<PAGE> 1
FILE NOS. 333-00295
811-07495
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 3, 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. 1
POST-EFFECTIVE AMENDMENT NO. / /
AND
REGISTRATION STATEMENT / /
UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 1 / /
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 LLP
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.
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THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
FORM N-1A
CROSS REFERENCE SHEET
<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
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
<TABLE>
<CAPTION>
PART B STATEMENT OF ADDITIONAL
ITEM NO. INFORMATION HEADINGS
- ------------------------------------------------------- -----------------------------------
<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 May , 1996
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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 "Underlying Diversified Fund"). 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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<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
Expense Summary........................................................ 2
Investment Objective of the Funds...................................... 3
Description of the Underlying Diversified Funds/Portfolios............. 6
Special Risks and Considerations....................................... 11
Investment Policies of the Underlying Diversified Funds/Portfolios..... 12
Hub & Spoke(R) Structure............................................... 13
Management of the Trust................................................ 14
Purchases and Redemptions of Shares.................................... 20
Other Information...................................................... 22
</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> 6
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>
Management Fees........................................................... .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 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%
Equity Value Fund 1.10%
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%
Equity Value Fund 1.10%
Special Equity Fund 1.50%
Aggressive Equity Fund 1.50%
International Equity Fund 1.40%
</TABLE>
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Based on the foregoing, the range of the average weighted expense ratio is
expected to be 1.12% to 1.25% for the Conservative Strategic Allocation Fund,
1.20% to 1.48% for the Moderate Strategic Allocation Fund and 1.20% to 1.50% 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............................................... $12.50 $ 38.91
Moderate................................................... $13.65 $ 42.46
Aggressive................................................. $14.18 $ 44.07
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES OR RETURN, AND ACTUAL EXPENSES AND RETURNS 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 Intermediate Government Bond Fund, High-Yield Bond
Fund, Equity Value Fund, Aggressive 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, High
Quality Bond Fund, Government/Corporate Bond Fund, Equity Income Fund, Growth &
Income Fund, Equity Growth Fund and Special Equity Fund reflect actual expenses
for the year ended December 31, 1995 and reflect voluntary waivers and
reimbursements by Diversified of certain expenses. Without such waivers and
reimbursements, Fund Expenses would have been 67.5% for the Money Market Fund,
91.2% for the High Quality Bond Fund, 56.9% for the Government/Corporate Bond
Fund, 17.9% for the Equity Income Fund, 21.7% for the Growth & Income Fund,
14.3% for the Equity Growth Fund and 15.7% for the Special Equity Fund. 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 Diversified Fund. Long term shareholders may
pay more than the economic equivalent of the maximum charges permitted by the
National Association of Securities Dealers, Inc.
INVESTMENT OBJECTIVES OF THE FUNDS
As a fundamental policy, each Fund offers investors a professionally
managed asset allocation investment program by purchasing shares of 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
allocates its assets among Underlying Diversified Funds. Each Fund's share price
will fluctuate with changing market conditions and the
3
<PAGE> 8
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 twelve 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
Corporation
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
Equity Value Growth & Income Ark Asset Management, Inc.
Growth & Income Growth & Income The Putnam Advisory Company, Inc.
Equity Growth Growth Jundt Associates, Inc.
Special Equity Growth Liberty Investment Management,
Inc., Ark Asset Management Co.,
Inc., Pilgrim Baxter & Associates,
Westport Asset Management, Inc.
Aggressive Equity Growth McKinley Capital 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, Equity Value Fund, Growth & Income Fund, Equity Growth Fund,
Special Equity Fund, Aggressive 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 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, Equity
Value 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. Diversified may increase the
allocation to the Money Market Fund in order to reduce volatility or to provide
a reserve for future allocations to other Underlying Diversified Funds. During
periods of abnormal market or economic conditions, Diversified may allocate
assets to the Money Market Fund as a temporary defensive measure.
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
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<PAGE> 9
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% - 40%
Intermediate Government Bond Fund -- 10% - 40%
Government/Corporate Bond Fund -- 10% - 50%
High-Yield Bond Fund -- 0% - 30%
Equity Income Fund -- 0% - 10%
Equity Value 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 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. In addition, Diversified
may allocate assets to the Money Market Fund in order to reduce volatility or to
provide a reserve for future allocations to other Underlying Diversified Funds.
During periods of abnormal market or economic conditions, Diversified may
allocate assets to the Money Market Fund as a temporary defensive measure.
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% - 30%
Intermediate Government Bond Fund -- 5% - 30%
Government/Corporate Bond Fund -- 5% - 40%
High-Yield Bond Fund -- 0% - 20%
Equity Income Fund -- 0% - 20%
Equity Value Fund -- 0% - 20%
Growth & Income Fund -- 0% - 20%
Equity Growth Fund -- 0% - 10%
Special Equity Fund -- 0% - 10%
Aggressive Equity Fund -- 0% - 10%
International Equity 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 Moderate Strategic Allocation Fund and may be changed at any
time without the approval of shareholders.
5
<PAGE> 10
AGGRESSIVE STRATEGIC ALLOCATION FUND. The investment objective of the
Aggressive Strategic Allocation Fund is long-term growth of capital and growth
of income. Under normal 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 in order to reduce volatility or to provide a reserve for
future allocations to Underlying Diversified Funds. During periods of abnormal
market or economic conditions, Diversified may allocate assets to the Money
Market Fund as a temporary defensive measure.
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% - 30%
Intermediate Government Bond Fund -- 0% - 20%
Government/Corporate Bond Fund -- 0% - 10%
High-Yield Bond Fund -- 0% - 10%
Equity Income Fund -- 5% - 30%
Equity Value Fund -- 5% - 30%
Growth & Income Fund -- 5% - 30%
Equity Growth Fund -- 5% - 20%
Special Equity Fund -- 0% - 15%
Aggressive Equity Fund -- 0% - 15%
International Equity Fund -- 5% - 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 Aggressive Strategic Allocation Fund and may be changed at any
time without the approval of shareholders.
DESCRIPTION OF THE UNDERLYING DIVERSIFIED FUNDS/PORTFOLIOS
The following is a brief description of the investment objective and
principal investment practices 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 objective 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
6
<PAGE> 11
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 investment objective
of any Underlying Diversified Fund or Underlying Diversified Portfolio 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 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
7
<PAGE> 12
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 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.
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<PAGE> 13
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
Ratings Group. 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. 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.
EQUITY VALUE FUND/PORTFOLIO. The investment objective of the Equity Value
Portfolio is to provide a high total investment return through investment in a
diversified portfolio of common stocks. The Equity Value 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
trading at low valuations relative to market and/or historical levels. These
stocks tend to have relatively low price/earnings ratios and/or relatively low
price/book value ratios. Low price/earnings ratios or price/book value ratios
means that the stock is less expensive than average relative to the company's
earnings or book value, respectively. The Portfolio invests primarily in common
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
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<PAGE> 14
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 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. 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
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 sized
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 sized 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 sized 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.
AGGRESSIVE EQUITY FUND/PORTFOLIO. The investment objective of the
Aggressive 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 Aggressive Equity Fund is designed for
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<PAGE> 15
investors in search of substantial long-term growth who can accept above-average
stock market risk and little of no current income. The Aggressive 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, revenue and/or value, without consideration for current income. The
Portfolio's primary equity investment are common stocks of small and medium
sized U.S. companies with market capitalizations between $750 million and $2.5
billion. 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 Aggressive 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, of issuers which,
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 the issuer's 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.
- - 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
11
<PAGE> 16
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 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 Diversified
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.
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.
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<PAGE> 17
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).
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.
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<PAGE> 18
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.
MANAGEMENT OF THE TRUST
Subject to such policies as the Board of Trustees of the Trust may
determine and pursuant to the Investment Advisory Agreement (the "Advisory
Agreement") with the Trust with respect to the Funds, 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 Agreement,
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.
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<PAGE> 19
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 the Advisory
Agreement.
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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<TABLE>
<CAPTION>
UNDERLYING DIVERSIFIED PORTFOLIO DIVERSIFIED SUBADVISERS
PORTFOLIO SUBADVISERS COMPENSATION(1) COMPENSATION
- ---------------------------- ----------------------------------- ------------ ------------
<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)
Equity Income Portfolio Asset Management Group 0.45 0.25
Equity Value Portfolio Ark Asset Management Co., Inc. 0.57 (4)
Growth & Income Portfolio Putnam Advisory Company, Inc. 0.60 (5)
Equity Growth Portfolio Jundt Associates, Inc. 0.70 0.625
Special Equity Portfolio (7) 0.80 0.50
Aggressive Equity Portfolio McKinley Capital Management 0.97 (7)
International Equity Capital Guardian Trust Company 0.75 (8)
Portfolio
</TABLE>
- ---------------
(1) Diversified is currently waiving a portion of its fee. See "Fees and
Expenses" on page 2 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) 0.45% on the first $100,000,000 in assets, 0.40% on the next $50,000,000 in
assets and 0.35% on the next $50,000,000 in assets; when the Portfolio
achieves $200,000,000 in assets, the rate shall be 0.40% on assets up to
$200,000,000 and 0.35% on assets in excess of $200,000,000 so long as the
Portfolio continues to have more than $200,000,000 in assets.
(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) 0.90% on the first $10,000,000 in assets, 0.80% on the next $15,000,000 in
assets, 0.60% on the next $25,000,000 in assets, 0.40% on the next
$50,000,000 in assets and 0.35% on assets in excess of $100,000,000.
(8) 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
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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 $639 million, $594 million of which were assets of registered
investment companies. Investment management decisions of Capital Management
Group are made by committee and not by managers individually.
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
$1.0 billion, $910 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 $2.1 billion, $203.5 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 $2 billion,
$1.5 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
Equity Value Portfolio with Ark Asset Management Co., Inc. ("Ark"). Ark was
formed in July 1989 and is owned by certain employees of ARK Asset Holdings,
Inc. The principal address of Ark is 55 Water Street, New York, NY 10041. Total
assets under management for equity value clients at December 31, 1995 were
approximately $9.8 billion, $75 million of which were assets of registered
investment companies. Investment management decisions of Ark are made by
committee and not by managers individually.
Diversified has entered into a Subadvisory Agreement with respect to the
Growth & Income Portfolio with The 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 $868 million, $125 million 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
$2.4 billion, $363 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
Aggressive Equity Portfolio with McKinley Capital Management, Inc. ("McKinley").
McKinley was formed in March 1991 and is owned by Robert Gillam. Total assets
under management for all aggressive equity clients at December 31, 1995 were
approximately $375 million, none of which were assets of registered
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investment companies. The principal business address of McKinley is 3301 C
Street, Anchorage, Alaska 99503. Investment management decisions of McKinley 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 $15 billion, and total assets under
management of registered investment companies for which CGTC acts as subadviser
was $612 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.
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
$1.7 billion, $83 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 $401 million, $91 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 $4.7 billion, $2.6 million 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 $520 million, $119
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
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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 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 each 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.
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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 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.
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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.
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,
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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 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 unless the Exchange closes
earlier, 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
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<PAGE> 27
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 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.
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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 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 hold,
and has no current intention of holding, 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 May , 1996,
contains more detailed information about the Trust, the Underlying Diversified
Funds and the Underlying Diversified Portfolios.
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<PAGE> 29
STATEMENT OF ADDITIONAL INFORMATION
MAY , 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, which are 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 17
Standard Performance Information 18
Determination of Net Asset Value; Valuation of Securities 21
Management of the Trust 22
Taxation 25
Distribution Plan 28
Independent Accountants 29
Description of the Trust; Fund Shares 29
Experts 30
Appendix 31
</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> 30
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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<PAGE> 31
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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<PAGE> 32
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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<PAGE> 33
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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<PAGE> 34
(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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<PAGE> 35
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 Advisers 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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<PAGE> 36
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 Underlying Diversified 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
Underlying Diversified 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 an Underlying Diversified 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
Underlying Diversified 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 Underlying Diversified Portfolio's foreign currency denominated portfolio
securities and the use of such techniques will subject the Underlying
Diversified 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
Underlying Diversified Portfolio may not always be able to enter into foreign
currency forward contracts at attractive prices and this will limit a Underlying
Diversified Portfolio's ability to use such contract to hedge or cross-hedge its
assets. Also, with regard to a Underlying Diversified 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 Underlying Diversified
Portfolio's cross-hedges and the movements in the exchange rates of the foreign
currencies in which the Underlying Diversified 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
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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 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, an Underlying Diversified 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.
An Underlying Diversified 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.
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Purchases or sales of stock index futures contracts are used to attempt to
protect the Underlying Diversified 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, 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
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<PAGE> 39
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 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.
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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.
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 Underlying Diversified 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
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<PAGE> 41
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 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
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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 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
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in selling securities it receives or it may be forced to hold underlying
securities until an option is exercised or expires.
When an Underlying Diversified 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 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.
An Underlying Diversified 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.
An Underlying Diversified 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.
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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 Underlying Diversified 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 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 Underlying Diversified 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. An Underlying Diversified 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.
16
<PAGE> 45
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 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, although the Underlying Diversified Portfolios may engage in
futures and options transactions;
(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;
17
<PAGE> 46
(2) 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;
(3) Options. Invest in options;
(4) 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;
(5) 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
(6) 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.
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<PAGE> 47
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 private accounts and 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 October 1,
1992. 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.
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 SINCE INCEPTION
------ ------- ---------------
<S> <C> <C> <C>
Conservative Fund........................... 15.7% 7.7% 7.1%
Moderate Fund............................... 19.0% 9.8% 10.2%
Aggressive Fund............................. 23.4% 11.9% 13.6%
</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.
19
<PAGE> 48
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."
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.
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.
World Investor, a European publication that periodically reviews the
performance of U.S. mutual funds investing internationally.
20
<PAGE> 49
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 unless the Exchange closes earlier,
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 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
21
<PAGE> 50
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; 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. Asterisks indicate those Trustee who are
"interested persons" (as defined in the 1940 Act) of the Trust. Unless otherwise
indicated, 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.
Donald E. Flynn*........... Vice President, AEGON USA, Inc., 1988 to present;
Executive Vice President, AEGON USA Investment
Management, Inc., 1988 to
22
<PAGE> 51
present; Vice President, AEGON USA Managed
Portfolios, Inc., 1988 to present.
Robert L. Lindsay.......... Retired; Executive Vice President, The Mutual Life
Insurance Company of New York (prior to July 1989);
His address is Two Huguenot Center, Tenafly, New
Jersey 07670-2520.
Nikhil Malvania............ Partner, Deaner-Malvania Associates (since January
1991); Manager and Vice President, Strategic
Planning Associates (prior to January 1991). His
address is 88 Perry Street, New York, New York
10014.
Joyce Galpern Norden....... 5/95 to present -- Co-Director, Urman's Health
Clinical Research Program Medical Center,
University of Pennsylvania. 10/93 to
5/95 -- Foundations Director, American Jewish
Committee; 2/91 to 9/93 -- Executive Director,
Food-People Allied to Combat Hunger Inc. Her
address is Nine Evergreen Way, North Tarrytown, New
York 10591.
Robert F. Colby............ 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............. 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.
Catherine A. Mohr.......... 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."
COMPENSATION
For the first fiscal year of the Trust, the following compensation is
estimated to be paid to its trustees.
<TABLE>
<CAPTION>
PENSION OR TOTAL
AGGREGATE RETIREMENT ESTIMATED COMPENSATION
COMPENSATION BENEFITS ACCRUED ANNUAL FROM REGISTRANT
NAME OF PERSON, FROM AS PART OF FUND BENEFITS UPON AND FUND COMPLEX
POSITION REGISTRANT* EXPENSES RETIREMENT PAID TO TRUSTEES
--------------- ------------ ---------------- ------------- ----------------
<S> <C> <C> <C> <C>
Tom A. Schlossberg....... -0- None N/A -0-
Trustee
Donald E. Flynn.......... -0- None N/A -0-
Trustee
Robert L. Lindsay........ $ 6,500 None N/A $13,000
Trustee
Nikhil Malvania.......... $ 6,500 None N/A $13,000
Trustee
Joyce Galpern Norden..... $ 6,500 None N/A $13,000
Trustee
</TABLE>
- ---------------
* These amounts are estimated for the 12-months ending December 31, 1996.
23
<PAGE> 52
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.
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
24
<PAGE> 53
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 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
25
<PAGE> 54
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.
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.
26
<PAGE> 55
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.
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.
27
<PAGE> 56
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 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.
28
<PAGE> 57
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P. 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 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
29
<PAGE> 58
(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 Coopers & Lybrand L.L.P. independent accountants, given on the
authority of said firm as experts in auditing and accounting.
30
<PAGE> 59
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
31
<PAGE> 60
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.
32
<PAGE> 61
REPORT OF INDEPENDENT ACCOUNTANTS
-------------------
To the Board of Trustees and Owners of Beneficial Interests of the
Diversified Investors Strategic Allocation Funds:
We have audited the accompanying statements of assets and liabilities
of Diversified Investors Strategic Allocation Funds (comprising, respectively,
the Diversified Investors Conservative, Moderate, and Aggressive Strategic
Allocation Funds) as of April 15, 1996. These statements of assets and
liabilities are the responsibility of the Funds management. Our responsibility
is to express an opinion on these statements of assets and liabilities based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements of assets and liabilities are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the statements of assets and liabilities referred to
above present fairly, in all material respects, the financial position of each
of the respective Funds constituting the Diversified Investors Strategic
Allocation Funds as of April 15, 1996, in conformity with generally accepted
accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
April 23, 1996
F-1
<PAGE> 62
DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
STATEMENTS OF ASSETS AND LIABILITIES
APRIL 15, 1996
<TABLE>
<CAPTION>
CONSERVATIVE MODERATE AGGRESSIVE
------------ -------- ----------
<S> <C> <C> <C>
ASSETS:
Cash..................................................... $ 33,333 $33,334 $ 33,333
------------ -------- ----------
NET ASSETS:.............................................. $ 33,333 $33,334 $ 33,333
========== ======= =========
Net asset value, redemption price and
offering price per share of beneficial interest
($33,333/3,333 shares outstanding,
$33,334/3,333 shares outstanding
and $33,333/3,333 shares outstanding
respectively).......................................... $ 10.00 $ 10.00 $ 10.00
========== ======= =========
</TABLE>
NOTE 1: ORGANIZATION
The Diversified Investors Strategic Allocation Funds (the "Trust"), is
comprised of three funds, the Diversified Investors Conservative Strategic
Allocation Fund (the "Conservative Fund"), Diversified Investors Moderate
Strategic Allocation Fund (the "Moderate Fund") and the Diversified Investors
Aggressive Strategic Allocation Fund (the "Aggressive Fund") (each a "Fund", and
collectively the "Funds"). 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. The Trust has been inactive
since that date except for matters relating to the Funds' establishment,
designation, registration of the Funds' shares of beneficial interest ("Shares")
under the Securities Act of 1933, and the sale of Fund shares ("Initial Shares")
for $33,333, $33,334 and $33,333 for the Conservative Fund, Moderate Fund and
Aggressive Fund, respectively, to Diversified Investment Advisors, Inc. (the
"Adviser"). The proceeds of such Initial Shares in the Funds were invested in
cash. Each Fund seeks to achieve its investment objective by investing all of
its assets in a diversified portfolio of other mutual funds managed by the
Adviser, ("Underlying Diversified Funds"). Organization expenses are being
borne by the Adviser.
NOTE 2: AGREEMENTS
The Trust has entered into an Investment Advisory Agreement with the
Adviser, under which the Adviser provides general investment advisory and
administrative services to each Fund. For providing these services, facilities
and for bearing the related expenses, the Adviser receives a fee from the Funds,
accrued daily and paid monthly, at an annual rate equal to 0.20% of the average
daily net assets.
F-2
<PAGE> 63
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 April 15, 1996
(b) Exhibits
<TABLE>
<C> <S>
1. and 2. Form N-1A Exhibits (1) and (2) previously filed with the Commission as part
of Initial Registration Statement dated January 19, 1996 on Form
N-1A -- Registration No. 333-00295 under the Securities Act of 1933 are
incorporated herein by reference.
3. Not applicable.
4. Not applicable.
5. Form of Investment Advisory Contract.
6. Form of Distribution Agreement.
7. Not applicable.
8. Form of Custodian Contract.
9. Form of Transfer Agency and Service Agreement.
10. Opinion of Counsel.
11. Consent of Independent Accountants.
12. Not applicable.
13. Investor Representation Letter of Initial Shareholder.
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotations.
17. Powers of Attorney.
</TABLE>
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
HOLDERS AS OF
TITLE OF CLASS APRIL 15, 1996
-------------------------------------------------------------------- ----------------
<S> <C>
Diversified Investors Conservative Strategic Allocation Fund........ 1
Diversified Investors Moderate Strategic Allocation Fund............ 1
Diversified Investors Aggressive Strategic Allocation Fund.......... 1
</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.
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
C-1
<PAGE> 64
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.
(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%
C-2
<PAGE> 65
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> 66
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 3rd
day of May, 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 May 3, 1996.
Signatures Title
- ---------- -----
*/s/ Tom Schlossberg
- -----------------------------
Tom Schlossberg Trustee
*/s/ Donald E. Flynn
- ------------------------------
Donald E. Flynn Trustee
*/s/ Nikhil Malvania
- ------------------------------
Nikhil Malvania Trustee
*/s/ Robert L. Lindsay
- ------------------------------
Robert L. Lindsay Trustee
*/s/ Joyce Galpern Norden
- ------------------------------
Joyce Galpern Norden Trustee
/s/ Robert F. Colby
- ------------------------------
Robert F. Colby
Attorney in Fact
<PAGE> 67
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Page
- ----------- ----
<S> <C>
1. and 2. Form N-1A Exhibits (1) and (2) previously filed with the Commission as part
of Initial Registration Statement dated January 19, 1996 on Form
N-1A -- Registration No. 333-00295 under the Securities Act of 1933 are
incorporated herein by reference.
3. Not applicable.
4. Not applicable.
5. Form of Investment Advisory Contract.
6. Form of Distribution Agreement.
7. Not applicable.
8. Form of Custodian Contract.
9. Form of Transfer Agency and Service Agreement.
10. Opinion of Counsel.
11. Consent of Independent Accountants.
12. Not applicable.
13. Investor Representation Letter of Initial Shareholder.
14. Not applicable.
15. Not applicable.
16. Schedule for Computation of Performance Quotations.
17. Powers of Attorney.
</TABLE>
<PAGE> 1
INVESTMENT ADVISORY AGREEMENT
AGREEMENT made as of February __, 1996 by and between The Diversified
Investors Strategic Allocation Funds, an open-end, non-diversified management
investment company under the Investment Company Act of 1940 (the "1940 Act")
(herein called the "Trust"), and Diversified Investment Advisors, Inc. a
Delaware corporation (herein called "Diversified").
WHEREAS, the Trust is comprised of three distinct series each of which
is a separate mutual fund issuing its own shares: Diversified Investors
Conservative Strategic Allocation Fund, Diversified Investors Moderate Strategic
Allocation Fund and Diversified Investors Aggressive Strategic Allocation Fund
(herein called "Fund(s)"); and
WHEREAS, each Fund of the Trust will purchase shares of existing mutual
funds managed by Diversified (herein called "Underlying Diversified Funds");
WHEREAS, Diversified has been organized to operate as an investment
advisor registered under the Investment Advisers Act of 1940; and
WHEREAS, the Trust desires to retain Diversified to render investment
advisory services to each of the series Funds, and Diversified is willing to so
render such services on the terms hereinafter set forth;
NOW, THEREFORE, this Agreement
WITNESSETH:
In consideration of the promises and mutual covenants herein contained,
it is agreed between the parties hereto as follows:
1. The Trust hereby appoints Diversified to act as investment advisor
to each Fund of the Trust for the period and on the terms set forth in this
Agreement. Diversified accepts such appointment and agrees to render the
services herein set forth for the compensation herein provided.
(a) Subject to the general supervision of the Board of Trustees
of the Trust, Diversified shall provide 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
<PAGE> 2
restrictions as provided in the then current Prospectus and the 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 investment will be
made without the payment of any commission or other sales charges.
As manager of the assets of the Funds, Diversified shall make
investments for the account of the Fund in accordance with Diversified's best
judgment and within the Funds' investment objectives, guidelines, and
restrictions, the 1940 Act and the provisions of the Internal Revenue Code of
1986 relating to regulated investment companies subject to policy decisions
adopted by the Board of Trustees.
(b) Diversified shall furnish to the Board of Trustees
periodic reports on the investment performance of the Funds and on the
performance of its obligations under this Agreement and shall supply such
additional reports and information as the Funds' officers or Board of Trustees
shall reasonably request.
(c) Diversified shall at its expense provide each Fund with
all services, equipment and facilities as may be required to perform its
obligations under this Agreement including, but not limited to:
(i) providing 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;
(ii) providing office space, equipment and clerical
personnel necessary for maintaining the
organization of the Funds and for performing
administrative and management functions;
(iii) supervising the overall administration of the
Funds, including negotiation of contracts and fees
with and the monitoring of performance and
billings of the Funds' transfer agent, custodian
and other independent contractors or agents;
(iv) preparing and, if applicable, filing all documents
required for compliance by the Funds with
applicable laws and regulations,
2
<PAGE> 3
including registration statements, registration
fee filings, semi- annual and annual reports to
investors, proxy statements and tax returns;
(v) preparation of agendas and supporting documents
for and minutes of meeting of Trustees, committees
of Trustees and investors; and
(vi) maintaining books and records of the Funds.
In addition, Diversified shall pay all operating expenses of the Fund
(including, without limitation, fees and expenses of independent trustees, audit
fees and legal fees) and take all other necessary actions to assure that the fee
payable to Diversified pursuant to Section 2. below shall be the only direct
expense payable by the Funds.
(d) Diversified shall have no discretion with respect to the
exercise of voting rights; and, whenever an Underlying Diversified Fund shall
hold a meeting of shareholders and request the Fund to vote on a matter, the
Fund will cast all of its votes in the same proportion as the votes of the
shareholders.
2. Diversified shall give the Funds the benefit of
Diversified's best judgment and efforts in rendering services under this
Agreement. As an inducement to Diversified's undertaking to render these
services, the Funds agree that Diversified shall not be liable under this
Agreement for any mistake in judgment or in any other event whatsoever provided
that nothing in this Agreement shall be deemed to protect or purport to protect
Diversified against any liability to the Funds or its investors to which
Diversified would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its advisory duties under this
Agreement or by reason of its reckless disregard of its obligations and duties
hereunder.
3. In consideration of the services to be rendered by
Diversified under this Agreement, each Fund shall pay Diversified a fee accrued
daily and paid monthly at an annual rate equal to 0.20% of each Fund's average
daily net assets. If the fees payable to Diversified pursuant to this paragraph
2 begin to accrue before the end of any month, or, if this Agreement terminates
before the end of any month, the fees for the period from that date to the end
of that month or from the beginning of that month to the date of termination, as
the case may be, shall be prorated according to the proportion which the period
bears to the full month in which the effectiveness or termination occurs. For
purposes of calculating the monthly fees, the value of the net assets of each
Fund shall be computed in the manner specified in its Regulation Statement on
Form N-1A for the computation of net asset value. For purposes of this
Agreement, a "business day" is any day the New York Stock Exchange is open for
trading. Diversified agrees to bear all expenses of the Funds other than the
0.20% advisory fee.
3
<PAGE> 4
In compliance with the requirements of Rule 31a-3 under the
1940 Act, Diversified hereby agrees that all records which it maintains for the
Funds are property of the Funds and further agrees to surrender promptly to the
Funds any such records upon the Funds' request. Diversified further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act any such
records required to be maintained by Rule 31a-1 under the 1940 Act.
Diversified, 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.
5. This Agreement shall be effective as to the Funds as of the date the
Funds commence investment operations after this Agreement shall have been
approved by the Board of Trustees of the Trust and the investor(s) in the Funds
in the manner contemplated by Section 15 of the 1940 Act and, unless sooner
terminated as provided herein, shall continue until the second anniversary of
the date hereof. Thereafter, if not terminated, this Agreement shall continue in
effect as to each Fund for successive periods of 12 months each, provided such
continuance is specifically approved at least annually by the vote of a majority
of those members of the Board of Trustees who are not parties to this Agreement
or interested persons of any such party, cast in person at a meeting called for
the purpose of voting on such approval; and either (a) by the vote of a majority
of the full Board of Trustees or (b) by vote of a majority of the outstanding
voting securities of the Funds; provided, however, that this Agreement may be
terminated by any or all of the three Funds at any time, without the payment of
any penalty, by the Board of Trustees or by vote of a majority of the
outstanding voting securities of the Funds on 60 days' written notice to
Diversified, or by Diversified as to any or all of the three Funds at any time,
without payment of any penalty, on 90 days' written notice to the Funds. This
Agreement will immediately terminate in the event of its assignment. (As used in
this Agreement, the terms "majority of the outstanding voting securities",
"interested person" and "assignment" shall have the same meanings as such terms
have in the 1940 Act and the rule and regulatory constructions thereunder.) This
Agreement may be terminated with respect to any Fund and remain in full force
and effect for those Funds which were not specifically terminated.
6. Except to the extent necessary to perform Diversified's obligations
under this Agreement, nothing herein shall be deemed to limit or restrict the
right of Diversified, or any affiliate of Diversified, or any employee of
Diversified, to engage in any other business or devote time and attention to the
management or other
4
<PAGE> 5
aspects of any other business, whether of a similar or dissimilar nature, or to
render services of any kind to any other trust, corporation, firm, individual or
association.
7. The investment management services of Diversified to the Funds under
this Agreement are not to be deemed exclusive as to Diversified and Diversified
will be free to render similar services to others.
Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
No provision of this Agreement may be changed, waived,
discharged or terminated orally, but only by an instrument in writing signed by
the party against which enforcement of the change, waiver, discharge, or
termination is sought and no material amendment of this Agreement shall be
effective until approved by vote of the holders of a majority of the outstanding
voting securities of the Funds.
This Agreement embodies the entire agreement and understanding
between the parties hereto and supersedes all prior agreements and
understandings relating to the subject matter hereof. The captions in this
Agreement are included for convenience of reference only and in no way define or
delimit any of the provisions hereof or otherwise affect their construction or
effect. Should any part of this Agreement be held or made invalid by a court
decision, statute, rule or otherwise, the remainder of this Agreement shall not
be affected thereby. This Agreement shall be binding and shall inure to the
benefit of the parties hereto and their respective successors, to the extent
permitted by law.
8. This Agreement shall be construed in accordance with the laws of the
State of New York provided that nothing herein shall be construed in a manner
inconsistent with the requirements of 1940 Act.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below as of the day and year first above
written.
Attest: The Diversified Investors
Strategic Allocation Funds
By:
- ------------------------- ----------------------------
Attest: Diversified Investment Advisors, Inc.
By:
- ------------------------- ----------------------------
SAF.IAA
6
<PAGE> 1
DISTRIBUTION AGREEMENT
DISTRIBUTION AGREEMENT, dated as of February ___, 1996, by and between
The Diversified Investors Strategic Allocation Funds, a Massachusetts business
trust (the "Trust"), and Diversified Investors Securities Corp., a Delaware
corporation ("DISC" or the "Distributor").
WITNESSETH:
WHEREAS, the Trust has been organized to operate as an open-end
investment company registered under the Investment Company Act of 1940, as
amended (collectively with the rules and regulations promulgated thereunder, the
"1940 Act") and under the Securities Act of 1933, as amended (the "1933 Act");
WHEREAS, the Shares of Beneficial Interest (par value $0.00001 per
share) of the Trust (the "Shares") are divided into separate series, the
Diversified Investors Conservative Strategic Allocation Fund, the Diversified
Investors Moderate Strategic Allocation Fund and the Diversified Investors
Aggressive Strategic Allocation Fund (each a "Fund" and collectively the
"Funds") (each Fund, along with any series which may in the future be
established, is a "Series"); and
WHEREAS, the Trust wishes to engage DISC to provide certain services
with respect to the distribution of Shares of each Series, and DISC is willing
to provide such services to the Trust on the terms and conditions hereinafter
set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
of the parties hereto as herein set forth, the parties covenant and agree as
follows:
1. The Trust grants to the Distributor the right, as agent of the
Trust, to solicit and accept orders for the purchase of Shares of each Series
upon the terms hereinbelow set forth during the term of this Agreement. While
this Agreement is in force, the Distributor agrees to use its best efforts to
find purchasers for Shares of each Series.
The Distributor shall have the right, as agent of the Trust, to order
from the Trust the Shares needed, but not more than the Shares needed (except
for clerical errors and errors of transmission), to fill unconditional orders
for Shares of each Series placed with the Distributor, all such orders to be
made in the manner set forth in such Series' then-current prospectus (the
"Prospectus") and then-current statement of additional information (the
"Statement of Additional Information") relating to such Series. The price which
shall be paid to the Trust for the Shares of each Series so purchased shall be
the net asset value per Share as determined in accordance with the provisions of
the Trust's Declaration of Trust and By-Laws and the respective Series'
then-current Prospectus and Statement of Additional Information, as may from
time to time be amended (collectively, the "Governing Instruments"). The
Distributor shall
<PAGE> 2
notify the custodian of the Trust with respect to each Series as of the time, as
disclosed in the respective Series' then-current Prospectus, that the net asset
value of such Series is determined, or such other time as is agreed to in
writing by the Distributor and the Trust) (a "Valuation Time"), on each business
day, or as soon thereafter as the orders placed with the Distributor have been
compiled, of the number of Shares of each Series and the prices thereof which
have been ordered through the Distributor since the respective Valuation Time.
The right granted to the Distributor to place orders for Shares with
the Trust shall be exclusive, except that this exclusive right shall not apply
to Shares issued in the event that an investment company (whether a regulated or
private investment company or a personal holding company) is merged with and
into or consolidated with the Trust or in the event that the Trust acquires, by
purchase or otherwise, all (or substantially all) the assets or the outstanding
shares of any such company; nor shall it apply to Shares issued by the Trust as
a dividend or stock split. The exclusive right to place orders for Shares
granted to the Distributor may be waived by the Distributor by notice to the
Trust in writing, either unconditionally or subject to such conditions and
limitations as may be set forth in such notice to the Trust. The Trust hereby
acknowledges that the Distributor may render distribution and other services to
other parties, including other investment companies. In connection with its
duties hereunder, the Distributor shall also arrange for computation of
performance statistics with respect to each Series and arrange for publication
of current price information in newspapers and other publications.
2. The Shares may be sold by the Distributor on behalf of the trust, to
any investor or to or through any dealer having a sales agreement with the
Distributor, upon the following terms and conditions:
The public offering price of Shares of each Series, i.e., the price per
Share at which the Distributor or any dealer purchasing Shares through the
Distributor may sell shares to the public, shall be as disclosed in the
respective Series then-current Prospectus.
The Trust shall have the right to suspend the sale of Shares of any
Series for any reason and to reject any purchase order in its sole discretion.
3. The Trust agrees that it will, from time to time, but subject to the
necessary approval, if any, of its shareholders and Trustees, take all necessary
action to register such number of Shares of each Series under the 1933 Act as
the Distributor may reasonably be expected to sell.
The Distributor shall be an independent contractor and neither the
Distributor nor any of its directors, officers or employees as such, is or shall
be, solely by reason of this Agreement, an employee of the Trust. It is
understood that Trustees, officers
2
<PAGE> 3
and shareholders of the Trust are or may become interested in the Distributor,
as directors, officers, employees, or otherwise and that directors, officers and
employees of the Distributor are or may become similarly interested in the Trust
and that the Distributor may be or become interested in the Trust as a
shareholder or otherwise. The Distributor is responsible for its own conduct and
the employment, control and conduct (but only with respect to the duties and
obligations of the Distributor hereunder) of its agents and employees and for
any injury to any person through its agents or employees. The Distributor
assumes full responsibility for its agents and employees under applicable
statutes and agrees to pay all employer taxes thereunder.
4. The Distributor covenants and agrees that, in selling Shares, it
will in all respects conform with the requirements of all state and federal laws
and the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. relating to the sale of Shares, and will indemnify and hold
harmless the Trust and each of its Trustees and officers and each person, if
any, who controls the Trust within the meaning of Section 15 of the 1933 Act or
Section 20 of the Securities Exchange Act of 1934 (the "Indemnified Parties")
against all losses, liabilities, damages, claims or expenses (including the
reasonable cost of investigating or defending any alleged loss, liability,
damages, claim or expense and advances for reasonable counsel fees incurred in
connection therewith) arising from any claim, demand, action or suit
(collectively, "Claims"), arising by reason of any person's acquiring any of the
Shares through the Distributor, which may be based upon the 1933 Act or any
other statute or common law, on account of any wrongful act of the Distributor
or any of its employees (including any failure to conform with any requirement
of any state or federal law or the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. relating to the sale of Shares) or on
the ground that the registration statement of the Trust under the 1933 Act,
including all amendments thereto (the "Registration Statement"), or Prospectus
or previous prospectus or Statement of Additional Information or previous
statement of additional information, with respect to such Shares, includes or
included an untrue statement of a material fact or omits or omitted to state a
material fact required to be stated therein or necessary in order to make the
statement therein not misleading, if and only if any such act, statement or
omission was made in reliance upon information furnished by the Distributor to
the Trust; provided, however, that in no case (a) is the indemnity of the
Distributor in favor of any Indemnified Party to be deemed to protect any such
Indemnified Party against liability to which such Indemnified Party would
otherwise be subject by reason of his or its willful misfeasance, bad faith or
gross negligence in the performance of its or his duties or by reason of its or
his reckless disregard of its or his obligations and duties under this Agreement
or (b) is the Distributor to be liable under its indemnity agreement contained
in this Section 4 with respect to any Claim made against any Indemnified Party
unless such Indemnified Party shall have notified the Distributor in writing
within 10 calendar days after the summons or other first legal process giving
information of the nature of the Claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated
3
<PAGE> 4
agent), but failure to notify the Distributor of any such Claim shall not
relieve it from any liability which it may have to any Indemnified Party
otherwise than on account of its indemnity agreement contained in this Section
4. The Distributor shall be entitled to participate, at its own expense, in the
defense, or, if it so elects, to assume the defense, of any suit brought to
enforce any such Claim, and, if the Distributor elects to assume the defense,
such defense shall be conducted by counsel chosen by it and satisfactory to each
Indemnified Party. In the event that the Distributor elects to assume the
defense of any such suit and retain such counsel, each Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it but, in case
the Distributor does not elect to assume the defense of any such suit, it shall
reimburse the Indemnified Parties for the reasonable fees and expenses of any
counsel retained by them. Except with the prior written consent of the
Distributor, no Indemnified Party shall confess any Claim or make any compromise
in any case in which the Distributor will be asked to indemnify such Indemnified
Party. The Distributor agrees promptly to notify the Trust of the commencement
of any litigation or proceeding against it in connection with the issuance and
sale of any of the Shares. The indemnity provisions of this Agreement shall
survive the termination of this Agreement with respect to events occurring prior
to such termination.
Neither the Distributor nor any dealer nor any other person is
authorized to give any information or to make any representation on behalf of
the Trust in connection with the sale of Shares of any Series, other than those
contained in the Registration Statement or Prospectus or Statement of Additional
Information relating to such Series.
In connection with the sales and offers of sales of Shares, the
Distributor shall give only such information and make only such statements or
representations as are contained in the Prospectus, Statement of Additional
Information or information furnished in writing to the Distributor by the Trust,
and the Trust shall not be responsible in any way for any other information,
statements or representations given or made by the Distributor or its
representatives or agents.
5. If, at any time during the term of this Agreement, the Trust shall
deem it necessary or advisable in the best interests of the Trust that any
amendment of this Agreement be made in order to comply with any recommendation
or requirement of the Securities and Exchange Commission or other governmental
authority or to obtain any advantage under Massachusetts or federal tax laws, it
shall notify the Distributor of the form of amendment which it deems necessary
or advisable and the reasons therefor. If the Distributor declines to assent to
such amendment (after a reasonable time), the Trust may terminate this Agreement
forthwith by written notice to the Distributor without payment of any penalty.
If, at any time during the term of this Agreement, the Distributor requests the
Trust to make any change in its Governing Instruments or in its methods of doing
business which are necessary in order to comply with any requirement of federal
law or regulations of the Securities and
4
<PAGE> 5
Exchange Commission or of a national securities association of which the
Distributor is or may become a member, relating to the sale of Shares, and the
Trust fails (after a reasonable time) to make any such change as requested, the
Distributor may terminate this Agreement forthwith by written notice to the
Trust without payment of any penalty.
6. The Distributor agrees that it will not take any long or short
position in the Shares of any Series and that, so far as it can control the
situation, it will prevent any of its directors or officers from taking any long
or short position in the Shares of such Series, except as permitted by the
Governing Instruments.
7. This Agreement shall become effective upon its execution and shall
continue in force for a period of two years and indefinitely thereafter,
provided that such continuance is "specifically approved at least annually" by
the vote of a majority of the Trustees of the Trust who are not "interested
persons" of the Trust or of the Distributor at a meeting specifically called for
the purpose of voting on such approval, and by the Board of Trustees of the
Trust.
This Agreement may be terminated as to any Series at any time (i) by
the Trust, (a) by the vote of a majority of the Trustees of the Trust who are
not "interested persons" of the Trust or the Distributor, (b) by the vote of a
majority of the full Board of Trustees of the Trust, or (c) by the "vote of a
majority of the outstanding voting securities" of that Series, or (ii) by the
Distributor, in any case without payment of any penalty on not more than 60
days' nor less than 30 days' written notice to the other party.
This Agreement shall automatically terminate in the event of its
assignment.
8. The terms "vote of a majority of the outstanding voting securities",
"interested person", "assignment" and "specifically approved at least annually"
shall have the respective meanings specified in, and shall be construed in a
manner consistent with, the 1940 Act, subject, however, to such exemptions as
may be granted by the Securities and Exchange Commission thereunder.
9. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby.
10. Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof. This
Agreement shall be construed and enforced in accordance with and governed by the
laws of the Commonwealth of Massachusetts. The captions in this Agreement are
included for convenience only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed and delivered in their names on their behalf by the undersigned,
thereunto duly authorized, all as of the day and year first above written.
Pursuant to the Trust's Declaration of Trust as may be amended from time to
time, the obligations of this Agreement are not binding upon any of the Trustees
or shareholders of the Trust individually, but bind only the Trust estate of the
Series.
THE DIVERSIFIED INVESTORS STRATEGIC
ALLOCATION FUNDS
By
-------------------------------------
Tom A. Schlossberg
President
DIVERSIFIED INVESTORS SECURITIES CORP.
By
-------------------------------------
Richard E. Finch
President
6
<PAGE> 1
CUSTODIAN AGREEMENT
BETWEEN
[Strategic Allocation Fund]
and
INVESTORS BANK & TRUST COMPANY
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
1. Bank Appointed Custodian................................................... 1
2. Definitions................................................................ 1
2.1 Authorized Person........................................ 1
2.2 Board. ................................................ 1
2.3 Security ................................................ 1
2.4 Portfolio Security....................................... 1
2.5 Officers' Certificate.................................... 2
2.6 Book-Entry System........................................ 2
2.7 Depository............................................... 2
2.8 Proper Instructions...................................... 2
3. Separate Accounts ......................................................... 2
4. Certification as to Authorized Persons..................................... 3
5. Custody of Cash ......................................................... 3
5.1 Purchase of Securities................................... 3
5.2 Redemptions ........................................ 3
5.3 Distributions and Expenses of Fund....................... 3
5.4 Payment in Respect of Securities......................... 4
5.5 Repayment of Loans....................................... 4
5.6 Repayment of Cash........................................ 4
5.7 Foreign Exchange Transactions............................ 4
5.8 Other Authorized Payments................................ 4
5.9 Termination.............................................. 4
6. Securities................................................................. 4
6.1 Segregation and Registration............................. 4
6.2 Voting and Proxies....................................... 5
6.3 Book-Entry System........................................ 5
6.4 Use of a Depository...................................... 6
6.5 Use of Book-Entry System for Commercial Paper............ 7
6.6 Use of Immobilization Programs........................... 8
6.7 Eurodollar CDs ........................................ 8
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
----
<S> <C>
6.8 Options and Futures Transactions......................... 9
(a) Puts and Calls Traded on Securities Exchanges,
NASDAQ or Over-the-Counter.................... 9
(b) Puts, Calls, and Futures Traded
on Commodities Exchanges...................... 9
6.9 Segregated Account....................................... 9
6.10 Interest Bearing Call or Time Deposits................... 11
6.11 Transfer of Securities................................... 11
7. Redemptions ......................................................... 13
8. Merger, Dissolution, etc. of Fund ........................................ 13
9. Actions of Bank Without Prior Authorization................................ 13
10. Collection; Defaults....................................................... 14
11. Maintenance of Records; Accounting Services................................ 14
12. Fund Evaluation and Yield.................................................. 14
12.1 Fund Evaluation.......................................... 14
12.2 Yield Calculation........................................ 15
13. Concerning the Bank ................................................ 16
13.1 Performance of Duties;
Standard of Care....................................... 16
13.2 Agents and Subcustodians................................. 17
13.3 Duties of the Bank with Respect to Property
Held Outside of the United States...................... 17
13.4 Insurance................................................ 20
13.5 Fees and Expenses of Bank................................ 20
13.6 Advances by Bank........................................ 21
14. Termination................................................................ 21
15. Confidentiality............................................................ 22
16. Notices .................................................................. 22
</TABLE>
<PAGE> 4
<TABLE>
<CAPTION>
Page
----
<S> <C>
17. Amendments................................................................. 22
18. Parties .................................................................. 24
19. Governing Law.............................................................. 24
20. Counterparts............................................................... 24
21. Limitation of Liability.................................................... 24
</TABLE>
<PAGE> 5
CUSTODIAN AGREEMENT
AGREEMENT made as of this ___ day of May, 1996, between [Strategic
Allocation Fund] a trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund") and INVESTORS BANK & TRUST COMPANY (the "Bank").
The Fund, an open-end management investment company, desires to place
and maintain all of its portfolio securities and cash in the custody of the
Bank. The Bank has at least the minimum qualifications required by Section
17(f)(1) of the Investment Company Act of 1940 (the "1940 Act") to act as
custodian of the portfolio securities and cash of the Fund, and has indicated
its willingness to so act, subject to the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements contained herein, the parties hereto agree as follows:
1. Bank Appointed Custodian. The Fund hereby appoints the Bank as
custodian of its portfolio securities and cash delivered to the Bank as
hereinafter described and the Bank agrees to act as such upon the terms and
conditions hereinafter set forth.
2. Definitions. Whenever used herein, the terms listed below will have
the following meaning:
2.1 Authorized Person. Authorized Person will mean any of the
persons duly authorized to give Proper Instructions or otherwise act on behalf
of the Fund by appropriate resolution of its Board, and set forth in a
certificate as required by Section 4 hereof.
2.2 Board. Board will mean the Board of Directors or the Board of
Trustees of the Fund, as the case ----- may be.
2.3 Security. The term security as used herein will have the same
meaning as when such term is used in the Securities Act of 1933, as amended,
including, without limitation, any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation in any profit
sharing agreement, collateral-trust certificate, preorganization certificate or
subscription, transferable share, investment contract, voting-trust certificate,
certificate of deposit for a security, fractional undivided interest in oil,
gas, or other mineral rights, any put, call, straddle, option, or privilege on
any security, certificate of deposit, or group or index of securities (including
any interest therein or based on the value thereof), or any put, call, straddle,
option, or privilege entered into on a national securities exchange relating to
a foreign currency, or, in general, any interest or instrument commonly known as
a "security", or any certificate of interest or participation in, temporary or
interim certificate for, receipt for, guarantee of, or warrant or right to
subscribe to, or option contract to purchase or sell any of the foregoing, and
futures, forward contracts and options thereon.
<PAGE> 6
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2.4 Portfolio Security. Portfolio Security will mean any security
owned by the Fund.
2.5 Officers' Certificate. Officers' Certificate will mean, unless
otherwise indicated, any request, direction, instruction, or certification in
writing signed by any two Authorized Persons of the Fund.
2.6 Book-Entry System. Book-Entry System shall mean the Federal
Reserve-Treasury Department Book Entry System for United States government,
instrumentality and agency securities operated by the Federal Reserve Bank, its
successor or successors and its nominee or nominees.
2.7 Depository. Depository shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and Exchange
Commission under Section 17A of the Securities Exchange Act of 1934 ("Exchange
Act"), its successor or successors and its nominee or nominees. The term
"Depository" shall further mean and include any other person authorized to act
as a depository under the 1940 Act, its successor or successors and its nominee
or nominees, specifically identified in a certified copy of a resolution of the
Board.
2.8 Proper Instructions. Proper Instructions shall mean (i)
instructions regarding the purchase or sale of Portfolio Securities, and
payments and deliveries in connection therewith, given by an Authorized Person
as shall have been designated in an Officers' Certificate, such instructions to
be given in such form and manner as the Bank and the Fund shall agree upon from
time to time, and (ii) instructions (which may be continuing instructions)
regarding other matters signed or initialed by such one or more persons from
time to time designated in an Officers' Certificate as having been authorized by
the Board. Oral instructions will be considered Proper Instructions if the Bank
reasonably believes them to have been given by a person authorized to give such
instructions with respect to the transaction involved. The Fund shall cause all
oral instructions to be promptly confirmed in writing. The Bank shall act upon
and comply with any subsequent Proper Instruction which modifies a prior
instruction and the sole obligation of the Bank with respect to any follow-up or
confirmatory instruction shall be to make reasonable efforts to detect any
discrepancy between the original instruction and such confirmation and to report
such discrepancy to the Fund. The Fund shall be responsible, at the Fund's
expense, for taking any action, including any reprocessing, necessary to correct
any such discrepancy or error, and to the extent such action requires the Bank
to act the Fund shall give the Bank specific Proper Instructions as to the
action required. Upon receipt of an Officers' Certificate as to the
authorization by the Board accompanied by a detailed description of procedures
approved by the Fund, Proper Instructions may include communication effected
directly between electro-mechanical or electronic devices provided that the
Board and the Bank are satisfied that such procedures afford adequate safeguards
for the Fund's assets.
3. Separate Accounts. If the Fund has more than one series or
portfolio, the Bank will segregate the assets of each series or portfolio to
which this Agreement relates into a separate account for each such series or
portfolio containing the assets of such series or
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portfolio (and all investment earnings thereon). Unless the context otherwise
requires, any reference in this Agreement to any actions to be taken by the Fund
shall be deemed to refer to the Fund acting on behalf of one or more of its
series, any reference in this Agreement to any assets of the Fund, including,
without limitation, any portfolio securities and cash and earnings thereon,
shall be deemed to refer only to assets of the applicable series, any duty or
obligation of the Bank hereunder to the Fund shall be deemed to refer to duties
and obligations with respect to the individual series and any obligation or
liability of the Fund hereunder shall be binding only with respect to the
individual series, and shall be discharged only out of the assets of such
series.
4. Certification as to Authorized Persons. The Secretary or Assistant
Secretary of the Fund will at all times maintain on file with the Bank his or
her certification to the Bank, in such form as may be acceptable to the Bank, of
(i) the names and signatures of the Authorized Persons and (ii) the names of the
Board, it being understood that upon the occurrence of any change in the
information set forth in the most recent certification on file (including
without limitation any person named in the most recent certification who is no
longer an Authorized Person as designated therein), the Secretary or Assistant
Secretary of the Fund, will sign a new or amended certification setting forth
the change and the new, additional or omitted names or signatures. The Bank will
be entitled to rely and act upon any Officers' Certificate given to it by the
Fund which has been signed by Authorized Persons named in the most recent
certification.
5. Custody of Cash. As custodian for the Fund, the Bank will open and
maintain a separate account or accounts in the name of the Fund or in the name
of the Bank, as Custodian of the Fund, and will deposit to the account of the
Fund all of the cash of the Fund, except for cash held by a subcustodian
appointed pursuant to Sections 13.2 or 13.3 hereof, including borrowed funds,
delivered to the Bank, subject only to draft or order by the Bank acting
pursuant to the terms of this Agreement. Upon receipt by the Bank of Proper
Instructions (which may be continuing instructions) or in the case of payments
for redemptions and repurchases of outstanding shares of beneficial interest in
the Fund, notification from the Fund's transfer agent as provided in Section 7,
requesting such payment, designating the payee or the account or accounts to
which the Bank will release funds for deposit, and stating that it is for a
purpose permitted under the terms of this Section 5, specifying the applicable
subsection, the Bank will make payments of cash held for the accounts of the
Fund, insofar as funds are available for that purpose, only as permitted in
subsections 5.1-5.9 below.
5.1 Purchase of Securities. Upon the purchase of securities for the
Fund, against contemporaneous receipt of such securities by the Bank registered
in the name of the Fund or in the name of, or properly endorsed and in form for
transfer to, the Bank, or a nominee of the Bank, or receipt for the account of
the Bank pursuant to the provisions of Section 6 below, each such payment to be
made at the purchase price shown on a broker's confirmation (or transaction
report in the case of Book Entry Paper) of purchase of the securities received
by the Bank before such payment is made, as confirmed in the Proper Instructions
received by the Bank before such payment is made.
<PAGE> 8
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5.2 Redemptions. In such amount as may be necessary for the
repurchase or redemption of shares of beneficial interest in the Fund offered
for repurchase or redemption in accordance with Section 7 of this Agreement.
5.3 Distributions and Expenses of Fund. For the payment on the
account of the Fund of dividends or other distributions to shareholders as may
from time to time be declared by the Board, interest, taxes, management or
supervisory fees, distribution fees, fees of the Bank for its services hereunder
and reimbursement of the expenses and liabilities of the Bank as provided
hereunder, fees of any transfer agent, fees for legal, accounting, and auditing
services, or other operating expenses of the Fund.
5.4 Payment in Respect of Securities. For payments in connection
with the conversion, exchange or surrender of Portfolio Securities or securities
subscribed to by the Fund held by or to be delivered to the Bank.
5.5 Repayment of Loans. To repay loans of money made to the Fund,
but, in the case of final payment, only upon redelivery to the Bank of any
Portfolio Securities pledged or hypothecated therefor and upon surrender of
documents evidencing the loan;
5.6 Repayment of Cash. To repay the cash delivered to the Fund for
the purpose of collateralizing the obligation to return to the Fund certificates
borrowed from the Fund representing Portfolio Securities, but only upon
redelivery to the Bank of such borrowed certificates.
5.7 Foreign Exchange Transactions. For payments in connection with
foreign exchange contracts or options to purchase and sell foreign currencies
for spot and future delivery which may be entered into by the Bank on behalf of
the Fund upon the receipt of Proper Instructions, such Proper Instructions to
specify the currency broker or banking institution (which may be the Bank, or
any other subcustodian or agent hereunder, acting as principal) with which the
contract or option is made, and the Bank shall have no duty with respect to the
selection of such currency brokers or banking institutions with which the Fund
deals or for their failure to comply with the terms of any contract or option.
5.8 Other Authorized Payments. For other authorized transactions of
the Fund, or other obligations of the Fund incurred for proper Fund purposes;
provided that before making any such payment the Bank will also receive a
certified copy of a resolution of the Board signed by an Authorized Person
(other than the Person certifying such resolution) and certified by its
Secretary or Assistant Secretary, naming the person or persons to whom such
payment is to be made, and either describing the transaction for which payment
is to be made and declaring it to be an authorized transaction of the Fund, or
specifying the amount of the obligation for which payment is to be made, setting
forth the purpose for which such obligation was incurred and declaring such
purpose to be a proper corporate purpose.
5.9 Termination: upon the termination of this Agreement as
hereinafter set forth pursuant to Section 8 and Section 14 of this Agreement.
<PAGE> 9
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6. Securities.
6.1 Segregation and Registration. Except as otherwise provided
herein, and except for securities to be delivered to any subcustodian appointed
pursuant to Sections 13.2 or 13.3 hereof, the Bank as custodian, will receive
and hold pursuant to the provisions hereof, in a separate account or accounts
and physically segregated at all times from those of other persons, any and all
Portfolio Securities which may now or hereafter be delivered to it by or for the
account of the Fund. All such Portfolio Securities will be held or disposed of
by the Bank for, and subject at all times to, the instructions of the Fund
pursuant to the terms of this Agreement. Subject to the specific provisions
herein relating to Portfolio Securities that are not physically held by the
Bank, the Bank will register all Portfolio Securities (unless otherwise directed
by Proper Instructions or an Officers' Certificate), in the name of a registered
nominee of the Bank as defined in the Internal Revenue Code and any Regulations
of the Treasury Department issued thereunder, and will execute and deliver all
such certificates in connection therewith as may be required by such laws or
regulations or under the laws of any state. The Bank will use its best efforts
to the end that the specific Portfolio Securities held by it hereunder will be
at all times identifiable.
The Fund will from time to time furnish to the Bank
appropriate instruments to enable it to hold or deliver in proper form for
transfer, or to register in the name of its registered nominee, any Portfolio
Securities which may from time to time be registered in the name of the Fund.
6.2 Voting and Proxies. Neither the Bank nor any nominee of the Bank
will vote any of the Portfolio Securities held hereunder, except in accordance
with Proper Instructions or an Officers' Certificate. The Bank will execute and
deliver, or cause to be executed and delivered, to the Fund all notices, proxies
and proxy soliciting materials with respect to such Securities, such proxies to
be executed by the registered holder of such Securities (if registered otherwise
than in the name of the Fund), but without indicating the manner in which such
proxies are to be voted.
6.3 Book-Entry System. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits of
Fund assets in the Book-Entry System, and (ii) for any subsequent changes to
such arrangements following such approval, the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
(a) The Bank may keep Portfolio Securities in the
Book-Entry System provided that such Portfolio Securities are represented in an
account ("Account") of the Bank (or its agent) in such System which shall not
include any assets of the Bank (or such agent) other than assets held as a
fiduciary, custodian, or otherwise for customers;
(b) The records of the Bank (and any such agent) with
respect to the Fund's participation in the Book-Entry System through the Bank
(or any such agent) will identify by book entry Portfolio Securities which are
included with other securities deposited in the Account and shall at all times
during the regular business hours of the Bank
<PAGE> 10
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(or such agent) be open for inspection by duly authorized officers, employees or
agents of the Fund. Where securities are transferred to the Fund's account, the
Bank shall also, by book entry or otherwise, identify as belonging to the Fund a
quantity of securities in fungible bulk of securities (i) registered in the name
of the Bank or its nominee, or (ii) shown on the Bank's account on the books of
the Federal Reserve Bank;
(c) The Bank (or its agent) shall pay for securities
purchased for the account of the Fund or shall pay cash collateral against the
return of Portfolio Securities loaned by the Fund upon (i) receipt of advice
from the Book-Entry System that such Securities have been transferred to the
Account, and (ii) the making of an entry on the records of the Bank (or its
agent) to reflect such payment and transfer for the account of the Fund. The
Bank (or its agent) shall transfer securities sold or loaned for the account of
the Fund upon
(i) receipt of advice from the Book-Entry System
that payment for securities sold or payment of the initial cash collateral
against the delivery of securities loaned by the Fund has been transferred to
the Account; and
(ii) the making of an entry on the records of the
Bank (or its agent) to reflect such transfer and payment for the account of the
Fund. Copies of all advices from the Book-Entry System of transfers of
securities for the account of the Fund shall identify the Fund, be maintained
for the Fund by the Bank and shall be provided to the Fund at its request. The
Bank shall send the Fund a confirmation, as defined by Rule 17f-4 of the 1940
Act, of any transfers to or from the account of the Fund;
(d) The Bank will promptly provide the Fund with any report
obtained by the Bank or its agent on the Book-Entry System's accounting system,
internal accounting control and procedures for safeguarding securities deposited
in the Book-Entry System;
(e) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of the Book-Entry System by reason of any
gross negligence, willful misfeasance or bad faith of the Bank or any of its
agents or of any of its or their employees or from any reckless disregard by the
Bank or any such agent of its duty to use its best efforts to enforce such
rights as it may have against the Book-Entry System; at the election of the
Fund, it shall be entitled to be subrogated for the Bank in any claim against
the Book-Entry System or any other person which the Bank or its agent may have
as a consequence of any such loss or damage if and to the extent that the Fund
has not been made whole for any loss or damage;
6.4 Use of a Depository. Provided (i) the Bank has received a
certified copy of a resolution of the Board specifically approving deposits in
DTC or other such Depository and (ii) for any subsequent changes to such
arrangements following such approval, the Board has reviewed and approved the
arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval:
<PAGE> 11
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(a) The Bank may use a Depository to hold, receive, exchange,
release, lend, deliver and otherwise deal with Portfolio Securities including
stock dividends, rights and other items of like nature, and to receive and remit
to the Bank on behalf of the Fund all income and other payments thereon and
to take all steps necessary and proper in connection with the collection
thereof;
(b) Registration of Portfolio Securities may be made in the
name of any nominee or nominees used by such Depository;
(c) Payment for securities purchased and sold may be made
through the clearing medium employed by such Depository for transactions of
participants acting through it. Upon any purchase of Portfolio Securities,
payment will be made only upon delivery of the securities to or for the account
of the Fund and the Fund shall pay cash collateral against the return of
Portfolio Securities loaned by the Fund only upon delivery of the Securities to
or for the account of the Fund; and upon any sale of Portfolio Securities,
delivery of the Securities will be made only against payment thereof or, in the
event Portfolio Securities are loaned, delivery of Securities will be made only
against receipt of the initial cash collateral to or for the account of the
Fund; and
(d) The Bank shall be liable to the Fund for any loss or
damage to the Fund resulting from use of a Depository by reason of any gross
negligence, willful misfeasance or bad faith of the Bank or its employees or
from any reckless disregard by the Bank of its duty to use its best efforts to
enforce such rights as it may have against a Depository. In this connection, the
Bank shall use its best efforts to ensure that:
(i) The Depository obtains replacement of any
certificated Portfolio Security deposited with it in the event such Security is
lost, destroyed, wrongfully taken or otherwise not available to be returned to
the Bank upon its request;
(ii) Any proxy materials received by a Depository
with respect to Portfolio Securities deposited with such Depository are
forwarded immediately to the Bank for prompt transmittal to the Fund;
(iii) Such Depository immediately forwards to the
Bank confirmation of any purchase or sale of Portfolio Securities and of the
appropriate book entry made by such Depository to the Fund's account;
(iv) Such Depository prepares and delivers to the
Bank such records with respect to the performance of the Bank's obligations and
duties hereunder as may be necessary for the Fund to comply with the
recordkeeping requirements of Section 31(a) of the 1940 Act and Rule 31(a)
thereunder; and
(v) Such Depository delivers to the Bank and the Fund
all internal accounting control reports, whether or not audited by an
independent public accountant, as well as such other reports as the Fund may
reasonably request in order to verify the Portfolio Securities held by such
Depository.
<PAGE> 12
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6.5 Use of Book-Entry System for Commercial Paper. Provided (i) the
Bank has received a certified copy of a resolution of the Board specifically
approving participation in a system maintained by the Bank for the holding of
commercial paper in book-entry form ("Book-Entry Paper") and (ii) for each year
following such approval the Board has received and approved the arrangements,
upon receipt of Proper Instructions and upon receipt of confirmation from an
Issuer (as defined below) that the Fund has purchased such Issuer's Book-entry
Paper, the Bank shall issue and hold in book-entry form, on behalf of the Fund,
commercial paper issued by issuers with whom the Bank has entered into a
book-entry agreement (the "Issuers"). In maintaining its Book-entry Paper
System, the Bank agrees that:
(a) the Bank will maintain all Book-Entry Paper held by the
Fund in an account of the Bank that includes only assets held by it for
customers;
(b) the records of the Bank with respect to the Fund's
purchase of Book- entry Paper through the Bank will identify, by book-entry,
Commercial Paper belonging to the Fund which is included in the Book-entry Paper
System and shall at all times during the regular business hours of the Bank be
open for inspection by duly authorized officers, employees or agents of the
Fund;
(c) The Bank shall pay for Book-Entry Paper purchased for the
account of the Fund upon contemporaneous (i) receipt of advice from the Issuer
that such sale of Book- Entry Paper has been effected, and (ii) the making of an
entry on the records of the Bank to reflect such payment and transfer for the
account of the Fund;
(d) The Bank shall cancel such Book-Entry Paper obligation
upon the maturity thereof upon contemporaneous (i) receipt of advice that
payment for such Book- Entry Paper has been transferred to the Fund, and (ii)
the making of an entry on the records of the Bank to reflect such payment for
the account of the Fund;
(e) the Bank shall transmit to the Fund a transaction journal
confirming each transaction in Book-Entry Paper for the account of the Fund on
the next business day following the transaction; and
(f) the Bank will send to the Fund such reports on its system
of internal accounting control with respect to the Book-Entry Paper System as
the Fund may reasonably request from time to time. .
6.6 Use of Immobilization Programs. Provided (i) the Bank has
received a certified copy of a resolution of the Board specifically approving
the maintenance of Portfolio Securities in an immobilization program operated by
a bank which meets the requirements of Section 26(a)(1) of the 1940 Act, and
(ii) for each year following such approval the Board has reviewed and approved
the arrangement and has not delivered an Officer's Certificate to the Bank
indicating that the Board has withdrawn its approval, the Bank shall enter into
such immobilization program with such bank acting as a subcustodian hereunder.
<PAGE> 13
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6.7 Eurodollar CDs. Any Portfolio Securities which are Eurodollar
CDs may be physically held by the European branch of the U.S. banking
institution that is the issuer of such Eurodollar CD (a "European Branch"),
provided that such Securities are identified on the books of the Bank as
belonging to the Fund and that the books of the Bank identify the European
Branch holding such Securities. Notwithstanding any other provision of this
Agreement to the contrary, except as stated in the first sentence of this
subsection 6.7, the Bank shall be under no other duty with respect to such
Eurodollar CDs belonging to the Fund, and shall have no liability to the Fund or
its shareholders with respect to the actions, inactions, whether negligent or
otherwise of such European Branch in connection with such Eurodollar CDs, except
for any loss or damage to the Fund resulting from the Bank's own gross
negligence, willful misfeasance or bad faith in the performance of its duties
hereunder.
6.8 Options and Futures Transactions.
(a) Puts and Calls Traded on Securities Exchanges, NASDAQ or
Over-the- Counter.
1. The Bank shall take action as to put options ("puts") and
call options ("calls") purchased or sold (written) by the Fund regarding escrow
or other arrangements (i) in accordance with the provisions of any agreement
entered into upon receipt of Proper Instructions between the Bank, any
broker-dealer registered under the Exchange Act and a member of the National
Association of Securities Dealers, Inc. (the "NASD"), and, if necessary, the
Fund relating to the compliance with the rules of the Options Clearing
Corporation and of any registered national securities exchange, or of any
similar organization or organizations.
2. Unless another agreement requires it to do so, the Bank
shall be under no duty or obligation to see that the Fund has deposited or is
maintaining adequate margin, if required, with any broker in connection with any
option, nor shall the Bank be under duty or obligation to present such option to
the broker for exercise unless it receives Proper Instructions from the Fund.
The Bank shall have no responsibility for the legality of any put or call
purchased or sold on behalf of the Fund, the propriety of any such purchase or
sale, or the adequacy of any collateral delivered to a broker in connection with
an option or deposited to or withdrawn from a Segregated Account (as defined in
subsection 6.9 below). The Bank specifically, but not by way of limitation,
shall not be under any duty or obligation to: (i) periodically check or notify
the Fund that the amount of such collateral held by a broker or held in a
Segregated Account is sufficient to protect such broker of the Fund against any
loss; (ii) effect the return of any collateral delivered to a broker; or (iii)
advise the Fund that any option it holds, has or is about to expire. Such duties
or obligations shall be the sole responsibility of the Fund.
(b) Puts, Calls and Futures Traded on Commodities Exchanges
1. The Bank shall take action as to puts, calls and futures
contracts ("Futures") purchased or sold by the Fund in accordance with the
provisions of any agreement among the Fund, the Bank and a Futures Commission
Merchant registered under
<PAGE> 14
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the Commodity Exchange Act, relating to compliance with the rules of the
Commodity Futures Trading Commission and/or any Contract Market, or any similar
organization or organizations, regarding account deposits in connection with
transactions by the Fund.
2. The responsibilities and liabilities of the Bank as to
futures, puts and calls traded on commodities exchanges, any Futures Commission
Merchant account and the Segregated Account shall be limited as set forth in
subparagraph (a)(2) of this Section 6.8 as if such subparagraph referred to
Futures Commission Merchants rather than brokers, and Futures and puts and calls
thereon instead of options.
6.9 Segregated Account. The Bank shall upon receipt of Proper
Instructions establish and maintain a Segregated Account or Accounts for and on
behalf of the Fund, into which Account or Accounts may be transferred upon
receipt of Proper Instructions cash and/or Portfolio Securities:
(a) in accordance with the provisions of any agreement among
the Fund, the Bank and a broker-dealer registered under the Exchange Act and a
member of the NASD or any Futures Commission Merchant registered under the
Commodity Exchange Act, relating to compliance with the rules of the Options
Clearing Corporation and of any registered national securities exchange or the
Commodity Futures Trading Commission or any registered Contract Market, or of
any similar organizations regarding escrow or other arrangements in connection
with transactions by the Fund;
(b) for the purpose of segregating cash or securities in
connection with options purchased or written by the Fund or commodity futures
purchased or written by the Fund;
(c) for the deposit of liquid assets, such as cash, U.S.
Government securities or other high grade debt obligations, having a market
value (marked to market on a daily basis) at all times equal to not less than
the aggregate purchase price due on the settlement dates of all the Fund's then
outstanding forward commitment or "when-issued" agreements relating to the
purchase of Portfolio Securities and all the Fund's then outstanding commitments
under reverse repurchase agreements entered into with broker-dealer firms;
(d) for the purposes of compliance by the Fund with the
procedures required by Investment Company Act Release No. 10666, or any
subsequent release or releases of the Securities and Exchange Commission
relating to the maintenance of Segregated Accounts by registered investment
companies;
(e) for other proper corporate purposes, but only, in the case
of this clause (e), upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board, or of the Executive Committee
signed by an officer of the Fund and certified by the Secretary or an Assistant
Secretary, setting forth the purpose or purposes of such Segregated Account and
declaring such purposes to be proper corporate purposes.
<PAGE> 15
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(f) Assets may be withdrawn from the Segregated Account
pursuant to Proper Instructions only
(i) with respect to assets deposited in accordance
with the provisions of any agreements referenced in (a) or (b)
above, in accordance with the provisions of such agreements;
(ii) with respect to assets deposited pursuant to (c)
or (d) above, for sale or delivery to meet the Fund's
obligations under outstanding firm commitment when issued
agreements for the purchase of Portfolio Securities and under
reverse repurchase agreements;
(iii) for exchange for other liquid assets of equal
or greater value deposited in the Segregated Account;
(iv) to the extent that the Fund's outstanding
forward commitment or when-issued agreements for the purchase
of portfolio securities or reverse repurchase agreements are
sold to other parties or the Fund's obligations thereunder are
met from assets of the Fund other than those in the Segregated
Account;
(v) for delivery upon settlement of a forward
commitment agreement for the sale of Portfolio Securities; or
(vi) with respect to assets deposited pursuant to (e)
above, in accordance with the purposes of such account as set
forth in Proper Instructions.
6.10 Interest Bearing Call or Time Deposits. The Bank shall, upon
receipt of Proper Instructions relating to the purchase by the Fund of
interest-bearing fixed-term and call deposits, transfer cash, by wire or
otherwise, in such amounts and to such bank or banks as shall be indicated in
such Proper Instructions. The Bank shall include in its records with respect to
the assets of the Fund appropriate notation as to the amount of each such
deposit, the banking institution with which such deposit is made (the "Deposit
Bank"), and shall retain such forms of advice or receipt evidencing the deposit,
if any, as may be forwarded to the Bank by the Deposit Bank. Such deposits shall
be deemed Portfolio Securities of the Fund and the responsibility of the Bank
therefore shall be the same as and no greater than the Bank's responsibility in
respect of other Portfolio Securities of the Fund.
6.11 Transfer of Securities. The Bank will transfer, exchange,
deliver or release Portfolio Securities held by it hereunder, insofar as such
Securities are available for such purpose, provided that before making any
transfer, exchange, delivery or release under this Section the Bank will receive
Proper Instructions requesting such transfer, exchange or delivery stating that
it is for a purpose permitted under the terms of this Section 6.11, specifying
the applicable subsection, or describing the purpose of the transaction with
sufficient particularity to permit the Bank to ascertain the applicable
subsection, only
<PAGE> 16
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(a) upon sales of Portfolio Securities for the account of the
Fund, against contemporaneous receipt by the Bank of payment therefor in full,
each such payment to be in the amount of the sale price shown in a broker's
confirmation of sale of the Portfolio Securities received by the Bank before
such payment is made, as confirmed in the Proper Instructions received by the
Bank before such payment is made;
(b) in exchange for or upon conversion into other securities
alone or other securities and cash pursuant to any plan of merger,
consolidation, reorganization, share split-up, change in par value,
recapitalization or readjustment or otherwise, upon exercise of subscription,
purchase or sale or other similar rights represented by such Portfolio
Securities, or for the purpose of tendering shares in the event of a tender
offer therefor, provided however that in the event of an offer of exchange,
tender offer, or other exercise of rights requiring the physical tender or
delivery of Portfolio Securities, the Bank shall have no liability for failure
to so tender in a timely manner unless such Proper Instructions are received by
the Bank at least two business days prior to the date required for tender, and
unless the Bank (or its agent or subcustodian hereunder) has actual possession
of such Security at least two business days prior to the date of tender;
(c) upon conversion of Portfolio Securities pursuant to their
terms into other securities;
(d) for the purpose of redeeming in kind shares of the Fund
upon authorization from the Fund;
(e) in the case of option contracts owned by the Fund, for
presentation to the endorsing broker;
(f) when such Portfolio Securities are called, redeemed or
retired or otherwise become payable;
(g) for the purpose of effectuating the pledge of Portfolio
Securities held by the Bank in order to collateralize loans made to the Fund by
any bank, including the Bank; provided, however, that such Portfolio Securities
will be released only upon payment to the Bank for the account of the Fund of
the moneys borrowed, except that in cases where additional collateral is
required to secure a borrowing already made, and such fact is made to appear in
the Proper Instructions, further Portfolio Securities may be released for that
purpose without any such payment. In the event that any such pledged Portfolio
Securities are held by the Bank, they will be so held for the account of the
lender, and after notice to the Fund from the lender in accordance with the
normal procedures of the lender, that an event of deficiency or default on the
loan has occurred, the Bank may deliver such pledged Portfolio Securities to or
for the account of the lender;
(h) for the purpose of releasing certificates representing
Portfolio Securities, against contemporaneous receipt by the Bank of the fair
market value of such
<PAGE> 17
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security, as set forth in the Proper Instructions received by the Bank before
such payment is made;
(i) for the purpose of delivering securities lent by the Fund
to a bank or broker dealer, but only against receipt in accordance with street
delivery custom except as otherwise provided herein, of adequate collateral as
agreed upon from time to time by the Fund and the Bank, and upon receipt of
payment in connection with any repurchase agreement relating to such securities
entered into by the Fund;
(j) for other authorized transactions of the Fund or for other
proper corporate purposes; provided that before making such transfer, the Bank
will also receive a certified copy of resolutions of the Board, signed by an
authorized officer of the Fund (other than the officer certifying such
resolution) and certified by its Secretary or Assistant Secretary, specifying
the Portfolio Securities to be delivered, setting forth the transaction in or
purpose for which such delivery is to be made, declaring such transaction to be
an authorized transaction of the Fund or such purpose to be a proper corporate
purpose, and naming the person or persons to whom delivery of such securities
shall be made; and
(k) upon termination of this Agreement as hereinafter set
forth pursuant to Section 8 and Section 14 of this Agreement.
As to any deliveries made by the Bank pursuant to subsections (a), (b),
(c), (e), (f), (g), (h) and (i) securities or cash receivable in exchange
therefor shall be delivered to the Bank.
7. Redemptions. In the case of payment of assets of the Fund held by
the Bank in connection with redemptions and repurchases by the Fund of
outstanding shares of beneficial interests in the Fund, the Bank will rely on
notification by the Fund's transfer agent of receipt of a request for redemption
and certificates, if issued, in proper form for redemption before such payment
is made. Payment shall be made in accordance with the Trust Instrument and
By-laws of the Fund, from assets available for said purpose.
8. Merger, Dissolution, etc. of Fund. In the case of the following
transactions, not in the ordinary course of business, namely, the merger of the
Fund into or the consolidation of the Fund with another investment company, the
sale by the Fund of all, or substantially all, of its assets to another
investment company, or the liquidation or dissolution of the Fund and
distribution of its assets, the Bank will deliver the Portfolio Securities held
by it under this Agreement and disburse cash only upon the order of the Fund set
forth in an Officers' Certificate, accompanied by a certified copy of a
resolution of the Board authorizing any of the foregoing transactions. Upon
completion of such delivery and disbursement and the payment of the fees,
disbursements and expenses of the Bank, this Agreement will terminate.
9. Actions of Bank Without Prior Authorization. Notwithstanding
anything herein to the contrary, unless and until the Bank receives an Officers'
Certificate to the contrary, it will without prior authorization or instruction
of the Fund or the transfer agent:
<PAGE> 18
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9.1 Endorse for collection and collect on behalf of and in the name
of the Fund all checks, drafts, or other negotiable or transferable instruments
or other orders for the payment of money received by it for the account of the
Fund and hold for the account of the Fund all income, dividends, interest and
other payments or distribution of cash with respect to the Portfolio Securities
held thereunder;
9.2 Present for payment all coupons and other income items held by
it for the account of the Fund which call for payment upon presentation and hold
the cash received by it upon such payment for the account of the Fund;
9.3 Receive and hold for the account of the Fund all securities
received as a distribution on Portfolio Securities as a result of a stock
dividend, share split-up, reorganization, recapitalization, merger,
consolidation, readjustment, distribution of rights and similar securities
issued with respect to any Portfolio Securities held by it hereunder.
9.4 Execute as agent on behalf of the Fund all necessary ownership
and other certificates and affidavits required by the Internal Revenue Code or
the regulations of the Treasury Department issued thereunder, or by the laws of
any state, now or hereafter in effect, inserting the Fund's name on such
certificates as the owner of the securities covered thereby, to the extent it
may lawfully do so and as may be required to obtain payment in respect thereof.
The Bank will execute and deliver such certificates in connection with Portfolio
Securities delivered to it or by it under this Agreement as may be required
under the provisions of the Internal Revenue Code and any Regulations of the
Treasury Department issued thereunder, or under the laws of any State;
9.5 Present for payment all Portfolio Securities which are called,
redeemed, retired or otherwise become payable, and hold cash received by it upon
payment for the account of the Fund; and
9.6 Exchange interim receipts or temporary securities for definitive
securities.
10. Collections and Defaults. The Bank will use all reasonable efforts
to collect any funds which may to its knowledge become collectible arising from
Portfolio Securities, including dividends, interest and other income, and to
transmit to the Fund notice actually received by it of any call for redemption,
offer of exchange, right of subscription, reorganization or other proceedings
affecting such Securities. If Portfolio Securities upon which such income is
payable are in default or payment is refused after due demand or presentation,
the Bank will notify the Fund in writing of any default or refusal to pay within
two business days from the day on which it receives knowledge of such default or
refusal. In addition, the Bank will send the Fund a written report once each
month showing any income on any Portfolio Security held by it which is more than
ten days overdue on the date of such report and which has not previously been
reported.
11. Maintenance of Records and Accounting Services. The Bank will
maintain records with respect to transactions for which the Bank is responsible
pursuant to the terms
<PAGE> 19
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and conditions of this Agreement, and in compliance with the applicable
rules and regulations of the 1940 Act and will furnish the Fund daily with a
statement of condition of the Fund. The Bank will furnish to the Fund at the end
of every month, and at the close of each quarter of the Fund's fiscal year, a
list of the Portfolio Securities and the aggregate amount of cash held by it for
the Fund. The books and records of the Bank pertaining to its actions under this
Agreement and reports by the Bank or its independent accountants concerning its
accounting system, procedures for safeguarding securities and internal
accounting controls will be open to inspection and audit at reasonable times by
officers of or auditors employed by the Fund and will be preserved by the Bank
in the manner and in accordance with the applicable rules and regulations under
the 1940 Act.
The Bank shall perform fund accounting and shall keep the books of
account and render statements or copies from time to time as reasonably
requested by the Treasurer or any executive officer of the Fund.
The Bank shall assist generally in the preparation of reports to
shareholders and others, audits of accounts, and other ministerial matters of
like nature.
12.1 Fund Evaluation. The Bank shall compute and, unless otherwise
directed by the Board, determine as of the close of regular trading on the New
York Stock Exchange on each day on which said Exchange is open for unrestricted
trading and as of such other days, or hours, if any, as may be authorized by the
Board, the net asset value and the public offering price of a share of capital
stock of the Fund, such determination to be made in accordance with the
provisions of the Trust Instrument and By-laws of the Fund and Prospectus and
Statement of Additional Information relating to the Fund, as they may from time
to time be amended, and any applicable resolutions of the Board at the time in
force and applicable; and promptly to notify the Fund, the proper exchange and
the NASD or such other persons as the Fund may request of the results of such
computation and determination. In computing the net asset value hereunder, the
Bank may rely in good faith upon information furnished to it by any Authorized
Person in respect of (i) the manner of accrual of the liabilities of the Fund
and in respect of liabilities of the Fund not appearing on its books of account
kept by the Bank, (ii) reserves, if any, authorized by the Board or that no such
reserves have been authorized, (iii) the source of the quotations to be used in
computing the net asset value, (iv) the value to be assigned to any security for
which no price quotations are available, and (v) the method of computation of
the public offering price on the basis of the net asset value of the shares, and
the Bank shall not be responsible for any loss occasioned by such reliance or
for any good faith reliance on any quotations received from a source pursuant to
(iii) above.
12.2. Yield Calculation. The Bank will compute the performance results
of the Fund (the "Yield Calculation") in accordance with the provisions of
Release No. 33-6753 and Release No. IC-16245 (February 2, 1988) (the "Releases")
promulgated by the Securities and Exchange Commission, and any subsequent
amendments to, published interpretations of or general conventions accepted by
the staff of the Securities and Exchange Commission with respect to such
releases or the subject matter thereof ("Subsequent Staff Positions"), subject
to the terms set forth below:
<PAGE> 20
-16-
(a) The Bank shall compute the Yield Calculation for the
Fund for the stated periods of time as shall be mutually agreed upon, and
communicate in a timely manner the result of such computation to the Fund.
(b) In performing the Yield Calculation, the Bank will
derive from the records it generates and maintains for the Fund pursuant Section
11 hereof, the items of data necessary for the computation. The Bank shall have
no responsibility to review, confirm, or otherwise assume any duty or liability
with respect to the accuracy or correctness of any such data supplied to it by
the Fund, any of the Fund's designated agents or any of the Fund's designated
third party providers.
(c) At the request of the Bank, the Fund shall provide,
and the Bank shall be entitled to rely on, written standards and guidelines to
be followed by the Bank in interpreting and applying the computation methods set
forth in the Releases or any Subsequent Staff Positions as they specifically
apply to the Fund. In the event that the computation methods in the Releases or
the Subsequent Staff Positions or the application to the Fund of a standard or
guideline is not free from doubt or in the event there is any question of
interpretation as to the characterization of a particular security or any aspect
of a security or a payment with respect thereto (e.g., original issue discount,
participating debt security, income or return of capital, etc.) or otherwise or
as to any other element of the computation which is pertinent to the Fund, the
Fund or its designated agent shall have the full responsibility for making the
determination of how the security, or payment is to be treated for purposes of
the computation and how the computation is to be made and shall inform the Bank
thereof on a timely basis. The Bank shall have no responsibility to make
independent determinations with respect to any item which is covered by this
Section, and shall not be responsible for its computations made in accordance
with such determinations so long as such computations are mathematically
correct.
(d) The Fund shall keep the Bank informed of all publicly
available information and of any non-public advice, or information obtained by
the Fund from its independent auditors or by its personnel or the personnel of
its investment adviser, or Subsequent Staff Positions related to the
computations to be undertaken by the Bank pursuant to this Agreement and the
Bank shall not be deemed to have knowledge of such information (except as
contained in the Releases) unless it has been furnished to the Bank in writing.
13. Concerning the Bank.
13.1 Performance of Duties and Standard of Care.
In performing its duties hereunder and any other duties listed on any Schedule
hereto, if any, the Bank will be entitled to receive and act upon the advice of
independent counsel of its own selection, which may be counsel for the Fund, and
will be without liability for any action taken or thing done or omitted to be
done in accordance with this Agreement in good faith in conformity with such
advice. In the performance of its duties hereunder, the Bank will be protected
and not be liable, and will be indemnified and held harmless for any action
<PAGE> 21
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taken or omitted to be taken by it in good faith reliance upon the terms of this
Agreement, any Officers' Certificate, Proper Instructions, resolution of the
Board, telegram, notice, request, certificate or other instrument reasonably
believed by the Bank to be genuine and for any other loss to the Fund except in
the case of its gross negligence, willful misfeasance or bad faith in the
performance of its duties or reckless disregard of its obligations and duties
hereunder.
The Bank will be under no duty or obligation to inquire into and will
not be liable for:
(a) the validity of the issue of any Portfolio Securities
purchased by or for the Fund, the legality of the purchases thereof or the
propriety of the price incurred therefor;
(b) the legality of any sale of any Portfolio Securities
by or for the Fund or the propriety of the amount for which the same are sold;
(c) the legality of an issue or sale of any shares of
beneficial interest in the Fund or the sufficiency of the amount to be received
therefor;
(d) the legality of the repurchase of any shares of
beneficial interest in the Fund or the propriety of the amount to be paid
therefor;
(e) the legality of the declaration of any dividend by
the Fund or the legality of the distribution of any Portfolio Securities as
payment in kind of such dividend; and
(f) any property or moneys of the Fund unless and until
received by it, and any such property or moneys delivered or paid by it pursuant
to the terms hereof.
Moreover, the Bank will not be under any duty or obligation to
ascertain whether any Portfolio Securities at any time delivered to or held by
it for the account of the Fund are such as may properly be held by the Fund
under the provisions of its Trust Instrument, By-laws, any federal or state
statutes or any rule or regulation of any governmental agency.
Notwithstanding anything in this Agreement to the contrary, in no event
shall the Bank be liable hereunder or to any third party:
(a) for any losses or damages of any kind resulting from
acts of God, earthquakes, fires, floods, storms or other disturbances of nature,
epidemics, strikes, riots, nationalization, expropriation, currency
restrictions, acts of war, civil war or terrorism, insurrection, nuclear fusion,
fission or radiation, the interruption, loss or malfunction of utilities,
transportation, or computers (hardware or software) and computer facilities, the
unavailability of energy sources and other similar happenings or events except
as results from the Bank's own gross negligence; or
<PAGE> 22
-18-
(b) for special, punitive or consequential damages
arising from the provision of services hereunder, even if the Bank has been
advised of the possibility of such damages.
13.2 Agents and Subcustodians with Respect to Property of the Fund
Held in the United States. The Bank may employ agents in the performance of its
duties hereunder and shall be responsible for the acts and omissions of such
agents as if performed by the Bank hereunder. Without limiting the foregoing,
certain duties of the Bank hereunder may be performed by one or more affiliates
of the Bank.
Upon receipt of Proper Instructions, the Bank may employ subcustodians,
provided that any such subcustodian meets at least the minimum qualifications
required by Section 17(f)(1) of the 1940 Act to act as a custodian of the Fund's
assets with respect to property of the Fund held in the United States. The Bank
shall have no liability to the Fund or any other person by reason of any act or
omission of any subcustodian and the Fund shall indemnify the Bank and hold it
harmless from and against any and all actions, suits and claims, arising
directly or indirectly out of the performance of any subcustodian. Upon request
of the Bank, the Fund shall assume the entire defense of any action, suit, or
claim subject to the foregoing indemnity. The Fund shall pay all fees and
expenses of any subcustodian.
13.3 Duties of the Bank with Respect to Property of the Fund Held
Outside of the United States.
(a) Appointment of Foreign Sub-Custodians. The Fund
hereby authorizes and instructs the Bank to employ as sub-custodians for the
Fund's Portfolio Securities and other assets maintained outside the United
States the foreign banking institutions and foreign securities depositories
designated on the Schedule attached hereto (each, a "Selected Foreign
Sub-Custodian"). Upon receipt of Proper Instructions, together with a certified
resolution of the Fund's Board of Trustees, the Bank and the Fund may agree to
designate additional foreign banking institutions and foreign securities
depositories to act as Selected Foreign Sub-Custodians hereunder. Upon receipt
of Proper Instructions, the Fund may instruct the Bank to cease the employment
of any one or more such Selected Foreign Sub-Custodians for maintaining custody
of the Fund's assets, and the Bank shall so cease to employ such sub-custodian
as soon as alternate custodial arrangements have been implemented.
(b) Foreign Securities Depositories. Except as may
otherwise be agreed upon in writing by the Bank and the Fund, assets of the Fund
shall be maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as Selected Foreign
Sub-Custodians pursuant to the terms hereof. Where possible, such arrangements
shall include entry into agreements containing the provisions set forth in
subparagraph (d) hereof. Notwithstanding the foregoing, except as may otherwise
be agreed upon in writing by the Bank and the Fund, the Fund authorizes the
deposit in Euro-clear, the securities clearance and depository facilities
operated by Morgan Guaranty Trust Company of New York in Brussels, Belgium, of
Foreign Portfolio Securities eligible for deposit therein and to utilize such
securities depository in connection with
<PAGE> 23
-19-
settlements of purchases and sales of securities and deliveries and returns of
securities, until notified to the contrary pursuant to subparagraph (a)
hereunder.
(c) Segregation of Securities. The Bank shall identify on
its books as belonging to the Fund the Foreign Portfolio Securities held by each
Selected Foreign Sub-Custodian. Each agreement pursuant to which the Bank
employs a foreign banking institution shall require that such institution
establish a custody account for the Bank and hold in that account, Foreign
Portfolio Securities and other assets of the Fund, and, in the event that such
institution deposits Foreign Portfolio Securities in a foreign securities
depository, that it shall identify on its books as belonging to the Bank the
securities so deposited.
(d) Agreements with Foreign Banking Institutions. Each of
the agreements pursuant to which a foreign banking institution holds assets of
the Fund (each, a "Foreign Sub-Custodian Agreement") shall be substantially in
the form previously made available to the Fund and shall provide that: (a) the
Fund's assets will not be subject to any right, charge, security interest, lien
or claim of any kind in favor of the foreign banking institution or its
creditors or agent, except a claim of payment for their safe custody or
administration (including, without limitation, any fees or taxes payable upon
transfers or reregistration of securities); (b) beneficial ownership of the
Fund's assets will be freely transferable without the payment of money or value
other than for custody or administration (including, without limitation, any
fees or taxes payable upon transfers or reregistration of securities); (c)
adequate records will be maintained identifying the assets as belonging to Bank;
(d) officers of or auditors employed by, or other representatives of the Bank,
including to the extent permitted under applicable law, the independent public
accountants for the Fund, will be given access to the books and records of the
foreign banking institution relating to its actions under its agreement with the
Bank; and (e) assets of the Fund held by the Selected Foreign Sub-Custodian will
be subject only to the instructions of the Bank or its agents.
(e) Access of Independent Accountants of the Fund. Upon
request of the Fund, the Bank will use its best efforts to arrange for the
independent accountants of the Fund to be afforded access to the books and
records of any foreign banking institution employed as a Selected Foreign
Sub-Custodian insofar as such books and records relate to the performance of
such foreign banking institution under its Foreign Sub-Custodian Agreement.
(f) Reports by Bank. The Bank will supply to the Fund
from time to time, as mutually agreed upon, statements in respect of the
securities and other assets of the Fund held by Selected Foreign Sub-Custodians,
including but not limited to an identification of entities having possession of
the Foreign Portfolio Securities and other assets of the Fund.
(g) Transactions in Foreign Custody Account. Transactions
with respect to the assets of the Fund held by a Selected Foreign Sub-Custodian
shall be effected pursuant to Proper Instructions from the Fund to the Bank and
shall be effected in accordance with the applicable Foreign Sub-Custodian
Agreement. If at any time any
<PAGE> 24
-20-
Foreign Portfolio Securities shall be registered in the name of the nominee of
the Selected Foreign Sub-Custodian, the Fund agrees to hold any such nominee
harmless from any liability by reason of the registration of such securities in
the name of such nominee.
Notwithstanding any provision of this Agreement to the contrary,
settlement and payment for Foreign Portfolio Securities received for the account
of the Fund and delivery of Foreign Portfolio Securities maintained for the
account of the Fund may be effected in accordance with the customary established
securities trading or securities processing practices and procedures in the
jurisdiction or market in which the transaction occurs, including, without
limitation, delivering securities to the purchaser thereof or to a dealer
therefor (or an agent for such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities from such purchaser
or dealer.
In connection with any action to be taken with respect to the Foreign
Portfolio Securities held hereunder, including, without limitation, the exercise
of any voting rights, subscription rights, redemption rights, exchange rights,
conversion rights or tender rights, or any other action in connection with any
other right, interest or privilege with respect to such Securities
(collectively, the "Rights"), the Bank shall promptly transmit to the Fund such
information in connection therewith as is made available to the Bank by the
Foreign Sub-Custodian, and shall promptly forward to the applicable Foreign
Sub-Custodian any instructions, forms or certifications with respect to such
Rights, and any instructions relating to the actions to be taken in connection
therewith, as the Bank shall receive from the Fund pursuant to Proper
Instructions. Notwithstanding the foregoing, the Bank shall have no further duty
or obligation with respect to such Rights, including, without limitation, the
determination of whether the Fund is entitled to participate in such Rights
under applicable U.S. and foreign laws, or the determination of whether any
action proposed to be taken with respect to such Rights by the Fund or by the
applicable Foreign Sub-Custodian will comply with all applicable terms and
conditions of any such Rights or any applicable laws or regulations, or market
practices within the market in which such action is to be taken or omitted.
(h) Liability of Selected Foreign Sub-Custodians. Each
Foreign Sub-Custodian Agreement with a foreign banking institution shall require
the institution to exercise reasonable care in the performance of its duties and
to indemnify, and hold harmless, the Bank and each Fund from and against certain
losses, damages, costs, expenses, liabilities or claims arising out of or in
connection with the institution's performance of such obligations, all as set
forth in the applicable Foreign Sub-Custodian Agreement. The Fund acknowledges
that the Bank, as a participant in Euro-clear, is subject to the Terms and
Conditions Governing the Euro-Clear System, a copy of which has been made
available to the Fund. The Fund acknowledges that pursuant to such Terms and
Conditions, Morgan Guaranty Brussels shall have the sole right to exercise or
assert any and all rights or claims in respect of actions or omissions of, or
the bankruptcy or insolvency of, any other depository, clearance system or
custodian utilized by Euro-clear in connection with the Fund's securities and
other assets.
<PAGE> 25
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(i) Liability of Bank. The Bank shall have no more or
less responsibility or liability on account of the acts or omissions of any
Selected Foreign Sub-Custodian employed hereunder than any such Selected Foreign
Sub-Custodian has to the Bank and, without limiting the foregoing, the Bank
shall not be liable for any loss, damage, cost, expense, liability or claim
resulting from nationalization, expropriation, currency restrictions, or acts of
war or terrorism, political risk (including, but not limited to, exchange
control restrictions, confiscation, insurrection, civil strife or armed
hostilities) other losses due to Acts of God, nuclear incident or any loss where
the Selected Foreign Sub-Custodian has otherwise exercised reasonable care.
(j) Monitoring Responsibilities. The Bank shall furnish
annually to the Fund, information concerning the Selected Foreign Sub-Custodians
employed hereunder for use by the Fund in evaluating such Selected Foreign
Sub-Custodians to ensure compliance with the requirements of Rule 17f-5 of the
Act. In addition, the Bank will promptly inform the Fund in the event that the
Bank is notified by a Selected Foreign Sub-Custodian that there appears to be a
substantial likelihood that its shareholders' equity will decline below $200
million (U.S. dollars or the equivalent thereof) or that its shareholders'
equity has declined below $200 million (in each case computed in accordance with
generally accepted U.S. accounting principles) or any other capital adequacy
test applicable to it by exemptive order, or if the Bank has actual knowledge of
any material loss of the assets of the Fund held by a Foreign Sub-Custodian.
(k) Tax Law. The Bank shall have no responsibility or
liability for any obligations now or hereafter imposed on the Fund or the Bank
as custodian of the Fund by the tax laws of any jurisdiction, and it shall be
the responsibility of the Fund to notify the Bank of the obligations imposed on
the Fund or the Bank as the custodian of the Fund by the tax law of any non-U.S.
jurisdiction, including responsibility for withholding and other taxes,
assessments or other governmental charges, certifications and governmental
reporting. The sole responsibility of the Custodian with regard to such tax law
shall be to use reasonable efforts to assist the Fund with respect to any claim
for exemption or refund under the tax law of jurisdictions for which the Fund
has provided such information.
13.4 Insurance. The Bank shall use the same care with respect to the
safekeeping of Portfolio Securities and cash of the Fund held by it as it uses
in respect of its own similar property but it need not maintain any special
insurance for the benefit of the Fund.
13.5. Fees and Expenses of Bank. The Fund will pay or reimburse the
Bank from time to time for any transfer taxes payable upon transfer of Portfolio
Securities made hereunder, and for all necessary proper disbursements, expenses
and charges made or incurred by the Bank in the performance of this Agreement
(including any duties listed on any Schedule hereto, if any) including any
indemnities for any loss, liabilities or expense to the Bank as provided above.
For the services rendered by the Bank hereunder, the Fund will pay to the Bank
such compensation or fees at such rate and at such times as shall be agreed upon
in writing by the parties from time to time. The Bank will also be entitled to
reimbursement by the Fund for all reasonable expenses incurred in conjunction
with termination of this Agreement.
<PAGE> 26
-22-
13.6 Advances by Bank. The Bank may, in its sole discretion, advance
funds on behalf of the Fund to make any payment permitted by this Agreement upon
receipt of any proper authorization required by this Agreement for such payments
by the Fund. Should such a payment or payments, with advanced funds, result in
an overdraft (due to insufficiencies of the Fund's account with the Bank, or for
any other reason) this Agreement deems any such overdraft or related
indebtedness, a loan made by the Bank to the Fund payable on demand and bearing
interest at the current rate charged by the Bank for such loans unless the Fund
shall provide the Bank with agreed upon compensating balances. The Fund agrees
that the Bank shall have a continuing lien and security interest to the extent
of any overdraft or indebtedness, in and to any property at any time held by it
for the Fund's benefit or in which the Fund has an interest and which is then in
the Bank's possession or control (or in the possession or control of any third
party acting on the Bank's behalf). The Fund authorizes the Bank, in its sole
discretion, at any time to charge any overdraft or indebtedness, together with
interest due thereon against any balance of account standing to the credit of
the Fund on the Bank's books.
14. Termination.
14.1 This Agreement may be terminated at any time after two years
from the date of this Agreement without penalty upon sixty days written notice
delivered by either party to the other by means of registered mail, and upon the
expiration of such sixty days this Agreement will terminate; provided, however,
that the effective date of such termination may be postponed to a date not more
than ninety days from the date of delivery of such notice (i) by the Bank in
order to prepare for the transfer by the Bank of all of the assets of the Fund
held hereunder, and (ii) by the Fund in order to give the Fund an opportunity to
make suitable arrangements for a successor custodian. At any time after the
termination of this Agreement, the Fund will, at its request, have access to the
records of the Bank relating to the performance of its duties as custodian.
14.2 In the event of the termination of this Agreement, the Bank
will immediately upon receipt or transmittal, as the case may be, of notice of
termination, commence and prosecute diligently to completion the transfer of all
cash and the delivery of all Portfolio Securities duly endorsed and all records
maintained under Section 11 to the successor custodian when appointed by the
Fund. The obligation of the Bank to deliver and transfer over the assets of the
Fund held by it directly to such successor custodian will commence as soon as
such successor is appointed and will continue until completed as aforesaid. If
the Fund does not select a successor custodian within ninety (90) days from the
date of delivery of notice of termination the Bank may, subject to the
provisions of subsection (14.3), deliver the Portfolio Securities and cash of
the Fund held by the Bank to a bank or trust company of its own selection which
meets the requirements of Section 17(f)(1) of the 1940 Act and has a reported
capital, surplus and undivided profits aggregating not less than $2,000,000, to
be held as the property of the Fund under terms similar to those on which they
were held by the Bank, whereupon such bank or trust company so selected by the
Bank will become the successor custodian of such assets of the Fund with the
same effect as though selected by the Board.
<PAGE> 27
-23-
14.3 Prior to the expiration of ninety (90) days after notice of
termination has been given, the Fund may furnish the Bank with an order of the
Fund advising that a successor custodian cannot be found willing and able to act
upon reasonable and customary terms and that there has been submitted to the
shareholders of the Fund the question of whether the Fund will be liquidated or
will function without a custodian for the assets of the Fund held by the Bank.
In that event the Bank will deliver the Portfolio Securities and cash of the
Fund held by it, subject as aforesaid, in accordance with one of such
alternatives which may be approved by the requisite vote of shareholders, upon
receipt by the Bank of a copy of the minutes of the meeting of shareholders at
which action was taken, certified by the Fund's Secretary and an opinion of
counsel to the Fund in form and content satisfactory to the Bank.
15. Confidentiality. Both parties hereto agree than any non-public
information obtained hereunder concerning the other party is confidential and
may not be disclosed to any other person without the consent of the other party,
except as may be required by applicable law or at the request of a governmental
agency. The parties further agree that a breach of this provision would
irreparably damage the other party and accordingly agree that each of them is
entitled, without bond or other security, to an injunction or injunctions to
prevent breaches of this provision.
16. Notices. Any notice or other instrument in writing authorized or
required by this Agreement to be given to either party hereto will be
sufficiently given if addressed to such party and mailed or delivered to it at
its office at the address set forth below; namely:
(a) In the case of notices sent to the Fund to:
[ ]
(b) In the case of notices sent to the Bank to:
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
Attention: [ ]
or at such other place as such party may from time to time designate in writing.
17. Amendments. This Agreement may not be altered or amended, except by
an instrument in writing, executed by both parties, and in the case of the Fund,
such alteration or amendment will be authorized and approved by its Board.
<PAGE> 28
-24-
18. Parties. This Agreement will be binding upon and shall inure to the
benefit of the parties hereto and their respective successors and assigns;
provided, however, that this Agreement will not be assignable by the Fund
without the written consent of the Bank or by the Bank without the written
consent of the Fund, authorized and approved by its Board; and provided further
that termination proceedings pursuant to Section 14 hereof will not be deemed to
be an assignment within the meaning of this provision.
19. Governing Law. This Agreement and all performance hereunder will be
governed by the laws of the Commonwealth of Massachusetts.
20. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but such
counterparts shall, together, constitute only one instrument.
21. Limitation of Liability. A copy of the Declaration of Trust of the
Fund is on file with the Secretary of the Fund and notice is hereby given that
this Agreement has been executed on behalf of the Fund by an officer of the Fund
as an officer and not individually and the obligations of the Fund arising out
of this Agreement are not binding upon any of the trustees, officers or
investors of the Fund individually but are binding only upon the assets and
property of the Fund.
<PAGE> 29
-25-
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized as of the day
and year first written above.
[Strategic Allocation Fund]]
By:_____________________________________
Name:
Title:
ATTEST:
____________________________
Investors Bank & Trust Company
By:_____________________________________
Name:
Title:
ATTEST:
____________________________
DATE:_______________________
<PAGE> 1
TRANSFER AGENCY AND SERVICE AGREEMENT
BETWEEN
THE DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS
AND
DIVERSIFIED INVESTMENT ADVISORS, INC.
<PAGE> 2
TABLE OF CONTENTS
PAGE
Article 1 Terms of Appointment; Duties of the Transfer Agent........... 2
Article 2 Fees and Expenses............................................ 5
Article 3 Representations and Warranties of the Transfer Agent......... 6
Article 4 Representations and Warranties of the Funds.................. 6
Article 5 Indemnification.............................................. 7
Article 6 Covenants of the Funds and the Transfer Agent............... 10
Article 7 Termination of Agreement.................................... 11
Article 8 Additional Funds............................................ 12
Article 9 Assignment.................................................. 12
Article 10 Amendment................................................... 13
Article 11 New York Law to Apply....................................... 13
Article 12 Merger of Agreement.........................................13
<PAGE> 3
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT as of the ___ day of ______________, 1996, by and between THE
DIVERSIFIED INVESTORS STRATEGIC ALLOCATION FUNDS, a Massachusetts business trust
having its principal office and place of business at 4 Manhattanville Road,
Purchase, New York 10577 (the "FUND"), and DIVERSIFIED INVESTMENT ADVISORS,
INC., a Delaware corporation having its principal office and place of business
at 4 Manhattanville Road, Purchase, New York 10577 (the "Transfer Agent").
WHEREAS, the Fund is authorized to issue shares in separate series,
with each such series representing interests in a separate portfolio of
securities and other assets; and
WHEREAS, the Fund intends initially to offer shares in three series,
the Conservative Strategic Allocation Series, the Moderate Strategic Allocation
Series and the Aggressive Strategic Allocation Series (each such series,
together with all other series subsequently established by the Fund and made
subject to this Agreement in accordance with Article 8 being herein referred to
as a "Series" and collectively as the "Series");
WHEREAS, the Fund on behalf of the Series desires to appoint the
Transfer Agent as its transfer agent, dividend disbursing agent and agent in
connection with certain other activities, and the Transfer Agent desires to
accept such appointment;
NOW, THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
ARTICLE 1 TERMS OF APPOINTMENT; DUTIES OF THE TRANSFER AGENT
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund on behalf of the Series hereby employs and appoints the
Transfer Agent to act as, and the Transfer Agent agrees to act as, its transfer
agent for the authorized and issued shares of beneficial interest of the Fund
representing interests in each of the respective Series ("Shares"), dividend
disbursing agent and agent in connection with any accumulation, open-account or
similar plans provided to the shareholders of each of the respective Series of
the Fund ("Shareholders") and set out in the currently effective prospectuses
and statement of additional information ("prospectus") of the Fund on behalf of
the applicable Series, including without limitation any periodic investment plan
or periodic withdrawal program.
<PAGE> 4
1.02 The Transfer Agent agrees that it will perform the
following services:
(a) In accordance with procedures established from time to
time by agreement between the Fund on behalf of each of the Series as
applicable, and the Transfer Agent, the Transfer Agent shall:
(i) Receive for acceptance orders for the purchase of
Shares and promptly deliver payment and appropriate
documentation therefor to the Custodian of the Fund
(the "Custodian");
(ii) Pursuant to purchase orders, issue the appropriate
number of Shares and hold such Shares in the
appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and
redemption directions and deliver the appropriate
documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives
monies paid to it by the Custodian with respect to
any redemption, pay over or cause to be paid over in
the appropriate manner such monies as instructed by
the redeeming Shareholders;
(v) Effect transfers of Shares by the registered owners
thereof upon receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and
distributions declared by the Fund on behalf of the
applicable Series;
(vii) Maintain records of account for and advise the Fund
and its Shareholders as to the foregoing; and
(ix) Record the issuance of Shares and maintain pursuant
to SEC Rule 17Ad-10(e) a record of the total number
of Shares which are authorized, based upon data
provided to it by the Fund, and issued and
outstanding. Transfer Agent shall also provide the
Fund on a regular basis with the total number of
Shares which are authorized and issued and
outstanding and shall have no obligation, when
recording the issuance of Shares, to monitor the
issuance of such Shares or to take cognizance of any
laws relating to the issue or sale of such Shares,
which functions shall be the sole responsibility of
the Fund.
2
<PAGE> 5
(b) In addition to and not in lieu of the services set forth
in the above paragraph (a), the Transfer Agent shall: (i) perform all of the
customary services of a transfer agent, dividend disbursing agent and, as
relevant, agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to: maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on U.S. resident and non-resident alien
accounts, preparing and filing U.S. Treasury Department Forms 1099 and other
appropriate forms required with respect to dividends and distributions by
federal authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable transactions in Shareholder
accounts, preparing and mailing activity statements for Shareholders, and
providing Shareholder account information and (ii) provide a system which will
enable the Fund to monitor the total number of Shares sold in each State.
(c) In addition, the Fund shall (i) identify to the Transfer
Agent in writing those transactions and assets to be treated as exempt from blue
sky reporting for each State and (ii) verify the establishment of transactions
for each State on the system prior to activation and thereafter monitor the
daily activity for each State. The responsibility of the Transfer Agent for the
Fund's "blue-sky" registration status is solely limited to the initial
establishment of transactions subject to "blue-sky" compliance by the Fund and
the reporting of such transactions to the Fund as provided above.
Procedures applicable to certain of these
services may be established from time to time by agreement between the Fund and
the Transfer Agent.
ARTICLE 2 FEES AND EXPENSES
2.01 The Transfer Agent and the Fund agree that the
administrative services provided by the Transfer Agent to the Fund pursuant to
the Administrative Services Agreement dated as of the date hereof shall include
the services provided hereunder and, accordingly, no additional compensation
shall be paid hereunder.
ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE TRANSFER AGENT
The Transfer Agent represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in
good standing under the laws of The State of Delaware.
3
<PAGE> 6
3.02 It is duly qualified to carry on its business in The
State of New York.
3.03 It is empowered under applicable laws and by its charter
and by-laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE FUND
The Fund represents and warrants to the Transfer Agent that;
4.01 It is a business trust duly organized and existing and in
good standing under the laws of the Commonwealth of Massachusetts.
4.02 It is empowered under applicable laws and by its
governing instruments to enter into and perform this Agreement.
4.03 All proceedings required by said governing instruments
have been taken to authorize it to enter into and perform this Agreement.
4.04 It is an open-end and diversified management investment
company registered under the Investment Company Act of 1940.
ARTICLE 5 INDEMNIFICATION
5.01 The Transfer Agent shall not be responsible for, and the
Fund shall on behalf of the applicable Series indemnify and hold the Transfer
Agent harmless from and against, any and all losses, damages, costs, charges,
counsel fees, payments, expenses and liability arising out of or attributable
to:
(a) All actions of the Transfer Agent or its agent or
subcontractors required to be taken pursuant to this Agreement, provided that
such actions are taken in good faith and without negligence or willful
misconduct.
(b) The Fund's refusal or failure to comply with the terms of
this Agreement, or which arise out of the Fund's lack of good faith, negligence
or willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
4
<PAGE> 7
(c) The reliance on or use by the Transfer Agent or its agents
or subcontractors of information, records and documents which (i) are received
by the Transfer Agent or its agents or subcontractors and furnished to it by or
on behalf of the Fund, and (ii) have been prepared and/or maintained by the Fund
or any other person or firm on behalf of the Fund.
(d) The reliance on, or the carrying out by the Transfer Agent
or its agents or subcontractors of any instructions or requests of the Fund on
behalf of the applicable Series.
(e) The offer or sale of Shares in violation of any
requirement under the federal securities laws or regulations or the securities
laws or regulations of any state that such Shares be registered in such state or
in violation of any stop order or other determination or ruling by any federal
or state agency with respect to the offer or sale of such Shares.
5.02 The Transfer Agent shall indemnify and hold the Fund
harmless from and against any and all losses, damages, costs, charges, counsel
fees, payments, expenses and liability arising out of or attributable to any
action or failure or omission to act by the Transfer Agent as a result of the
Transfer Agent's lack of good faith, negligence or willful misconduct.
5.03 At any time the Transfer Agent may apply to any officer
of the Fund for instructions, and may consult with legal counsel with respect to
any matter arising in connection with the services to be performed by the
Transfer Agent under this Agreement, and the Transfer Agent and its agents or
subcontractors shall not be liable and shall be indemnified by the Fund on
behalf of the applicable Series for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel provided,
however, that the Transfer Agent shall give prompt notice to the Fund of the
circumstances relating to the matter for which it seeks such advice of counsel.
The Transfer Agent, its agents and subcontractors shall be protected and
indemnified in acting upon any paper or document furnished by or on behalf of
the Fund, reasonably believed to be genuine and to have been signed by the
proper person or persons, or upon any instruction, information, data, records or
documents provided the Transfer Agent or its agents or subcontractors by machine
readable input, telex, CRT data entry or other similar means authorized by the
Fund, and shall not be held to have notice of any change of authority of any
person, until receipt of written notice thereof from the Fund. The Transfer
Agent, its agents and subcontractors shall also be protected and indemnified in
recognizing share certificates which are reasonably believed to bear the proper
manual or facsimile signatures of the officers of the Fund, and the proper
countersignature of any former transfer agent or registrar, or of a co-transfer
agent or co-registrar.
5
<PAGE> 8
5.04 In the event either party is unable to perform its
obligations under the terms of this Agreement because of acts of God, strikes,
equipment or transmission failure or damage reasonably beyond its control, or
other causes reasonably beyond its control, such party shall not be liable for
damages to the other for any damages resulting from such failure to perform or
otherwise from such causes.
5.05 Neither party to this Agreement shall be liable to the
other party for consequential damages under any provision of this Agreement or
for any act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in
this Article 5 shall apply, upon the assertion of a claim for which either party
may be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess any claim or make any compromise in any
case in which the other party may be required to indemnify it except with the
other party's prior written consent.
ARTICLE 6 COVENANTS OF THE FUND AND THE TRANSFER AGENT
6.01 The Fund shall on behalf of each of the Series promptly
furnish to the Transfer Agent the following:
(a) A certified copy of the resolution of the Trustees of the
Fund authorizing the appointment of the Transfer Agent and the execution and
delivery of this Agreement.
(b) A copy of the governing instruments of the Fund and all
amendments thereto.
6.02 The Transfer Agent hereby agrees to establish and
maintain facilities and procedures reasonably acceptable to the Fund for
safekeeping of share certificates, check forms and facsimile signature
imprinting devices, if any; and for the preparation or use, and for keeping
account of, such certificates, forms and devices.
6.03 The Transfer Agent shall keep records relating to the
services to be performed hereunder, in the form and manner as it may deem
advisable. To the extent required by Section 31 of the Investment Company Act of
1940, as amended, and the Rules thereunder, the Transfer Agent agrees that all
such records prepared or maintained by the Transfer Agent relating to the
services to be performed by the Transfer Agent hereunder are the property of the
Fund and will be preserved, maintained and made available in accordance with
such Section and Rules, and will be surrendered promptly to the Fund on and in
accordance with its request.
6
<PAGE> 9
6.04 The Transfer Agent and the Fund agree that all books,
records, information and data pertaining to the business of the other party
which are exchanged or received pursuant to the negotiation or the carrying out
of this Agreement shall remain confidential, and shall not be voluntarily
disclosed to any other person, except as may be required by law.
6.05 In case of any requests or demands for the inspection of
the Shareholder records of the Fund, the Transfer Agent will endeavor to notify
the Fund and to secure instructions from an authorized officer of the Fund as to
such inspection. The Transfer Agent reserves the right, however, to exhibit the
Shareholder records to any person whenever it is advised by its counsel that it
may be held liable for the failure to exhibit the Shareholder records to such
person.
ARTICLE 7 TERMINATION OF AGREEMENT
7.01 This Agreement may be terminated by either party upon
sixty (60) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
reasonable out-of-pocket expenses associated with the movement of records and
material will be borne by the Fund on behalf of the applicable Series.
Additionally, the Transfer Agent reserves the right to charge for any other
reasonable expenses associated with such termination; provided that the Transfer
Agent shall incur any such expense only with the prior approval of the Fund. No
expenses will be borne by the Fund to protect the Transfer Agent's proprietary
interest in programming or record retention.
ARTICLE 8 ADDITIONAL FUNDS
8.01 In the event that the Fund establishes one or more series of
Shares, in addition to those set forth in the second "WHEREAS" clause above,
with respect to which it desires to have the Transfer Agent render services as
transfer agent under the terms hereof, it shall so notify the Transfer Agent in
writing, and if the Transfer Agent agrees in writing to provide such services,
such series of Shares shall become a Series hereunder.
ARTICLE 9 ASSIGNMENT
9.01 Except as provided in Section 9.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
9.02 This Agreement shall inure to the benefit of, and be
binding upon, the parties and their respective permitted successors and assigns.
7
<PAGE> 10
ARTICLE 10 AMENDMENT
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Trustees of the Fund.
ARTICLE 11 NEW YORK LAW TO APPLY
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of The State of New
York.
ARTICLE 12 MERGER OF AGREEMENT
12.01 This Agreement constitutes the entire agreement between
the parties hereto and supersedes any prior agreement with respect to the
subject matter hereof whether oral or written.
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in their names and on their behalf under their seals by
and through their duly authorized officers as of the day and year first above
written.
THE DIVERSIFIED INVESTORS STRATEGIC
ALLOCATION FUNDS
By:
----------------------------------
ATTEST:
- ------------------------------
DIVERSIFIED INVESTMENT ADVISORS, INC.
By:
----------------------------------
ATTEST:
- ------------------------------
8
<PAGE> 1
[BIGHAM, DANA & GOULD LLP LETTERHEAD]
April 25, 1996
The Diversified Investors Strategic Allocation Funds
Four Manhattanville Road
Purchase, New York 10577
Re: The Diversified Investors Strategic Allocation Funds
----------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to The Diversified Investors Strategic
Allocation Funds (the "Trust"), a Massachusetts business trust, in connection
with the Trust's Registration Statement on Form N-1A filed with the Securities
and Exchange Commission on January 19, 1996, as proposed to be amended by
Amendment No. 1 to be filed with the Securities and Exchange Commission on or
about April 26, 1996 (such Registration Statement, as proposed to be amended,
the "Registration Statement") with respect to an indefinite number of its
shares of beneficial interest, par value $0.00001 per share (the "Shares"). You
have requested that we deliver this opinion to you for use by you in the
Registration Statement.
In connection with the furnishing of this opinion, we have examined the
following documents:
(a) a certificate of the Secretary of State of the Commonwealth of
Massachusetts as to the existence of the Trust;
(b) copies, certified by the Secretary of State of the Commonwealth
of Massachusetts, of the Trust's Declaration of Trust and all amendments
thereto on file in the office of the Secretary of State;
(c) a certificate executed by the Secretary of the Trust,
certifying as to and attaching copies of the Trust's Declaration of Trust,
By-Laws and certain votes adopted by the Trustees of the Trust authorizing the
issuance of the Shares; and
(d) the Registration Statement.
In such examination, we have assumed the genuineness of all signatures,
the conformity to the originals of all of the documents reviewed by us as
copies, the authenticity and completeness of all original documents reviewed by
us in original or copy form and the legal competence of each individual
executing any document.
<PAGE> 2
BINGHAM, DANA & GOULD LLP
The Diversified Investors Strategic Allocation Funds
April 25, 1996
Page 2
This opinion is based entirely on our review of the documents listed
above and such investigation of law as we have deemed necessary or appropriate.
We have made no other review or investigation of any kind whatsoever, and we
have assumed, without independent inquiry, the accuracy of the information set
forth in such documents.
This opinion is limited solely to the internal substantive laws of the
Commonwealth of Massachusetts as applied by courts located in such
Commonwealth, except that we express no opinion as to any Massachusetts
securities laws. No opinion is given herein as to the choice of law or internal
substantive rules of law which any tribunal may apply to the matters referred
to herein.
We understand that all of the foregoing assumptions and limitations are
acceptable to you.
Based upon and subject to the foregoing, please be advised that it is
our opinion that:
1. The Trust is duly organized and existing under the Trust's
Declaration of Trust and the laws of the Commonwealth of Massachusetts as a
voluntary association with transferable shares of beneficial interest commonly
referred to as a "Massachusetts business trust."
2. The Shares, when issued and sold in accordance with the
Registration Statement and the Trust's Declaration of Trust and By-Laws, will
be legally issued, fully paid and non-assessable, except that, as set forth
in the Registration Statement, shareholders of the Trust may under certain
circumstances be held personally liable for the Trust's obligations.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement.
Very truly yours,
/s/ Lea Anne Copenhefer
---------------------------
Lea Anne Copenhefer
BINGHAM, DANA & GOULD LLP
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
--------------------
We consent to the inclusion in this Pre-Effective Amendment No. 1 to the
Registration Statement on Form N-1A (File No. 333-00295) of our report dated
April 23, 1996 on our audits of the statements of assets and liabilities of
Diversified Investors Strategic Allocation Funds.
We also consent to the references to our Firm in the Statement of Additional
Information under the captions "Independent Accountants" and "Experts".
COOPERS & LYBRAND L.L.P.
New York, New York
May 2, 1996
<PAGE> 1
[DIVERSIFIED INVESTMENT ADVISORS LETTERHEAD]
April 15, 1995
The Diversified Investors Strategic Allocation Funds
Four Manhattanville Road
Purchase, New York 10577
Ladies and Gentlemen:
Re: Diversified Investors Strategic Allocation Funds
With respect to our purchase from you of shares of beneficial interest ("Initial
Shares") of The Diversified Investors Conservative Strategic Allocation Fund,
The Diversified Investors Moderate Strategic Allocation Fund and The
Diversified Investors Aggressive Strategic Allocation Fund, each a series of The
Diversified Investors Strategic Allocation Funds, we hereby advise you that we
are purchasing such Initial Shares with no intention to dispose of them either
through resale to others or redemption.
Very truly yours,
DIVERSIFIED INVESTMENT ADVISORS, INC.
By: /s/ ROBERT F. COLBY
---------------------------------
Robert F. Colby
Vice President & General Counsel
<PAGE> 1
MN043
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
7-DAY YIELD
Quotations of "yield" will be based on the net investment income per
share generated over a seven-day period. The income is then "annualized".
BASE PERIOD RETURN = Net Change in Account Value
---------------------------
Beginning Account Value
CURRENT YIELD = Base Period Return x 365/7
The "effective yield" is calculated similarly, but when annualized, the
income earned by the investment during that seven-day period is assumed to be
reinvested. The effective yield will be slightly higher than the yield because
of the compounding effect of this assumed reinvestment.
7-DAY EFFECTIVE YIELD
365/7
EFFECTIVE YIELD = [(1 + Base Period Return) ] - 1
(Base Period Return = net change in account value divided by
beginning account value)
TOTAL RETURN
Quotations of a Fund's average annual total return will be expressed in
terms of the average annual compounded rate of return of a hypothetical
investment in such Fund over periods of 1, 5 and 10 years (up to the life of
the Fund), calculated pursuant to the following formula:
n
P (1 + T) = ERV
(where P = a hypothetical initial payment of $1,000, T = the average annual
total return, n = the number of years and ERV = the ending redeemable value of
a hypothetical $1,000 payment made at the beginning of the period). All total
return figures will reflect the deduction of Fund expenses (net of certain
expenses reimbursed) on an annual basis and will assume that all dividends and
distributions are reinvested when paid.
30-DAY YIELD
Quotations of yield will be based on a Fund's investment income per
share earned during a particular 30-day period, less expenses accrued during
the period ("net investment income") and will be computed by dividing net
investment income
<PAGE> 2
by the maximum offering price per share on the last day of the period, according
to the following formula:
a-b 6
30-DAY YIELD = 2[(--- + 1) -1]
cd
(where a = dividends and interest earned during the period, b = expenses accrued
for the period (net of any reimbursements), c = the average daily number of
shares outstanding during the period that were entitled to receive dividends and
d = the maximum offering price per share on the last day of the period).
<PAGE> 1
POWER OF ATTORNEY
Known all men by these presents that Tom Schlossberg, whose signature
appears below, constitutes and appoints Alfred Sylvain and Robert Colby, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any registration statements and
amendments thereto for The Diversified Investors Strategic Allocation Funds,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 20th
day of February, 1996.
/s/ Tom A. Schlossberg
--------------------------------------
Tom A. Schlossberg
Trustee
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the 20th day of February, 1996, before me personally came Tom Schlossberg to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 2
POWER OF ATTORNEY
Known all men by these presents that Donald E. Flynn, whose signature
appears below, constitutes and appoints Alfred Sylvain and Robert Colby, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any registration statements and
amendments thereto for The Diversified Investors Strategic Allocation Funds,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 20th
day of February, 1996.
/s/ Donald E. Flynn
--------------------------------------
Donald E. Flynn
Trustee
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the 20th day of February, 1996, before me personally came Donald E. Flynn to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 3
POWER OF ATTORNEY
Known all men by these presents that Nikhil Malvania whose signature
appears below, constitutes and appoints Alfred Sylvain and Robert Colby, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any registration statements and
amendments thereto for The Diversified Investors Strategic Allocation Funds,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 20th
day of February, 1996.
/s/ Nikhil Malvania
--------------------------------------
Nikhil Malvania
Trustee
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the 20th day of February, 1996, before me personally came Nikhil Malvania to
me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 4
POWER OF ATTORNEY
Known all men by these presents that Robert L. Lindsay, whose signature
appears below, constitutes and appoints Alfred Sylvain and Robert Colby, and
each of them, his attorneys-in-fact, each with the power of substitution, for
him in any and all capacities, to sign any registration statements and
amendments thereto for The Diversified Investors Strategic Allocation Funds,
and to file the same, with exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that each of said attorneys-in-fact may do or cause to be done
by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 20th
day of February, 1996.
/s/ Robert L. Lindsay
--------------------------------------
Robert L. Lindsay
Trustee
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the 20th day of February, 1996, before me personally came Robert L. Lindsay
to me known to be the person described in and who executed the foregoing
instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
<PAGE> 5
POWER OF ATTORNEY
Known all men by these presents that Joyce Galpern Norden, whose
signature appears below, constitutes and appoints Alfred Sylvain and Robert
Colby, and each of them, his attorneys-in-fact, each with the power of
substitution, for him in any and all capacities, to sign any registration
statements and amendments thereto for The Diversified Investors Strategic
Allocation Funds, and to file the same, with exhibits thereto and other
documents in connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorneys-in-fact may do
or cause to be done by virtue hereof.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand the 20th
day of February, 1996.
/s/ Joyce Galpern Norden
--------------------------------------
Joyce Galpern Norden
Trustee
STATE OF NEW YORK )
) ss.:
COUNTY OF WESTCHESTER )
On the 20th day of February, 1996, before me personally came
Joyce Galpern Norden to me known to be the person described in and who
executed the foregoing instrument, and acknowledged that he executed same.
[SEAL]
/s/ Catherine A. Mohr
