than 5% of the value of each Fund's
total assets would be invested in the securities of issuers which at
the time of purchase had been in operation for less than three years,
including predecessors and unconditional guarantors; or
(7) Warrants. Invest in warrants.
Pursuant to an Exemptive Order issued by the Securities and Exchange
Commission (Investment Company Act Release No. IC-21669, January 11, 1996): each
Fund may invest more than 5% of its assets in any one Underlying Diversified
Fund, and each Fund may invest substantially all of its assets, collectively, in
Underlying Diversified Funds.
Because of their investment objectives and policies, the Funds will each
concentrate more than 25% of their assets in the mutual fund industry. In
accordance with the Funds' investment programs set forth in the Prospectus, each
of the Funds may invest more than 25% of its assets in certain of the Underlying
Diversified Funds. However, each of the Underlying Diversified Funds in which
each Fund will invest will not concentrate more than 25% of its total assets in
any one industry.
STANDARD PERFORMANCE INFORMATION
From time to time, quotations of a Fund's performance may be included in
advertisements, sales literature or shareholder reports. These performance
figures are calculated in the following manner for each Fund:
TOTAL RETURN: The Fund's total return will be calculated for certain
periods by determining the average annual compounded rates of return over
those periods that would cause an investment of $1,000 (with all
distributions reinvested) to reach the value of that investment at the end
of the periods. The Fund may also calculate (i) a total return assuming an
initial account value of $1,000 and/or (ii) total rates of return which
represent aggregate performance over a period of year-by-year performance.
YIELD: The Fund's yield quotation will be based on the annualized net
investment income per share of the Fund over a 30-day period. The current
yield for the Fund is calculated by dividing the net investment income per
share of the Fund earned during the period by the net asset value per share
of the Fund on the last day of that period. The resulting figure is then
annualized. Net investment income per share is determined by dividing (i)
the dividends and interest earned during the period, minus accrued expenses
for the period, by (ii) the average number of Fund shares entitled to
receive dividends during the period multiplied by the net asset value per
share on the last day of the period.
Total returns calculated for any of the Funds for any period which includes
a period prior to the effective date of the Funds' registration statement will
reflect the performance of all collective investment vehicles managed by
Diversified during the periods indicated with investment objectives, policies
and restrictions substantially similar to the Conservative Fund, Moderate Fund
and Aggressive Fund, respectively, and which have been managed as they are
expected to be managed. The commencement date on which Diversified began
managing such collective investment vehicles is . These returns
are adjusted to assume that all charges, expenses and fees of the Conservative
Fund, Moderate Fund and Aggressive Fund which are presently in effect were
deducted during such periods.
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<PAGE> 46
The average annual total returns at December 31, 1995 for all such private
accounts and collective investment vehicles managed by Diversified, adjusted to
assume that all such charges, expenses and fees presently in effect were
deducted, are as follows:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS SINCE INCEPTION
------ ------- ------- -------- ---------------
<S> <C> <C> <C> <C> <C>
Conservative Fund............... N/A N/A
Moderate Fund................... N/A N/A
Aggressive Fund................. N/A N/A
</TABLE>
Any yield or total return quotation provided for a Fund should not be
considered as representative of the performance of the Fund in the future since
the net asset value of shares of the Fund will vary based not only on respective
allocations to Underlying Diversified Funds and the type, quality and maturities
of the securities held in the Underlying Diversified Portfolios, but also on
changes in the current value of such securities and on changes in the expenses
of the Underlying Diversified Funds and the Underlying Diversified Portfolios.
These factors and possible differences in the methods used to calculate yields
and total return should be considered when comparing the yield and total return
of a Fund to yields and total rates of return published for other investment
companies or other investment vehicles. Total return reflects the performance of
both principal and income.
COMPARISON OF FUND PERFORMANCE
Comparison of the quoted non-standardized performance of various
investments is valid only if performance is calculated in the same manner. Since
there are different methods of calculating performance, investors should
consider the effect of the methods used to calculate performance when comparing
performance of a Fund with performance quoted with respect to other investment
companies or types of investments.
In connection with communicating its performance to current or prospective
shareholders, a Fund also may compare these figures to the performance of other
mutual funds tracked by mutual fund rating services or to unmanaged indices
which may assume reinvestment of dividends but generally do not reflect
deductions for administrative and management costs. An Underlying Portfolio may
invest in some instruments not eligible for inclusion in such an index, and may
be prohibited from investing in some instruments included in this index.
Evaluations of a Fund's performance made by independent sources may also be used
in advertisements concerning a Fund. Sources for a Fund's performance
information may include, but are not limited to, the following:
Asian Wall Street Journal, a weekly Asian newspaper that often reviews U.S.
mutual funds investing internationally.
Barron's, a Dow Jones and Company, Inc. business and financial weekly that
periodically reviews mutual fund performance data.
Business Week, a national business weekly that periodically reports the
performance rankings and ratings of a variety of mutual funds investing
abroad.
Changing Times, The Kiplinger Magazine, a monthly investment advisory
publication that periodically features the performance of a variety of
securities.
Consumer Digest, a monthly business/financial magazine that includes a
"Money Watch" section featuring financial news.
Donoghue's Money Fund Report, a weekly publication of the Donoghue
Organization, Inc., of Holliston, Massachusetts, reporting on the
performance of the nation's money market funds, summarizing money market
fund activity, and including certain averages as performance benchmarks,
specifically "Donoghue's Money Fund Average" and "Donoghue's Government
Money Fund Average."
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<PAGE> 47
Financial Times, Europe's business newspaper, which features from time to
time articles on international or country-specific funds.
Financial World, a general business/financial magazine that includes a
"Market Watch" department reporting on activities in the mutual fund
industry.
Forbes, a national business publication that from time to time reports the
performance of specific investment companies in the mutual fund industry.
Fortune, a national business publication that periodically rates the
performance of a variety of mutual funds.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
Investor's Daily, a daily newspaper that features financial, economic and
business news.
Lipper Analytical Services, Inc.'s Mutual Fund Performance Analysis, a
weekly publication of industry-wide mutual fund averages by type of fund.
Money, a monthly magazine that from time to time features both specific
funds and the mutual fund industry as a whole.
New York Times, a nationally distributed newspaper which regularly covers
financial news.
Personal Investing News, a monthly news publication that often reports on
investment opportunities and market conditions.
Personal Investor, a monthly investment advisory publication that includes
a "Mutual Funds Outlook" section reporting on mutual fund performance
measures, yields, indices and portfolio holdings.
Success, a monthly magazine targeted to the world of entrepreneurs and
growing business, often featuring mutual fund performance data.
U.S. News and World Report, a national business weekly that periodically
reports mutual fund performance data.
Wall Street Journal, a Dow Jones and Company, Inc. newspaper which
regularly covers financial news.
Weisenberger Investment Companies Services, an annual compendium of
information about mutual funds and other investment companies, including
comparative data on funds' backgrounds, management policies, salient
features, management results, income and dividend records, and price
ranges.
Working Women, a monthly publication that features a "Financial Workshop"
section reporting on the mutual fund/financial industry.
DETERMINATION OF NET ASSET VALUE; VALUATION OF SECURITIES
The Trust determines the net asset value of the shares of each Fund each
day that the Adviser is open for business. (As a result, a Fund will normally
determine its net asset value every weekday except for the following holidays:
New Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas.) This daily determination of net
asset value is made as of the close of regular trading on the New York Stock
Exchange, currently 4:00 p.m., New York time, by dividing the total assets of a
Fund less all of its liabilities, by the total number of shares of a Fund
outstanding at the time the determination is made. Purchases and redemptions
will be effected at the time of determination of net asset value next following
the receipt of any purchase or
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<PAGE> 48
redemption order deemed to be in good order. (See "Purchases and Redemptions of
Shares" in the Prospectus.)
The shares of the Underlying Diversified Funds held by each Fund are valued
at the net asset value of each Underlying Diversified Fund. This net asset value
reflects the valuation of securities held by the Underlying Diversified
Portfolios. Therefore, the following discussion reflects valuation policies of
the Underlying Diversified Portfolios.
Trading in securities on most non-U.S. exchanges and over-the-counter
markets is normally completed before the close of regular trading on the New
York Stock Exchange and may also take place on days on which the New York Stock
Exchange is closed. If events materially affecting the value of non-U.S.
securities occur between the time when the exchange on which they are traded
closes and the time when net asset value is calculated, such securities will be
valued at fair value in accordance with procedures established by and under the
general supervision of the Board of Trustees of the Underlying Diversified
Portfolios.
Equity securities are valued at the last sale price on the exchange on
which they are primarily traded or at the ask price on the NASDAQ system for
unlisted national market issues, or at the last quoted bid price for securities
in which there were no sales during the day or for unlisted securities not
reported on the NASDAQ system. Bonds and other fixed income securities (other
than short-term obligations, but including listed issues) are valued on the
basis of valuations furnished by a pricing service, the use of which has been
approved by the Board of Trustees. In making such valuations, the pricing
service utilizes both dealer-supplied valuations and electronic data processing
techniques that take into account appropriate factors such as institutional-size
trading in similar groups of securities, yield, quality, coupon rate, maturity,
type of issue, trading characteristics and other market data, without exclusive
reliance upon quoted prices or exchange or over-the-counter prices, since such
valuations are believed to reflect more accurately the fair value of such
securities. Short-term obligations which mature in 60 days or less are valued at
amortized cost, which approximates fair value as determined by the Board of
Trustees of the Underlying Diversified Portfolios. Futures and option contracts
that are traded on commodities or securities exchanges are normally valued at
the settlement price on the exchange on which they are traded. Portfolio
securities (other than short-term obligations) for which there are no such
quotations or valuations are valued at fair value as determined in good faith by
or at the direction of the Board of Trustees of the Underlying Diversified
Portfolios.
Interest income on long-term obligations is determined on the basis of
interest accrued plus amortization of discount (generally, the difference
between issue price and stated redemption price at maturity) and premiums
(generally, the excess of purchase price over stated redemption price at
maturity). Interest income on short-term obligations is determined on the basis
of interest and discount accrued less amortization of premium.
Any assets or liabilities initially denominated in terms of foreign
currencies are translated into U.S. dollars at the official exchange rate or,
alternatively, at the mean of the current bid and asked prices of such
currencies against the U.S. dollar last quoted by a major bank that is a regular
participant in the foreign exchange market or on the basis of a pricing service
that takes into account the quotes provided by a number of such major banks. If
neither of these alternatives is available or both are deemed not to provide a
suitable methodology for converting a foreign currency into U.S. dollars, the
Board of Trustees of the Underlying Diversified Portfolios, in good faith, will
establish a conversion rate for such currency.
A determination of value used in calculating net asset value must be a fair
value determination made in good faith utilizing procedures approved by the
Board of Trustees of the Underlying Diversified Portfolios. While no single
standard for determining fair value exists, as a general rule, the current fair
value of a security would appear to be the amount which an Underlying
Diversified Portfolio could expect to receive upon its current sale. Some, but
not necessarily all, of the general factors which may be considered in
determining fair value include: (i) the fundamental analytical data relating to
the investment; (ii) the nature and duration of restrictions on disposition of
the securities;
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<PAGE> 49
and (iii) an evaluation of the forces which influence the market in which these
securities are purchased and sold. Without limiting or including all of the
specific factors which may be considered in determining fair value, some of the
specific factors include: type of security, financial statements of the issuer,
cost at date of purchase, size of holding, discount from market value, value of
unrestricted securities of the same class at the time of purchase, special
reports prepared by analysts, information as to any transactions or offers with
respect to the security, existence of merger proposals or tender offers
affecting the securities, price and extent of public trading in similar
securities of the issuer or comparable companies, and other relevant matters.
Each investor in each Underlying Diversified Portfolio, including the
corresponding fund, may add to or reduce its investment in the Underlying
Diversified Portfolio on each day that the Adviser and the Subadviser of the
Portfolio are open for business. As of 4:00 p.m. (New York time) on each such
day, the value of each investor's interest in an Underlying Diversified
Portfolio will be determined by multiplying the net asset value of the
Underlying Diversified Portfolio by the percentage representing that investor's
share of the aggregate beneficial interests in the Underlying Diversified
Portfolio. Any additions or reductions which are to be effected on that day will
then be effected. The investor's percentage of the aggregate beneficial
interests in the Underlying Diversified Portfolio will then be recomputed as the
percentage equal to the fraction (i) the numerator of which is the value of such
investor's investment in the Underlying Diversified Portfolio as of 4:00 p.m. on
such day plus or minus, as the case may be, the amount of net additions to or
reductions in the investor's investment in the Underlying Diversified Portfolio
effected on such day, and (ii) the denominator of which is the aggregate net
asset value of the Underlying Diversified Portfolio as of 4:00 p.m. on such day
plus or minus, as the case may be, the amount of the net additions to or
reductions in the aggregate investments in the Underlying Diversified Portfolio
by all investors in the Underlying Diversified Portfolio. The percentage so
determined will then be applied to determine the value of the investor's
interest in an Underlying Diversified Portfolio as of 4:00 p.m. on the following
day the New York Stock Exchange is open for trading.
MANAGEMENT OF THE TRUST
The respective Trustees and officers of the Trust and their principal
occupations during the past five years are set forth below. Their titles may
have varied during that period. The address of each Trustee and officer of the
Trust is Four Manhattanville Road, Purchase, New York 10577.
TRUSTEES AND OFFICERS OF THE TRUST
Tom A. Schlossberg......... President, Chief Executive Officer and Chairman of
the Board; President, Diversified, 10/92 to
present; Executive Vice President and Head of
Pension Operations, The Mutual Life Insurance
Company of New York, 1/93 to 12/93.
Robert F. Colby............ Trustee and Secretary; Vice President and Chief
Corporate Counsel, Mutual Life Insurance Company of
New York, 4/90 to 12/93; Vice President and General
Counsel, Diversified, 1/93 to present; Vice
President of DISC, 11/93 to present.
Alfred C. Sylvain.......... Treasurer and Assistant Secretary; Vice President
and Treasurer of Diversified, 11/93 to present;
Treasurer of DISC, 11/93 to present; Vice
President, Mutual Life Insurance Company of New
York, 1/91 to 12/93.
John F. Hughes............. Trustee and Assistant Secretary; Senior Counsel,
Mutual Life Insurance Company of New York, 1/88 to
12/93; Vice President and Senior Counsel,
Diversified, 11/93 to present; Assistant Secretary,
DISC 11/93 to present.
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<PAGE> 50
Catherine A. Mohr.......... Trustee and Assistant Secretary; Assistant Vice
President, The Mutual Life Insurance Company of New
York, 1/91-12/93; Vice President, Diversified, 1/93
to present.
The Declaration of Trust provides that the Trust will indemnify its
Trustees and officers as described below under "Description of the Trust; Fund
Shares."
INVESTMENT ADVISORY SERVICES
The Adviser manages the assets of each Fund pursuant to an Investment
Advisory Agreement (the "Advisory Agreement") with the Trust with respect to
such Fund and the investment policies described herein and in the Prospectus.
Under the Advisory Agreement with the Funds, the Adviser has agreed to bear any
expenses of the Funds other than the 0.20% advisory fee. Of course, shareholders
of the Funds will still indirectly bear their proportionate share of the cost of
operating the Underlying Diversified Funds in which the Funds invest because the
Funds, as shareholders of the Underlying Diversified Funds, will bear their
proportionate share of any fees and expenses paid by the Underlying Diversified
Funds.
Under the Advisory Agreement with each Fund, Diversified provides each Fund
with discretionary investment services. Specifically, Diversified is responsible
for supervising and directing the investments of each Fund in accordance with
each Fund's investment objectives, program, and restrictions as provided in the
prospectus and this Statement of Additional Information. Diversified is also
responsible for effecting all security transactions on behalf of each Fund. The
Funds will invest their assets in the shares of the Underlying Diversified Funds
and such investments will be made without the payment of any commission or other
sales charges. In addition to these services, Diversified provides each Fund
with certain corporate administrative services, including: maintaining trust
records, and registering and qualifying each Fund's shares under federal and
state laws; monitoring the financial, accounting, and administrative functions
of each Fund; maintaining liaison with the agents employed by each Fund such as
the custodian; assisting each Fund in the coordination of such agents'
activities; and permitting Diversified's employees to serve as officers,
directors, and committee members of each Fund without cost to the Fund.
Each Fund's Advisory Agreement also provides that Diversified, its
directors, officers, employees, and certain other persons performing specific
functions for the Funds will only be liable to the Fund for losses resulting
from willful misfeasance, bad faith, gross negligence, or reckless disregard of
duty.
The Adviser's fees are described in the Funds' Prospectus. The Adviser, if
required by applicable state law, shall reimburse a Fund or waive all or part of
its fees up to, but not exceeding, its investment advisory fees. Such
reimbursement, if required, will be equal to the combined aggregate annual
expenses of the appropriate Fund which exceed that expense limitation with the
lowest threshold prescribed by any state in which such Fund is qualified for
offer or sale. Management of the Trust has been advised that the lowest such
threshold currently in effect is 2 1/2% of net assets up to $30,000,000, 2% of
the next $70,000,000 of net assets and 1 1/2% of net assets in excess of that
amount.
Diversified is an investment firm dedicated to meeting the complete needs
of retirement plan sponsors and participants from pre- through post-retirement.
Diversified provides flexible, high-quality services coupled with the employment
of independent investment managers in an innovative investment structure.
Diversified services over $8 billion in retirement plan assets and has
offices in Boston, Charlotte, Chicago, Cincinnati, Dallas, Houston, New Orleans,
New York, Philadelphia, Portland and San Francisco. It maintains recordkeeping
for 300,000 participants and has 490 employees dedicated to retirement plan
investment and administration. Its employees average more than seven years of
retirement plan experience.
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<PAGE> 51
As experts in customizing retirement solutions, Diversified offers
comprehensive programs of high-quality investments and administrative services
to defined benefit, defined contribution and not-for-profit pension plan
sponsors. Diversified forms a partnership with its clients to provide
exceptional plan design, participant communication programs, recordkeeping
services and technical guidance.
Diversified's investment structure provides access to an array of
complementary investment alternatives representing the major asset classes along
the risk/reward spectrum. Subadvisers for Underlying Diversified Portfolios are
selected from more than 2,000 highly accomplished independent firms. Each
subadviser's performance is carefully monitored by Diversified taking into
consideration fund performance in light of investment objectives and policies
and level of risk.
Through a rigorous portfolio manager selection process which includes
researching each subadviser's asset class, track record, organizational
structure, management team, consistency of performance and assets under
management, five to ten subadvisers are chosen. Out of that group, Diversified
then carefully chooses the three most qualified subadvisers based on performance
evaluation, ownership structure, personnel and philosophy to return for an
on-site visit and a quantitative and qualitative analysis by the investment
committee. Out of those three subadvisers, Diversified then hires the most
qualified, independent subadviser for each Portfolio, subject to approval by the
Board of Trustees for Underlying Diversified Portfolios including a majority of
the Trustees who are not "interested persons".
Diversified brings comprehensive monitoring and control to the investment
management process. It seeks superior portfolio management and moves
purposefully in replacing managers when warranted. From a plan sponsor's
perspective, replacing a manager, and not the investment fund, is a key
advantage in avoiding the expense and difficulty of re-enrolling participants or
disrupting established plan administration. Replacing a Subadviser, however,
will necessitate a shareholder proxy solicitation which involves other expenses
to a Fund.
Highly disciplined manager evaluation on both a quantitative and
qualitative basis, is an ongoing process. Diversified's Manager Monitoring Group
gathers and analyzes performance and Diversified's Investment Committee reviews
it. Performance attribution, risk/return ratios and purchase/sale assessments
are prepared monthly and, each quarter, a more comprehensive review is completed
which consists of manager visits, fundamental analysis and statistical analysis.
Extensive quarterly analysis is conducted to ensure that the investment fund is
being managed in line with the stated objectives. Semiannually, the Investment
Committee reviews the back-up manager selection, regression analysis and
universe comparisons.
A number of "red flags" signal a more extensive and frequent manager
review. These flags consist of a return inconsistent with the investment
objective, changes in subadviser leadership, ownership or portfolio managers,
large changes in assets under management and changes in philosophy or
discipline. The immediate response to any red flag is to assess the potential
impact on the manager's ability to meet investment objectives. Diversified
monitors "back-up" additional independent managers for each investment so that,
should a manager change be warranted, the transition can be effected on a timely
basis.
CUSTODIAN AND TRANSFER AGENT
Pursuant to the Advisory Agreement, Diversified acts as transfer agent for
each of the Funds (the "Transfer Agent"). The Transfer Agent maintains an
account for each shareholder of a Fund, performs other transfer agency
functions, and acts as dividend disbursing agent for each Fund.
Pursuant to a Custodian Agreement, Investors Bank & Trust Company acts as
the custodian of each Fund's assets, i.e., each Fund's interest in Underlying
Diversified Funds (the "Custodian"). The Custodian maintains shares of the
Underlying Diversified Funds in the book entry system of the Underlying
Diversified Funds' transfer agent. For its services, the Custodian will receive
such
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<PAGE> 52
compensation as may from time to time be agreed upon by it and Diversified.
Pursuant to the Advisory Agreement, Diversified has agreed to pay all such fees.
TAXATION
TAXATION OF THE FUNDS. Each Fund intends to qualify as a regulated
investment company ("RIC") for federal income tax purposes by meeting all
applicable requirements of Subchapter M of the Code, including requirements as
to the nature of the Fund's gross income, the amount of Fund distributions and
the composition and holding period of the Fund's portfolio assets. Because each
Fund intends to distribute all of its net investment income and net capital
gains to its shareholders in accordance with the timing requirements imposed by
the Code, it is expected that no Fund will be required to pay any federal income
or excise taxes. If a Fund should fail to qualify as a RIC in any year, the Fund
will incur a regular corporate federal income tax upon its taxable income
(thereby reducing the return realized by Fund shareholders) and Fund
distributions would constitute ordinary corporate dividends when issued to the
Qualified Investors. However, such Investors would not, in that event, incur any
income tax liability on such distributions provided they remain exempt from
federal income tax.
A Fund's investment company taxable income and net capital gains for tax
purposes will in general be derived from distributions from the Underlying
Diversified Funds as well as from gains and losses recognized in connection with
the redemption of shares in the Underlying Diversified Funds. A Fund's
recognition of gains or losses in connection with the redemption of shares in
the Underlying Diversified Funds may be subject to a number of special rules of
the Code. A Fund's recognition of losses in connection with the redemption of
shares of an Underlying Diversified Fund may be deferred under the rules of the
Code deferring losses where other shares of the same Underlying Diversified Fund
have been purchased within 30 days before or after the redemption of shares
giving rise to the loss. In addition, capital losses on the redemption of shares
of Underlying Diversified Funds held for six months or less, if not deferred
under the "wash sale" rules previously discussed, may be recharacterized as
long-term capital losses to the extent of any distributions in respect of such
shares of net capital gains by the Underlying Diversified Fund. Finally, gains
recognized in connection with the redemption of shares in the Underlying
Diversified Funds may be characterized as dividends, includable as part of the
Fund's investment company taxable income rather than as part of the Fund's
capital gains, under Section 302 of the Code. In general, under Section 302 of
the Code distributions in redemption of stock may instead be treated as
dividends unless the redemption of stock is substantially disproportionate with
respect to the Fund or is not essentially equivalent to a dividend.
TAXATION OF THE UNDERLYING DIVERSIFIED FUNDS. Each Underlying Diversified
Fund similarly has elected to be, and intends to qualify to be treated each year
as, a RIC. Provided an Underlying Diversified Fund meets all applicable
requirements of a RIC, and inasmuch as each Underlying Diversified Fund intends
to distribute all of its net investment income and net capital gains to its
shareholders, including the Funds, in accordance with the timing requirements
imposed by the Code, it is expected that no Underlying Diversified Fund will be
required to pay any federal income or excise taxes, although foreign source
income of the Underlying Diversified Funds may be subject to foreign withholding
taxes.
Under interpretations by the Portfolios of the Internal Revenue Code (1)
each Portfolio will be treated for federal income tax purposes as a partnership
which is not a publicly traded partnership and (2) for purposes of determining
whether an Underlying Diversified Fund satisfies requirements of Subchapter M of
the Code, the Underlying Diversified Fund, as an investor in its corresponding
Portfolio, will be deemed to own a proportionate share of that Portfolio's
assets and will be deemed to be entitled to the Portfolio's income attributable
to that share. The Portfolio Series has advised the Underlying Diversified Funds
that it intends to conduct the Portfolios' operations so as to enable investors,
including the Underlying Diversified Funds, to satisfy those requirements.
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<PAGE> 53
If an Underlying Diversified Fund should fail to qualify as a RIC in any
year, the Underlying Diversified Fund will incur a regular corporate federal
income tax upon its taxable income (thereby reducing the return realized by its
shareholders) and its distributions would constitute ordinary corporate
dividends when issued to its shareholders. However, the Funds, as shareholders
of the Underlying Diversified Funds, would not necessarily incur any income tax
liability on such distributions provided they continue to qualify as RICs and
distribute their net investment income and net capital gains to their
shareholders in accordance with the timing requirements imposed by the Code.
TAXATION OF THE PORTFOLIOS. Inasmuch as each Portfolio will be treated for
federal income tax purposes as a partnership which is not a publicly traded
partnership, no Portfolio is expected to incur any federal income or excise
taxes.
TAXATION OF QUALIFIED INVESTORS. Each Fund is designed to meet the
long-term investment needs of, and will be available only to, certain individual
and group retirement plans which, subject to specific requirements, may qualify
for tax-exempt status under the Code. Each Fund has been designed and will be
managed with the assumption that all shareholders are such tax-qualified
individual or group plans. Accordingly, Fund shares are not appropriate
investments for individuals or participants in group plans which would be
subject to tax liability upon the occurrence of distributions from a Fund,
including redemptions of shares and exchanges between Funds. Potential
shareholders should consult their tax advisors prior to purchasing Fund shares
to ensure that any such purchase will be carried out through an appropriate
individual or group retirement plan and will be consistent with the terms and
restrictions of such plan. Where applicable, participants in group retirement
plans should consult their plan administrator for additional information about
restrictions on investments and other terms of an underlying plan.
Distributions. Tax-qualified retirement plans which invest in any Fund
generally will not be subject to tax liability on either distributions from a
Fund or redemptions of shares of a Fund. Rather, participants are taxed when
they take distributions from the underlying plan in accordance with the rules
under the Code governing the taxation of such distributions. Qualified Investors
otherwise generally exempt from federal taxation of their income might
nevertheless be taxed on distributions of the Fund, and any gain realized on
redemption of Fund shares, where the Investor is subject to the unrelated
business taxable income provisions of the Code with respect to its investment in
the Fund because, e.g., its acquisition of shares in the Fund was financed with
debt.
If, for any reason, a Qualified Investor is not exempt from income taxation
such Qualified Investor will be subject to tax on distributions received from
the Fund irrespective of the fact that such distributions are reinvested in
additional shares. Distributions to such Investors, other than of net capital
gains, will be taxable as ordinary income; distributions of net capital gains
would be taxable to such Investors as long-term capital gain without regard to
the length of time they have held in shares in the Fund. Certain dividends
declared in October, November or December of a calendar year and paid in January
of the succeeding calendar year to a Qualified Investor which is subject to tax
on the distribution are taxable to such Investor as if paid on December 31 of
the year in which they were declared.
Sale of Shares. Any gain or loss realized by a shareholder subject to
federal income tax upon the sale or other disposition of shares of a Fund,
generally will be a capital gain or loss that will be long-term if the
shareholder's holding period for the shares exceeds one year and otherwise
short-term. Any loss realized on a sale or exchange of a Fund's shares by such a
shareholder will be disallowed to the extent the shares disposed of are replaced
(including by shares acquired pursuant to reinvested distribution) within a
period of 61 days beginning 30 days before and ending 30 days after the
disposition. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any loss realized by such a shareholder on a
disposition of a Fund's shares held for six months or less will be treated as a
long-term capital loss to the extent of any distributions of net capital gain
received by the shareholder with respect to such shares.
26
<PAGE> 54
OTHER TAXATION. The Trust and the Underlying Diversified Funds are
organized as Massachusetts business trusts and, under current law, neither the
Trust, any Fund nor any Underlying Diversified Fund is liable for any income or
franchise tax in the Commonwealth of Massachusetts, provided that in the case of
the Trust and the Funds, each Fund, and in the case of an Underlying Diversified
Fund, the Underlying Diversified Fund, continues to qualify as a RIC for federal
income tax purposes.
The Underlying Diversified Portfolios are organized as a New York trust.
The Underlying Diversified Portfolios are not subject to any income or franchise
tax in the State of New York so long as it is treated as a partnership (not
taxable as a publicly traded partnership) for federal income tax purposes.
Income received by an Underlying Diversified Portfolio from sources within
foreign countries may be subject to withholding and other taxes imposed by such
countries. Tax conventions between certain countries and the United States may
reduce or eliminate such taxes. It is impossible to determine the effective rate
of foreign tax in advance since the amount of assets to be invested in various
countries will vary.
Shareholders of the Funds may be subject to state and local taxes on a
Fund's distributions to them. Shareholders are advised to consult their own tax
advisers with respect to the particular tax consequences to them of an
investment in a Fund.
DISTRIBUTION PLAN
The Underlying Diversified Funds have adopted a Distribution Plan (the
"Distribution Plan") in accordance with Rule 12b-1 under the 1940 Act after
having concluded that there is a reasonable likelihood that the Distribution
Plan will benefit the Underlying Diversified Funds and their shareholders. The
Distribution Plan provides that the Distributor may receive a fee from each
Underlying Diversified Fund at an annual rate not to exceed 0.25% of that fund's
average daily net assets in anticipation of, or as reimbursement for, expenses
incurred in connection with the sale of shares of the fund, such as advertising
expenses and the expenses of printing (excluding typesetting) and distributing
Prospectuses and reports used for sales purposes, expenses of preparing and
printing of sales literature and other distribution-related expenses.
The Distribution Plan will continue in effect if such continuance is
specifically approved at least annually by a vote of both a majority of the
Trustees of the Underlying Diversified Funds and a majority of the Trustees who
are not "interested persons" and who have no direct or indirect financial
interest in the operation of the Distribution Plan or in any agreement related
to such Plan ("Qualified Trustees"). The Distribution Plan requires that at
least quarterly the Distributor shall provide to the Board of Trustees and the
Board of Trustees shall review a written report of the amounts expended (and the
purposes therefor) under the Distribution Plan. The Distribution Plan further
provides that the selection and nomination of disinterested Trustees shall be
committed to the discretion of disinterested Trustees then in office. The
Distribution Plan may be terminated with respect to an Underlying Diversified
Fund at any time by a vote of a majority of Qualified Trustees or by vote of a
majority of the outstanding voting securities of that fund. The Distribution
Plan may not be amended to increase materially the amount of permitted expenses
thereunder without the approval of a majority of the outstanding voting
securities of the Underlying Diversified Fund and may not be materially amended
in any case without a vote of the majority of both the Trustees and the
Qualified Trustees. The Distributor will preserve copies of any plan, agreement
or report made pursuant to the Distribution Plan for a period of not less than
six years from the date of the Distribution Plan, and for the first two years
the Distributor will preserve such copies in an easily accessible place.
As contemplated by the Distribution Plan, Diversified Investors Securities
Corp. acts as the agent of the Underlying Diversified Funds in connection with
the offering of shares pursuant to a Distribution Agreement (the "Distribution
Agreement"). After the Prospectuses and periodic reports have been prepared, set
in type and mailed to existing shareholders, the Distributor pays for the
printing and
27
<PAGE> 55
distribution of copies of the Prospectuses and periodic reports which are used
in connection with the offering of shares of the Funds to prospective investors.
The Prospectus contains a description of fees payable to the Distributor under
the Distribution Agreement.
INDEPENDENT ACCOUNTANTS
serves as the Funds' independent accountants providing audit and
accounting services including (i) audit of the annual financial statements, (ii)
assistance and consultation with respect to the preparation of filings with the
SEC and (iii) preparation of annual income tax returns.
DESCRIPTION OF THE TRUST; FUND SHARES
The Trust is a Massachusetts business trust established under a Declaration
of Trust dated as of January 5, 1996. Its authorized capital consists of an
unlimited number of shares of beneficial interest of $0.00001 par value which
may be issued in separate series. Currently, the Trust has three active series,
although additional series may be established from time to time. If additional
series are established, each share of a series will represent an equal
proportionate interest in that series with each other share of the series.
The assets of the Trust received for the issue or sale of the shares of
each series and all income, earnings, profits and proceeds thereof, subject only
to the rights of creditors, are specifically allocated to such series and
constitute the underlying assets of such series. The underlying assets of each
series are segregated on the books of account, and are to be charged with the
liabilities in respect to such series and with such a share of the general
liabilities of the Trust. Expenses with respect to any two or more series are to
be allocated in proportion to the asset value of the respective series except
where allocations of direct expenses can otherwise be fairly made. The officers
of the Trust, subject to the general supervision of the Trustees, have the power
to determine which liabilities are allocable to a given series, or which are
general or allocable to two or more series. In the event of the dissolution or
liquidation of the Trust or any series, the holders of the shares of any series
are entitled to receive as a class the value of the underlying assets of such
shares available for distribution to shareholders.
Shares of the Trust entitle their holder to one vote per share; however,
separate votes are taken by each series on matters affecting an individual
series. For example, a change in investment policy for a series would be voted
upon only by shareholders of the series involved.
On matters submitted for consideration by shareholders of any Fund, a Fund
will vote its shares in proportion to the vote of all other holders of shares of
that Underlying Diversified Fund.
The Declaration of Trust provides that obligations of the Trust are not
binding upon the Trustees individually but only upon the property of the Trust,
that the Trustees and officers will not be liable for errors of judgment or
mistakes of fact or law, and that the Trust will indemnify its Trustees and
officers against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices with the Trust unless, as
to liability to the Trust or its shareholders, it is finally adjudicated that
they engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in their offices, or unless with respect to any
other matter it is finally adjudicated that they did not act in good faith in
the reasonable belief that their actions were in the best interests of the
Trust. In the case of settlement, such indemnification will not be provided
unless it has been determined by a court or other body approving the settlement
or other disposition, or by a reasonable determination, based upon a review of
readily available facts, by vote of a majority of disinterested Trustees or in a
written opinion of independent counsel, that such officers or Trustees have not
engaged in willful misfeasance, bad faith, gross negligence or reckless
disregard of their duties.
Under Massachusetts law, shareholders of a Massachusetts business trust
may, under certain circumstances, be held personally liable as partners for its
obligations and liabilities. However, the Declaration of Trust contains an
express disclaimer of shareholder liability for acts or obligations of
28
<PAGE> 56
each Fund and provides for indemnification and reimbursement of expenses out of
Fund property for any shareholder held personally liable for the obligations of
a particular Fund. The Declaration of Trust also provides for the maintenance,
by or on behalf of the Trust and the Funds, of appropriate insurance (for
example, fidelity bonding and errors and omissions insurance) for the protection
of the Funds, their shareholders, Trustees, officers, employees and agents
covering possible tort and other liabilities. Thus, the risk of a shareholder
incurring financial loss on account of shareholder liability is limited to
circumstances in which both inadequate insurance existed and a Fund itself was
unable to meet its obligations.
EXPERTS
The financial statements included herein have been so included in reliance
on the report of independent accountants, given on the authority of said firm as
experts in auditing and accounting.
29
<PAGE> 57
APPENDIX A
DESCRIPTION OF SECURITY RATINGS
STANDARD & POOR'S
CORPORATE AND MUNICIPAL BONDS
AAA -- Debt rated AAA have the highest rating assigned by Standard & Poor's
to a debt obligation. Capacity to pay interest and repay principal is
extremely strong.
AA -- Debt rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in a small degree.
A -- Debt rated A have a strong capacity to pay interest and repay
principal although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debts in
higher rated categories.
BBB -- Debt rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debts in this category than for debts in
higher rated categories.
BB -- Debt rated BB is regarded as having less near-term vulnerability to
default than other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely interest
and principal payments.
COMMERCIAL PAPER, INCLUDING TAX EXEMPT
A -- Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are further
refined with the designations 1, 2, and 3 to indicate the relative degree
of safety.
A-1 -- This designation indicates that the degree of safety regarding
timely payment is very strong.
MOODY'S
CORPORATE AND MUNICIPAL BONDS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to
as "gilt edge". Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally
known as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or there may
be other elements present which make the long term risks appear somewhat
larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may
be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Bonds which are rated Baa are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present
but certain protective elements may be lacking or may be characteristically
unreliable
30
<PAGE> 58
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba -- Bonds which are rated Ba are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
COMMERCIAL PAPER
Prime-1 -- Issuers rated P-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations.
Prime-1 repayment capacity will normally be evidenced by the following
characteristics:
- Leading market positions in well established industries.
- High rates of return on funds employed.
- Conservative capitalization structures with moderate reliance on debt and
ample asset protection.
- Broad margins in earnings coverage of fixed financial charges and high
internal cash generation.
- Well established access to a range of financial markets and assured
sources of alternate liquidity.
31
<PAGE> 59
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
The following reports and financial statements are included in Part B:
The Diversified Investors Strategic Allocation Funds: Statement of
Assets and Liabilities at , 1996
(b) Exhibits
<TABLE>
<C> <S>
1. Declaration of Trust.1
2. By-Laws of the Trust.1
3. Not applicable.
4. Not applicable.
5. Form of Investment Advisory Contract.2
6. Form of Distribution Agreement.2
7. Not applicable.
8. Form of Custodian Contract.2
9. Form of Transfer Agency and Service Agreement.2
10. Opinion of Counsel.2
11. Consent of Independent Auditors.2
12. Not applicable.
13. Investor Representation Letter of Initial Shareholder.2
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotations.2
17. Powers of Attorney.2
</TABLE>
-----------------------
1 Filed herewith.
2 To Be filed by amendment.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
See "Management of the Trust -- and Officers of the Trust" in the Statement
of Additional Information filed as part of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF RECORD
TITLE OF CLASS HOLDERS AS OF 1996
------------------------------------------------------------------- -------------------
<S> <C>
Diversified Investors Conservative Strategic Allocation Fund.......
Diversified Investors Moderate Strategic Allocation Fund...........
Diversified Investors Aggressive Strategic Allocation Fund.........
</TABLE>
ITEM 27. INDEMNIFICATION.
Reference is made to Article V of the Registrant's Declaration of Trust,
filed as Exhibit 1 to this Registration Statement.
C-1
<PAGE> 60
Insofar as indemnification for liability arising under the Securities Act
of 1933, as amended (the "1933 Act"), may be permitted to Trustees, officers and
controlling persons of the Trust pursuant to the Trust's Declaration of Trust,
or otherwise, the Trust has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the 1933 Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Trust of expenses incurred or
paid by a Trustee, officer or controlling person of the Trust in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with the securities being registered, the
Trust will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the 1933 Act and will be governed by the final adjudication of such
issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Not applicable.
ITEM 29. PRINCIPAL UNDERWRITERS.
(a) Diversified Investors Securities Corp. is the principal underwriter
(the "Distributor") of the Registrant. The Distributor also serves as principal
underwriter for The Diversified Investors Funds Group and as the exclusive
placement agent for Diversified Investors Portfolios.
(b) The names, titles and principal business addresses of the officers and
directors of the Distributor are as stated on Form U-4 filed by each individual
officer and of Form BD including Schedule A thereof (File No. 8-45671) (filed on
August 31, 1993 and amended September 20, 1993), the text of which is herein
incorporated by reference.
(c) Not applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS.
Diversified Investment Advisors, Inc.
Four Manhattanville Road
Purchase, New York 10577
(transfer agent)
Diversified Investors Securities Corp.
Four Manhattanville Road
Purchase, New York 10577
(distributor)
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02205-1537
(custodian)
ITEM 31. MANAGEMENT SERVICES.
Not applicable.
ITEM 32. UNDERTAKINGS.
(a) The Registrant undertakes to file a post-effective amendment, using
financials which need not be certified, within four to six months following the
effective date of this registration statement. The financial statements included
in such amendment will be as of and for the time period ended on a date
reasonably close or as soon as practicable to the date of the filing of the
amendment.
C-2
<PAGE> 61
(b) The Registrant undertakes to comply with Section 16(c) of the 1940 Act
as though such provisions of the 1940 Act were applicable to the Registrant,
except that the request referred to in the third full paragraph thereof may only
be made by shareholders who hold in the aggregate at least 10% of the
outstanding shares of the Registrant, regardless of the net asset value of
shares held by such requesting shareholders.
(c) Registrant hereby undertakes to furnish each person to whom a
prospectus is delivered with a copy of the Registrant's latest annual report to
shareholders upon request and without charge.
C-3
<PAGE> 62
Signatures
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the County of Westchester and the State of New York on the 18th
day of January, 1996.
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
By: /s/ Robert F. Colby
------------------------------
Robert F. Colby, Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on January 18, 1996.
Signatures Title
- ---------- -----
/s/ Robert F. Colby
- ------------------------------
Robert F. Colby Trustee
/s/ John F. Hughes
- -----------------------------
John F. Hughes Trustee
/s/ Catherine A. Mohr
- -----------------------------
Catherine A. Mohr Trustee
<PAGE> 63
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page
- ----------- ----
<S> <C>
99 1. Declaration of Trust
2. By-Laws of the Trust
</TABLE>
<PAGE> 1
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
AMENDMENT
TO
DECLARATION OF TRUST
The undersigned, constituting a majority of the Trustees of The
Diversified Investors Strategic Allocation Funds (the "Trust"), a business trust
organized under the laws of the Commonwealth of Massachusetts pursuant to the
Declaration of Trust, dated as of January 5, 1996 (the "Declaration"), in
accordance with the provisions of Section 9.3(f) of the Declaration, do hereby
amend the Declaration to reflect that, by virtue of her resignation as a Trustee
of the Trust effective January 5, 1996, Lea Anne Copenhefer is no longer a
Trustee of the Trust, and that the following are all of the Trustees of the
Trust:
Robert F. Colby 4 Manhattanville Road
Purchase, New York 10577
John F. Hughes 4 Manhattanville Road
Purchase, New York 10577
Catherine A. Mohr 4 Manhattanville Road
Purchase, New York 10577
IN WITNESS WHEREOF, the undersigned have executed this Amendment as of
the 5th day of January, 1996.
/s/ Robert F. Colby /s/ John F. Hughes
- ----------------------- --------------------------
Robert F. Colby John F. Hughes
/s/ Catherine A. Mohr
- -----------------------
Catherine A. Mohr
<PAGE> 2
DECLARATION OF TRUST
OF
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
----------------------------
Dated as of January 5, 1996
----------------------------
WHEREAS, the Trustee desires to establish a trust for the investment
and reinvestment of funds contributed thereto; and
WHEREAS, the Trustee desires that the beneficial interest in the trust
assets be divided into transferable Shares of Beneficial Interest (par value
$0.00001 per share) ("Shares") issued in one or more series as hereinafter
provided;
NOW THEREFORE, the Trustee and any successor Trustees elected or
appointed in accordance with this Declaration of Trust hereby declare that all
money and property contributed to the trust established hereunder shall be held
and managed in trust for the benefit of holders, from time to time, of the
Shares issued hereunder and subject to the provisions hereof.
ARTICLE I
NAME AND DEFINITIONS
Section 1.1. Name. The name of the trust created hereby is "The
Diversified Investors Strategic Allocation Funds".
Section 1.2. Definitions. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.3 hereof.
(b) "By-Laws" means the By-laws referred to in Section 3.9 hereof, as
amended from time to time.
(c) "Commission" has the meaning given that term in the 1940 Act.
(d) "Custodian" means a party employed by the Trust to furnish services
as described in Article X of the By-Laws.
(e) "Declaration" means this Declaration of Trust as amended or
restated from time to time. Reference in this Declaration of Trust to
"Declaration", "hereof", "herein", and "hereunder" shall be deemed to refer to
this Declaration rather than the article or section in which such words appear.
(f) "Distributor" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.2 hereof.
<PAGE> 3
-2-
(g) "Interested Person" has the meaning given that term in the 1940
Act.
(h) "Investment Adviser" means a party furnishing services to the Trust
pursuant to any contract described in Section 4.1 hereof.
(i) "Majority Shareholder Vote" has the same meaning as the phrase
"vote of a majority of the outstanding voting securities" as defined in the 1940
Act, except that such term may be used herein with respect to the Shares of the
Trust as a whole or the Shares of any particular series, as the context may
require.
(j) "1940 Act" means the Investment Company Act of 1940 (and any
successor statute) and the Rules and Regulations thereunder, as amended from
time to time.
(k) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities, whether
or not legal entities, and governments and agencies and political subdivisions
thereof, whether domestic or foreign.
(l) "Shareholder" means a record owner of outstanding Shares.
(m) "Shares" means the Shares of Beneficial Interest into which the
beneficial interest in the Trust shall be divided from time to time or, when
used in relation to any particular series of Shares established by the Trustees
pursuant to Section 6.9 hereof, equal proportionate transferable units into
which such series of Shares shall be divided from time to time. The term
"Shares" includes fractions of Shares as well as whole Shares.
(n) "Shareholder Servicing Agent" means a party furnishing services to
the Trust pursuant to any shareholder servicing contract described in Section
4.4 hereof.
(o) "Transfer Agent" means a party furnishing services to the Trust
pursuant to any transfer agency contract described in Section 4.4 hereof.
(p) "Trust" means the Massachusetts voluntary association established
by this Declaration.
(q) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees, including, without limitation, any and all property
allocated or belonging to any series of Shares pursuant to Section 6.9 hereof.
(r) "Trustees" means the persons who have signed the Declaration, so
long as they shall continue in office in accordance with the terms hereof, and
all other persons who may from time to time be duly elected or appointed,
qualified and serving as Trustees in accordance with the provisions hereof, and
reference herein to a Trustee or the Trustees shall refer to such person or
persons in their capacity as trustees hereunder.
<PAGE> 4
-3-
ARTICLE II
TRUSTEES
Section 2.1. Number of Trustees. The number of Trustees shall be such
number as shall be fixed from time to time by a majority of the Trustees,
provided, however, that from and after January 8, 1996, the number of Trustees
shall in no event be less than three nor more than 15. Except as determined from
time to time by resolution of the Trustees, no decrease in the number of
Trustees shall have the effect of removing any Trustee from office prior to the
expiration of his term, but the number of Trustees may be decreased in
conjunction with the removal of a Trustee pursuant to Section 2.2 hereof.
Section 2.2. Term of Office of Trustees. Subject to the provisions of
Section 16(a) of the 1940 Act, the Trustees shall hold office during the
lifetime of this Trust and until its termination as hereinafter provided; except
that (a) any Trustee may resign his trust (without need for prior or subsequent
accounting) by an instrument in writing signed by him and delivered to the other
Trustees, which shall take effect upon such delivery or upon such later date as
is specified therein; (b) any Trustee may be removed with cause, at any time by
written instrument signed by at least two-thirds of the remaining Trustees,
specifying the date when such removal shall become effective; (c) any Trustee
who has attained a mandatory retirement age established pursuant to any written
policy adopted from time to time by at least two thirds of the Trustees shall,
automatically and without action of such Trustee or the remaining Trustees, be
deemed to have retired in accordance with the terms of such policy, effective as
of the date determined in accordance with such policy; (d) any Trustee who has
become incapacitated by illness or injury as determined by a majority of the
other Trustees, may be retired by written instrument signed by a majority of the
other Trustees, specifying the date of his retirement; and (e) a Trustee may be
removed at any meeting of Shareholders by a vote of two thirds of the
outstanding Shares. For purposes of the foregoing clause (b), the term "cause"
shall include, but not be limited to, willful misconduct, dishonesty, fraud, a
felony conviction or failure to comply with such written policies as may from
time to time be adopted by at least two thirds of the Trustees with respect to
the conduct of Trustees and attendance at meetings. Upon the resignation,
retirement or removal of a Trustee, or his otherwise ceasing to be a Trustee, he
shall execute and deliver such documents as the remaining Trustees shall require
for the purpose of conveying to the Trust or the remaining Trustees any Trust
Property held in the name of the resigning, retiring or removed Trustee. Upon
the incapacity or death of any Trustee, his legal representative shall execute
and deliver on his behalf such documents as the remaining Trustees shall require
as provided in the preceding sentence.
Section 2.3. Resignation and Appointment of Trustees . In case of the
declination, death, resignation, retirement, removal or inability of any of the
Trustees, or in case a vacancy shall, by reason of an increase in number, or for
any other reason, exist, a majority of the remaining Trustees shall fill such
vacancy by appointing such other individual as they in their discretion shall
see fit. Any such appointment shall not become effective, however, until the
person named in the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of this
Declaration. The power of appointment is subject to the provisions of Section
16(a) of the 1940 Act.
Section 2.4. Vacancies. The death, declination, resignation,
retirement, removal or incapacity of the Trustees, or any one of them, shall not
operate to annul the Trust or
<PAGE> 5
-4-
to revoke any existing agency created pursuant to the terms of this Declaration.
Whenever a vacancy in the number of Trustees shall occur, until such vacancy is
filled as provided in Section 2.3, or the number of Trustees as fixed is
reduced, the Trustees in office, regardless of their number, shall have all the
powers granted to the Trustees and shall discharge all the duties imposed upon
the Trustees by this Declaration.
Section 2.5. Delegation of Power to Other Trustees. Any Trustee
may, by power of attorney, delegate his power for a period not exceeding six
months at any one time to any other Trustee or Trustees; provided that in no
case shall fewer than two Trustees personally exercise the powers granted to the
Trustees under this Declaration except as herein otherwise expressly provided.
ARTICLE III
POWERS OF TRUSTEES
Section 3.1. General. The Trustees shall have exclusive and absolute
control over the Trust Property and over the business of the Trust to the same
extent as if the Trustees were the sole owners of the Trust Property and
business in their own right, but with such powers of delegation as may be
permitted by this Declaration. The Trustees shall have power to conduct the
business of the Trust and carry on its operations in any and all of its branches
and maintain offices both within and without the Commonwealth of Massachusetts,
in any and all states of the United States of America, in the District of
Columbia, and in any and all commonwealths, territories, dependencies, colonies,
possessions, agencies or instrumentalities of the United States of America and
of foreign governments, and to do all such other things and execute all such
instruments as the Trustees deem necessary, proper or desirable in order to
promote the interests of the Trust although such things are not herein
specifically mentioned. Any determination as to what is in the interests of the
Trust made by the Trustees in good faith shall be conclusive. In construing the
provisions of this Declaration, the presumption shall be in favor of a grant of
power to the Trustees.
The Trustees in all instances shall act as principals, and are and
shall be free from the control of the Shareholders. The Trustees shall have full
power and authority to do any and all acts and to make and execute any and all
contracts and instruments that they may consider necessary or appropriate in
connection with the management of the Trust. The Trustees shall not in any way
be bound or limited by present or future laws or customs in regard to Trust
investments, but shall have full authority and power to make any and all
investments which they, in their uncontrolled discretion, shall deem proper to
accomplish the purposes of this Trust.
The Trust shall be of the type commonly called a Massachusetts business
trust, and, without limiting the provisions hereof, the Trust may exercise all
powers which are ordinarily exercised by such a trust.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid power. Such powers of the Trustees may be exercised
without order of or resort to any court.
Section 3.2. Investments. (a) The Trustees shall have the power:
(i) to conduct, operate and carry on the business of an investment
company;
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(ii) to subscribe for, invest in, reinvest in, purchase or otherwise
acquire, own, hold, pledge, sell, assign, transfer, exchange, distribute, lend
or otherwise deal in or dispose of U.S. and foreign currencies, any form of gold
or other precious metal, commodity contracts, any form of option contract,
contracts for the future acquisition or delivery of fixed income or other
securities, shares of, or any other interest in, any investment company as
defined in the Investment Company Act of 1940, and securities and related
derivatives of every nature and kind, including, without limitation, all types
of bonds, debentures, stocks, negotiable or non-negotiable instruments,
obligations, evidences of indebtedness, certificates of deposit or indebtedness,
commercial paper, repurchase agreements, bankers' acceptances, and other
securities of any kind, issued, created, guaranteed or sponsored by any and all
Persons, including, without limitation,
(A) states, territories and possessions of the United States and the
District of Columbia and any political subdivision, agency or instrumentality of
any such Person,
(B) the U.S. Government, any foreign government, any political
subdivision or any agency or instrumentality of the U.S. Government, any foreign
government or any political subdivision of the U.S. Government or any foreign
government,
(C) any international or supranational instrumentality,
(D) any bank or savings institution, or
(E) any corporation, trust, partnership or other organization organized
under the laws of the United States or of any state, territory or possession
thereof, or under any foreign law;
or in "when issued" contracts for any such securities, to retain Trust assets in
cash and from time to time to change the securities or obligations in which the
assets of the Trust are invested; and to exercise any and all rights, powers and
privileges of ownership or interest in respect of any and all such investments
of every kind and description, including, without limitation, the right to
consent and otherwise act with respect thereto, with power to designate one or
more Persons to exercise any of said rights, powers and privileges in respect of
any of said investments;
(iii) to hold any security or property in a form not indicating any
trust, whether in bearer, unregistered or other negotiable form, either in its
own name or in the name of a custodian or a nominee or nominees, subject in
either case to proper safeguards according to the usual practice of
Massachusetts trust companies or investment companies;
(iv) to definitively interpret the investment objective, policies and
limitations of the Trust or any series; and
(v) to carry on any other business in connection with or incidental to
any of the foregoing powers, to do everything necessary, proper or desirable for
the accomplishment of any purpose or the attainment of any object or the
furtherance of any power hereinbefore set forth, and to do every other act or
thing incidental or appurtenant to or connected with the aforesaid purposes,
objects or powers.
(b) The Trustees shall not be limited to investing in securities or
obligations maturing before the possible termination of the Trust, nor shall the
Trustees be limited by any law limiting the investments which may be made by
fiduciaries.
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(c) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without any
requirement of approval by shareholders to either invest all or a portion of the
Trust Property, or sell all or a portion of the Trust Property and invest the
proceeds of such sales, in one or more investment companies that are registered
under the 1940 Act.
Section 3.3. Legal Title. Legal title to all Trust Property shall be
vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust, or in the name of any
other Person or nominee, on such terms as the Trustees may determine. The right,
title and interest of the Trustees in the Trust Property shall vest
automatically in each Person who may hereafter become a Trustee. Upon the
resignation, removal or death of a Trustee, such Trustee shall automatically
cease to have any right, title or interest in any of the Trust Property, and the
right, title and interest of such Trustee in the Trust Property shall vest
automatically in the remaining Trustees. Such vesting and cessation of title
shall be effective whether or not conveyancing documents have been executed and
delivered.
Section 3.4. Issuance and Repurchase of Securities. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer, and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section 6.9
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds of the Trust or other Trust Property, whether
capital or surplus or otherwise, to the full extent now or hereafter permitted
by the laws of the Commonwealth of Massachusetts governing business
corporations.
Section 3.5. Borrowing Money; Lending Trust Property. The Trustees
shall have power to borrow money or otherwise obtain credit and to secure the
same by mortgaging, pledging or otherwise subjecting as security the Trust
Property, to endorse, guarantee, or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust Property.
Section 3.6. Delegation; Committees. The Trustees shall have power to
delegate from time to time to such of their number or to officers, employees,
independent contractors or agents of the Trust the doing of such things and the
execution of such instruments either in the name of the Trust or the names of
the Trustees or otherwise as the Trustees may deem expedient.
Section 3.7. Collection and Payment. Subject to Section 6.9
hereof, the Trustees shall have power to collect all property due to the Trust;
to pay all claims, including taxes, against the Trust Property; to prosecute,
defend, compromise or abandon any claims relating to the Trust Property; to
foreclose any security interest securing any obligations, by virtue of which any
property is owed to the Trust; and to enter into releases, agreements and other
instruments.
Section 3.8. Expenses. Subject to Section 6.9 hereof, the
Trustees shall have the power to incur and pay any expenses which in the opinion
of the Trustees are necessary or incidental to carry out any of the purposes of
this Declaration, and to pay reasonable compensation from the funds of the Trust
to themselves as Trustees. The Trustees shall fix the compensation of all
officers, employees and Trustees. The Trustees shall be reimbursed from the
Trust estate or the assets belonging to the appropriate series for
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their expenses and disbursements and for all losses and liabilities by them
incurred in administering the Trust; and for the payment of such expenses,
disbursements, losses and liabilities, the Trustees shall have a lien on the
assets belonging to the appropriate series prior to any rights of interests of
the Shareholders thereto.
Section 3.9. Manner of Acting; By-Laws. Except as otherwise
provided herein or in the By-Laws, any action to be taken by the Trustees may be
taken by a majority of the Trustees present at a meeting of Trustees at which a
quorum (as determined in the ByLaws) is present, including any meeting held by
means of a conference telephone circuit or similar communications equipment by
means of which all persons participating in the meeting can hear each other, or
by written consent of a majority of the Trustees. The Trustees may adopt By-Laws
not inconsistent with this Declaration to provide for the conduct of the
business of the Trust and may amend or repeal such By-Laws to the extent such
power is not reserved to the Shareholders.
Section 3.10. Miscellaneous Powers. The Trustees shall have the
power to: (a) employ or contract with such Persons as the Trustees may deem
desirable for the transaction of the business of the Trust; (b) enter into joint
ventures, partnerships and any other combinations or associations; (c) remove
Trustees or fill vacancies in or add to their number, elect and remove such
officers and appoint and terminate such agents or employees as they consider
appropriate, and appoint from their own number, and terminate, any one or more
committees which may exercise some or all of the power and authority of the
Trustees as the Trustees may determine; (d) purchase, and pay for out of Trust
Property, insurance policies insuring the Shareholders, the Administrator,
Trustees, officers, employees, agents, the Investment Adviser, the Distributor,
selected dealers or independent contractors of the Trust against all claims
arising by reason of holding any such position or by reason of any action taken
or omitted by any such Person in such capacity, whether or not constituting
negligence, or whether or not the Trust would have the power to indemnify such
Person against such liability; (e) establish pension, profit-sharing, Share
purchase, and other retirement, incentive and benefit plans for any Trustees,
officers, employees or agents of the Trust; (f) to the extent permitted by law,
indemnify any person with whom the Trust has dealings, including any Investment
Adviser, Administrator, Custodian, Distributor, Transfer Agent, Shareholder
Servicing Agent, dealer, or other agent or independent contractor, to such
extent as the Trustees shall determine; (g) guarantee indebtedness or
contractual obligations of others; (h) determine and change the fiscal year of
the Trust and the method by which its accounts shall be kept; (i) adopt a seal
for the Trust, provided, that the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust; (j) set record dates
for any purpose; (k) subject to Section 9.4 and Section 9.6, merge or
consolidate the Trust with any other corporation, association, trust or other
organization and sell, convey, transfer, or lease all or substantially all of
the assets of the Trust; and (l) set apart, from time to time, out of any funds
of the Trust a reserve or reserves for any proper purpose, and abolish any such
reserve.
Section 3.11. Principal Transactions. Except in transactions permitted
by the 1940 Act, or any order of exemption issued by the Commission, the
Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust to, any Trustee or officer of the Trust or any firm of which any
such Trustee or officer is a member acting as principal, or have any such
dealings with any Investment Adviser, Administrator, Shareholder Servicing
Agent, Custodian (other than repurchase agreements), Distributor or Transfer
Agent or with any Interested Person of such Person; but the Trust may, upon
customary terms, employ any such Person, or firm or company in which such Person
<PAGE> 9
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is an Interested Person, as broker, legal counsel, registrar, transfer agent,
dividend disbursing agent or custodian.
Section 3.12. Trustees and Officers as Shareholders. Except as
hereinafter provided, no officer, Trustee or member of any advisory board of the
Trust, and no member, partner, officer, director or trustee of the Investment
Adviser, Administrator or of the Distributor, and no Investment Adviser,
Administrator or Distributor of the Trust, shall take long or short positions in
the securities issued by the Trust. The foregoing provision shall not prevent:
(a) The Distributor from purchasing Shares from the Trust if such
purchases are limited (except for reasonable allowances for clerical errors,
delays and errors of transmission and cancellation of orders) to purchases for
the purpose of filling orders for Shares received by the Distributor and
provided that orders to purchase from the Trust are entered with the Trust or
the Custodian promptly upon receipt by the Distributor of purchase orders for
Shares, unless the Distributor is otherwise instructed by its customer;
(b) The Distributor from purchasing Shares as agent for the account of
the Trust;
(c) The purchase from the Trust or from the Distributor of Shares by
any officer, Trustee or member of any advisory board of the Trust or by any
member, partner, officer, director or trustee of the Investment Adviser or of
the Distributor at a price not lower than the net asset value of the Shares at
the moment of such purchase, provided that any such sales are only to be made
pursuant to a uniform offer described in the current prospectus or statement of
additional information for the Shares being purchased; or
(d) The Investment Adviser, the Distributor, the Administrator, or any
of their officers, partners, directors or trustees from purchasing Shares prior
to the effective date of the Trust's Registration Statement under the Securities
Act of 1933, as amended, relating to the Shares.
ARTICLE IV
INVESTMENT ADVISER, DISTRIBUTOR, ADMINISTRATOR, TRANSFER AGENT
AND SHAREHOLDER SERVICING AGENTS
Section 4.1. Investment Adviser. Subject to a Majority Shareholder Vote
of the Shares of each series affected thereby, the Trustees may in their
discretion from time to time enter into one or more investment advisory or
management contracts whereby the other party to each such contract shall
undertake to furnish the Trust such management, investment advisory, statistical
and research facilities and services, promotional activities, and such other
facilities and services, if any, with respect to one or more series of Shares,
as the Trustees shall from time to time consider desirable and all upon such
terms and conditions as the Trustees may in their discretion determine.
Notwithstanding any provision of this Declaration, the Trustees may delegate to
the Investment Adviser authority (subject to such general or specific
instructions as the Trustees may from time to time adopt) to effect purchases,
sales, loans or exchanges of assets of the Trust on behalf of the Trustees or
may authorize any officer, employee or Trustee to effect such purchases, sales,
loans or exchanges pursuant to recommendations of the Investment Adviser (and
all without further action by the Trustees). Any of such
<PAGE> 10
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purchases, sales, loans or exchanges shall be deemed to have been authorized by
all the Trustees. Such services may be provided by one or more Persons.
Section 4.2. Distributor. The Trustees may in their discretion
from time to time enter into one or more distribution contracts providing for
the sale of Shares whereby the Trust may either agree to sell the Shares to the
other party to any such contract or appoint any such other party its sales agent
for such Shares. In either case, any such contract shall be on such terms and
conditions as the Trustees may in their discretion determine, provided that such
terms and conditions are not inconsistent with the provisions of this
Declaration or the By-Laws; and such contract may also provide for the
repurchase or sale of Shares by such other party as principal or as agent of the
Trust and may provide that such other party may enter into selected dealer and
sales agreements with registered securities dealers and depository institutions
to further the purpose of the distribution or repurchase of the Shares. Such
services may be provided by one or more Persons.
Section 4.3. Administrator. The Trustees may in their
discretion from time to time enter into one or more administrative services
contracts whereby the other party to each such contract shall undertake to
furnish such administrative services to the Trust as the Trustees shall from
time to time consider desirable and all upon such terms and conditions as the
Trustees may in their discretion determine, provided that such terms and
conditions are not inconsistent with the provisions of this Declaration or the
By-Laws. Such services may be provided by one or more Persons.
Section 4.4. Transfer Agent and Shareholder Servicing Agents.
The Trustees may in their discretion from time to time enter into one or more
transfer agency and shareholder servicing contracts whereby the other party to
each such contract shall undertake to furnish such transfer agency and/or
shareholder services to the Trust or to Shareholders of the Trust as the
Trustees shall from time to time consider desirable and all upon such terms and
conditions as the Trustees may in their discretion determine, provided that such
terms and conditions are not inconsistent with the provisions of this
Declaration or the By-Laws. Such services may be provided by one or more
Persons. Except as otherwise provided in the applicable shareholder servicing
contract, a Shareholder Servicing Agent shall be deemed to be the record owner
of outstanding Shares beneficially owned by customers of such Shareholder
Servicing Agent for whom it is acting pursuant to such shareholder servicing
contract.
Section 4.5. Parties to Contract. Any contract of the character
described in Section 4.1, 4.2, 4.3 or 4.4 of this Article IV or any custodian
contract as described in Article X of the By-Laws may be entered into with any
Person, although one or more of the Trustees or officers of the Trust may be an
officer, partner, director, trustee, shareholder, or member of such other party
to the contract, and no such contract shall be invalidated or rendered voidable
by reason of the existence of any such relationship; nor shall any Person
holding such relationship be liable merely by reason of such relationship for
any loss or expense to the Trust under or by reason of any such contract or
accountable for any profit realized directly or indirectly therefrom, provided
that the contract when entered into was not inconsistent with the provisions of
this Article IV or the By-Laws. The same Person may be the other party to
contracts entered into pursuant to Sections 4.1, 4.2, 4.3 and 4.4 above or any
custodian contract as described in Article X of the By-Laws, and any individual
may be financially interested or otherwise affiliated with Persons who are
parties to any or all of the contracts mentioned in this Section 4.5.
<PAGE> 11
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ARTICLE V
LIMITATIONS ON LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
Section 5.1. No Personal Liability of Shareholders, Trustees, etc. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property or the acts, obligations or affairs of the
Trust. No Trustee, officer or employee of the Trust shall be subject to any
personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust and
all such Persons shall look solely to the Trust Property for satisfaction of
claims of any nature arising in connection with the affairs of the Trust. If any
Shareholder, Trustee, officer or employee, as such, of the Trust, is made a
party to any suit or proceeding to enforce any such liability, he shall not, on
account thereof, be held to any personal liability. The Trust shall indemnify
and hold each Shareholder harmless from and against all claims and liabilities
to which such Shareholder may become subject by reason of his being or having
been a Shareholder, and shall reimburse such Shareholder for all legal and other
expenses reasonably incurred by him in connection with any such claim or
liability. The rights accruing to a Shareholder under this Section 5.1 shall not
exclude any other right to which such Shareholder may be lawfully entitled, nor
shall anything herein contained restrict the right of the Trust to indemnify or
reimburse a Shareholder in any appropriate situation even though not
specifically provided herein. Notwithstanding any other provision of this
Declaration to the contrary, no Trust Property shall be used to indemnify or
reimburse any Shareholder of any Shares of any series other than Trust Property
allocated or belonging to that series.
Section 5.2. Non-Liability of Trustees, etc. No Trustee,
officer or employee of the Trust shall be liable to the Trust or to any
Shareholder, Trustee, officer, employee, or agent thereof for any action or
failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust), or for any error
of judgment or mistake of fact or law, except for his own bad faith, wilful
misfeasance, gross negligence or reckless disregard of his duties.
Section 5.3. Mandatory Indemnification; Insurance. (a) Subject to the
exceptions and limitations contained in paragraph (b) below:
(i) every person who is or has been a Trustee or officer of the Trust
shall be indemnified by the Trust, to the fullest extent permitted by law
(including the 1940 Act) as currently in effect or as hereafter amended, against
all liability and against all expenses reasonably incurred or paid by him in
connection with any claim, action, suit or proceeding in which he becomes
involved as a party or otherwise by virtue of his being or having been a Trustee
or officer and against amounts paid or incurred by him in the settlement
thereof;
(ii) the words "claim", "action", "suit", or "proceeding" shall apply
to all claims, actions, suits or proceedings (civil, criminal, administrative or
other, including appeals), actual or threatened; and the words "liability" and
"expenses" shall include, without limitation, attorneys' fees, costs, judgments,
amounts paid in settlement, fines, penalties and other liabilities.
(b) No indemnification shall be provided hereunder to a Trustee or
officer:
<PAGE> 12
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(i) against any liability to the Trust or the Shareholders by reason
of a final adjudication by the court or other body before which the proceeding
was brought that he engaged in wilful misfeasance, bad faith, gross negligence
or reckless disregard of the duties involved in the conduct of his office;
(ii) with respect to any matter as to which he shall have been finally
adjudicated not to have acted in good faith in the reasonable belief that his
action was in the best interest of the Trust; or
(iii) in the event of a settlement involving a payment by a Trustee or
officer or other disposition not involving a final adjudication as provided in
paragraph (b) (i) or (b) (ii) above resulting in a payment by a Trustee or
officer, unless there has been either a determination that such Trustee or
officer did not engage in wilful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office by the
court or other body approving the settlement or other disposition or by a
reasonable determination, based upon a review of readily available facts (as
opposed to a full trial-type inquiry) that he did not engage in such conduct:
(a) by vote of a majority of the Disinterested Trustees acting on the
matter (provided that a majority of the Disinterested Trustees then in office
act on the matter); or
(b) by written opinion of independent legal counsel.
(c) Subject to the provisions of the 1940 Act, the Trust may maintain
insurance for the protection of the Trust Property, its present or former
Shareholders, Trustees, officers, employees, independent contractors and agents
in such amount as the Trustees shall deem adequate to cover possible tort
liability (whether or not the Trust would have the power to indemnify such
Persons against such liability), and such other insurance as the Trustees in
their sole judgment shall deem advisable.
(d) The rights of indemnification herein provided shall be severable,
shall not affect any other rights to which any Trustee or officer may now or
hereafter be entitled, shall continue as to a Person who has ceased to be such a
Trustee or officer and shall inure to the benefit of the heirs, executors and
administrators of such Person. Nothing contained herein shall affect any rights
to indemnification to which personnel other than Trustees and officers may be
entitled by contract or otherwise under law.
(e) Expenses of preparation and presentation of a defense to any
claim, action, suit, or proceeding of the character described in paragraph (a)
of this Section 5.3 shall be advanced by the Trust prior to final disposition
thereof upon receipt of an undertaking by or on behalf of the recipient to repay
such amount if it is ultimately determined that he is not entitled to
indemnification under this Section 5.3, provided that either:
(i) such undertaking is secured by a surety bond or some other
appropriate security or the Trust shall be insured against losses arising out of
any such advances; or
(ii) a majority of the Disinterested Trustees acting on the matter
(provided that a majority of the Disinterested Trustees then in office act on
the matter) or an independent legal counsel in a written opinion, shall
determine, based upon a review of readily available facts (as opposed to a full
trial-type inquiry), that there is reason to believe that the recipient
ultimately will be found entitled to indemnification.
<PAGE> 13
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As used in this Section 5.3 a "Disinterested Trustee" is one (i) who is
not an "Interested Person" of the Trust (including anyone who has been exempted
from being an "Interested Person" by any rule, regulation or order of the
Commission), and (ii) against whom none of such actions, suits or other
proceedings or another action, suit or other proceeding on the same or similar
grounds is then or had been pending.
Section 5.4. No Bond Required of Trustees. No Trustee shall be
obligated to give any bond or other security for the performance of any of his
duties hereunder.
Section 5.5. No Duty of Investigation; Notice in Trust Instruments,
etc. No purchaser, lender, Shareholder Servicing Agent, Transfer Agent or other
Person dealing with the Trustees or any officer, employee or agent of the Trust
shall be bound to make any inquiry concerning the validity of any transaction
purporting to be made by the Trustees or by said officer, employee or agent or
be liable for the application of money or property paid, loaned, or delivered to
or on the order of the Trustees or of said officer, employee or agent. Every
obligation, contract, instrument, certificate, Share, other security of the
Trust or undertaking, and every other act or thing whatsoever executed in
connection with the Trust shall be conclusively presumed to have been executed
or done by the executors thereof only in their capacity as Trustees under this
Declaration or in their capacity as officers, employees or agents of the Trust.
Every written obligation, contract, instrument, certificate, Share, other
security of the Trust or undertaking made or issued by the Trustees shall recite
that the same is executed or made by them not individually, but as Trustees
under this Declaration, and that the obligations of any such instrument are not
binding upon any of the Trustees or Shareholders individually, but bind only the
trust estate, and may contain any further recital which they or he may deem
appropriate, but the omission of such recital shall not operate to bind any of
the Trustees or Shareholders individually. The Trustees shall at all times
maintain insurance for the protection of the Trust Property, Shareholders,
Trustees, officers, employees and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability, and such other insurance as the
Trustees in their sole judgment shall deem advisable.
Section 5.6. Reliance on Experts, etc. Each Trustee and officer or
employee of the Trust shall, in the performance of his duties, be fully and
completely justified and protected with regard to any act or any failure to act
resulting from reliance in good faith upon the books of account or other records
of the Trust, upon an opinion of counsel, or upon reports made to the Trust by
any of its officers or employees or by the Investment Adviser, the Distributor,
Transfer Agent, any Shareholder Servicing Agent, and any dealers, accountants,
appraisers or other experts or consultants selected with reasonable care by the
Trustees, officers or employees of the Trust, regardless of whether such counsel
or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
Section 6.1. Beneficial Interest. The interest of the
beneficiaries hereunder may be divided into transferable Shares, which may be
divided into one or more series as provided in Section 6.9 hereof. Each such
series shall have such class or classes of Shares as the Trustees may from time
to time determine. The number of Shares authorized hereunder is unlimited. The
Trustees may divide or combine the Shares into a greater or lesser number, and
may classify or reclassify any unissued Shares into one
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or more series or classes of Shares. All Shares issued hereunder including,
without limitation, Shares issued in connection with a dividend in Shares or a
split of Shares, shall be fully paid and non-assessable.
Section 6.2. Rights of Shareholders . The ownership of the Trust
Property of every description and the right to conduct any business hereinbefore
described are vested exclusively in the Trustees, and the Shareholders shall
have no interest therein other than the beneficial interest conferred by their
Shares, and they shall have no right to call for any partition or division of
any property, profits, rights or interests of the Trust nor can they be called
upon to assume any losses of the Trust or suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in this Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion or
exchange rights, except as the Trustees may determine with respect to any series
of Shares. Every Shareholder by virtue of having become a Shareholder shall be
held expressly to have assented and agreed to the terms of this Declaration and
to have become a party hereto. The death of a Shareholder during the continuance
of the Trust shall not operate to terminate the Trust nor entitle the
representative of any deceased Shareholder to an accounting or to take any
action in court or elsewhere against the Trust or the Trustees, but only to the
rights of said decedent under this Trust.
Section 6.3. Trust Only. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and the
Shareholders. It is not the intention of the Trustees to create a general
partnership, limited partnership, joint stock association, corporation, bailment
or any form of legal relationship other than a trust. Nothing in this
Declaration shall be construed to make the Shareholders, either by themselves or
with the Trustees, partners or members of a joint stock association.
Section 6.4. Issuance of Shares. The Trustees, in their
discretion may, from time to time without vote of the Shareholders, issue
Shares, in addition to the then issued and outstanding Shares and Shares held in
the treasury, to such party or parties and for such amount and type of
consideration, including cash or property, and on such terms as the Trustees may
deem best, and may in such manner acquire other assets (including the
acquisition of assets subject to, and in connection, with the assumption of
liabilities) and businesses. In connection with any issuance of Shares, the
Trustees may issue fractional Shares. The Trustees may from time to time divide
or combine the Shares of any series into a greater or lesser number without
thereby changing their proportionate beneficial interests in Trust Property
allocated or belonging to such series. Contributions to the Trust may be
accepted for, and Shares shall be redeemed as, whole Shares and/or fractions of
a Share.
Section 6.5. Register of Shares. A register or registers shall be kept
at the principal office of the Trust or at an office of the Transfer Agent
(and/or any sub-transfer agent which may be a Shareholder Servicing Agent) which
register or registers, taken together, shall contain the names and addresses of
the Shareholders and the number of Shares held by them respectively and a record
of all transfers thereof. Such register or registers shall be conclusive as to
who are the holders of the Shares and who shall be entitled to receive dividends
or distributions or otherwise to exercise or enjoy the rights of Shareholders.
No Shareholder shall be entitled to receive payment of any dividend or
distribution, nor to have notice given to him as herein or in the By-Laws
provided, until he has given his address to the Transfer Agent, a sub-transfer
agent, or such other officer or agent of the Trustees as shall keep the said
register for entry thereon. It is not contemplated that certificates will be
issued for the Shares; however, the Trustees, in
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their discretion, may authorize the issuance of Share certificates and
promulgate appropriate rules and regulations as to their use.
The Trust shall be entitled to treat the holder of record of any Share
or Shares as the holder in fact thereof, and shall not be bound to recognize any
equitable or other claim of interest in such Share or Shares on the part of any
other person except as may be otherwise expressly provided by law.
Section 6.6 Transfer of Shares. Shares shall be transferable
on the records of the Trust only by the record holder thereof or by his agent
thereunto duly authorized in writing, upon delivery to the Trustees, the
Transfer Agent or a sub-transfer agent, of a duly executed instrument of
transfer, together with any certificate or certificates (if issued) for such
Shares and such evidence of the genuineness of each such execution and
authorization and of other matters as may reasonably be required. Upon such
delivery the transfer shall be recorded on the register of the Trust. Until such
record is made, the Shareholder of record shall be deemed to be the holder of
such Shares for all purposes hereunder and neither the Trustees nor any Transfer
Agent, a sub-transfer agent or registrar nor any officer, employee or agent of
the Trust shall be affected by any notice of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy, or incompetence of any Shareholder, or otherwise by operation of
law, shall be recorded on the register of Shares as the holder of such Shares
upon production of the proper evidence thereof to the Trustees, the Transfer
Agent or a sub-transfer agent; but until such record is made, the Shareholder of
record shall be deemed to be the holder of such Shares for all purposes
hereunder and neither the Trustees nor any Transfer Agent, sub-transfer agent or
registrar nor any officer or agent of the Trust shall be affected by any notice
of such death, bankruptcy or incompetence, or other operation of law.
Section 6.7. Notices. Any and all notices to which any
Shareholder may be entitled and any and all communications shall be deemed duly
served or given if mailed, postage prepaid, addressed to any Shareholder of
record at his last known address as recorded on the register of the Trust.
Section 6.8. Voting Powers. The Shareholders shall have power
to vote only (i) for the election of Trustees as provided in Section 16 of the
1940 Act (or any other applicable current or successor provision), (ii) for the
removal of Trustees as provided in Section 2.2 hereof, (iii) with respect to any
investment advisory or management contract as provided in Section 4.1 hereof,
(iv) with respect to termination of the Trust as provided in Section 9.2 hereof,
(v) with respect to any amendment of this Declaration to the extent and as
provided in Section 9.3 hereof, (vi) with respect to any merger, consolidation
or sale of assets as provided in Sections 9.4 and 9.6 hereof, (vii) with respect
to incorporation of the Trust or any series to the extent and as provided in
Sections 9.5 and 9.6 hereof, (viii) to the same extent as the stockholders of a
Massachusetts business corporation as to whether or not a court action,
proceeding or claim should or should not be brought or maintained derivatively
or as a class action on behalf of the Trust or the Shareholders, and (ix) with
respect to such additional matters relating to the Trust as may be required by
this Declaration, the By-Laws or any registration of the Trust with the
Commission (or any successor agency) or any state, or as the Trustees may
consider necessary or desirable. Each whole Share shall be entitled to one vote
as to any matter on which it is entitled to vote and each fractional Share shall
be entitled to a proportionate fractional vote, except that Shares held in the
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treasury of the Trust shall not be voted. Shares shall be voted by individual
series on any matter submitted to a vote of the Shareholders of the Trust except
as provided in Section 6.9(g) hereof. There shall be no cumulative voting in the
election of Trustees. Until Shares are issued, the Trustees may exercise all
rights of Shareholders and may take any action required by law, this Declaration
or the By-Laws to be taken by Shareholders. At any meeting of Shareholders of
the Trust or of any series of the Trust, a Shareholder Servicing Agent may vote
any shares as to which such Shareholder Servicing Agent is the agent of record
and which are not otherwise represented in person or by proxy at the meeting,
proportionately in accordance with the votes cast by beneficial owners of all
shares otherwise represented at the meeting in person or by proxy as to which
such Shareholder Servicing Agent is the agent of record. Any shares so voted by
a Shareholder Servicing Agent will be deemed represented at the meeting for
quorum purposes. The By-Laws may include further provisions for Shareholder
votes and meetings and related matters.
Section 6.9. Series Designation . As set forth in Appendix I hereto,
the Trustees have authorized the division of Shares into series, as designated
and established pursuant to the provisions of Appendix I and this Section 6.9.
The Trustees, in their discretion, may authorize the division of Shares into one
or more additional series, and the different series shall be established and
designated, and the variations in the relative rights, privileges and
preferences as between the different series shall be fixed and determined by the
Trustees upon and subject to the following provisions:
(a) All Shares shall be identical except that there may be such
variations as shall be fixed and determined by the Trustees between different
series as to purchase price, right of redemption and the price, terms and manner
of redemption, and special and relative rights as to dividends and on
liquidation.
(b) The number of authorized Shares and the number of Shares of each
series that may be issued shall be unlimited. The Trustees may classify or
reclassify any unissued Shares or any Shares previously issued and reacquired of
any series into one or more series that may be established and designated from
time to time. The Trustees may hold as treasury shares (of the same or some
other series), reissue for such consideration and on such terms as they may
determine, or cancel any Shares of any series reacquired by the Trust at their
discretion from time to time.
(c) All consideration received by the Trust for the issuance or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income and earnings thereon,
profits therefrom, and proceeds thereof, including any proceeds derived from the
sale, exchange or liquidation of such assets, and any funds or payments derived
from any reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the rights
of creditors of such series, and shall be so recorded upon the books of account
of the Trust. In the event that there are any assets, income, earnings, profits,
proceeds, funds or payments which are not readily identifiable as belonging to
any particular series, the Trustees shall allocate them to and among any one or
more of the series established and designated from time to time in such manner
and on such basis as the Trustees, in their sole discretion, deem fair and
equitable. Each such allocation by the Trustees shall be conclusive and binding
upon the Shareholders of all series for all purposes. No Shareholder of any
particular series shall have any claim on or right to any assets allocated or
belonging to any other series of Shares.
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(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series and all expenses,
costs, charges and reserves attributable to that series, and any general
liabilities, expenses, costs, charges or reserves of the Trust which are not
readily identifiable as belonging to any particular series shall be allocated
and charged by the Trustees to and among any one or more of the series
established and designated from time to time in such manner and on such basis as
the Trustees, in their sole discretion, deem fair and equitable. Each allocation
of liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the Shareholders of all series for all purposes. The
Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items shall be treated as income and which items as
capital; and each such determination and allocation shall be conclusive and
binding upon the Shareholders. Under no circumstances shall the assets allocated
or belonging to any particular series be charged with liabilities, expenses,
costs, charges or reserves attributable to any other series. All Persons who
have extended credit which has been allocated to a particular series, or who
have a claim or contract which has been allocated to any particular series,
shall look only to the assets of that particular series for payment of such
credit, claim or contract.
(e) The power of the Trustees to invest and reinvest the Trust Property
allocated or belonging to any particular series shall be governed by Section 3.2
hereof unless otherwise provided in the instrument of the Trustees establishing
such series which is hereinafter described.
(f) Each Share of a series shall represent a beneficial interest in the
net assets allocated or belonging to such series only, and such interest shall
not extend to the assets of the Trust generally. Dividends and distributions on
Shares of a particular series may be paid with such frequency as the Trustees
may determine, which may be monthly or otherwise, pursuant to a standing vote or
votes adopted only once or with such frequency as the Trustees may determine, to
the Shareholders of that series only, from such of the income and capital gains,
accrued or realized, from the assets belonging to that series, as the Trustees
may determine, after providing for actual and accrued liabilities belonging to
that series. All dividends and distributions on Shares of a particular series
shall be distributed pro rata to the Shareholders of that series in
proportion to the number of Shares of that series held by such Shareholders at
the date and time of record established for the payment of such dividends or
distributions. Shares of any particular series of the Trust may be redeemed
solely out of Trust Property allocated or belonging to that series. Upon
liquidation or termination of a series of the Trust, Shareholders of such series
shall be entitled to receive a pro rata share of the net assets of such
series only.
(g) Notwithstanding any provision hereof to the contrary, on any matter
submitted to a vote of the Shareholders of the Trust, all Shares then entitled
to vote shall be voted by individual series, except that (i) when required by
the 1940 Act to be voted in the aggregate, Shares shall not be voted by
individual series, and (ii) when the Trustees have determined that the matter
affects only the interests of Shareholders of one or more series or classes of
Shares of a series, only Shareholders of such series or class shall be entitled
to vote thereon.
(h) The establishment and designation of any series of Shares shall be
effective upon the execution by a majority of the Trustees of an instrument
setting forth such establishment and designation and the relative rights and
preferences of such series, or as otherwise provided in such instrument, or upon
a resolution adopted by a
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majority of the Trustees and the execution by an officer of the Trust on behalf
of the Trustees of an instrument setting forth such establishment and
designation and the relative rights and preferences of such series, or as
otherwise provided in such instrument. At any time that there are no Shares
outstanding of any particular series previously established and designated, the
Trustees may by an instrument executed by a majority of their number abolish
that series and the establishment and designation thereof. Each instrument
referred to in this paragraph shall have the status of an amendment to this
Declaration.
(i) Notwithstanding anything in this Declaration to the contrary, the
Trustees may, in their discretion, authorize the division of Shares of any
series into Shares of one or more classes or subseries of such series. All
Shares of a class or a subseries shall be identical with each other and with the
Shares of each other class or subseries of the same series except for such
variations between classes or subseries as may be approved by the Board of
Trustees and be permitted under the 1940 Act or pursuant to any exemptive order
issued by the Commission.
ARTICLE VII
REDEMPTIONS
Section 7.1 Redemptions . In case any Shareholder at any time desires
to dispose of his Shares, he may deposit his certificate or certificates
therefor, duly endorsed in blank or accompanied by an instrument of transfer
executed in blank, or if the Shares are not represented by any certificate, a
written request or other such form of request as the Trustees may from time to
time authorize, at the office of the Transfer Agent, the Shareholder Servicing
Agent which is the agent of record for such Shareholder, or at the office of any
bank or trust company, either in or outside of the Commonwealth of
Massachusetts, which is a member of the Federal Reserve System and which the
said Transfer Agent or the said Shareholder Servicing Agent has designated in
writing for that purpose, together with an irrevocable offer in writing in a
form acceptable to the Trustees to sell the Shares represented thereby to the
Trust at the net asset value per Share thereof (less any applicable redemption
fee or sales charge), next determined after such deposit as provided in Article
VIII hereof. Payment (which may be in cash or in kind) for said Shares shall be
made to the Shareholder within seven days after the date on which the deposit is
made, unless (i) the date of payment is postponed pursuant to Section 7.2
hereof, or (ii) the receipt, or verification of receipt, of the purchase price
for the Shares to be redeemed is delayed, in either of which events payment may
be delayed beyond seven days.
Section 7.2. Suspension of Right of Redemption. The Trust may
declare a suspension of the right of redemption or postpone the date of payment
of the redemption proceeds for the whole or any part of any period (i) during
which the New York Stock Exchange is closed other than customary week-end and
holiday closings, (ii) during which trading on the New York Stock Exchange is
restricted, (iii) during which an emergency exists as a result of which disposal
by the Trust of securities owned by it is not reasonably practicable or it is
not reasonably practicable for the Trust fairly to determine the value of its
net assets, or (iv) during which the Commission for the protection of
Shareholders by order permits the suspension of the right of redemption or
postponement of the date of payment of the redemption proceeds; provided that
applicable rules and regulations of the Commission shall govern as to whether
the conditions prescribed in (ii), (iii) or (iv) exist. Such suspension shall
take effect at such time as the Trust shall specify but not later than the close
of business on the business
<PAGE> 19
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day next following the declaration of suspension, and thereafter there shall be
no right of redemption or payment of the redemption proceeds until the Trust
shall declare the suspension at an end, except that the suspension shall
terminate in any event on the first day on which said stock exchange shall have
reopened or the period specified in (ii) or (iii) shall have expired (as to
which, in the absence of an official ruling by the Commission, the determination
of the Trust shall be conclusive). In the case of a suspension of the right of
redemption, a Shareholder may either withdraw his request for redemption or
receive payment based on the net asset value existing after the termination of
the suspension.
Section 7.3. Disclosure of Holding. The Shareholders of the Trust shall
upon demand disclose to the Trustees in writing such information with respect to
direct and indirect ownership of Shares of the Trust as the Trustees deem
necessary to comply with the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), or to comply with the requirements of any other authority.
Upon the failure of a Shareholder to disclose such information and to comply
with such demand of the Trustees, the Trust shall have the power to redeem such
Shares at a redemption price determined in accordance with Section 7.1 hereof.
Section 7.4. Redemptions of Accounts of Less than Minimum Amount . The
Trustees shall have the power, and any Shareholder Servicing Agent with whom the
Trust has so agreed (or a subcontractor of such Shareholder Servicing Agent)
shall have the power, at any time to redeem Shares of any Shareholder at a
redemption price determined in accordance with Section 7.1 hereof if at such
time the aggregate net asset value of the Shares owned by such Shareholder is
less than a minimum amount as determined from time to time and disclosed in a
prospectus of the Trust or in the Shareholder Servicing Agent's (or
subcontractor's) agreement with its customer. A Shareholder shall be notified
that the aggregate value of his Shares is less than such minimum amount and
allowed 60 days to make an additional investment before redemption is processed.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
(a) The Trustees may from time to time declare and pay dividends and
other distributions. The Trustees, in their absolute discretion, may prescribe
and shall set forth in the By-Laws or in a duly adopted vote or votes of the
Trustees such bases and times for determining the per Share net asset value of
the Shares or net income, or the declaration and payment of dividends and
distributions, as they may deem necessary or desirable.
(b) Dividends and other distributions may be declared pursuant to a
standing resolution or resolutions adopted only once or with such frequency as
the Trustees may determine, and may be payable in Shares of that series or class
thereof, as appropriate, at the election of each Shareholder of that series or
class. All dividends and distributions on Shares of a particular series shall be
distributed pro rata to the holders of that series in proportion to the
number of Shares of that series held by such payment of such dividends or
distributions, except that such dividends and distributions shall approximately
reflect expenses allocated to a particular class of such series.
<PAGE> 20
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(c) Anything in this instrument to the contrary notwithstanding, the
Trustees may at any time declare and distribute a "stock dividend" pro rata
among the Shareholders of a particular series or of a class thereof as of the
record date of that series.
ARTICLE IX
DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
Section 9.1. Duration. The Trust shall continue without limitation of
time but subject to the provisions of this Article IX.
Section 9.2. Termination of Trust. (a) The Trust maybe terminated (i)
by a Majority Shareholder Vote of its Shareholders, or (ii) by the Trustees by
written notice to the Shareholders. Any series of the Trust may be terminated
(i) by a Majority Shareholder Vote of the Shareholders of that series, or (ii)
by the Trustees by written notice to the Shareholders of that series.
Upon the termination of the Trust or any series of the Trust:
(i) The Trust or series of the Trust shall carry on no business
except for the purpose of winding up its affairs;
(ii) The Trustees shall proceed to wind up the affairs of the Trust or
series of the Trust and all the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or series of the Trust shall have
been wound up, including the power to fulfill or discharge the contracts of the
Trust, collect the assets of the Trust or series of the Trust, sell, convey,
assign, exchange, transfer or otherwise dispose of all or any part of the
remaining Trust Property of the Trust or series of the Trust to one or more
Persons at public or private sale for consideration which may consist in whole
or in part of cash, securities or other property of any kind, discharge or pay
the liabilities of the Trust or series of the Trust, and to do all other acts
appropriate to liquidate the business of the Trust or series of the Trust;
provided, that any sale, conveyance, assignment, exchange, transfer or other
disposition of all or substantially all of the Trust Property of the Trust or
series of theTrust shall require Shareholder approval in accordance with Section
9.4 or 9.6 hereof, respectively; and
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property of the Trust or series of the Trust, in
cash or in kind or partly in cash and partly in kind, among the Shareholders of
the Trust or series of the Trust according to their respective rights.
(b) After termination of the Trust or series of the Trust and
distribution to the Shareholders of the Trust or series of the Trust as herein
provided, a majority of the Trustees shall execute and lodge among the records
of the Trust an instrument in writing setting forth the fact of such
termination, and the Trustees shall thereupon be discharged from all further
liabilities and duties hereunder with respect to the Trust or series of the
Trust, and the rights and interests of all Shareholders of the Trust or series
of the Trust shall thereupon cease.
<PAGE> 21
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Section 9.3. Amendment Procedure. All rights granted to
Shareholders hereunder are granted subject to a right to amend this Declaration,
except as otherwise provided.
(a) This Declaration may be amended by a Majority Shareholder Vote of
the Shareholders or by any instrument in writing, without a meeting, signed by a
majority of the Trustees and consented to by the holders of not less than a
majority of the Shares of the Trust. The Trustees may also amend this
Declaration without the vote or consent of Shareholders to designate series in
accordance with Section 6.9 hereof, to change the name of the Trust, to change
the registered agent or principal office of the Trust as provided in Section
11.6 hereof, to supply any omission, to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or to conform this
Declaration to the requirements of applicable federal laws or regulations or the
requirements of the regulated investment company provisions of the Code, or to
(i) change the state or other jurisdiction designated herein as the state or
other jurisdiction whose laws shall be the governing law hereof, (ii) effect
such changes herein as the Trustees find to be necessary or appropriate (A) to
permit the filing of this Declaration under the laws of such state or other
jurisdiction applicable to trusts or voluntary associations, (B) to permit the
Trust to elect to be treated as a "regulated investment company" under the
applicable provisions of the Code or (C) to permit the transfer of shares (or to
permit the transfer of any other beneficial interests or shares in the Trust,
however denominated), and (iii) in conjunction with any amendment contemplated
by the foregoing clause (i) or the foregoing clause (ii) to make any and all
such further changes or modifications to this Declaration as the Trustees find
to be necessary or appropriate, any finding of the Trustees referred to in the
foregoing clause (ii) or clause (iii) to be conclusively evidenced by the
execution of any such amendment by a majority of the Trustees, but the Trustees
shall not be liable for failing so to do.
(b) No amendment which the Trustees have determined would affect the
rights, privileges or interests of holders of a particular series of Shares, but
not the rights, privileges or interests of holders of all series of Shares
generally, and which would otherwise require a Majority Shareholder Vote under
paragraph (a) of this Section 9.3, may be made except with the vote or consent
by a Majority Shareholder Vote of Shareholders of such series.
(c) Notwithstanding any other provision of this Declaration to the
contrary, the Trustees shall have the power in their discretion without any
requirement of approval by shareholders to either invest all or a portion of the
Trust Property, or sell all or a portion of the Trust Property and invest the
proceeds of such sales, in one or more investment companies that are registered
under the 1940 Act.
(d) Notwithstanding any other provision hereof, no amendment may be
made under this Section 9.3 which would change any rights with respect to the
Shares, or any series of Shares, by reducing the amount payable thereon upon
liquidation of the Trust or by diminishing or eliminating any voting rights
pertaining thereto, except with the Majority Shareholder Vote of the Shares or
that series of Shares. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability of
the Shareholders, Trustees, officers, employees and agents of the Trust or to
permit assessments upon Shareholders.
(e) A certificate signed by a majority of the Trustees setting forth an
amendment and reciting that it was duly adopted by the Shareholders or by the
Trustees
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as aforesaid, and executed by a majority of the Trustees, shall be conclusive
evidence of such amendment when lodged among the records of the Trust.
(f) Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of Shares of the Trust shall have become effective,
this Declaration may be amended in any respect by the affirmative vote of a
majority of the Trustees or by an instrument signed by a majority of the
Trustees.
Section 9.4. Merger, Consolidation and Sale of Assets . The Trust may
merge or consolidate with any other corporation, association, trust or other
organization or may sell, lease or exchange all or substantially all of the
Trust Property (or all or substantially all of the Trust Property allocated or
belonging to a particular series of the Trust) including its good will, upon
such terms and conditions and for such consideration when and as authorized at
any meeting of Shareholders called for such purpose by the vote of the holders
of two-thirds of the outstanding Shares of all series of the Trust voting as a
single class, or of the affected series of the Trust, as the case may be, or by
an instrument or instruments in writing without a meeting, consented to by the
vote of the holders of two-thirds of the outstanding Shares of all series of the
Trust voting as a single class, or of the affected series of the Trust, as the
case may be; provided, however, that if such merger, consolidation, sale, lease
or exchange is recommended by the Trustees, the vote or written consent by
Majority Shareholder Vote shall be sufficient authorization; and any such
merger, consolidation, sale, lease or exchange shall be deemed for all purposes
to have been accomplished under and pursuant to the statutes of the Commonwealth
of Massachusetts. Nothing contained herein shall be construed as requiring
approval of Shareholders for any sale of assets in the ordinary course of the
business of the Trust.
Section 9.5. Incorporation, Reorganization. With the approval
of the holders of a majority of the Shares outstanding and entitled to vote, the
Trustees may cause to be organized or assist in organizing a corporation or
corporations under the laws of any jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization to take over
all of the Trust Property or to carry on any business in which the Trust shall
directly or indirectly have any interest, and to sell, convey and transfer the
Trust Property to any such corporation, trust, partnership, association or
organization in exchange for the shares or securities thereof or otherwise, and
to lend money to, subscribe for the shares or securities of, and enter into any
contracts with any such corporation, trust, partnership, association or
organization in which the Trust holds or is about to acquire shares or any other
interest. Subject to Section 9.4 hereof, the Trustees may also cause a merger or
consolidation between the Trust or any successor thereto and any such
corporation, trust, partnership, association or other organization if and to the
extent permitted by law. Nothing contained in this Section 9.5 shall be
construed as requiring approval of Shareholders for the Trustees to organize or
assist in organizing one or more corporations, trusts, partnerships,
associations or other organizations and selling, conveying or transferring a
portion of the Trust Property to such organization or entities.
Section 9.6. Incorporation or Reorganization of Series. With
the approval of a Majority Shareholder Vote of any series, the Trustees may
sell, lease or exchange all of the Trust Property allocated or belonging to that
series, or cause to be organized or assist in organizing a corporation or
corporations under the laws of any other jurisdiction, or any other trust, unit
investment trust, partnership, association or other organization, to take over
all of the Trust Property allocated or belonging to that series
<PAGE> 23
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and to sell, convey and transfer such Trust Property to any such corporation,
trust, unit investment trust, partnership, association, or other organization
in exchange for the shares or securities thereof or otherwise.
ARTICLE X
REPORTS TO SHAREHOLDERS AND SHAREHOLDER COMMUNICATIONS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust, including financial
statements which shall at least annually be certified by independent public
accountants.
ARTICLE XI
MISCELLANEOUS
Section 11.1. Fi1ing. This Declaration and any amendment hereto
shall be filed in the office of the Secretary of the Commonwealth of
Massachusetts and in such other place or places as may be required under the
laws of the Commonwealth of Massachusetts and may also be filed or recorded in
such other places as the Trustees deem appropriate. Each amendment shall be
signed a majority of the Trustees or shall be accompanied by a certificate of an
appropriate officer of the Trust stating that such amendment was properly
approved. Unless such amendment or certificate sets forth a later date on which
it shall take effect, any amendment shall take effect as of its approval. A
restated Declaration, integrating into a single instrument all of the provisions
of the Declaration which are then in effect and operative, may be executed from
time to time by a majority of the Trustees and shall be conclusive evidence of
all amendments contained therein and may thereafter be referred to in lieu of
this original Declaration and the various amendments thereto.
Section 11.2. Governing Law. This Declaration is executed by
the Trustees and delivered in the Commonwealth of Massachusetts and with
reference to the laws thereof, and the rights of all parties and the validity
and construction of every provision hereof shall be subject to and construed
according to the laws of said Commonwealth.
Section 11.3. Counterparts . This Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
Section 11.4. Reliance by Third Parties. Any certificate
executed by an individual who, according to the records of the Trust, is a
Trustee hereunder certifying to: (i) the number or identity of Trustees or
Shareholders, (ii) the due authorization of the execution of any instrument or
writing, (iii) the form of any vote passed at a meeting of Trustees or
Shareholders, (iv) the fact that the number of Trustees or Shareholders present
at any meeting or executing any written instrument satisfies the requirements of
this Declaration, (v) the form of any By-Laws adopted by or the identity of any
officers elected by the Trustees, or (vi) the existence of any fact or facts
which in any manner relates to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person dealing with the
Trustees and their successors.
Section 11.5. Provisions in Conflict with Law or Regulations.
(a) The provisions of this Declaration are severable, and if the Trustees shall
determine, with the advice of
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counsel, that any such provision is in conflict with the 1940 Act, the regulated
investment company provisions of the Code or with other applicable laws and
regulations, the conflicting provision shall be deemed never to have constituted
a part of this Declaration; provided however, that such determination shall not
affect any of the remaining provisions of this Declaration or render invalid or
improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
attach only to such provision in such jurisdiction and shall not in any manner
affect such provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
Section 11.6. Principal Office. The principal office of the
Trust is 4 Manhattanville Road, Purchase, New York 10577 or such other address
determined by the Trustees. The name of the registered agent of the Trust is
Corporation Service Company at 84 State Street, Boston, MA 02109. The Trustees
may, without the approval of Shareholders, change the registered agent of the
Trust and the principal office of the Trust.
Section 11.7. References and Headings . Masculine pronouns shall be
deemed to include the feminine and the neuter, as the context shall require.
Headings are placed herein for convenience of reference only, and in case of any
conflict, the text of this instrument, rather than the headings, shall control.
IN WITNESS WHEREOF, the undersigned has executed this instrument as of
the 5th day of January, 1996.
/s/ Lea Anne Copenhefer
---------------------------------
Lea Anne Copenhefer
as Trustee
and not individually
150 Federal Street
Boston, Massachusetts
<PAGE> 25
Appendix I
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
Establishment and
Designation of Series of Shares of
Beneficial Interest (par value $0.00001 per share)
Dated as of January 5, 1996
Pursuant to Section 6.9 of the Declaration of Trust, dated as of
January 5, 1996 (the "Declaration of Trust"), of The Diversified Investors
Strategic Allocation Funds (the "Trust"), the Trustees of the Trust hereby
establish and designate three initial series of Shares (as defined in the
Declaration of Trust) but reserve the right to create additional series from
time to time (each such series a "Fund"' and collectively the "Funds") to have
the following special and relative rights:
1. The Funds shall be designated as follows:
Diversified Investors Conservative Strategic Allocation Fund
Diversified Investors Moderate Strategic Allocation Fund
Diversified Investors Aggressive Strategic Allocation Fund
2. Each Fund shall be authorized to hold cash, invest in securities,
instruments and other properties and use investment techniques as from time to
time described in the Trust's then currently effective registration statement
under the Securities Act of 1933 to the extent pertaining to the offering of
Shares of such Fund. Each Share of a Fund shall be redeemable, shall be entitled
to one vote (or fraction thereof in respect of a fractional share) on matters on
which Shares of the Fund shall be entitled to vote, shall represent a pro rata
beneficial interest in the assets allocated or belonging to the Fund, and shall
be entitled to receive its pro rata share of the net assets of the Fund upon
liquidation of the Fund, all as provided in Section 6.9 of the Declaration of
Trust. The proceeds of sales of Shares of a Fund, together with any income and
gain thereon, less any diminution or expenses thereof, shall irrevocably belong
to that Fund, unless otherwise required by law.
3. Shareholders of each Fund shall vote separately as a class on any
matter to the extent required by, and any matter shall be deemed to have been
effectively acted upon with respect to the Fund as provided in, Rule 18f-2, as
from time to time in effect, under the Investment Company Act of 1940, as
amended, or any successor rule, and by the Declaration of Trust.
4. The assets and liabilities of the Trust shall be allocated among the
Funds as set forth in Section 6.9 of the Declaration of Trust.
5. Subject to the provisions of Section 6.9 and Article IX of the
Declaration of Trust, the Trustees (including any successor Trustees) shall have
the right at any time and from time to time to reallocate assets and expenses,
to change the designation of any Fund now or hereafter created, or otherwise to
change the special and relative rights of any Fund.
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BY-LAWS OF THE DIVERSIFIED INVESTORS
STRATEGIC ALLOCATION FUNDS
ARTICLE I
DEFINITIONS
The terms "Commission", "Declaration", "Distributor", "Investment
Adviser", "Majority Shareholder Vote", "1940 Act", "Shareholder", "Shares",
"Transfer Agent", "Trust", "Trust Property" and "Trustees" have the respective
meanings given them in the Declaration of Trust of The Diversified Investors
Strategic Allocation Funds dated as of January 5, 1996.
ARTICLE II
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the
principal office of the Trust shall be in Purchase, New York.
Section 2. Other Offices. The Trust may have offices in such other
places as the Trustees may from time to time determine.
ARTICLE III
SHAREHOLDERS
Section 1. Meetings. A meeting of Shareholders may be called at any
time by a majority of the Trustees and shall be called by any Trustee upon
written request, which shall specify the purpose or purposes for which such
meeting is to be called, of Shareholders holding in the aggregate not less than
10% of the outstanding Shares entitled to vote on the matters specified in such
written request. Any such meeting shall be held within or without the
Commonwealth of Massachusetts on such day and at such time as the Trustees shall
designate. The holders of a majority of outstanding Shares entitled to vote
present in person or by proxy shall constitute a quorum at any meeting of the
Shareholders. In the absence of a quorum, a majority of outstanding Shares
entitled to vote present in person or by proxy may adjourn the meeting from time
to time until a quorum shall be present.
Whenever a matter is required to be voted by Shareholders of the Trust
in the aggregate under Section 6.8 and Section 6.9 and Section 6.9(g) of the
Declaration, the Trust may either hold a meeting of Shareholders of all series,
as defined in Section 6.9 of the Declaration, to vote on such matter, or hold
separate meetings of shareholders of each of the individual series to vote on
such matter, provided that (i) such separate meetings shall be held within one
year of each other, (ii) a quorum consisting of the holders of the majority of
outstanding Shares of the individual series entitled to vote present in person
or by proxy shall be present at each such separate meeting and (iii) a quorum
consisting of the holders of a majority of all Shares of the Trust entitled to
vote present in person or by proxy shall be present in the aggregate at such
separate meetings, and the votes of Shareholders at all such separate meetings
shall be
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aggregated in order to determine if sufficient votes have been cast for
such matter to be voted.
Section 2. Notice of Meetings. Notice of all meetings of Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder entitled to vote at such meeting at his
address as recorded on the register of the Trust, mailed at least 10 days and
not more than 60 days before the meeting. Only the business stated in the notice
of the meeting shall be considered at such meeting. Any adjourned meeting may be
held as adjourned without further notice. No notice need be given to any
Shareholder who shall have failed to inform the Trust of his current address or
if a written waiver of notice, executed before or after the meeting by the
Shareholder or his attorney thereunto authorized, is filed with the records of
the meeting.
Where separate meetings are held for Shareholders of each of the
individual series to vote on a matter required to be voted on by Shareholders of
the Trust in the aggregate, as provided in Article III, Section 1 above, notice
of each such separate meeting shall be provided in the manner described above in
this Section 2.
Section 3. Record Date. For the purpose of determining the Shareholders
who are entitled to notice of and to vote at any meeting, or to participate in
any distribution, or for the purpose of any other action, the Trustees may from
time to time close the transfer books for such period, not exceeding 30 days, as
the Trustees may determine; or without closing the transfer books the Trustees
may fix a date not more than 60 days prior to the date of any meeting of
Shareholders or distribution or other action as a record date for the
determination of the persons to be treated as Shareholders of record for such
purpose.
Where separate meetings are held for Shareholders of each of the
individual series to vote on a matter required to be voted on by Shareholders of
the Trust in the aggregate, as provided in Article III, Section 1 above, the
record date of each such separate meeting shall be determined in the manner
described above in this Section 3.
Section 4. Proxies. At any meeting of Shareholders, any
holder of Shares entitled to vote thereat may vote by proxy, provided that no
proxy shall be voted at any meeting unless it shall have been placed on file
with the Secretary, or with such other officer or agent of the Trust as the
Secretary may direct, for verification prior to the time at which such vote
shall be taken. Pursuant to a vote of a majority of the Trustees, proxies may be
solicited in the name of the Trust or one or more Trustees or officers of the
Trust. Only Shareholders of record shall be entitled to vote. Each full Share
shall be entitled to one vote and fractional Shares shall be entitled to a vote
of such fraction. When any Share is held jointly by several persons, any one of
them may vote at any meeting in person or by proxy in respect of such Share, but
if more than one of them shall be present at such meeting in person or by proxy,
and such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or to the legal
control of any other person as regards the charge or management of such Share,
such Share may be voted by such guardian or such other person appointed or
having such control, and such vote may be given in person or by proxy. Unless
otherwise specifically
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limited by their terms, proxies shall entitle the holder thereof to vote at any
adjournment of a meeting.
Section 5. Inspection of Records. The records of the Trust shall be
open to inspection by Shareholders to the same extent as is permitted
shareholders of a Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders
entitled to vote on the matter (or such larger proportion thereof as shall be
required by law, the Declaration or these By-Laws for approval of such matter)
consent to the action in writing and the written consents are filed with the
records of the meetings of Shareholders. Such consent shall be treated for all
purposes as a vote taken at a meeting of Shareholders.
ARTICLE IV
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their
discretion provide for regular or stated meetings of the Trustees. Notice of
regular or stated meetings need not be given. Meetings of the Trustees other
than regular or stated meetings shall be held whenever called by the Chairman or
by any Trustee. Notice of the time and place of each meeting other than regular
or stated meetings shall be given by the Secretary or an Assistant Secretary or
by the officer or Trustee calling the meeting and shall be mailed to each
Trustee at least two days before the meeting, or shall be telegraphed, cabled,
or wirelessed to each Trustee at his business address, or personally delivered
to him at least one day before the meeting. Notice of a meeting need not be
given to any Trustee if a written waiver of notice, executed by him before or
after the meeting, is filed with the records of the meeting, or to any Trustee
who attends the meeting without protesting prior thereto or at its commencement
the lack of notice to him. A notice or waiver of notice need not specify the
purpose of any meeting. The Trustees may meet by means of a telephone conference
circuit or similar communications equipment by means of which all persons
participating in the meeting can hear each other, which telephone conference
meeting shall be deemed to have been held at a place designated by the Trustees
at the meeting. Any action required or permitted to be taken at any meeting of
the Trustees may be taken by the Trustees without a meeting if all the Trustees
consent to the action in writing and the written consents are filed with the
records of the Trustees' meetings. Such consents shall be treated as a vote for
all purposes.
Section 2. Quorum and Manner of Acting. A majority of the Trustees
shall constitute a quorum for the transaction of business at any regular or
special meeting of the Trustees and (except as otherwise required by law, the
Declaration or these ByLaws) the act of a majority of the Trustees present at
any such meeting, at which a quorum is present, shall be the act of the
Trustees. In the absence of a quorum, a majority of the Trustees present may
adjourn the meeting from time to time until a quorum shall be present. Notice of
an adjourned meeting need not be given.
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ARTICLE V
COMMITTEES AND ADVISORY BOARD
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three Trustees to hold office at the
pleasure of the Trustees. While the Trustees are not in session, the Executive
Committee shall have the power to conduct the current and ordinary business of
the Trust, including the purchase and sale of securities and the designation of
securities to be delivered upon redemption of Shares of the Trust, and such
other powers of the Trustees as the Trustees may, from time to time, delegate to
the Executive Committee except those powers which by law, the Declaration or
these By-Laws the Trustees are prohibited from so delegating. The Trustees may
also elect from their own number other Committees from time to time, the number
composing such Committees, the powers conferred upon the same (subject to the
same limitations as with respect to the Executive Committee) and the term of
membership on such Committees to be determined by the Trustees. The Trustees may
designate a chairman of any such Committee. In the absence of such designation a
Committee may elect its own chairman. The Trustees may abolish any Committee at
any time. The Trustees shall have power to rescind any action of any Committee,
but no such rescission shall have retroactive effect.
Section 2. Meeting, Quorum and Manner of Acting. The Trustees may (i)
provide for stated meetings of any Committee, (ii) specify the manner of calling
and notice required for special meetings of any Committee, (iii) specify the
number of members of a Committee required to constitute a quorum and the number
of members of a Committee required to exercise specified powers delegated to
such Committee, (iv) authorize the making of decisions to exercise specified
powers by written assent of the requisite number of members of a Committee
without a meeting, and (v) authorize the members of a Committee to meet by means
of a telephone conference circuit. Unless the Trustees so provide, all the
Committees shall be governed by the same rules as the full Board is.
Each Committee may, but is not required to, keep regular minutes of its
meetings and records of decisions taken without a meeting and cause them to be
recorded in a book designated for that purpose and kept in the office of the
Trust.
Section 3. Advisory Board. The Trustees may appoint an Advisory Board
to consist in the first instance of not less than three members. Members of such
Advisory Board shall not be Trustees or officers and need not be Shareholders. A
member of such Advisory Board shall hold office for such period as the Trustees
may by vote provide and may resign therefrom by a written instrument signed by
him which shall take effect upon its delivery to the Trustees. The Advisory
Board shall have no legal powers and shall not perform the functions of Trustees
in any manner, such Advisory Board being intended merely to act in an advisory
capacity. Such Advisory Board shall meet at such times and upon such notice as
the Trustees may by vote provide.
Section 4. Chairman. The Trustees may, by a majority vote of all the
Trustees, elect from their own number a Chairman, to hold office until his
successor shall have been duly elected and qualified. The Chairman shall not
hold any other office. The Chairman may be, but need not be, a Shareholder. The
Chairman shall preside at all meetings of the Trustees and shall have such other
duties as from time to time may be assigned to him by the Trustees.
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ARTICLE VI
OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, each of whom shall be elected by the
Trustees. The Trustees may elect or appoint such other officers or agents as the
business of the Trust may require, including one or more Vice Presidents, one or
more Assistant Treasurers, and one or more Assistant Secretaries. The Trustees
may delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise
provided by law, the Declaration or these By-Laws, the President, the Treasurer
and the Secretary shall hold office until his respective successor shall have
been duly elected and qualified, and all other officers shall hold office at the
pleasure of the Trustees. The Secretary and Treasurer may be the same person. A
Vice President and the Treasurer or a Vice President and the Secretary may be
the same person, but the offices of Vice President, Secretary and Treasurer
shall not be held by the same person. Except as above provided, any two offices
may be held by the same person. Any officer may be, but does not need be, a
Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of
the Trustees, may remove any officer with or without cause by a vote of a
majority of the Trustees. Any officer or agent appointed by any officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 4. Powers and Duties of the President. The President, unless
the Chairman, if any, is so appointed by the Trustees, shall be the principal
executive officer of the Trust. Subject to the control of the Trustees and any
committee of the Trustees, the President shall at all times exercise a general
supervision and direction over the affairs of the Trust. The President shall
have the power to employ attorneys and counsel for the Trust and to employ such
subordinate officers, agents, clerks and employees as he may find necessary to
transact the business of the Trust. The President shall also have the power to
grant, issue, execute or sign such powers of attorney, proxies or other
documents as may be deemed advisable or necessary in the furtherance of the
interests of the Trust. The President shall have such other powers and duties
as, from time to time, may be conferred upon or assigned to him by the Trustees.
Section 5. Powers and Duties of Vice Presidents. In the absence or
disability of the President, the Vice President or, if there are more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him from time to time by the Trustees or the President.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be
the principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his hands to such custodian
as the Trustees may employ pursuant to Article X hereof. The Treasurer shall
render a statement of condition of the finances of the Trust to the Trustees as
often as they shall require the
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same and shall in general perform all the duties incident to the office of
Treasurer and such other duties as from time to time may be assigned to him by
the Trustees. The Treasurer shall give a bond for the faithful discharge of his
duties, if required to do so by the Trustees, in such sum and with such surety
or sureties as the Trustees shall require. The Treasurer shall be responsible
for the general supervision of the Trust's funds and property and for the
general supervision of the Trust's custodian.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep
the minutes of all meetings of the Shareholders in proper books provided for
that purpose; shall keep the minutes of all meetings of the Trustees; shall have
custody of the seal of the Trust; and shall have charge of the Share transfer
books, lists and records unless the same are in the charge of the Transfer
Agent. The Secretary shall attend to the giving and serving of all notices by
the Trust in accordance with the provisions of these By-Laws and as required by
law; and subject to these By-Laws, shall in general perform all the duties
incident to the office of Secretary and such other duties as from time to time
may be assigned to him by the Trustees.
Section 8. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall perform such other duties as from time
to time may be assigned to him by the Trustees. Each Assistant Treasurer shall
give a bond for the faithful discharge of his duties, if required to do so by
the Trustees, in such sum and with such surety or sureties as the Trustees shall
require.
Section 9. Powers and Duties of Assistant Secretaries. In the absence
or disability of the Secretary, any Assistant Secretary designated by the
Trustees shall perform all of the duties, and may exercise any of the powers, of
the Secretary. Each Assistant Secretary shall perform such other duties as from
time to time may be assigned to him by the Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable law or provision of the Declaration,
the compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any committee of officers upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he is also a Trustee.
Section 11. Execution of Papers. Except as the Trustees may generally
or in particular cases authorize, all deeds, leases, transfers, contracts,
bonds, notes, checks, drafts and other obligations made, accepted or endorsed by
the Trust shall be executed by the President, any Vice President, or the
Treasurer, or by whomever else shall be designated for that purpose by the
Trustees, and need not bear the seal of the Trust.
ARTICLE VII
FISCAL YEAR
The fiscal year of the Trust shall be determined by the Trustees,
provided, however, that the Trustees may from time to time change the fiscal
year.
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ARTICLE VIII
SEAL
The Trustees may adopt a seal which shall be in such form and shall
have such inscription thereon as the Trustees may from time to time prescribe.
ARTICLE IX
WAIVERS OF NOTICE
Whenever any notice is required to be given by law, the Declaration or
these By-Laws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before or after the time stated therein, shall
be deemed equivalent thereto. A notice shall be deemed to have been telegraphed,
cabled or wirelessed for the purposes of these By-Laws when it has been
delivered to a representative of any telegraph, cable or wireless company with
instruction that it be telegraphed, cabled or wirelessed. Any notice shall be
deemed to be given at the time when the same shall be mailed, telegraphed,
cabled or wirelessed.
ARTICLE X
CUSTODIAN
Section 1. Appointment and Duties. The Trustees shall at all times
employ a bank or trust company having a capital, surplus and undivided profits
of at least $5,000,000 as custodian with authority as its agent, but subject to
such restrictions, limitations and other requirements, if any, as may be
contained in the Declaration, these By-Laws and the 1940 Act:
(i) to hold the securities owned by the Trust and deliver the same
upon written order;
(ii) to receive and receipt for any monies due to the Trust and
deposit the same in its own banking department or elsewhere as the
Trustees may direct;
(iii) to disburse such funds upon orders or vouchers;
(iv) if authorized by the Trustees, to keep the books and accounts of
the Trust and furnish clerical and accounting services; and
(v) if authorized by the Trustees, to compute the net income of the
Trust and the net asset value of Shares;
all upon such basis of compensation as may be agreed upon between the Trustees
and the custodian.
The Trustees may also authorize the custodian to employ one or more
sub-custodians from time to time to perform such of the acts and services of the
custodian and upon such terms and conditions as may be agreed upon between the
custodian and
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such sub-custodian and approved by the Trustees. Subject to the approval of the
Trustees, the custodian may enter into arrangements with securities
depositories. All such custodial, sub-custodial and depository arrangements
shall be subject to, and comply with, the provisions of the 1940 Act and the
rules and regulations promulgated thereunder.
Section 2. Central Certificate System. Subject to such rules,
regulations and orders as the Commission may adopt, the Trustees may direct the
custodian to deposit all or any part of the securities owned by the Trust (1) in
a system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of 1934, pursuant to which system
all securities of any particular class or series of any issuer deposited within
the system are treated as fungible and may be transferred or pledged by
bookkeeping entry without physical delivery of such securities, provided that
all such deposits shall be subject to withdrawal only upon the order of the
Trust or its custodian; or (2) with such other person as may be permitted by the
Commission, or otherwise in accordance with the 1940 Act.
Section 3. Acceptance of Receipts in Lieu of Certificates. Subject to
such rules, regulations and orders as the Commission may adopt, the Trustees may
direct the custodian to accept written receipts or other written evidences
indicating purchases of securities held in book-entry form in the Federal
Reserve System in accordance with regulations promulgated by the Board of
Governors of the Federal Reserve System and the local Federal Reserve Banks in
lieu of receipt of certificates representing such securities.
Section 4. Provisions of Custodian Contract. The following provisions
shall apply to the employment of a custodian pursuant to this Article X and to
any contract entered into with the custodian so employed:
(a) The Trustees shall cause to be delivered to the custodian all
securities owned by the Trust or to which it may become entitled, and shall
order the same to be delivered by the custodian only upon completion of a sale,
exchange, transfer, pledge, or other disposition thereof, and upon receipt by
the custodian of the consideration therefor or a certificate of deposit or a
receipt of an issuer or of its Transfer Agent, all as the Trustees may generally
or from time to time require or approve, or to a successor custodian; and the
Trustees shall cause all funds owned by the Trust or to which it may become
entitled to be paid to the custodian, and shall order the same disbursed only
for investment against delivery of the securities acquired, or in payment of
expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a successor custodian; provided,
however, that nothing herein shall prevent delivery of securities for
examination to the broker purchasing the same in accord with the "street
delivery" custom whereby such securities are delivered to such broker in
exchange for a delivery receipt exchanged on the same day for an uncertified
check of such broker to be presented on the same day for certification.
(b) In case of the resignation, removal or inability to serve of any
such custodian, the Trust shall promptly appoint another bank or trust company
meeting the requirements of this Article X as successor custodian. The agreement
with the custodian shall provide that the retiring custodian shall, upon receipt
of notice of such appointment, deliver all Trust Property in its possession to
and only to such successor, and that pending appointment of a successor
custodian, or a vote of the Shareholders to function without a custodian, the
custodian shall not deliver any Trust Property to the
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Trust, but may deliver all or any part of the Trust Property to a bank or trust
company doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus and undivided profits (as shown in its last published
report) of at least $5,000,000; provided that arrangements are made for the
Trust Property to be held under terms similar to those on which they were held
by the retiring custodian.
ARTICLE XI
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or
new By-Laws may be adopted (a) by the Shareholders by a Majority Shareholder
Vote, or (b) by the Trustees, provided, however, that no By-Law may be amended,
adopted or repealed by the Trustees if such amendment, adoption or repeal
requires, pursuant to law, the Declaration or these By-Laws, a vote of the
Shareholders.
